by Hamdi Ulukaya
Photography: Getty Images
I’ve always loved yogurt—the thick kind I grew up eating in Turkey, where my mother made it from scratch on our family’s dairy farm. When I moved to the United States, in 1994, I found American yogurt to be disgusting—too sugary and watery. If I wanted yogurt, I usually made it myself at home. So when I came across a piece of junk mail advertising a fully equipped yogurt factory for sale, in March 2005, I was curious. The factory was about 65 miles west of the feta cheese company, Euphrates, that I’d started in upstate New York a few years earlier. In 2005 Euphrates had fewer than 40 employees and about $2 million in sales; it was barely breaking even.
Kraft owned the yogurt factory, and it had decided to get out of the yogurt business. The advertisement showed some photographs of the building, which had been constructed in 1920 and appeared to be in rough shape. On a whim, I called the broker and arranged to drive over the next morning to take a look.
The factory was a sad place, sort of like a cemetery, in a very small town. Fifty-five employees were preparing to shut it down. A lot of equipment was included, but it was old. The best thing about the place was the price: less than $1 million. Some of the individual machines would cost more than that if purchased new.
On the drive home I called my attorney, who is my main business adviser. I told him I wanted to buy the factory. He thought it was a terrible idea. He had three good arguments: First, because I’d be buying it “as is,” I really had no idea how well it would function. Second, Kraft is a pretty successful company, and if it was giving up on this facility, this town, and the yogurt industry, maybe it knew something I didn’t. Third, and maybe the strongest objection, where was I going to get that kind of money? He was right: At that point, I had nowhere near enough money for such a big purchase.
But as it turned out, I was able to borrow the money to buy the factory—and after Chobani hit the market, I financed our growth through further bank loans and reinvested profits. This is a crucial piece of the Chobani story. Our ability to grow without reliance on external investors—the venture capitalists, private equity types, strategic partners, and potential acquirers who’ve offered us money since we launched—was vital to our success. Today Chobani is a $1 billion business, and I remain the sole owner. That means I can run the company the way I choose—and plan for its future without pressure from outsiders.
Too many entrepreneurs believe it’s impossible to scale a business without relying on VCs or other equity investors. That view is wrong. If I could grow a company from zero to $1 billion in less than a decade in a capital-intensive industry, many other businesses can too.
Slotting Our Cups
To buy the yogurt factory, I obtained a bank loan backed by the U.S. Small Business Administration. I learned about SBA loans from two loan officers at KeyBank. I spent two days writing a business plan, offered a personal guarantee, and put up 10% of the purchase price. The bank and the government put up the other 90%, with a low interest rate and a 10-year term. The loan was sufficient to create a small amount of working capital in addition to the purchase price. The process took about five months, and on August 17, 2005, I had the keys to the factory.
I immediately hired a master yogurt maker from Turkey, and we spent the next two years perfecting our recipe. I hired four employees who’d worked at the Kraft plant, and because we had nothing to produce, I kept them busy repainting and repairing the factory for a few months. By early 2006 we’d begun making private-label American-style yogurt as a contract manufacturer for other companies, just to bring in some revenue.
In addition to fine-tuning our own recipe, we worked hard to get the packaging right. This was a big expense—about $250,000. American yogurt has always been sold in containers with relatively narrow openings. In Europe yogurt containers are wider and squatter, and that’s what I wanted for Chobani—I wanted the package to signal that the product inside was very different.
By late 2007 we were ready to go to market. At that point we made several crucial decisions that allowed us to finance our growth once the business took off.
First, we insisted that Chobani be sold in mainstream grocery stores rather than specialty stores, and that it be stocked in the dairy aisle, alongside existing yogurt brands, rather than in the gourmet or natural food aisles. That’s probably the single most important decision we made. Although many Americans had never heard of Greek yogurt until Chobani launched, at least one rival brand had been selling Greek yogurt in specialty stores since the mid-1990s. But because it had limited distribution, it remained a tiny niche product. We wanted Chobani to be accessible to everyone. If we’d said yes to early offers from specialty stores, the company never would have grown as quickly as it did.
Second, we negotiated with retailers over their slotting fees. Most big supermarkets were asking a minimum of $10,000 per SKU to stock our product, and some were asking up to $100,000, so if we wanted to put six flavors of yogurt in a store, it would want an up-front payment of at least $60,000. We didn’t have that kind of money. So we negotiated to pay off the slotting fees over time as the yogurt sold.
Third, I worked really hard to determine the right unit selling price to fund future growth. I spent a lot of time figuring out our cup costs, ingredient costs, and labor costs, and I made a simple model to calculate the exact price that would allow us to break even once we hit 20,000 cases a week in sales. That’s a relatively low volume: It meant that if customers liked the product, we’d quickly be profitable and could reinvest our profits in growth. We ended up charging less than $1.50 a cup—more than traditional American brands (which typically sold for less than $1), but far less than the European-style yogurt that sold for $3 to $5 in gourmet stores. A lot of new companies would have launched at a lower price and tried to raise the price later. I avoided that by figuring out an initial price that made long-term sense.
Often when a start-up launches a product, there’s an agonizing wait to see if customers will buy it. We didn’t have that problem. Within a couple of weeks after Chobani got into ShopRite, we started getting orders for 5,000 cases. The first time we received one, I kept double-checking to make sure it didn’t say 500. It quickly became clear that our biggest challenge wasn’t going to be selling enough yogurt—it was going to be making enough yogurt.
