Feb 28, 2017

Is Kellogg’s Move Paving the Way for Other CPG Brands?

Just over two weeks ago, the Kellogg Company announced that it will be leaving its direct-store-delivery network this year to pursue the warehouse distribution model. The transitioning process from DSD is set to begin in the second quarter of this year, and was motivated by the ability of the warehouse model to better leverage scale and technology that the company and its’ customers currently have (Schroeder). The warehouse distribution model is not new to Kellogg, as 75% of the company’s U.S. sales are already handled through warehouse distribution, including the company’s Pringles, frozen foods and morning foods (Kellogg Company). With the remaining 25% of Kellogg’s sales now up for grabs, many broadline distributors are waiting in anticipation.

Moving Kellogg solely to a warehouse distribution system will offer a significant opportunity to accelerate growth for the company, but this move was not made without consequence. The transition will result in the closure of Kellogg’s remaining 39 distribution centers, and the laying off of some 700 to 800 DSD sales personnel. Kellogg anticipates this transition to finalize in 4Q 2017.

Needless to say, it was not an easy decision for Chairman and CEO John Bryant, who said:

“The DSD organization has been at the heart of our crackers and cookies business from its start, but times have changed in the form of consumer habits and customer landscape, and we believe that this shift will allow us to compete more effectively in today’s market environment” (Kell).

Many brands in the industry like Kellogg are seeing opportunity in re-evaluating operational strategy, and the shifting economics of alternative solutions.

The payoff in moving to warehouse distribution is big for Kellogg. In fact, the cost-savings program is forecasted to generate savings of $600 million to $700 million through 2019, up from the prior estimate of $425 million to $475 million through 2018 (CNBC). But Kellogg also warned that sales will slow again in 2017, due to the disruption from the distribution change and some reduced pricing. Ultimately, the short lull in sales is worth it to Kellogg, who is already seeing higher service levels and shares in U.S snack categories and channels that are selling via warehouse distribution instead of DSD. Bryant spoke on this matter when he said:

“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” (Schroeder).

The ability to redeploy resources previously tied to DSD will be something that other leading brands in this industry are very interested in. If Kellogg’s shift is as successful as projected, it would be prescient for other large category leaders to follow suit.