PARIS — Central to the Kellogg Co.’s plans to exit its U.S. snacks direct-store delivery distribution model is the financial savings anticipated to be generated by the move. During a June 13 presentation at the Deutsche Bank Global Consumer Conference, company executives outlined how they will invest the savings.
|Fareed Khan, c.f.o. for Kellogg|
“Some of those we’re going to take to the bottom line, pretty significantly in snacks,” said Fareed A. Khan, chief financial officer. “Some of those will enhance the margins that retailers get, which supports them — which gives them support of the initiatives. And the big part of that allows us to reinvest back in the snacks portfolio, both in terms of brand building and product innovation.”
Without getting into specific numbers, John Bryant, chairman and chief executive officer of the Kellogg Co., iterated the savings will be significant.
|John Bryant, chairman and c.e.o. of Kellogg|
“… The D.S.D. system on average cost about 20% of sales to maintain,” he said. “Our warehouse system is more like 5% of sales. So, it’s 15 points of margin in there between those two systems.”
Since Kellogg’s February announcement it would be exiting its D.S.D. model for U.S. snacks there has been discussion around the pros and cons of the distribution model. Mr. Bryant said not all retailers view the D.S.D. model in a positive light and some were having product delivered to the back of their stores.
“They can do it very effectively, very efficiently,” he said. “And, in some respect, this system is unnecessary. So, 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.”
While financial savings were cited as the primary driver of the transition, Mr. Bryant said changes in the retail marketplace also played into management’s decision.
“Today, for most customers, the shelf is set nationally, set at center,” he said. “D.S.D. operators can't just walk in and move the shelf around.”
He added that large end displays also tend to be set by retailers as part of their national calendar. Where the shift away from D.S.D. may impact the company is with “secondary displays,” Mr. Bryant said.“…We’ll probably lose some secondary merchandising …,” he said. “And some of our competitors may pick that up. But is that worth 15 points of sales in difference? And by investing back in the brands, by working with our retailers who are now making a higher margin on our products, we believe we can achieve growth in other ways that will offset that and help us gain share over time.”