Kellogg, the cereal maker behind Rice Krispies and Corn Flakes, could trim over 1,100 jobs as the Big Food maker changes how it delivers snacks in a way it claims will be more competitive.
On Wednesday, the company disclosed that it would exit a direct store delivery model in favor of a warehouse model, which is already used by Kellogg’s Pringles brand and the rest of the North American non-snack business. In total, Kellogg said it would close 39 distribution centers, which will all shutter by the fourth quarter of 2017. On average, those centers employ about 30 full-time workers—so layoffs could exceed 1,100.
The change means that Kellogg will no long ship snacks directly to retail customers’ stores, but instead it will ship to their warehouses. The U.S. snacks business is massive for Kellogg—it generated $3.2 billion in sales (total global sales are $13 billion) and is the company’s biggest business segment in North America, though sales have been in decline.
“We’ve been actively engaged in conversations with some of our biggest retail partners who have expressed strong interest in hiring these employees for high-demand roles once the transition is complete,” said Kris Charles, a company spokesperson, in an e-mail to Fortune. “As a result, we are optimistic that our employees will find similar employment once this transition is complete.”
In a conference call with analysts during Kellogg’s fourth-quarter earnings results presentation, Chairman and CEO John Bryant said the decision wasn’t an easy one.
“The DSD [direct store delivery] organization has been at the heart of our crackers and cookies business from its start, but times have changed in the form of consumer habits and customer landscape, and we believe that this shift…will allow us to compete more effectively in today’s market environment,” Bryant said. Kellogg explained that the change isn’t too big of a transformation, because more than three-quarters of U.S. sales already rely on warehouse distribution.
But the pivot was badly needed for U.S. snacks, which includes the Keebler, Cheez-It, and Town House brands. Paul Norman, president of Kellogg’s North American business, told analysts that shopping patterns are drastically changing. Consumers—in particular millennials—are making more trips to the store, buying fewer items, leaning on e-commerce, and also shopping the perimeter of the store more than the interior where Kellogg goods are generally stocked.
“We need to invest in our business in different ways, too,” Norman said. He added that too many of the U.S. snacks unit’s resources were being dedicated to distribution. “That doesn’t allow us to invest enough in activities that resonate better with today’s consumer and to drive our categories, including brand building, shopper marketing, new package formats.”
Kellogg said that the distribution transition would help boost a cost-savings program to reach $600 million to $700 million through 2019, up from the prior estimate of $425 million to $475 million through 2018. But Kellogg also warned that sales for the U.S. snacks business would slow again in 2017, due to the disruption from the distribution change and some reduced pricing.