Over the next 18 months we found ways to increase the capacity of our factory without making big investments. We couldn’t afford new equipment, so we went around the country to find used equipment and arranged to buy it on installment. Eventually we retrofitted our filling machine—the big constraint on our plant—so that it could handle 100,000 cases a week. We also limited our capital investment by relying on manual labor instead of automation: For instance, the finished cups of yogurt were hand-packed in cartons. During that time I rarely left the factory—I slept there most nights.
We were extremely careful with cash. Too many start-ups hire people in anticipation of growth; we waited until the business was bigger. Every Friday I met with our finance guy. I made sure that our employees and our milk suppliers were paid on time, but we let a lot of other bills go a little longer. Because we had set up the business to be profitable early, every cup of yogurt we sold gave us more free cash. Our model had other advantages: Yogurt is perishable, which limits inventories; and supermarkets pay us promptly after delivery, whereas most of our suppliers give us a month or two to pay. That really helped our cash flow.
Sticking to the Mission
A few months after our first sale, I began getting calls from potential investors. In early 2008 we attended a convention in Anaheim called Expo West, where natural products manufacturers meet buyers from big retail chains. The show attracts a lot of investors, and we were repeatedly approached by people who said they’d like a stake in Chobani. Most of them said we would need much more cash if we really wanted to grow. They also said we’d benefit from having experienced managers and strategists aboard, to help us figure out how to navigate as we grew larger.
This was all new to me. I didn’t even know what private equity was. I was running Chobani as a simple mom-and-pop operation. I had no strategy for dealing with potential investors. But Greek yogurt was becoming so popular that bigger players such as Dannon and Yoplait were going to launch their own versions. We needed to grow quickly enough to prevent established companies from stealing the market we’d created. So it felt like the race was on.
Source: Nielsen
For a while I took calls and meetings with private equity firms. It was a learning process. They try to make you doubt yourself—it’s a standard part of their pitch. I kept hearing the same things over and over: “You’ve never done this before.” “This is not a world for a start-up.” They talked about the size of the marketing budget I’d need when Dannon came in. They emphasized the experience and sophistication and knowledge they’d bring to my business.
But the more I thought about it, the more confident I grew. We didn’t have experience, but most of our early decisions had been right. The product and packaging were really good. We’d gotten our product into the dairy aisle when experienced people said it belonged in the natural foods section. And the word of mouth was so strong that marketing was taking care of itself. Besides money, what exactly would these people bring to the table?
One reason I could have that attitude is that Chobani’s quick success had made our bankers willing to fund our growth. In 2009 we needed to make a big investment to boost our capacity. We were selling 200,000 cases a week, and I wanted to increase that to one million cases. We’d need at least $30 million in new loans. By then our bankers had been watching us for four years, and they’d seen growing profitability over the previous 18 months. Our growth projections were based on simple math: We were still selling mostly in the Northeast, and if supermarkets in the rest of the country sold as much Chobani as our existing accounts did, the demand would easily justify our expansion plans.
I also knew that as soon as I took money from investors, the clock would start ticking. Private equity investors want to cash out in five to seven years—they would probably push us to sell Chobani to a big food company. I’ve seen other small food companies go that route, and inevitably they lose their souls. I care about the integrity of our product—I want it to be delicious, nutritious, and accessible to everyone. If I took on investors, my ability to stick to this mission would be limited. I had spent two years living in that factory; it was working now, and it was my baby. Eventually I simply stopped returning calls from potential investors. There really wasn’t anything to talk about.
Bigger competitors did bring their own Greek yogurts to market, but much more slowly than I’d expected. When I first tasted one of them, it was so terrible I thought it must have spoiled. I sent someone out to buy a few more cups, but they all tasted the same. I even wondered whether the company might deliberately be making its Greek yogurt taste terrible in an attempt to turn off consumers and spoil the entire category in order to preserve the profits of its established brands of sugary yogurt. I had put aside $7 million for a big ad campaign when our larger rivals launched their Greek yogurts, but after I tasted their products, I canceled the ads. There was no need.
Today we have a syndicate of banks and a credit line to meet our capital requirements. In December 2012 we opened a factory in Idaho, and altogether we’ve invested about $700 million in our plants and equipment. Today we produce more than 2 million cases of yogurt a week, and our business is still growing.
The biggest downside of our self-financing approach is that nearly 100% of my net worth is in Chobani. To financial planners, that’s a nightmare scenario. Every single one of my advisers thinks I should sell a stake in order to diversify. “What if something happens tomorrow?” they say. But I don’t think enthusiasm for our product is a short-lived thing. Yogurt is just getting started in America. Canadians eat one and a half times as much per capita as Americans, and Europeans eat up to seven and a half times as much. Now that good yogurt is available here, people are eating more. Foodies and chefs and nutritionists love it.
Eventually we may take Chobani public. If I’m not going to sell it to a big food company or turn it into a family business, I’ll need to set up some way for it to live beyond me. I’m not sure how I’ll choose to turn Chobani into a legacy—but that’s a nice problem to have.
Editors’ Note: In 2012 Ulukaya was sued by his ex-wife, Ayse Giray, who claims that money she invested in his feta cheese business in the early 2000s provided the initial financing for Chobani. She is seeking a 53% stake in Chobani. The company says Ulukaya has always been and remains the sole shareholder of Chobani, and no shares of the cheese business have ever been issued to any outside investors.
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