Chobani: Sour Milk Never Tasted So Sweet

How a Turkish farmer grew a 90-year-old abandoned Kraft factory into the world’s largest yogurt plant.

In 2005 the only way to get Americans to eat yogurt was to load it with sugar, preservatives, and pastel-colored dyes.

At least, that’s what Yoplait and Dannon thought.

That same year Turkish immigrant Hamdi Ulukaya saw a listing for a 90-year-old dilapidated Kraft yogurt factory in New Berlin, NY to be sold with milk processing machinery as-is. Against advice from his lawyer, Ulukaya filed for an $800,000 loan from the Small Business Administration, purchased the plant, and founded Chobani, a strained yogurt manufacturing company that brings pure yogurt to the masses. [1]

Since then, Chobani has expanded rapidly, reaching a billion dollars in revenue within its first five years of operation. [1] How did a niche packaged foods player outcompete larger incumbents to achieve Silicon Valley-level growth?

From: chobani.com
Chobani Bite [7]
Chobani focused its business model on delivering affordable, high-quality yogurt to the average consumer. To deliver on this promise, the company configured its operating model to source large volumes of quality milk, process the milk using its proprietary recipe, and deliver individually-wrapped yogurt containers at scale. The company successfully aligned business and operating model by implementing the following strategies:

 

From: chobani.com
Yogurt cup filling process [7]
Scaling sustainably. Chobani received no outside equity investment. The company is wholly-owned by Ulukaya and financed through debt. [2] As a result, the company had to balance operational shortcomings with its business objective of scaling quickly. Its first factory in New Berlin is emblematic of this tension. A labyrinth of stairways and tangled equipment, the plant has been expanded and reconfigured to double capacity multiple times as orders rolled in. Instead of buying new equipment, Chobani retrofitted used equipment to deliver the product customers demanded. This minimized upfront capital expenditure and ensured that money was only invested once there was proven long term demand.

As of 2013 the New Berlin plant operated 24/7. Machines were on for 10 hours followed by a four hour cleaning period. Workers operated in a four-shift system, wherein employees worked two 12-hour days followed by two full days off. [3] Given the plant’s stretched capacity, Chobani built the world’s largest yogurt plant in Twin Falls, Idaho in late 2013. Using an innovative design-build approach that combined the engineering and design steps of construction, the $450 million plant was constructed in 10 months rather than the usual two year time horizon. [4] The Idaho plant accommodates 14 production lines and can process 11 million pounds of milk per day. [4]

From: chobani.com
Chobani’s first plant in New Berlin, NY [7]
Arrow

From: chobani.com
Chobani’s Twin Falls Plant, the world’s largest yogurt plant [7]
Delaying new plant construction until absolutely necessary allowed Chobani to remain nimble in its early days and invest money only in products that sold well. This agility in operating model was a major advantage. A/B testing products at Yoplait simply wasn’t as easy as it was in Chobani’s highly experimental facility.

 

 

 

From: chobani.com
Packing Cases [7]

Focusing on mainstream retailers. Unlike existing “Greek” yogurt producers, Chobani targeted the mass market by pricing its product at $1.50, slightly above the 99 cent traditional yogurts but far below the $3 gourmet yogurt that sold in health food aisles. [2] The company also ignored specialty retailers and instead grew relationships with mass-market retail stores such as ShopRite. Shelf space was expensive. At $10,000 per SKU, Chobani could not afford to stock its product alongside more established competitors. [2] The company therefore negotiated paying slotting fees in installments, which helped smooth out costs.

 

Maintaining milk vendor relationships above all else. Not only does yogurt production require large capital expenditure up front, but it also has high working capital requirements. Ulukaya prioritized relationships with key suppliers and let payments to other vendors fall behind in order to remain solvent. [2] He identified milk suppliers and his employees as top priority and made sure to pay them first. Prioritizing relationships ensured that Chobani stretched every dollar to scale its business and continually improved its cash conversion cycle.

Chobani's production process as presented to consumers [6]
Chobani’s production process as presented to consumers [6]
Even with deliberate focus on scaling responsibly, Chobani operations have not gone without a hitch. In late 2013 the company had to recall an undisclosed number of its yogurt cups after reports of fizzy yogurt. Caused by mold in Chobani’s Idaho plant, the spoiled yogurt caused only minor illness in some consumers. [5] Nevertheless, as Chobani’s first recall, the incident served as a warning sign to scaling too quickly. Since the incident, the company has refocused on maintaining quality throughout its operating model but has vowed to continue keeping preservatives out of its recipe.

With rumors of a near term IPO, Chobani’s high growth highlights the importance of aligning operating objectives with an agile business model in order to be able to face industry giants head on.

 

 

Sources:

  1. Rebecca Mead, “Just Add Sugar,” New Yorker, November 4, 2013.
  2. Hamdi Ulukaya, “Chobani’s Founder on Growing a Start-Up Without Outside Investors,” Harvard Business Review, Entrepreneurial Finance, October 2013.
  3. Bryan Gruley, “At Chobani, the Turkish King of Greek Yogurt,” Bloomberg, January 13, 2013.
  4. Amy Florence Fischbach, “Chobani Builds World’s Largest Yogurt Plant,” Electrical Construction and Maintenance, February 18, 2014.
  5. Cadice Choi, “Chobani Recalls Greek Yogurt Cups,” Huffington Post, September 5, 2013.
  6. “The Chobani Story,” Chobani Media Kit.
  7. Chobani multimedia: http://www.chobani.com/media

 

 

Previous:

McKinsey – A Lack of Structural Optimization

Next:

Elsevier: empowering knowledge or “enemy of science”

4 thoughts on “Chobani: Sour Milk Never Tasted So Sweet

  1. Interesting! (And great title)! I knew very little about the founding of Chobani but they are clearly an incredible success story. It would be interesting to learn more about what caused the spoilage in January 2013. Obviously in food processing quality is number one, so it would be interesting to better understand what caused this issue and what steps they took in the future to prevent something like that from happening again.

  2. Great post! With the last decades “health craze,” I’ve seen the yogurt aisle become more and more crowded (in terms of customers and offering varieties). You are totally right when you say that Chobani offers that middle price point between the high-quality niche $3+ yogurts and 99cent traditional yogurts. It amazes me that they are so successful with this strategy because sometimes when companies pick a middle price point, they actually lose out on both extremes of high-quality consumers and low-quality consumers. Somehow Chobani seems to capture both at $1.50. I would love to see if Chobani expands it’s product offering in the next few years as they have become a trusted brand in the dairy aisle and would certainly be able to use some brand equity to sell things like smoothies / milk / etc.

  3. Very interesting post! I’d be interested to understand Chobani’s process for innovation. I know they had been struggling last year financially and their Chobani “flip” product really saved them. What is their current strategy for deciding what products to launch? What products to market? What role does the R&D team play in the product launch process? Additionally, as Chobani thinks about future growth in an already saturated market, I wonder if there is an opportunity to break into other product categories like cream cheese or sour cream, utilizing their existing recipes, as well as to expand its target customer from the “female shopper” to the “male who chooses chips and chobani dip.”

  4. Very insightful post Sophia. This is a great example where timing the market plus efficient operations leads to success. I love the fact that Ulukaya was able to get an old plant for cheap, improve its operations while riding on a growing market wave, and later scale to a second state-of-the-art plant by apply all its operational learning. From a quick Wikipedia reference it looks like Ulukaya has a diary background but not manufacturing, so it’s very interesting to see manufacturing it’s something that could be learned over time!

Leave a comment