Kellogg to exit direct-store delivery for U.S. Snacks

Feb. 9, 2017 - by Eric Schroeder

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Kellogg will begin to exit its direct-store delivery network in the second quarter.

BATTLE CREEK, MICH. — Kellogg Co. on Feb. 8 said it will begin to exit its direct-store delivery (D.S.D.) network in the second quarter, transitioning the D.S.D. portion of its U.S. Snacks business to the warehouse model already used by Pringles and the rest of its North American business.

Kellogg said it believes the new warehouse model will be “transformational” for the Battle Creek-based company, helping to reduce complexity and cost structure in the business while driving growth and profitability for Kellogg and its retail partners.

John Bryant, chairman and c.e.o. of Kellogg

“The consumer and retail landscape continues to change,” said John Bryant, chairman and chief executive officer of Kellogg. “We have to change the way we reach and communicate with consumers. Because our customers’ and our own warehouse distribution systems have become more efficient and effective, we can now redeploy resources previously tied to D.S.D. and direct them to the kinds of brand investments that drive greater demand with today’s consumers — ultimately growing our business and our retailers’ businesses.”

A major factor driving Kellogg’s decision to switch distribution models is the changing landscape of consumer shopping patterns. The company said consumers increasingly are shopping in both a wider variety of retail outlets and on-line, and by shifting resources from the operational support of D.S.D. to brand building, shopper marketing and pack formats that better meet consumers’ evolving needs, Kellogg believes it will be able to better drive growth in its snacks business.

Efficiency is another factor playing into the decision to switch models, Kellogg said. According to Kellogg, a warehouse distribution model better leverages scale and technology that the company and its customers currently have. Kellogg said 75% of U.S. sales are handled through warehouse distribution, including the company’s Pringles, frozen foods and morning foods businesses. Moving completely to a warehouse distribution system offers a significant opportunity to accelerate growth, Kellogg noted.

Paul Norman, president of Kellogg North America

“We see the warehouse model as a clear advantage for us,” said Paul Norman, president of Kellogg North America. “In fact, we realize both higher service levels and share in the U.S. Snacks categories and channels that sell through warehouse distribution already.”

A shift to a warehouse model also will allow the company to reduce complexity and bring benefits to both retail partners and Kellogg, the company said.

“By utilizing one service platform, we can better leverage the first-class warehouse systems that we and our retailers have to unlock significant opportunities for joint value creation, be they in service, cost efficiencies, or scale benefits,” Mr. Norman explained. “Our retail customers also have more sophisticated technology and replenishment capability. This is a strategic, forward-looking move that will transform not only our U.S. Snacks business, but also our U.S. business as a whole.”

Kellogg will begin the transition away from the D.S.D. network in the second quarter, with plans to complete the shift by the end of the fourth quarter of 2017. The transition will include the transfer of inventory from Kellogg’s distribution centers to retailers’ warehouses and the closing of its distribution centers.

“While this is the right move for the future of the company, it was a difficult decision because of the impact on affected employees,” Mr. Bryant said. “We are doing everything we can to help our employees manage through this transition.”

The initiative is part of an expanded Project K program. After a transition period, Kellogg said it expects the initiative to contribute to accelerating its top-line growth over time, and to bring U.S. Snacks’ operating profit margin in line with that of Kellogg North America.

In a Feb. 8 research note, Robert Moskow, a research analyst with Credit Suisse, estimated the transition will affect about 700 to 800 D.S.D. sales personnel covering $2 billion of sales for the Keebler and Sunshine brands in the United States, equating to net savings of approximately $52 million to $60 million on an annual basis by 2018.

Mr. Moskow also said the implications for the company and the industry are “significant.”

Robert Moskow, research analyst with Credit Suisse

“We believe Mondelez and Campbell will benefit the most from this decision, at least in the short run,” Mr. Moskow noted. “After stumbling through a D.S.D. restructuring and workforce reduction in 2016 that hurt its market share, Mondelez’s Nabisco business now has an opportunity to regain market share during what is likely to be a painful transition for Kellogg. Campbell’s Pepperidge Farm unit, which has already gained momentum over the past six months behind stronger merchandising and promotional support, is likely to benefit as well. After a year, Mondelez can then decide whether the executional advantage it gained over Kellogg is enough to justify maintaining the costly D.S.D. network or whether to follow Kellogg’s path.

“Frankly, in an environment where volume growth is so hard to come by and where 3G keeps raising the bar for profit margins, Mondelez may eventually make this transition as well.”