Could This Yogurt Company Be Worth Investing in?

Chobani is one of the most popular yogurt brands across the United States, but it's founder-led management team has a much bigger vision for the brand. In this week's episode of Industry Focus, Motley Fool analyst Asit Sharma and host Emily Flippen discuss the company's recent S-1 filing.

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This video was recorded on Nov. 30, 2021.

Emily Flippen: Welcome to Industry Focus. Today is Tuesday, it is November 30th, if memory serves. I'm your Consumer Goods host, Emily Flippen. Today I'm joined by Asit Sharma and we're going to be talking about a really exciting IPO that I think a lot of American consumers especially will know very well, which is Chobani. Thanks for joining, Asit.

Asit Sharma: Emily, thanks for having me. I'm really excited to talk about this one because as I just learned, we're both fans of yogurt.

Emily Flippen: Yogurt is such an agreeable food. It's hard not to be a fan of yogurt and in particular it's hard not to be a fan of Chobani. It's a yogurt brand that was relatively new at its time. I believe it got started around 2007, but took off really quickly here in the United States because I'll just say it's delicious, right?

Asit Sharma: Absolutely. I think that Chobani is a high-quality yogurt. I've always enjoyed the taste. I think they were marketing their version of Greek yogurt a few years ago, I tried it. Now, this is not my go-to yogurts, and perhaps we should take a quick quiz here. I have started eating Bulgarian yogurt made in Texas. Actually, Emily, now the brand is escaping me, but it's quite good. It has a tart taste. This is very popular in Eastern Europe and actually even in places like Turkey, where Chobani's founder hails from. What is your go-to yogurt?

Emily Flippen: Well, I hate to be a spoiler alert for this episode, but my go-to yogurt is still Chobani, in particular, one of Chobani's is best-selling products, which is their flip cups. It's basically dessert and the cup I will say, so I'm not sure if it's the healthiest offering that Chobani has, but it's in my opinion the best. Although I know that the industry is very saturated right now with lots of alternatives. When Chobani was first getting started, their only yogurt that you could really get in the United States was, I'd say, Yoplait for instance, which is very sugary, very water yogurt. With the expansion of Greek yogurt, there's also been the crop ups of different types of yogurt and you mentioned Bulgarian yogurt as one example. I know that. What's popular in my area right now is Skyr, which I believe comes from Northern Europe. I could be wrong about that. But another very tart, very thick, very cultured yogurt.

Asit Sharma: I want to say that Skyr is from Iceland, Emily, and I believe that there's one strain of the yogurt, which is the de facto heritage strain, and you have Skyr and then you have Skyr knockoffs. But yeah, another variety of yogurt that hails from Europe. I think we need to get busy here in the US because most of our innovation was in the '70s and '80s and that was bad innovation that added sugar that you talked about and artificial flavorings, which I think we've moved beyond. But this is such an interesting founder story of the founder of Chobani hails from Turkey as I mentioned, Hamdi Ulukaya. When he came to the US in 1994, he missed the very natural simple tastes that he grew up with on a farm in Turkey and by chance went to the sale of a factory after getting a flier in the mail in upstate New York. 

He bought the factory which was about to shutdown. It was a yogurt factory with 55 employees who were about to lose their jobs. He bought this on a whim with bank financing and that was the start of this journey that ends in an IPO. At least this stage of the journey now Chobani's headed toward the public markets. But I find that origin story really inspiring and I know I've knocked a few origin stories lately as we've looked at S1s. So I thought I should give credit to this one. This is a really feel good story. Not only did Hamdi Ulukaya start a company that employs lots of people in the US. But he also was a major proponent of yogurt. This is better for you, right? He's changed the way we approach it. Many of us are healthier for that.

Emily Flippen: I love this story because when you look at how Chobani has grown today you'll notice that one of the metrics they point out, and this is a big trend across their entire S1, is that they still have this focus on inclusion and diversity. I believe it was 30 percent of their employees identify as immigrants or refugees. They have a minimum hourly wage at $15 an hour with an average hourly wage of $19 an hour. This is a company that I think is staying very true to the nature of how it's founded and created. It is also a public benefit corporation so taking a lot of actions to keep true to the ideas and the mindset that was underlying its founding story.

