Comment: Chobani wise to consider stake sale
Simply 100, Chobani's answer to Yoplait Greek 100
Chobani is the leading US manufacturer in the lucrative, high-growth Greek yoghurt sector. But with rising competition from the larger dairy majors - and Chobani's own growth aspirations globally - the company could well be wise to consider ways to secure a cash injection, Katy Askew suggests.
Chobani is a power player in US Greek yoghurt. Indeed, much of the dynamic expansion of Greek yoghurt's popularity can be attributed to Chobani. The group has proven itself a category leader and innovator, expanding rapidly to reach sales of US$1bn.
In 2005, Chobani founder Hamdi Ulukaya purchased a disused yoghurt factory located in upstate New York from Kraft Foods, who had decided to exit the sector. Chobani launched its first products into a small Long Island grocery store two years later. In 2009, the group picked up listings with Ahold's Stop and Shop and ShopRite. Sales exploded. Listings were won throughout the US. Greek yoghurt went from being 1% of total US yoghurt sales in 2007 to accounting for 44% of the market last year.
In an op-ed in the Harvard Business Review last Autumn, Ulukaya attributed much of Chobani's success to the fact that the company was founded and operated without outside investment.
"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 $1bn 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," the businessman wrote.
All this could be about to change. Reports this week have suggested that Chobani is now mulling a stake sale. According to the New York Times, the firm is in talks with six potential investors for a deal that could value it at $5bn. The bidders reportedly include two companies that would provide a strategic alliance, two equity investors and two lenders.
Looking at the wider context of the US Greek yoghurt category and entrepreneurial Chobani's ambitious plans for international growth the need to raise capital for investment is apparent.
The strong growth of demand for Greek yoghurt has not gone unnoticed and the sector is becoming an increasingly crowded and competitive space.
Danone was the first dairy major to really commit to expanding in Greek yoghurt in the US with the launch of its Oikos brand.
According to management, the French firm's efforts are paying off and it has steadily been growing market share. In Danone's most recent financial update, management told analysts that the group resisted passing on input price increases to consumers in order to remain competitive in the market. As a result, the group was able to grow volumes in the sector and increase its market share from number two to "joint number one".
Danone's plans do not end there. The group is planning further offensives this year, with the development of Greek products that hit higher price points to be supported by marketing dollars.
General Mills, a late entrant apparently slow to grasp the scale of the opportunity, has become relentless in its bid to catch up with the category champions. Last year, the group reformulated and relaunched its Yoplait-branded Greek offering in a bid to reverse sales declines and improve quality perceptions. At the time, General Mills CEO Ken Powell said the strained "more of a traditional Greek product" offered a much improved taste profile.
Starting in January, General Mills launched a marketing campaign aimed at driving this point home. The company has set its sights on Chobani in particular and, in a TV and online blitz, the company has challenged consumers to take the tried and tested "taste test". In a national "taste off", as General Mills termed it, consumers blind sampled two Greek yoghurt products: Yoplait and Chobani's blueberry varietiees. In General Mills' narrative Yoplait (shockingly) comes out on top.
The move is an attempt to overcome consumer perceptions that Yoplait offers an inferior taste. When first launched, Yopliat Greek did not use the traditional "straining" method - a mistake the company is still working to recover from.
General Mills has invested heavily in NPD in the Greek yoghurt sector. While the company is still battling weak share trends, the results have included some bright spots. Yoplait Greek 100 - a low fat variety - has proven Yoplait's biggest new product for decades, hitting sales of $150m in the first full-year.
General Mills believes its efforts are paying off. Late last year, CFO Don Mulligan insisted that Greek sales were now "significantly" outpacing the category as a whole. This assessment was reiterated by Powell last month. Speaking at the Consumer Analyst Group of New York conference, Powell emphasised General Mills has been able to reverse declining share trends. "Our share has moved up to 10% in the latest period."
To some extent, Chobani might feel a bit like a company under siege in the US.
Characteristically, Chobani's defence has been to launch an attack of its own. The group is investing on innovation and during 2013 Chobani launched a swathe of new products - from Flip yoghurts to yoghurts in pouches. Chobani's answer to the Yopliat 100 launch with its own 100 calorie line, Simply 100.
Chobani is also upping its hitherto rather minimalist marketing efforts. Chobani's marketing investment has included shelling out on a high-profile Super Bowl ad last month.
And, earlier this month, Chobani invested about $4m to expand its big manufacturing plant in Twin Falls, Idaho.
Added to the pot, Chobani has some ambitious international expansion plans in tough markets where the firm lacks first-mover advantage. The Greek yoghurt maker has entered both the UK and Australia. It was forced to retreat from the UK due to a costly court battle over the use of the term 'Greek yoghurt' in the country.
Ambitious Chobani is firing on all cylinders. But all this comes with a hefty price tag - in competitive markets where price increases are not an option and discounting is increasingly becoming the norm. Although Chobani is a strong cash-generating company (with sales up around 30% last year to circa $1bn), it is also true that the privately-owned group lacks the deep pockets of the industry heavyweights against which it is pitted.
Raising funds has become a necessary prerequisite of Chobani's continued growth. To the right partner - one that could potentially bring additional experience and expertise as well as much-needed cash - a stake sale would be a sensible option for this dynamic and ambitious food maker.
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