By Li Hongmei

Coffee giant Starbucks was to pay nearly US$2.76 billion to a division of Kraft Foods Inc after an arbitrator ruled that it had broken a long-term distribution agreement, the companies said Tuesday.

The arbitrator ruled that Starbucks was not justified in ending its distribution deal with Kraft four years early, after saying the distributor was not doing enough to push its coffee in supermarkets.

The deal was first signed in 1998, and renewed for a 10-year period in 2004.

Starbucks ended the deal to leave it free to market its own single-serving Via capsules. It offered Kraft US$750 million as a buy-out, but the offer was refused.

The arbitrator awarded US$2.23 billion in damages over the lost income, and US$527 million in interest and legal fees.

Kraft said it raised supermarket sales of Starbucks-branded products in its stores from US$50 million in 1998 to approximately US$500 million in 2010.

Starbucks said it was "pleased the arbitration has ended; however, we strongly disagree with the arbitrator's conclusion."

Taking our packaged coffee business back from Kraft was the right decision for Starbucks, our brand and our shareholders," chief financial officer Troy Alstead said.

Kraft spun off its distribution business into a company called Mondelez in October 2012 and said it would forward the proceeds from the settlement to the new company to fund a stock buyback.