The Supply Side: How Chobani challenged and beat the big players

by The City Wire staff ( 117 views 

Chobani yogurt founder Hamdi Ulukaya said began in mid-2005 on an 18-month project in a small kitchen with five employees to craft what he hoped would be a pure and natural form of Greek yogurt.

David Denholm, president and chief operating officer of Chobani, was a speaker at the SHOP Retail Conference recently held at the University of Arkansas. Denholm shared some insight into how this small U.S. company helped to revolutionize a product category in just three years.

Ulukaya was running a small cheese manufacturing facility at the time with sales of about $2 million and barely breaking even, when he saw a “for sale” ad in his junk mail for a fully equipped yogurt plant about 65 miles away. Against the advice of his lawyer and banker, he bought the 100-year-old shuttered manufacturing plant formerly owned by Kraft, and set out to create Chobani.

“Milk is a gift from nature, coming to us as good as nature can give us … so as a manufacturer we sought to add only natural ingredients,” Ulukaya noted in autobiographical blog for Harvard Business Review. “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.”

Denholm said Ulukaya, a fan of Sam Walton’s philosophies, sought to challenge the status quo and craft a purer yogurt following the DNNA plan, which means the yogurt must be “Delicious, Nutritious, Natural and Accessible,” Denholm said.

“How matters at Chobani. A cup of yogurt may not change the world, but how we make it might,” is the company mantra shared by Denholm during his talk. He said Chobani is committed to nutrition, which is not typically taught in school but something consumers need to know their entire life.

Within three years of Chobani’s product launch in 2007, it became a top-selling brand in the U.S. and led product revolution as other manufacturers tried to make up for lost time. Stuart Jackson, of Chicago-based L.E.K. consulting, said in his March 14 Harvard Business blog that Chobani gobbled up market share for a few years as the major food companies stuck to their regular lines of yogurt.

“Chobani went on to become the second largest yogurt seller in the U.S. and cost General Mills, Dannon, and other established players billions of dollars in sales,” Jackson noted on his blog.

Jack Sinclair, executive vice president of grocery for Walmart U.S., has said the explosive growth in the Greek yogurt category in recent years forced the retailer to revamp its freezer cases to accommodate all the new products coming online. Sinclair has also said consumers now want to know where their food comes from, and they want to know if it’s sourced responsibly. They want fresh and natural and believe they shouldn’t have to pay more for the better-for-you products, Sinclair said.

Jackson and blog co-author Manny Picciola note there are several key lessons that big food companies can learn from Chobani’s success. The consultants said food giants like P&G and Unilever need to play more “small ball” as they are generally trying to “swing for the fences” with new product launches. In doing so, they missed the ball on Greek yogurt. 

In the blog the consultants credit PepsiCo for its partnership with Sabra that unleashed a hummus craze that shows no sign of abating. They said General Mills’ Small Planet Foods is another example of a giant allowing a junior segment to operate autonomously from the mother ship.

Ulukaya has said he launched Chobani with almost no money available for promotion or advertising because “deep down I knew I had something very good.” To unleash food fads, companies need to have the same confidence and choose products they can believe in, Jackson noted. 

Controlled taste tests used by most large food companies to glean consumer preferences have taken companies down a path toward sweeter, fatter, and often unhealthy products. The consultants said big companies need to learn the difference between “good taste” and “tastes good.”

A fundamental difference between Chobani and other food giants is the focus on gross margins. Jackson said food giants need to end their obsession with ingredient cost which is one of the reasons they didn’t initially pursue Greek yogurt. 

“It costs more to make and contains less water than regular yogurt,” Jackson notes. “Food companies should distribute their gaze more evenly across their value chain. Instead of focusing primarily on downstream activities such as packaging and promotion, they should also look upstream to identify promising natural ingredients.”

The consultants add that great products can command premiums, and become popular with very little marketing spend.

Kale, quinoa, or chia anyone?