Chobani's Founder on Growing a Start-Up Without Outside Investors

HBR.ORG OCTOBER 2013 REPRINT R1310A

HOW I DID IT Chobani’s Founder on Growing a Start-Up Without Outside Investors The Idea: The author’s passion for the yogurt of his boyhood in Turkey—and the serendipitous availability of an old yogurt factory in upstate New York—combined to produce Chobani. Within three years it was the top-selling U.S. brand. by Hamdi Ulukaya FOR ARTICLE REPRINTS CALL 800-988-0886 OR 617-783-7500, OR VISIT HBR.ORG Hamdi Ulukaya is the founder and How I Did It… CEO of Chobani. Chobani’s Founder on Growing a Start-Up Without Outside Investors

by Hamdi Ulukaya ’ve always loved yogurt—the thick kind Kraft owned the yogurt factory, and it I grew up eating in Turkey, where my had decided to get out of the yogurt busi- Imother made it from scratch on our fam- ness. The advertisement showed some pho- THE IDEA ily’s dairy farm. When I moved to the United tographs of the building, which had been The author’s passion States, in 1994, I found American yogurt to constructed in 1920 and appeared to be in for the yogurt of his be disgusting—too sugary and watery. If rough shape. On a whim, I called the broker boyhood in Turkey— I wanted yogurt, I usually made it myself and arranged to drive over the next morn- and the serendipitous at home. So when I came across a piece of ing to take a look. availability of an old junk mail advertising a fully equipped yo- The factory was a sad place, sort of like gurt factory for sale, in March 2005, I was a cemetery, in a very small town. Fifty-five yogurt factory in upstate curious. The factory was about 65 miles employees were preparing to shut it down. New York—combined to west of the feta cheese company, Euphrates, A lot of equipment was included, but it was produce Chobani. Within that I’d started in upstate New York a few old. The best thing about the place was the three years it was the years earlier. In 2005 Euphrates had fewer price: less than $1 million. Some of the indi- top-selling U.S. brand. than 40 employees and about $2 million in vidual machines would cost more than that

PHOTOGRAPHY: GETTY PHOTOGRAPHY: IMAGES sales; it was barely breaking even. if purchased new.

CREATING A MARKET, ONE CONTAINER AT A TIME

2005 2006 2007 2009 Hamdi Ulukaya buys an The plant makes U.S.-style The first cup of Chobani Chobani becomes the old Kraft yogurt plant in yogurt for other companies, hits grocery shelves in best-selling brand of Greek upstate New York. while Ulukaya and a Turkish- Great Neck, New York. yogurt in the United States. born yogurt maker develop the Chobani recipe.

On the drive home I called my attorney, owner. That means I can run the company ing right. This was a big expense—about who is my main business adviser. I told him the way I choose—and plan for its future $250,000. American yogurt has always I wanted to buy the factory. He thought it without pressure from outsiders. been sold in containers with relatively nar- was a terrible idea. He had three good argu- Too many entrepreneurs believe it’s im- row openings. In Europe yogurt containers ments: First, because I’d be buying it “as possible to scale a business without relying are wider and squatter, and that’s what I is,” I really had no idea how well it would on VCs or other equity investors. That view wanted for Chobani—I wanted the package function. Second, Kraft is a pretty success- is wrong. If I could grow a company from to signal that the product inside was very ful company, and if it was giving up on this zero to $1 billion in less than a decade in a different. facility, this town, and the yogurt industry, capital-intensive industry, many other busi- By late 2007 we were ready to go to mar- maybe it knew something I didn’t. Third, nesses can too. ket. At that point we made several crucial and maybe the strongest objection, where decisions that allowed us to finance our was I going to get that kind of money? He Slotting Our Cups growth once the business took off. was right: At that point, I had nowhere near To buy the yogurt factory, I obtained a bank First, we insisted that Chobani be sold enough money for such a big purchase. loan backed by the U.S. Small Business Ad- in mainstream grocery stores rather than ministration. I learned about SBA loans specialty stores, and that it be stocked in Insisting that Chobani from two loan officers at KeyBank. I spent the dairy aisle, alongside existing yogurt two days writing a business plan, offered brands, rather than in the gourmet or natu- be stocked in the dairy a personal guarantee, and put up 10% of ral food aisles. That’s probably the single aisle—rather than the the purchase price. The bank and the gov- most important decision we made. Al- ernment put up the other 90%, with a low though many Americans had never heard gourmet section—is interest rate and a 10-year term. The loan of Greek yogurt until Chobani launched, probably the single was sufficient to create a small amount of at least one rival brand had been selling working capital in addition to the purchase Greek yogurt in specialty stores since the most important price. The process took about five months, mid-1990s. But because it had limited dis- decision we made. and on August 17, 2005, I had the keys to tribution, it remained a tiny niche product. the factory. We wanted Chobani to be accessible to ev- I immediately hired a master yogurt eryone. If we’d said yes to early offers from But as it turned out, I was able to bor- maker from Turkey, and we spent the next specialty stores, the company never would row the money to buy the factory—and two years perfecting our recipe. I hired four have grown as quickly as it did. after Chobani hit the market, I financed our employees who’d worked at the Kraft plant, Second, we negotiated with retailers growth through further bank loans and re- and because we had nothing to produce, I over their slotting fees. Most big supermar- invested profits. This is a crucial piece of the kept them busy repainting and repairing kets were asking a minimum of $10,000 per Chobani story. Our ability to grow without the factory for a few months. By early 2006 SKU to stock our product, and some were reliance on external investors—the venture we’d begun making private-label American- asking up to $100,000, so if we wanted capitalists, private equity types, strategic style yogurt as a contract manufacturer for to put six flavors of yogurt in a store, it partners, and potential acquirers who’ve other companies, just to bring in some would want an up-front payment of at least offered us money since we launched—was revenue. $60,000. We didn’t have that kind of money. vital to our success. Today Chobani is a In addition to fine-tuning our own So we negotiated to pay off the slotting fees

