February 8, 2017 / 10:11 PM / 3 years ago

Kellogg to switch delivery model for U.S. snacks unit to cut costs

(Reuters) - Corn Flakes maker Kellogg Co said on Wednesday it would stop distributing its U.S. snacks business’ products directly to stores and switch to its more widely used warehouse model to cut costs and adapt to a changing retail landscape.

Kellogg's Corn Flakes cereal is pictured at a Ralphs grocery store in Pasadena, California August 3, 2015. REUTERS/Mario Anzuoni/File Photo

The decision reflects the shift by shoppers toward buying groceries outside of grocery stores, as well as Kellogg’s continued focus on revitalizing its snack business.

The distribution model change is part of an expanded “Project K” program, which Kellogg launched in 2013 to save up to $475 million annually by 2018 through job cuts and production optimization.

Kellogg said it will close its distribution centers and that there would be layoffs, though it declined to provide details.

“Out of respect for employees who are still being notified, we are not sharing that information at this time,” Kellogg said in a statement.

Kellogg already distributes about 75 percent of its U.S. sales through warehouses, including products in its frozen foods and morning foods businesses.

The direct-store delivery model was part of the appeal that drew Kellogg to its 2001 $3.6 billion acquisition of Keebler snacks. Kellogg used the deal as a launching pad for its snack platform, adding chip company Pringles in 2012, in a deal valued at $2.7 billion.

The U.S. snacks business, which also includes Cheez-It crackers and Special K cereal bars, accounted for about 25 percent of Kellogg’s sales in the third quarter. These sales declined in 2014 through the first half of 2016, before flattening out in the third quarter, led by core brands Cheez-It and Pringles. Kellogg, which is scheduled to report fourth-quarter results on Thursday, said it would start the transition in the second quarter of 2017 and expects to complete the move in the fourth quarter.

“We believe (the move) will help us grow the business in the long term, taking resources tied up in distribution and putting them back into the brands themselves,” said John Bryant, chairman and chief executive of Kellogg. The company, which also makes Pop-Tarts and Fruit Loops, said it would provide severance, benefits and retention packages to employees impacted by the transition.

Kellogg’s shares were marginally higher, up 0.15 percent at $73.60, in trading after the bell.

Reporting by Jessica Kuruthukulangara in Bengaluru and Lauren Hirsch in New York; Editing by Savio D'Souza and Leslie Adler

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