To boost profit as sales drop, Kellogg squeezes small businesses, too

In nine years, Frank Canize has worn out two transmissions on his Chevy Express van, hauling Kellogg Co.'s Keebler cookies and Sunshine crackers from New Jersey warehouses to Lehigh Valley stores.

After his maintenance work as a Home Depot contractor dried up in the recession, Canize saw little choice but to start a small business.

"At 52, I had no job prospects. To support my family, I bought a Kellogg's route" from the company's distributor, he said. "I move 300, 400 cases a week, making good money."  Drivers keep about 14 percent of the gross, or around $2,100 in an average week, from which they pay gas, warehouse rent, taxes, any helpers, and keep what's left, according to a drivers' group. The classic American Dream.

"It worked out well," said Canize. "Until this year, when they decided to back out of the deals, and cut us loose."

Kellogg, like its larger rival General Mills Inc. and other big food companies that bake, salt, and sweeten grains, has posted lower sales in the last few years as consumers seek healthier foods. But Kellogg has continued to boost profits, and its share price, by adding new brands and cutting costs. Kellogg's decision to shut 39 distribution centers and lay off thousands of warehouse, sales and support staff, including nearly 300 in Horsham, Montgomery County, this summer, has drawn attention from elected officials such as U.S. Sen. Bob Casey (D., Pa.), who asked Kellogg to explain its job cuts in a letter Monday.

Less public is the damage that corporate streamlining wreaks on small businesses and contractors such as Canize's firm, Garden State Specialty Services, one of dozens of delivery outfits under exclusive contracts to handle Kellogg products in New York, New Jersey, and Pennsylvania.

Last month Kellogg officials at the company's Battle Creek, Mich., headquarters sent the distribution managers who handle the delivery firms a memo in corporate-speak: Under Kellogg's "new Snacks go-to-market strategy," the small delivery businesses "will no longer be leveraged," and "we are terminating the agreement effective August 4." Kellogg plans to ship its cookies and crackers by tractor-trailers, from the factory to store-chain warehouse, cutting out the little guys.

"I have substantial money invested in my route, and now Kellogg's has decided to end the system," said Canize. "They don't care."

Kellogg public relations staff didn't return phone and email messages seeking comment. An outside PR consultant who represents Kellogg agreed to pass inquiries to executives, but Kellogg had no response. Its general counsel, Gary Pilnick, and other Kellogg lawyers didn't respond. "I have nothing to say," added Michael Ambrosio, manager at W.M. Brown Group Inc., which contracts the delivery firms for Kellogg.

The firms now face making warehouse leases and truck payments, and cutting their own staff.

"I was a store manager for Target. I'd been a store manager 30 years, a lot of working weekends. I wanted to be my own boss for awhile," and to be able to work with his son, said James Colgan, owner of distributor Cele Corp., which services King's Supermarkets and Food Towns in north Jersey. In 2014, "I took $190,000 of my 401(k) money and bought a Kellogg's route, from a broker. Foolishly." He said Kellogg gave no warning. "Now I have none of that retirement money, no job, I'm in real trouble here," he said. "Some guys put their entire savings in it. This is destroying people's lives. It's not good, to be out of work at 59."

"My exposure is over $300,000," added TJF Snacks owner Douglas Raymond, who bought a route, a truck and a van in 2009 and hired drivers to haul Kellogg products to Staten Island stores. "Seems like theft," he said, calling it "a no-brainer" that Kellogg should pay for the routes it's taking.

A group of the delivery route owners sent a "letter of demand" to Kellogg and Brown on June 13. They blamed Kellogg's "pursuit of corporate greed" for terminating their rights and "unjustly enriching itself" at their expense. They concluded Kellogg should pay for their routes — at the usual price of about 30 times average weekly sales — or give them back their routes.

Abraham George, the New York lawyer who drafted the letter, says Kellogg hasn't responded. He said he has been talking to large Manhattan law firms to prepare a class-action lawsuit for the delivery firms.

In its outline, the case reminded me of the former Comcast installation firm owners who sued the cable giant in 2014, accusing bosses of encouraging them to buy trucks and hire drivers, then pushing them out of business by consolidating to a few national installers. Comcast has said in court filings that it has the right to fire and hire contractors as it chooses.

"That's the trend in corporate America," the drivers' lawyer, told me. "They tell us, 'Oh this is capitalism.' " And who can stand in its way?

"But our guys are working-class folks who saw this as a chance to make a living. Our guys accepted the company's process, and relied on it. For a company to all of a sudden disavow it — we just hope they'll go ahead and do the right thing. Give [the delivery people] mediation. Let them look at the books. Come to a fair agreement."