Asit Sharma: Yeah, very mission-oriented. I should say too that just being able to do good in society and make a profit aren't mutually exclusive. There are a number of companies that we've seen become really successful with this model. I know Etsy isn't a public benefit corporation but it is or was a B Corp but, I'm not sure if they even have that certification. But when they started and came to the public markets, they certainly had that mission-driven bent and we've looked at other companies here. Coursera comes to mind, Emily, that is a B Corp plus has that public benefit corporation layer. It certainly doesn't hamper a company from at least getting to the public markets and growing at scale. I should add to this that the yogurt market is not a sleeping market. It is huge and there's a lot of competition in it. I googled this just a few minutes before we came on. But for viewers out there, I'm going to pause for a moment and be quiet, take a guess how big the global yogurt market is. Emily may know, but I'm going to ask her not to chime in here. It is $40 billion. That is a huge market. When you look across the consumer goods spectrum, there are few single food markets that approach that size. If anyone out there is a fan of the multinational food conglomerates, you'll often read how really big picture food categories like cereal or coffee or yogurt can affect one quotas results. That's how big and bad this market is. There's plenty of opportunity here and I think Chobani has been a pretty innovative company in this space.

Emily Flippen: It's amazing how they've essentially created the Greek yogurt market and how they've pivoted from Greek Yogurt into other areas as well. To this point, we've mostly talked about Greek yogurt, right? That is the core of their business. It is the majority of their sales. But the majority of the growth that Chobani is experiencing is actually coming from their other products. A lot of people might be familiar with their oat milk. If you remember back to when we did the Oatly episode here on Industry Focus a number of months ago, Chobani is one of the biggest competitors in oat milk. They've managed to keep their brand, that Chobani brand and pivoting it into new areas. They also have some pretty popular plant-based coffee creamers alongside those snacky cups that are my personal favorite of the product line. While you think about yogurt and that is critical, right? Demand for yogurt globally, that $40 billion market is critical, don't overlook the growth that's coming from new areas. Chobani is unique in the fact that they have a single brand that they've used across the consumer packaged goods space.

Asit Sharma: I find it interesting to your point, Emily, that in the first nine months of this year, the company cited 39 percent of their net product sales were generated by product innovations and those happen to be in North America. So it simultaneously backs up your point about the growth and innovation coming from the newer markets that we're seeing other companies compete in. But it also shows how much white space this company really has scaled up in North America, but I think as a global company there's some potential here as well. We should mention here also that Chobani has a really huge portion of the US market. There is a really wonderful line chart in their S1 that shows their total market share in the US for the last 12 quarters or so. Basically they've clawed their way up from an already big 17 percent to about 20 percent of the US market. I have trouble wrapping my head around this as someone who's spent a lot of time in this industry. It is so rare to see any player, even if you look at the biggest consumer product conglomerates in the world like Nestle or Mondelez have 20 percent share in any one major geographical category. I was so surprised to see that metric.

Emily Flippen: It really was astounding and I think it goes to show just how prominent the brand is. Again, instead of taking the approach of a parent company owning a single brand in yogurt and maybe a single brand in say, butter or cheese or a milk, keeping it all centralized. Although I will say, I was surprised by, I suppose the lack of detail that we got in Chobani's S1. I was expecting there to be some data around that aided or unaided brand awareness especially underpaying that 20 percent market share. Maybe they feel like they didn't need it because that 20 percent, market share spoke for itself, but I do wish they had it because I was curious to myself when I say the name Chobani, how many people immediately associate it with the Greek yogurt? More importantly, when I say Greek yogurt, how many people immediately associate it with Chobani?

Asit Sharma: It's an interesting point, maybe because there's nowhere to go from here but down. [laughs] They probably will do well to maintain that share I'm guessing in the US market while increasing share in the categories that you mentioned like oat milk, all types of plant-based that is non-lactose foods that their factories are equipped to manufacture. So maybe that's one reason it doesn't do them much benefit to site that here in the S1 and then have to report back on a yearly basis when they file that annual report, that the unaided brand awareness has declined a bit as competitors have come in. But holding that number 1 position is going to be important. We know that Greek yogurt has become an essential part of the yogurt market because consumers are trending younger and healthier. So this is the right place, right time, business in that it scaled up as the demographics of the yogurt market were changing. I am very interested in another stat which we didn't get a huge amount of detail on. This is a bar chart in the S1. Emily they having amazing compounded annual growth rate for consumer goods company. Between 2010 and 2020 the company grew at an annualized rate of 19 percent. So now they have about $1.4 billion in sales as of their last fiscal year. I wonder how much of that is front-loaded in the early days, and I wonder what the cadence looks like over the last 6-7 years. We have a few rows of data in the consolidated income statements, but I wonder about that trend going forward. The best path that a consumer goods company can expect in a global market of this size is usually something in the mid-single-digits, meaning you're keeping a couple of percentage points ahead of inflation. Now with inflation rising, everyone is going to get a little bump up. So let's just say high single digits for argument's sake. But if that becomes a normalized growth rate let's say the next 10 years, I think that's still we use this as an attractive business with all the adjacencies they're exploring. I was curious if you had any thoughts on that growth pattern.

Emily Flippen: Well, just that this is definitely going to be slowing business. I think a lot of the big explosive growth is behind Chobani when you look at their expansion into things like oat milk. One of the notes that they make is that they have over 260 yogurt SKUs. So they've expanded a lot. When you think about the oat milk category, they are number 3 in the category. So third in terms of market share, less than six months after launching onto the shelf. Again, using that brand, getting really big in this space. Their coffee creamer is over 10 percent of the total market share for us coffee creamers. A lot of that product innovation which is internally generated, and you have to give them respect for that, but a lot of that product generation is in the past. I think repeating that success maybe more challenging. The low-hanging fruit has already been grabbed for Chobani, but this is sustainable growth, right? The demand for things like coffee creamer, the demand for yogurt, although a little bit more variable than coffee creamer, these aren't going away. I just don't think you're going to get that 20 percent compound annual growth rate for much longer into the future. So I would expect that to continue to taper down and go back to that just above inflation average.

Asit Sharma: Yeah. For sure the market though it's big. Let's say that there are those out there who have had this great experience of investing in some of the big consumer conglomerates when they were smaller, and I'm talking about you who are listening today who are decades investors [laughs] and like companies that are rock solid in that sense, this market. If we just look at the market, what Emily was talking about here, the nondairy probiotic market in the US, that's $830 million market annually. Much space for this company to play and I do like the characteristics of having the innovation DNA and having mastered production at scale in a very short time, this company has not been around that long. You've got a lot of elements here. Again, with that very engaged founder who has great cultures, built a great culture as mission-oriented. If you have many key elements of a successful investments, it's not going to be a textile investment that's going to pull everyone's portfolio forward and be that commit in once holdings. But I can see this being, for many people, a pretty solid play on the consumer goods space. But we would have to look at the financials to make that determination [laughs] I was curious Emily, we had some chats before we went on air this morning, what did you think looking over the financial statements?

Emily Flippen: We maybe buried the lead here at the story and in fact, we had a different story, prepped for our episode today, but had to pivot when we got a hold of Chobani, and part of the reason why I was so interested in pivoting is because of this financial picture. Now, what I will say is that on an adjusted basis, this is a pretty profitable company. They make 4-5 percent adjusted EBITDA metrics, they have really strong operating cash flow. In fact, before even opening up the S_1, I posted a question to my family. I said, do you think Chobani is a profitable company? My immediate response was, yeah, of course, Chobani's a profitable company. I thought about how large it was, how prevalent it was across most supply chains, especially in the United States. I was very surprised to find out that on a non-adjusted basis, this company was not profitable. In fact, it was losing tens of millions of dollars and a quick look at their balance sheet may explain why this business is not generating the very bottom-line profits that I think are possible for it, and maybe I'll let you speak to why that may be the case.

Asit Sharma: Well, the easy answer is that this company is levered up, Emily. It makes sense in one context. Chobani grew from one factory, again with 55 employees, to it can be with the wide manufacturing footprint and it has really scaled up, as we've already decided to be a dominant player in the yogurt market. The flip side of that coin is they have $1.4 billion of debt on their balance sheets. For me, a guy who's always talking on this show about working capital, their current ratio is one-to-one. That means they've got as much in ready money as they do in obligations due within one year. It's not a company that has this fat balance of working capital with that debt loads. What it means is that you're going to see an expression of interest expense on the income statement, that's the non-adjusted number that Emily was referring to when you factor in interest expense. What is a profitable operation on an operating basis becomes a loss-making company. But I think that while we don't have the completed numbers in the S_1, we just have placeholder blanks. We can already see from the use of proceeds that Chobani intends to use some of the proceeds from this offering to pay down some of its long-term debt. I'm just going to read a few figures to give you a flavor of this. This is from the past three years, the year ended December 29th, 2018, and then pull forward for the next few years.

Chobani had an operating profit of 59 million bucks in 2018, their interest expense was $93 million. In 2018, they had income from operations or an operating profit of 77 million bucks, they had interest expense of 95 million. Forty one or let's call it $42 million in operating profit in 2020, interest expense of 96 million. You see the drag here on the income statement, it's the debt. What if the public came in and paid-off a good portion of the debt that's been used to help Chobani grow. The picture starts to look a little different. We don't have those final numbers or at least I didn't see them in the S_1 version I pulled and I don't believe they're out yet, but you have an equation that could work. I do want to point out though, before I turn this back over to Emily for some thoughts, that a company like Chobani which is so efficiency focused, so productivity focused, and so bent on having a very solid manufacturing footprint is going to have ongoing CapEx capital expenditure that's significant. While the company is generating pretty decent operating cash flow every year, it's got a capital expenditure component that decreases the amount of free cash flow that's available to utilize, and just will give you one figure here that paints this picture. In the year they just finished, the year ended December 26, 2020, Chobani generated about $106 million in operating cash flow, but they had $74 million in capital expenditure and that's pretty much par for the course. If you go back a few years, that is a steady rhythm that they have where most of operating cash flow is being consumed by these investments in manufacturing and that's probably going to continue for some time to come.

Emily Flippen: It's just a fundamentally capital-intensive business, which makes it challenging and even more challenging when you add on and just under $1.4 billion of debt, as you mentioned. For reference, the company did about $1.4 billion of sales in all of 2020. It's a pretty hefty amount of debt they have, I will be super interested to see what the company's financial picture looks like after they go public and after they've used some of this proceeds from this IPO to rejig this business. But even with the debt load coming down to your point, this is a business that just needs a lot of capital to grow and run. It's not fundamentally a bad thing, this is the nature of what it means to be not just a consumer packaged goods business, not just a consumer goods business, but also business that works in food, refrigerated items, especially that can go bad. You have to be very quick with how you manage that inventory. But all of this together, I think it paints a picture to me that I will say feels a little less efficient than the company we're going to talk about next week and that'll be my little tease, so tune in for next week's episode, but both good businesses.

Asit Sharma: Sure, and I will say, again, this is a signal to those really long-term investors. There's a payoff for all this capital expenditure, and one of the payoffs is visible and immediate. The company said that it fulfilled 98 percent of the heightened demand it had in 2020 because they had invested in so much of these production facilities. They've got that original plant in New Berlin, New York and they've got this what they call a state-of-the-art facility in Twin Falls, Idaho. As they are adding capacity here, they've got the flexibility to meet challenges that come about and that results in sales. If you don't have the production capacity and COVID happens, you won't get the sales on your topline if you can't meet that demand. I was impressed by that. They do have a facility in Melbourne, Australia where they're producing yogurt and they're going to expand that plant to get into some of these adjacencies in Australia by the end of this year. The last thing that we probably should mention, about their approach to production goes back to something Emily was talking about at the beginning of this episode that they do have this culture of innovation, they've got what they call innovation and community center in Twin Falls. It's an R&D facility, 71,000 square feet, but it's about research and development and also family. It's a weird facility, and I don't think I've ever read about one that's quite like this, which doubles as a wellness center in the same premises where the company is streaming up its next big products in the markets that wants to compete in. I think there's some fun stuff going on with this capital expenditure that fits within the mission, the overall bent to this company, both from an efficiency in manufacturing side and from the cultural side we mentioned. Moving beyond the next 3-5 years for those who might be looking for that next CPG investment. This is still interesting to me. I have to add to the tease though, maybe we're going to see a more efficient model [laughs] a week from today when we talk about an exciting company that Emily is uncovered.

Emily Flippen: Well, I'm excited to talk about both of these businesses with you, I'll be really interested to see which one gets the edge to you. Not that these are two comparable businesses. The company we'll talk about next week is not a yogurt company, fair warning, but either way, really great businesses, it's fun to see such interesting consumer packaged goods businesses coming to the market. Asit, thank you as always for being willing to chat through them with me on the show, which I should really just rename the S1 show at this point. [laughs]

Asit Sharma: I think you're right. One day we'll get away from these quick tear-downs, but they are so much fun, and I know we've got just a minute or so before you have to go. I want to squeeze in one more detail before we sign off and that is something I forgot to say earlier. This company has its own in-house creative agency. A lot or most of the branding and advertising that we see from Chobani comes from within, which is impressive too.

Emily Flippen: Awesome. Asit, thank you for joining and I can't wait to keep an eye on this.

Asit Sharma: It sounds great. Thanks Emily.

Emily Flippen: Listeners, that does it for this episode of Industry Focus. If you have any questions or just want to reach out to say, hey, shoot us an email at [email protected] or tweet at us @MFIndustryFocus. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against any stocks mentioned. Don't buy or sell anything based solely on what you hear. Thanks to Tim Sparks for his work behind the screen today. For Asit Sharma, I'm Emily Flippen, thanks for listening at Fool on.

Asit Sharma: Thanks Emily. See you.

Emily Flippen: Thank you. