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.

A couple of days ago, I heard a local TV news story that indicated that Kellogg was experiencing a nationwide supply shortage of its Eggo brand of frozen waffles.  The context of the story was that consumers across the country were bummed out. My initial reaction was to tuck this story away for perhaps an upcoming Supply Chain Matters blog post on continued difficulties in ramping-up supply chains in post recession recovery.  But today, there is a totally new and more concerning twist to this ongoing situation.

ABC News is reporting today that while Kellogg Company blamed a nationwide shortage of its Eggo brand frozen waffles on plant flooding caused from heavy rains, that is only part of the story.  The Atlanta production facility was reported to be closed during much of September and October to actually sanitize the plant after inspectors discovered Listeria monocytogenes in a sample of Eggos within the plant.

The story further indicates that Kellogg agreed to recall about 4500 cases of Eggos on September 2 after a routine state inspection discovered the presence of Listeria. A Kellogg spokesperson indicated the plant was closed for both (initial) cleaning and as a result of the later incident of flooding. In an email sent to ABC News, the spokesperson wrote: “Just as the Atlanta facility was ready to resume production, excessive rain in the region caused flooding at the facility, which delayed the start-up.”

The assistant commissioner of consumer protection for the Georgia Department of Health also indicated that Kellogg had entered into an agreement with state and federal officials on a “hygienic restoration plan”, but in late September as Kellogg was ready to reopen the plant, heavy rains hit Atlanta. That same official indicated that flood waters did not appear to enter the plant, but Kellogg wanted time to perform their hygienic restoration over again.

Meanwhile, it appears that Kellogg has been embarking on its own social and traditional media driven campaign to lament the large shortage of Eggo waffles. A posting that today appeared in the Huffington Post, of all places, notes that there will be a nationwide shortage of the popular Eggo frozen waffles because of interruptions in production at two of the four plants that produce the product. It further acknowledges the shutdown of the Atlanta plant because of flood, and notes that several production lines at its largest bakery in Rossville Tennessee are closed indefinitely for repairs. The same Kellogg spokesperson quoted in the ABC News story who half acknowledged the Atlanta shutdown was caused by both hygienic cleaning and flooding, is quoted in the Huffington Post as not knowing how long the Atlanta plant was shut down, but indicated it is back at full production now.

The Huffington posting notes that news of the shortage spread quickly on Twitter as shoppers reported not being able to find their favorite breakfast food, and are apparently in lamenting the scarcity on Facebook as well.  The final tip off is that the article closes with web links to Kellogg Eggo related web sites including www.leggomyeggo.com.

After reading both of these postings, as well as other related news accounts, I must state that from my perspective of supply chain risk management, I am totally confused as well as concerned.  Rarely have I ever heard of production lines at a supply plant being closed indefinitely without more specific information as to cause. The various accounts of what really led Atlanta to shutdown are also convoluted. And finally, comes the statement that it will take the middle of 2010 before shelves around the country are re-stocked at pre-shutdown levels.  That amounts to seven months of production and half a year’s worth of sales impact!

In the interests of rationality, and not knowing all the specific facts related to this ongoing disruption, I won’t attempt to speculate any further in my posting as to what’s really going on at Kellogg.  Hopefully more rational explanations will come forth, and I welcome any of them. 

But, I certainly hope that Kellogg is not undertaking a twisted social media campaign to have consumers lament the nationwide shortage of Eggos in order to save face to what’s really occurring in their supply chain.  

When the threat of product contamination occurs anywhere in the supply chain, it is best to err on the side of safety.  This blog has commented on many incidents over past months where this has occurred.  The most public was the recent contamination incidents involving peanut products.  Our external view indicates that Kellogg has taken extraordinary action to do the same. But a social media campaign to motivate consumers to lament the shortage of their favorite breakfast food is in my view, over the top.

 Bob Ferrari

Just about a week ago, I alerted Supply Chain Matters readers to the ongoing investigation by the U.S. Center for Disease Control of a human outbreak of infection due to Salmonella serotype Typhimurium. At the time, 388 persons were identified as sickened, with ongoing investigations from multiple agencies to determine the cause. As of today, the number of reported sick has risen to 430, and five deaths have been reported across three states (Idaho, Minnesota, and Virginia).

It has not taken long to now identify the potential cause of this outbreak linked to peanut butter.  Virginia based Peanut Corporation of America (PCA), which distributes its peanut butter in bulk to institutions, private label food companies, and other food producers, issued a nationwide recall on January 13^th for 21 lots of peanut butter made since July 1 at its plant located in Blakely Georgia.  PCA utilizes the brand Parnell’s Pride in its institutional products, and is also sold by the King Nut Company under the name of King Nut, An open container of King Nut peanut butter in a Minnesota long-term care facility was found to contain the strain of salmonella.

While FDA and media reports continue to stress that none of the recalled peanut butter is sold to end consumers in retail stores, the implications of the potential contamination will echo through various food production supply chains, and indirectly impact consumers.  The first indicator is that The Kellogg Company announced a precautionary hold of the sale of a variety of its Austin and Keebler branded peanut butter cracker  sandwiches.  Consumers and retail stores are being asked to hold onto the Kellogg products, but not eat them, until the investigation is complete.

We need to applaud PCA and King Nut for their prompt and proactive actions in voluntarily recalling their institutional products.  I especially applaud Kellogg for taking bold action to not only protect consumers, but proactively respond to a supply chain risk situation.  Crisis what-if, and business continuity planning are important tenets of an effective supply chain risk management plan.  This ongoing situation is yet another opportunity to observe these plans in action.  Other consumer product companies utilizing peanut butter or paste should focus upstream and proactively act.  Consumers and customers should be your first priority.

Bob Ferrari