$1 billion business, and I remain the sole recipe, we worked hard to get the packag- over time as the yogurt sold. BRETT AFFRUNTI ILLUSTRATION:

3 Harvard Business Review October 2013 FOR ARTICLE REPRINTS CALL 800-988-0886 OR 617-783-7500, OR VISIT HBR.ORG

CREATING A MARKET, ONE CONTAINER AT A TIME

2010 2013 Chobani becomes Chobani sales are the best-selling expected to top brand of all yogurt in $1.3 billion. the United States and expands to Canada and Australia. $1.3 billion

Third, I worked really hard to determine could handle the right unit selling price to fund future 100,000 cases growth. I spent a lot of time figuring out a week. We also our cup costs, ingredient costs, and labor limited our capital costs, and I made a simple model to calcu- investment by relying on manual labor Follow late the exact price that would allow us to instead of automation: For instance, the break even once we hit 20,000 cases a week finished cups of yogurt were hand-packed the in sales. That’s a relatively low volume: It in cartons. During that time I rarely left the meant that if customers liked the product, factory—I slept there most nights. we’d quickly be profitable and could re- We were extremely careful with cash. Reader invest our profits in growth. We ended up Too many start-ups hire people in antici- charging less than $1.50 a cup—more than pation of growth; we waited until the busi- traditional American brands (which typi- ness was bigger. Every Friday I met with Harvard cally sold for less than $1), but far less than our finance guy. I made sure that our em- the European-style yogurt that sold for $3 ployees and our milk suppliers were paid Business to $5 in gourmet stores. A lot of new compa- on time, but we let a lot of other bills go a nies would have launched at a lower price little longer. Because we had set up the and tried to raise the price later. I avoided business to be profitable early, every cup Review that by figuring out an initial price that of yogurt we sold gave us more free cash. made long-term sense. Our model had other advantages: Yogurt Often when a start-up launches a prod- is perishable, which limits inventories; and uct, there’s an agonizing wait to see if cus- supermarkets pay us promptly after deliv- tomers will buy it. We didn’t have that prob- ery, whereas most of our suppliers give us lem. Within a couple of weeks after Chobani a month or two to pay. That really helped got into ShopRite, we started getting orders our cash flow. for 5,000 cases. The first time we received one, I kept double-checking to make sure it Sticking to the Mission didn’t say 500. It quickly became clear that A few months after our first sale, I began our biggest challenge wasn’t going to be getting calls from potential investors. In selling enough yogurt—it was going to be early 2008 we attended a convention in making enough yogurt. Anaheim called Expo West, where natu- Over the next 18 months we found ways ral products manufacturers meet buyers to increase the capacity of our factory with- from big retail chains. The show attracts out making big investments. We couldn’t a lot of investors, and we were repeatedly afford new equipment, so we went around approached by people who said they’d like the country to find used equipment and a stake in Chobani. Most of them said we arranged to buy it on installment. Even- would need much more cash if we really tually we retrofitted our filling machine— wanted to grow. They also said we’d ben- hbr.org the big constraint on our plant—so that it efit from having experienced managers The Revival of Smart

16425_HBR_1third_vert.indd 3 12/3/10 1:16 PM HOW I DID IT

Creating a Category Since Chobani’s launch, Greek yogurt has stolen share from traditional yogurt—but it has also helped grow the overall U.S. yogurt market by more than $1 billion.

