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How The Kellogg Company Fell Out With Honduras

A series of lawsuits between the company and its exclusive distributor in the Central American country have prevented it from selling its products

Breach of contract.
May 09, 2022 | 03:00 pm

San Pedro Sula — After decades of being part of the breakfast of millions of Honduran families, The Kellogg Company (K) has been unable to sell its cereals in the local market for more than a year, according to judicial authorities.

The history of the case dates back to October 1972, when the U.S. multinational agri-food company signed a private contract with local distributor Diapa (Distribuidora de Productos Alimenticios) for the distribution and representation of the Kellogg brand in Honduras.

The contractual relationship helped Diapa become the largest consumer products distributor in the country, with a catalog of more than 2,500 food, cleaning, personal care and other products.

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Also, “this relationship made the brand grow in Honduras, to the point that it is not just anyone who has maintained since 1972 a contractual relationship, but that began to change by 2014, and we found out about it in 2017″, according to Juan Diego Lacayo González, director of JDL Abogados, one of the law firms that assisted Diapa during the legal process.

In an interview with Bloomberg Línea, Lacayo González explained that, by 2017, the distributor’s lawyers learned that Kellogg had appointed third party companies that were distributing the same products for which Diapa had signed an exclusive distribution contract in the country.

According to legal representatives of the distributor, the multinational company began to sell directly to all of Diapa’s competitors, causing the Honduran company to run out of Kellogg product in the warehouse and thus lowering its sales rates.

“We realized that there was a duality, and that someone in Kellogg had decided that for these markets, where the contracts were of long standing, it was necessary to break them, basically, so that the market size would increase and the consumer could have other options that they did not necessarily want to give to Diapa”, added Lacayo González.

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Fifty years ago, Honduras had 2.8 million inhabitants and there were few companies with the sufficient financial muscle to purchase volumes of projects. However, the context changed as the population grew and the country began to see more commercial activity.

“The evolution of the market in the world has made exclusive representations difficult,” Lacayo Gonzalez said. “A decision by directive of the parent company (of Kellogg) eliminated all those exclusive contracts, and so they went country by country, eliminating them, until in Honduras they wanted to do it the hard way”.

Legal Processes

In 2019, Kellogg de Centroamérica filed a lawsuit against Diapa before the Conciliation and Arbitration Center of the Tegucigalpa Chamber of Commerce and Industry, in which it sought a ruling on the breach of contract by the distributor and a declaration of the termination of the private representation and distribution contract in Honduras.

The lawsuit also sought the payment of $16.6 million in compensation for damages, as well as the covering of the costs of the legal process.

Kellogg's has been around for almost 120 years.dfd

However, the ruling required the multinational to reestablish the exclusivity agreed with Diapa in the distribution of its products in the Honduran market, as contemplated in the terms of the contract.

When filing the annulment appeal on January 12, 2021, this time before the First Court of Civil Appeals, Kellogg expressed its concern over the economic losses generated by the breach of contract.

In addition, there was a lack of sufficient product to supply the Honduran market, the incorrect application of discounting of credit notes without authorization, and the subordination of payment on the issuance of credit notes when there had been no authorization to discount or reduce amounts that had not been effectively traded.

The company added that the distributor had generated expenses of $27,820, some 681,868 lempiras (HNL), for delays at ports due to the lack of payment of customs charges. It also reported the sending of digital images of supposed payments that were reflected in the system weeks or months later, and a lack of compliance with the distribution contract and the law for distributors, agents and foreign companies, regulations dating from December 1977.

Kellogg argued that the distributor’s poor sales performance, lack of payment and poor customer service was affecting its reputation.

However, the distributor demonstrated that Kellogg breached the agreed geographic exclusivity clause by proving that partner companies of the conglomerate were importing products into Honduras through third parties.

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For this purpose, they suppressed the brand of the packaging of the products and altered the distinctive name of three of its most commercialized cereals in the country: Corn Flakes, Choco Krispis and Zucaritas, apparently to avoid the risk of the detention of the articles by Honduran customs, who realized that the products came from the Kellogg plant in Toluca (Pronumex), the same manufacturer of the cereals.

The Court of Appeals determined that Kellogg had not complied with its obligations and, as a result, could not make demands on the other party, and the lawsuit was thrown out. According to the judiciary, Kellogg also failed to prove any of the grounds alleged in the appeal for annulment.

Why Can’t Kellogg Sell Its Products in Honduras?

As part of the arbitration proceedings, Kellogg had asked the judge for an interim injunction, which consisted in preventing Diapa from introducing or selling its products in Honduras, by suspending the company’s status as exclusive distributor, and which had been in force during the entire legal process.

However, when the judgment of acquittal was issued, the Sentencing Court decreed another precautionary measure, in which it indicated to Kellogg that, until it complies with the ruling, and until it restores the exclusive distribution relationship with Diapa, it may not market its product, since Diapa is the only distributor authorized to do so.

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What Does Kellogg Say?

In an interview with Bloomberg Línea, Kellogg Latin America’s director of corporate affairs, Roberto Vásquez, said that, “unfortunately for our Honduran consumers”, the company “has been subject to manifestly biased resolutions, unique in the more than 180 countries where we operate, which we attribute to the influence that the local distributor Diapa has exerted”.

Vásquez added that publicly, the distributor “is recognized for having minimized its operations, widely failing to fulfill its obligations to its customers and affecting its suppliers, workers and other grantors, many of whom also have taken legal action that precede that between Kellogg and Diapa”.

He said there is concern that local laws support “these types of companies, and impede the economic and commercial growth of the Honduran market”.

Although it is currently hindered from serving the Honduran market, the company has expressed an interest in returning to Honduras, promoting investment, jobs and better food among domestic consumers.

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“There are many legal processes between Diapa and Kellogg regarding which, because many of them are ongoing, it is not possible to elaborate, but we can reaffirm, with full conviction, that the company will always be respectful of complying with the law, asserting its rights at all times before the appropriate authorities, and as permitted by Honduran law,” Vásquez said.

The multinational company added that it expects to see changes in the rule of law, “given the protection we have seen granted to a local company that is the subject of so many lawsuits from so many sectors.”

Diapa’s Current Situation

Due to the conflict with one of its main partners, Diapa, a company founded in San Pedro Sula in 1966, is currently “weakened” financially speaking. “The only one that has protected us is the law”, according to Lacayo González.

A Diapa building in Tegucigalpa.dfd

Meanwhile, the distributor has at least 20 lawsuits pending, in addition to other processes before the Labor Court and recent claims made by the distributor’s employees, who through a sit-in in June 2021 and covered by national media, denounced salary arrears and non-compliance with other labor rights.