Kellogg to invest distribution savings in retail margins, snack portfolio

Dive Brief:

  • Kellogg is expecting significant cost savings — up to 15% — once it transitions its distribution model from direct store delivery to a warehouse model, company executives said at the Deutsche Bank Global Consumer Conference in Paris, according to Food Business News. The company announced the change in February, which could result in the loss of more than 1,100 jobs through closing 39 regional delivery centers.
  • CFO Fareed Khan said that many of the savings will enhance the company's bottom line. Some will add to the margins retailers get on the products, "which gives them support of the initiatives," he said. Other funds will allow Kellogg to reinvest in its snack portfolio through brand building and product innovation.
  • John Bryant, Kellogg chairman and CEO, said that many retailers don't have a positive opinion of the direct store distribution model. "We believe warehouse is the right way to go. We have very strong retail support for doing that and we have confidence that this is the right way for us to run our business and to grow our business long-term,” he said, according to Food Business News.

Dive Insight:

As executives talk up the efficiencies and cost savings of the warehouse delivery model, there is a reason for they will have extra money: More than 1,100 people will be put out of work.  

Under a strategic initiative called Project K that's aimed at fueling growth through better efficiency and effectiveness, Kellogg has been working to cut jobs wherever possible. The company also announced the elimination of 250 jobs earlier this year  — mostly at its headquarters in Battle Creek, Michigan. Kellogg's Project K initiative is expected to generate between $425 million and $475 million in annual cost savings by 2018.

A decade ago, direct store delivery was seen as a powerful way for manufacturers to improve the relationship with stores and consumers, with suppliers delivering exactly what shoppers need to individual stores. According to a report by the Grocery Manufacturers Association in 2008, products that were delivered through DSD represented 24% of unit volume spent in store. More than three-quarters of retailers said that their DSD pushes would remain constant or increase in the year.

Now, warehouse delivery is taking hold — often as a cost savings mechanism. It's unclear if retailers prefer it, given that Kellogg executives repeatedly emphasized the increasing margins that stores will receive on their products.

“We’re seeing many food manufacturers reevaluate their distribution models as pressures to reduce operating expenses have increased, as have consumer shopping habits,” Rick Schreiber, national manufacturing practice leader at accounting and consulting firm BDO, told Food Dive previously. “The industry as a whole is moving toward centralized distribution not only to cut logistics costs and take advantage of efficiencies of scale, but to better compete with emerging online grocery options, customized meal delivery services and other alternatives.”

Job cuts and other efficiency measures are already paying dividends for Kellogg. The company saw its first-quarter profits increase by nearly 50% because of these changes. But the manufacturer's brand sales — specifically cereal — remained sluggish. If the company wants to grow, it may want to consider reinvesting more of these new profits into research and development in order to add new items to its family of products. Eliminating jobs can only go so far to push the company into the black.

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Filed Under: Manufacturing Corporate
Top image credit: Kellogg