and strategists aboard, to help us figure out how to navigate as we grew larger. GREEK $391 MILLION $932 MILLION $1.8 BILLION $2.6 BILLION This was all new to me. I didn’t even YOGURT know what private equity was. I was run- ning Chobani as a simple mom-and-pop operation. I had no strategy for dealing with potential investors. But Greek yogurt ALL OTHER $4.4 BILLION $4.4 BILLION $4.1 BILLION $3.6 BILLION was becoming so popular that bigger play- YOGURT ers such as Dannon and Yoplait were going to launch their own versions. We needed 2010 2011 2012 2013 to grow quickly enough to prevent established companies from stealing the market SOURCE NIELSEN we’d created. So it felt like the race was on. For a while I took calls and meetings did, the demand would easily justify our factory in Idaho, and altogether we’ve in- with private equity firms. It was a learn- expansion plans. vested about $700 million in our plants and ing process. They try to make you doubt I also knew that as soon as I took money equipment. Today we produce more than yourself—it’s a standard part of their from investors, the clock would start tick- 2 million cases of yogurt a week, and our pitch. I kept hearing the same things over ing. Private equity investors want to cash business is still growing. and over: “You’ve never done this before.” out in five to seven years—they would The biggest downside of our self-financ- “This is not a world for a start-up.” They probably push us to sell Chobani to a big ing approach is that nearly 100% of my net talked about the size of the marketing bud- food company. I’ve seen other small food worth is in Chobani. To financial planners, get I’d need when Dannon came in. They companies go that route, and inevitably that’s a nightmare scenario. Every single emphasized the experience and sophisti- they lose their souls. I care about the integ- one of my advisers thinks I should sell a cation and knowledge they’d bring to my rity of our product—I want it to be delicious, stake in order to diversify. “What if some- business. nutritious, and accessible to everyone. If I thing happens tomorrow?” they say. But I But the more I thought about it, the took on investors, my ability to stick to this don’t think enthusiasm for our product is more confident I grew. We didn’t have ex- mission would be limited. I had spent two a short-lived thing. Yogurt is just getting perience, but most of our early decisions years living in that factory; it was working started in America. Canadians eat one and had been right. The product and packaging now, and it was my baby. Eventually I sim- a half times as much per capita as Ameri- were really good. We’d gotten our product ply stopped returning calls from potential cans, and Europeans eat up to seven and a into the dairy aisle when experienced peo- investors. There really wasn’t anything to half times as much. Now that good yogurt ple said it belonged in the natural foods sec- talk about. is available here, people are eating more. tion. And the word of mouth was so strong Bigger competitors did bring their own Foodies and chefs and nutritionists love it. that marketing was taking care of itself. Greek yogurts to market, but much more Eventually we may take Chobani pub- Besides money, what exactly would these slowly than I’d expected. When I first tasted lic. If I’m not going to sell it to a big food people bring to the table? one of them, it was so terrible I thought it company or turn it into a family business, One reason I could have that attitude is must have spoiled. I sent someone out to I’ll need to set up some way for it to live that Chobani’s quick success had made our buy a few more cups, but they all tasted beyond me. I’m not sure how I’ll choose to bankers willing to fund our growth. In 2009 the same. I even wondered whether the turn Chobani into a legacy—but that’s a nice we needed to make a big investment to company might deliberately be making its problem to have. HBR Reprint R1310A boost our capacity. We were selling 200,000 Greek yogurt taste terrible in an attempt to cases a week, and I wanted to increase that turn off consumers and spoil the entire cat- EDITORS’ NOTE In 2012 Ulukaya was to one million cases. We’d need at least egory in order to preserve the profits of its sued by his ex-wife, Ayse Giray, who claims $30 million in new loans. By then our bank- established brands of sugary yogurt. I had that money she invested in his feta cheese ers had been watching us for four years, and put aside $7 million for a big ad campaign business in the early 2000s provided the they’d seen growing profitability over the when our larger rivals launched their Greek initial financing for Chobani.She is seeking previous 18 months. Our growth projec- yogurts, but after I tasted their products, I a 53% stake in Chobani. The company says tions were based on simple math: We were canceled the ads. There was no need. Ulukaya has always been and remains the still selling mostly in the Northeast, and if Today we have a syndicate of banks and sole shareholder of Chobani, and no shares supermarkets in the rest of the country sold a credit line to meet our capital require- of the cheese business have ever been issued as much Chobani as our existing accounts ments. In December 2012 we opened a to any outside investors.

5 Harvard Business Review October 2013