Contending with a Product Boom at Chobani

&doublequot;With this kind of growth, you can’t get out in front of it,&doublequot; says James McConeghy, the yogurt maker's finance chief.
Vincent Ryan and David McCannDecember 9, 2011

In the 1990s, high-tech companies yearned to get to a point in the technology adoption life cycle called “just ship.” Based on the models of Silicon Valley consultant Geoffrey Moore, the just ship phase was when the buying population of a product exploded and it was all the company could do to get products out the door to keep up with demand. Moore described the stage as being “inside the tornado,” the title of one of his books.

Few high-tech companies ever got there. Fast-forward 20 years, though, and Agro Farma, the maker of Chobani yogurt, is the embodiment of Moore’s tornado stage. The Norwich, New York–based company has taken the Greek-style yogurt category by storm. In four years, the Chobani brand has achieved number-one market share in the United States and 90% shelf penetration at traditional grocers. The company’s South Edmeston, New York, facility (100 miles west of Albany) churns out 1.6 million cases of product a week, up from 300,000 18 months ago, and plans to move past 2 million in early 2012.

The company was started by Hamdi Ulukaya, a Turkish entrepreneur who bought an abandoned Kraft yogurt plant in upstate New York. Now Agro Farma is spreading beyond its Empire State roots. It bought Melbourne, Australia-based Bead Foods, a yogurt and dessert maker, last June, and it recently purchased 190 acres in Twin Falls, Idaho, on which it plans to build a $128 million manufacturing facility.

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The company’s finance chief is James McConeghy, who joined the now $700 million (in revenues) firm a year and a half ago. McConeghy is a former vice president of finance at Bausch & Lomb, and he also worked in finance at Rayban and other branded-goods companies. He recently spoke with CFO about how Agro Farma is managing explosive growth while plotting further expansion, and how its success is causing larger competitors to take notice. An edited version of the interview follows.

Is your growth in head count commensurate with the growth in revenue?
It’s pretty close. At the beginning of 2010, head count was 150; now we’re at about 1,000. Probably the head count hasn’t grown as fast percentagewise. We get a little more efficient all the time. We always think we’re running behind the curve. With this kind of growth, you can’t get out in front of it. It’s hard. The finance and IT staff has gone from 5 people to 25 people in 18 months.

One of the things that contributed to head count was in-sourcing some manufacturing. We were buying our cups prelabeled overseas; now we buy them domestically and label them ourselves in our facility in South Edmeston. We’re more efficient, making the product closer to the plant and eliminating logistics-type wrinkles that come with great distances.

Are you able to keep up with current demand for Chobani yogurt?
We’ve been scrambling. Virtually the entire time I’ve been here, the whole thing is about how do we get more production. That’s part of the strategy behind the Twin Falls land deal. Twin Falls will add 60% to 70% capacity in the first phase. The capacity is not just to service our traditional grocers; we’ve also taken on about 2,000 Wal-Marts. And while we’re strong in the Northeast, there are other health-conscious parts of the country where our share is not as big. It’s just a function of time to get the distribution up.

But you’re not putting the brakes on.
No, we’re branching out into other channels, to further make the product part of everyday living in America. One of the next growth channels we are pursuing is the food-service channel — making the product available in schools. It’s a very nutritious product, and from a taste perspective should sell well. Americans consume about half the yogurt that Canadians consume, and about a sixth of the yogurt that the Europeans consume, on a per capita basis. We don’t really consume yogurt like the rest of the world does. I didn’t use to eat yogurt. I didn’t like the way it tasted. The key for us is to not just take share away from somebody else but to grow the market.

Are you expanding into other countries besides Australia?
Canada. Our product is black-marketed into Canada. We don’t know how it gets there, but we know it gets there because consumers write us and say, “We’ve bought your product in the U.S.; why is it so expensive here in Canada?” The supply-management system in Canada would charge a duty of 237% to ship from the U.S., which makes it prohibitive. So you have to produce in the home market. We’ve actually gone through the process that the Canadians call the test-market application, which would allow us to import product for three months at about a 5% to 10% duty. If the product is successful, we have to commit to building a manufacturing plant in Canada, and they would give us another 12 months at that 5% to 10% duty range to get the facility up and running. Our vice president of business development has worked very hard at getting us in there. It was not an easy sell.

Are your suppliers keeping up with the rapid expansion in production?
Probably the biggest supply-chain issue for us is milk. We’re consuming 15% of all milk produced in New York State. That has definitely stretched the capacity. The farmers have been great. They’ve been adding [capacity], and Dairy Farmers of America has helped us work through any issues. Idaho [where the Twin Falls plant will be located] has just passed New York to become the number-three dairy state in the U.S.

How do you forecast growth like this to suppliers? You can’t. I mean you can tell suppliers, “We’re going to grow by 100%.” But they say, “Are you kidding me?” And you say, “We’re going to grow by 200%” and they say, “Are you really kidding me?” And then you end up growing by 300% and they really start scratching their heads. That’s the type of growth we’ve experienced.

Are you hedging the price of these commodities at all?
We have not hedged. Obviously the number-one commodity to hedge if we could would be milk. We’ve talked to a number of different people, but there really isn’t an effective mechanism. We don’t use milk powder; we use liquid milk. Liquid milk is something that is fresh and perishable. It’s hard to hedge that.

How difficult has it been to raise the capital necessary to fund all of these growth initiatives?
Because of our go-to-market model and because of some of the partners that we’ve chosen, not just on the banking side but on the auditing side, it’s not too difficult for us to raise capital. Since I’ve been here, we’ve gone to the bank markets three times. We’ve updated our senior facility those three times and we’ll be putting a fourth iteration of the facility in place soon. Hamdi invests a lot back in the business, and that’s important for the banks. They don’t want to see their money in and the principal owner’s out.

At this phase of its life cycle, what is the company’s largest risk?
We’ve gone from zero to 15% market share in four years. The people that were already in the market have lost share. The big risk is that there’s a lot of attention on this category, and not just from traditional dairy folks. Obviously Dannon is focused on this because they’re big in yogurt. Yoplait’s big in yogurt. Pepsi just announced that it is going to get into yogurt. You’re talking about world-class companies that for the most part make great products.

Our market share actually went from 14% to 15% since they introduced Dannon Greek. We actually think that to some extent [its launch] helped because it continued to bring more attention to the Greek segment of the market. But the best defense is a great product. We’re going to have to continue to innovate and be aggressive. And we’re going to have to continue to be nimble. We’re not a sleepy company in upstate New York anymore.