While Kellogg’s U.S. snacks business is its largest division, with $3.2 billion in net sales, the manufacturer sees room for growth.
And it hopes transitioning from direct store delivery (DSD) to warehouse distribution, which means Kellogg will no longer ship product directly to its customers’ stores, will get the job done.
“This action demonstrates just how serious we are about creating a more competitive and faster-growing snacks business,” said Paul Norman, president of Kellogg North America, during the company’s fourth-quarter 2016 earnings call.
The Battle Creek, Mich.-based manufacturer will transition its U.S. snacks business—the only Kellogg division to use DSD for the grocery and mass channels—to warehouse during second-quarter 2017. The move should be complete in fourth-quarter 2017.
For Kellogg, transitioning its snacks business to warehouse is a no-brainer. For one thing, it puts all its products under one distribution model, allowing Kellogg to leverage its technology and scale to create more efficiencies, such as better inventory management and more full truckloads.
Plus, “[snacks] is not a high-spoilage category,” said John Bryant, chairman and CEO of Kellogg, during the fourth-quarter earnings call. “It is not date-code sensitive. So it is a system that can go through warehouse.”
Kellogg had been shipping only 40% of its snacks via warehouse, and “where it does we have higher growth, higher share, better margins and better service to our customers,” Bryant said.
Pringles, which Kellogg acquired from Procter & Gamble in 2012, is a testament to that.
The stackable chip, which is distributed via warehouse, has grown at a compound annual growth rate of 4% a year for the past four years, said Adrienne Deanie Elsner, president of Kellogg’s U.S. snacks division, during the 2017 Consumer Analyst Group of New York investor conference held in February in Boca Raton, Fla.
And by shifting its resources away from DSD, Kellogg will be able to direct even more attention to Pringles, as well as brands such as Cheez-It and Rice Krispies Treats.
“When you look at their incrementality and the profitability, there’s a lot of growth to be had that we can’t get at today because of the focus of our resources,” Norman said.
That growth, however, might not be evident until after 2018.
“There is a bit of a reset to the U.S. snacks’ net sales in 2017 and 2018 before we see acceleration in growth,” Norman said. “Between the impact to net sales and the shift of distribution costs into cost of goods sold, there will also be a reset to U.S. snacks’ gross-profit margin.”
With the exit of DSD, Kellogg’s retail partners will take on added costs associated with taking products from their warehouses to their stores, and stocking their own shelves. “We will compensate,” Norman said. “We want to make sure that our retailers have everything they need to be able to run the business better.”
This means lower list prices and possibly higher margins for retailers.
Aside from growth, the distribution change is also a way for Kellogg to adapt to evolving shopping patterns.
Consumers, particularly millennials, are shopping across more channels, making more trips to the store, buying fewer items and leaning on e-commerce.
“This consumer is going to be with us for the next 30 years; this is the way these consumers will continue to shop,” Elsner said. “As our [retail] customers react to this landscape change, they’re shifting to smaller formats in a lot of urban areas. Those stores are not serviced by our DSD.”
As it shifts to warehouse, Kellogg will close 39 distribution centers across the United States by fourth-quarter 2017, Fortune reported. Those centers employ about 30 full-time workers, which means layoff s could exceed 1,100.
“An undertaking of [this] size is extremely complicated. It involves a large number of employees. It involves transferring inventory, and it involves closing distribution centers,” Norman said. “I think when you get to the story with our retailers … they agree this is the right strategic move. … They love the fact we are investing more in our brands.”
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