BATTLE CREEK, Mich. -- The Kellogg Co. will begin to exit its direct-store-delivery (DSD) network in the second quarter of this year. The company will transition its U.S. snacks division to the warehouse model already in use by Pringles and the rest of its North American businesses.
Calling the move "transformational," this new strategy is expected to reduce complexity and associated costs while spurring growth and profitability for the company and its retail partners alike.
"The consumer and retail landscape continues to change," said John Bryant, chairman and CEO for Kellogg, Battle Creek, Mich. "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 DSD 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."
Click through to see how this new system will work and how it could affect retailers ...
Because shopping patterns and behaviors have changed in the past few years to include online and alternative retail channels such as dollar and club, the Kellogg Co. felt it was necessary to shift resources from operational support DSD to brand building, shopper marketing and packaging to meet those changing patterns and consumer needs. The company expects this renewed focus on the consumer to help drive growth in its snacks business.
The warehouse model leverages the scale and technology that Kellogg and its retail partners already have. It is already used by 75% of Kellogg's U.S. sales, including Pringles and frozen and Morning Foods businesses. By transitioning all operations to warehouse, the company expects to hone its service and accelerate growth in the snacks business.
"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."
"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," Norman said. "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."
How it works
The transition from the DSD network will be complete in fourth-quarter 2017. It will involve a transfer of inventory from Kellogg's distribution centers to retailers' warehouses and the closing of its distribution centers. After a transition period, the company expects top-line growth will accelerate over time, and bring its U.S. snacks' operating profit margin in line with that of Kellogg North America.
Kellogg brands include Keebler, Pringles, Pop-Tarts, Cheez-It and more.