As American shoppers flee big box stores to do more of their shopping from the comfort of their homes, Kellogg is changing its delivery model to adapt to the trend. If shoppers aren’t even going to stores, Kellogg won’t either. Instead the company will be delivering its products to grocery warehouses where the grocer will decide what to move to retail aisles, and what to keep on hand to fulfill online orders. Annie Gasparro explains the choice at The Wall Street Journal:
Kellogg Co. is abandoning its traditional way of delivering some snacks to stores in an effort to cut costs, though it risks hurting sales of some products.
The maker of Cheez-Its and Keebler cookies, which reported fourth-quarter earnings Thursday, will begin delivering its U.S. crackers and cookies to grocery stores’ warehouses, rather than directly to the individual stores.
Paul Norman, Kellogg’s president of North America, said the decision makes sense as more Americans buy food online. “Shoppers might not even be coming into the store. When you shop that way, it makes no sense that we have a lot of resources tied up in our trucks and our own people delivering to stores,” he said in an interview.
Kellogg wrote in its press release on the change that the move would drive better performance for Kellogg and for its retail partners.
“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.
Financial details will be shared when the company issues its Q4 Earnings release on Feb. 9 at 8:00 a.m. EST. 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.
Teamsters unions working for Kellogg are not happy about the decision, which is likely to reduce the number of drivers Kellogg employs dramatically. Union president Jim Hoffa said of the change “On February 8, The Kellogg Company announced its short-sighted plan to eliminate their U.S. (Keebler) snacks direct store delivery system across the country which will destroy nearly 1,200 good, Teamster jobs in key markets across the country. It is an outrage for Kellogg’s – an iconic American company – to turn its back on working families.”
In an interview with Food Business News, Kellogg executive Deanie Elsner pointed to changing customer habits as driving the change in policy. FBN reports:
Consumer shopping habits are changing in a way that is unfavorable to D.S.D.[direct-store delivery], Ms. Elsner said. Specifically, she said consumers are “splintering” trips to more channels.
She said retailers will benefit through smaller distribution center inventories across the entire Kellogg portfolio of products, with servicing more often.
Discussing the prospective transition, Ms. Elsner said the company’s D.S.D. infrastructure will remain fully functioning in place during the transition, but that incentive plans will help push the transition forward.
Noting again that the warehouse system already handles 75% of the Kellogg North American portfolio, she emphasized that Kellogg is not launching the warehouse system from scratch. The company benefits from information technology, customer service and invoicing systems already in place.
A seasoned leadership team will be leading the transition, she said.
“We are treating this transition like a major merger and acquisition,” she said. “For us, the numbers are clear, the time to shift from D.S.D. is now,” she said.
Read more here.
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