Kellogg executives defend shift from D.S.D.

by Josh Sosland
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Kellogg snack truck
Kellogg will begin to exit its direct-store delivery network in the second quarter.

BOCA RATON, FLA. — While a transition of U.S. Snacks distribution to a warehouse model will not be without bumps, the move is the right one for Kellogg Co. and will be successful, top executives said.

In a Feb. 21 presentation, John A. Bryant, chairman, president and chief executive officer, and Deanie Elsner, president, U.S. Snacks, discussed and defended the decision to make the move away from direct-store delivery (D.S.D.). The two spoke at the 2017 Consumer Analyst Group of New York annual conference at the Boca Raton Resort & Club in Boca Raton.

John Bryant, Kellogg
John Bryant, chairman, president and c.e.o. of Kellogg

“Forty per cent of our snacks already are sold through warehouse distribution,” Mr. Bryant said. “Where we are in warehouse with snacks (including Pringles), we have higher growth rates, higher share and higher margins.”

Ms. Elsner noted that already, U.S. Snacks is the largest Kellogg business in the United States with $3.2 billion in annual sales, led by the Cheez-It, Pringles and Rice Krispies Treats brands.

Ms. Elsner said a large part of the snacks business is invested in the D.S.D. system and acknowledged that the recent announcement to exit D.S.D. has “sparked a lot of debate.”

While saying she would not jump into the debate, she made the case for why the shift made sense. The products distributed by D.S.D. have qualities making them suitable for warehouse distribution, she said. For instance, Kellogg snacks are not fragile and have longer shelf life than many D.S.D. products.

While velocities are faster than most products distributed in warehouses, the velocities are not so fast they can’t be handled by retailers, she said.

Kellogg's snacks - Cheez-It, Pringles, Rice Krispies
U.S. Snacks is the largest Kellogg business in the United States, led by the Cheez-It, Pringles and Rice Krispies Treats brands.

Consumer shopping habits are changing in a way that is unfavorable to D.S.D., 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.

Deanie Elsner, Kellogg
Deanie Elsner, president of U.S. Snacks for Kellogg

“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.

With all the preparations the company is making, Mr. Bryant said the shift will not be without bumps.

“It will be disruptive,” he said. “It will be volatile. Competitors will try to take advantage of the change. But it absolutely is the right thing to do.”

Mr. Bryant emphasized the importance of snacks company-wide at Kellogg, noting that the segment accounts for 50% of the company’s sales.

Pringles, Kellogg
Pringles is still in a very early stage of growth in many markets, including South America and North America.

“Pringles revolutionized our international snacks business,” he said, doubling and tripling sales in many markets.

He said Pringles was still in a very early stage of growth in many markets, including South America and North America.

Kellogg in emerging markets has been growing at a 4% to 5% annual compounded rate, excluding acquisitions joint ventures and acquisitions.

Mr. Bryant said the opportunity in emerging markets is difficult to overstate.

“This is the defining trend of our lifetimes,” he said.

Overall, Mr. Bryant expressed pride in Kellogg’s progress toward expanding its margins in its quest of a 350 basis point improvement between 2015 and 2018. Margins expanded by 90 basis points to 15.4% in 2016, and another 100 basis point gain is expected in 2017. 
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