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BATTLE CREEK, Mich. — Kellogg Co. is taking its snacks delivery in a new direction.
The company is exiting its Direct Store Delivery (DSD) network in the second quarter, transitioning the DSD-distributed portion of the company's U.S. Snacks business to the warehouse model already used by Pringles and the rest of its North American business.
The new model will be transformational for Kellogg, reducing complexity and cost structure while driving growth and profitability for the company and its retail partners.
"The consumer and retail landscape continues to change," said John Bryant, Kellogg Co. chairman and CEO. "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," Bryant explained.
According to Kellogg, shopping patterns and behaviors have changed significantly over the past few years with consumers increasingly shopping in both a wider variety of retail outlets and online.
By shifting resources from the operational support of DSD to brand building, shopper marketing and pack formats that better meet consumers' evolving needs, Kellogg can better drive growth in its U.S. Snacks business.
In addition, the warehouse model, to which the DSD network will be transitioned, leverages scale and technology that Kellogg and its customers currently have.
Warehouse distribution is already utilized by 75 percent of Kellogg's U.S. sales, including the Pringles, Frozen Foods and Morning Foods businesses. Moving completely to a warehouse distribution system offers a significant opportunity to accelerate growth.
"We see the warehouse model as a clear advantage for us," said Paul Norman, president, 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."
Moving to the warehouse model will also 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," 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," he added.
The transition from the DSD network will be complete in the fourth quarter. It will encompass a 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," Bryant said. "We are doing everything we can to help our employees manage through this transition."
The company is providing severance and benefits, as well as offering retention packages for impacted employees to help ensure business continuity.
This initiative will be part of an expanded Project K program. After a transition period, the company expects this 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.
Battle Creek-based Kellogg brands include Kellogg's, Keebler, Special K, Pringles, Cheez-It, Eggo, and Mini-Wheats. With 2015 sales of $13.5 billion and more than 1,600 foods, Kellogg is the world's leading cereal company; second largest producer of cookies, crackers and savory snacks; and a leading North American frozen foods company.