Well Kellogg upper management capitulated to Walmart and agreed to distribute Kellogg Snacks through Walmart warehouses. I assume at a reduced case cost. Walmart pulling out of theKellogg DSD model basically collapses the economies of scale of the DSD system. It becomes too expensive to spread those fixed expenses (drivers, trucks, reps, merchandisers, distro centers) around to the remaining chains throughout the US. Or at least too expensive for Kellogg upper management to swallow.
“We see the warehouse model as a clear advantage for us,” said Paul Norman, president of Kellogg North America. “In fact, we realize both higher service levels and share in the U.S. Snacks categories and channels that sell through warehouse distribution already.”
I enjoy Paul’s quote above for its lack of sanity. When I walk into my Walmarts, the worse grocery sections (blown out, empty) are the Walmart house brand (Great Valu) sections. So we and all Kellogg stock holders (I am one) are to accept that a Walmart clerk, probably paid wages below the poverty line, maybe has a HS Diploma, will service the Kelloggs sections so effectively that the business will grow? I love the scene in Jaws when Hooper brings the Shark cage on the boat. You know what I mean.
Lets take a look how the end of the DSD model will affect the traditional grocery chains: within 12 months the linear footage that Kelloggs enjoys in the cookie/cracker aisle now will probably be cut by at least 40% through SKU rationalization etc…. Also, the major chain accounts don’t WANT to take on any new labor costs. All my stores are aggressively cutting back on labor hours. The store managers I have told about the end of Kellogg DSD don’t care but the Grocery managers and clerks do. They are the ones that are going to have to deal with the fallout. The major theme displays that I put up every year in my chain stores are a thing of the past. The hutches and shippers I have throughout my stores and all those points of interruption gone. Its not a grocery manager or grocery clerk that puts up and services those displays. Me thinks Kellogg is in for a HUGE shock when the Holidays roll around and the cracker numbers are in the toilet. That reminds me, I gotta move my Kellogg stock; or maybe short it. HMMMM.
Which brings me back to Walmart. Lets look a year or two down the road when Kellogg has burned its bridges and collapsed its business in its traditional grocery chains. It will obviously depend on Walmart for more and more of its business. When it gets to that tipping point where Walmart has such a huge chunk of Kellogg business is where the fun starts. You know Walmart will then put the screws on and milk every last bit of margin $$ out of Kellogg. Walmart will have Kellogg by the cajones and just squeeze and squeeze. What will Deanie a former shell of itself. More then likely the ship will be taking on water then and they will have left with whatever golden parachute they receive and Deanie will have to sell her $1.03 million dollar mansion.
Such is hubris.