The FINANCIAL — Kellogg Company on February 8 announced it will begin to exit 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, according to Kellogg Company.
“The consumer and retail landscape continues to change,” said John Bryant, Kellogg Company 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.”
Consumers’ shopping patterns are changing
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 Snacks business.
Warehouse distribution model is more effective and efficient
The highly efficient 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.”
Driving growth for Kellogg and for retailer partners
Moving to the warehouse model will also allow the company to reduce complexity and bring benefits to both retail partners and Kellogg.
“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,” added Norman. “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.”
The transition from the DSD network will be complete in the fourth quarter of 2017. 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,” said Bryant. “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.