Last April, Procter and Gamble announced its intent to merge its Pringles® business into Diamond Foods. At the time, Supply Chain Matters believed that this deal had significant supply chain implications.  That was then. Like many business stories of late, unplanned and troubling events concerning Diamond have led P&G to opt for another suitor. The deal was undone by revelations that Diamond senior management has wrongly accounted for payments to walnut growers, and both Diamond’s CEO and CFO have been sacked.

This week, the new acquirer for Pringles® is cereal maker Kellogg Co., who as Diamond had before, has the opportunity to become a top player in the global savory snacks business.  This new all-cash deal has a total value of $2.7 billion and is expected to close by the summer, pending regulatory approvals. When the news broke, Kellogg’s stock price rose almost 5 percent, optimistic news that Kellogg has sought for some time. This new business adds an additional $1.5 billion in annual sales on a global scale along with many upside potentials, but Kellogg also takes on an incremental $2 billion in new debt.

The Wall Street Journal in its reporting noted that P&G heard from other interested parties in acquiring Pringles® but CEO Bob McDonald declined naming any of these.  We speculate that most all of the current top market players in global snacks were knocking on P&G’s door. The WSJ further noted that because of legal restrictions related to the previous deal with Diamond, the deal with Kellogg was consummated in all night sessions over the last four or five days. Kellogg’s last major acquisition was a $3.8 billion deal to acquire Keebler in 2000.

As we noted in last year’s commentary, Pringles dominant presence lies among mass merchandising (48 percent), grocery (25 percent) and convenience (12 percent). Kellogg on the other hand has a current high presence in grocery with some mass merchandising, but lacks any substantial global presence. Pringles should immediately add such presence, bringing along a world class manufacturing and supply chain capabilities, including production presence in the U.S. Europe and Asia, and a distribution presence among 140 countries. Pringles joins Kellogg’s other savory snack brands such as Cheez-It, Keebler, Nutri-Grain, Special-K Cracker Chips.  The addition of Pringles almost triples the size of the existing snacks business, and when completed Kellogg’s cereal and snacks business will be of similar size.  The initial estimate of combined synergies are $10 million in 2012 and between $50 million and $75 million after 2013.

Kellogg also has its own unique supply chain challenges having been involved in some visible product recall incidents involving Eggo® Waffles in 2009, and later a cereal recall. In January 2011 Kellogg’s CEO publically noted that the company would put additional time and effort into restoring investor confidence in its supply chain. Kellogg senior management has since taken some considerable heat from Wall Street analysts for admissions that it cut too much in supply chain resources and needed to invest in additional resources to insure consistent product processes which Supply Chain Matters praised.

The new challenge will of course be overall integration.  With Pringles, Kellogg inherits significant presence in emerging markets such as Latin America, China, Russia and other countries.  But as supply chain distribution professionals know, distribution channels and logistics to serve these markets are far different.  In our view it would be very wise for Kellogg’s SCM team to allow the Pringle’s SCM team to lead in driving global distribution needs. Kellogg’s for the most part has been emphasizing a direct-to-store distribution model which does not lend itself well in emerging markets.

From a technology and systems perspective, Kellogg has been in the process of re-implementing SAP within its U.S. operations, and management indicates that the addition of Pringles business presents an added opportunity to integrate within the SAP environment. P&G itself has provided ongoing service arrangements to transition Pringles and is a very sophisticated user of SAP applications, often serving as a lighthouse customer.  Here again, Kellogg teams can gain valuable learning and insights particularly regarding deployment and use of SAP advanced supply chain related applications.

As in the prior Diamond acquisition, on paper, the potentials of a Kellogg snack business with the addition of Pringles look rather promising but the devil always rest with the details.  For our part, Supply Chain Matters will keep a watchful eye on ongoing developments.

Bob Ferrari

© 2012 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.