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Kellogg to switch delivery model for U.S. snacks unit to cut costs

Kellogg's Corn Flakes cereal is pictured at a Ralphs grocery store in Pasadena, California August 3, 2015. REUTERS/Mario Anzuoni/File Photo

(Reuters) - Corn Flakes maker Kellogg Co said on Wednesday it would stop distributing its U.S. snacks business's products directly to stores and instead switch to its more widely used warehouse model in order to cut costs.

The U.S. snacks business, which includes Cheez-It crackers, Pringles chips, Special K cereal bars and Keebler cookies, accounted for about 25 percent of Kellogg's total sales in the third quarter ended Oct. 1.

The business reported sales declines in 2014 and 2015 and the first two quarters of 2016, before posting flat sales in the third, led by core brands such as Cheez-It and Pringles.

The switch in the distribution model is expected to bring the business's operating profit margin in line with that of its North America business, Kellogg said.

About 75 percent of the company's U.S. sales, including products in its frozen foods and morning foods businesses as well as some in the snacks business, are done through the warehouse distribution model, Kellogg said.

" ... We realize both higher service levels and share in the U.S. Snacks categories and channels that sell through warehouse distribution already," said Paul Norman, president of Kellogg North America.

The company said the shift in the distribution model will be part of an expanded "Project K" program, which it launched in 2013 to save up to $475 million annually by 2018 through job cuts and production optimization.

This is not the first time Kellogg is resorting to revamping its U.S. snacks business to spark growth. The company had overhauled the unit's sales force in the first quarter by changing employees' roles, managers and zones.

Kellogg, which is scheduled to report fourth-quarter 2016 results on Thursday, said it would start the transition in the second quarter of 2017 and expects to complete the move in the fourth quarter.

The company, which also makes Pop-Tarts and Froot Loops, said it would provide severance, benefits and retention packages to employees impacted by the transition.

Kellogg's shares were marginally higher, up 0.15 percent at $73.60, in trading after the bell.

(Reporting by Jessica Kuruthukulangara in Bengaluru; Editing by Savio D'Souza)