Swiss food giant Nestlé has announced it is transitioning from a direct-store-delivery (DSD) network to a warehouse model in the US, a move that will see the closure of eight frozen distribution centres and frozen inventory transfer points.
Bloomberg estimates the move, which will be completed by the second quarter of 2020, will result in the loss of 4,000 jobs.
Nestlé said the measures – announced at a shareholder event in Arlington, Virginia – will enable further growth in its ice cream and pizza businesses by simplifying the route to market.
“This change will leverage the highly-efficient warehouse network that Nestlé already uses for its frozen meals and snacks, which will enable the company to better meet the needs of retail customers and consumers,” it said.
News agency Bloomberg said the restructuring exercise will see the elimination of an operation that now includes 230 facilities, 1,400 trucks and 2,000 different routes.
It suggested the cuts represent about 8.3% of the company’s US workforce of 48,000 people.
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Steve Presley, chairman and CEO of Nestlé USA, said: “Ice cream and pizza are growing categories in which we hold strong leadership positions. As we continue to focus on driving long-term profitable growth, leveraging a simpler route to market unlocks resources we can use to fuel our efforts in demand generation, such as product innovation and brand building.
“Moving to a warehouse model has numerous benefits for us and our retail customers. By taking advantage of the unmatched breadth and depth of our existing frozen warehouse network, our retail customer partners can better leverage their existing networks.”
Presley described the change as “a win-win for Nestlé and our customers” but admitted the decision “will impact employees in our sales and supply chain teams, and will result in the closure of eight company-owned frozen distribution centres and our frozen inventory transfer points”.
Whilst its has been widely-estimated in the US media that the changes will eliminate 4,000 jobs, that figure has not yet been confirmed by Nestlé.
News agency Reuters quoted Nestlé as saying its plans would mean a one-time cost of about US$500m and a one-time negative sales impact of about $450m.
During the investor presentation on Tuesday (7 May), Nestlé chief executive Mark Schneider said. “This is massive … in terms of the value it can translate into.”
Pondering the company’s decision, Andrew Wood, an analyst at Bernstein who follows Nestlé, said: “US frozen has been a high-profile headache for Nestlé for most of the last decade.”
He added: “After five years of sales declines and share losses from 2010-2014, management made a significant public effort to turn this business around in 2015, with some signs of success in 2015-2016. However, while 2017-2018 saw a market recovery (+3.5% in 2018), Nestlé continued to suffer declines (-0.4%) and it lost triple-digit bps [basis points] market share in most periods.”
Wood concluded: “We continue to believe that a strategic review/disposal of US frozen food should be one of the steps of [CEO] Schneider’s ‘Quiet Revolution.'”
Another major food business, Kellogg, made a similar decision to move away from the DSD delivery model for its US snacks business in early 2017. This cost-cutting exercise resulted in the loss of 1,200 jobs.