Last April, Procter and Gamble announced its intent to sell its Pringles® snack potato chip business to Diamond Foods. 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 were eventually sacked as a result of these revelations. P&G then sought another buyer and found one in the Kellogg Company which quickly agreed to a $2.7 billion all-cash deal to acquire this global brand and its business operations. Similar to Diamond before, and other would-be suitors, Kellogg was provided an immediate opportunity to become a top player in the global savory snacks business.
At the end of April came news that Kellogg had indeed completed its acquisition of the Pringles chip and cracker product line, ahead of schedule, and in-effect, making Kellogg the number two savory snacks provider behind PepsiCo’s Frito-Lay, and tripling that company’s international snack business. With the acquisition completed, Kellogg is presented with obvious supply chain business process and technology synergy opportunities.
As Supply Chain Matters has noted in our previous commentaries, 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 estimates of the combined synergies were reported as $10 million in 2012 and between $50 million and $75 million after 2013.
We also re-state our view that it would be very wise for Kellogg’s SCM team to allow the Pringle’s SCM team to lead in driving global distribution business process and investment learning. Kellogg’s for the most part has been emphasizing a direct-to-store distribution model which does not lend itself well in emerging markets. Kellogg also took on a considerable amount of debt, reported to be about $2 billion, in order to finance this acquisition. It would be a shame if the need to fund this debt triggers more short-term aggressive cost reduction efforts within Kellogg’s supply chain activities. Kellogg has also had some previous supply chain related quality setbacks related to past product recalls involving its Eggo product line prompting its new CEO to previously declare that the company needs to restore investor confidence in Kellogg supply chain capabilities.
Now is the time to build integration and collaboration in global-wide supply chain process capabilities. P&G is among the top five rated supply chains and provides proven abilities in managing global supply chain fulfillment and distribution, and the Pringles team has certainly fulfilled that mission. Much synergies can be gained from the combined group. 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. Kellogg teams can gain valuable learning and insights particularly regarding deployment and use of SAP advanced supply chain related applications.
A new, more dynamic era begins for Kellogg’s internal and external supply chain teams with higher stakes and rewards. The coming months should bear close watching.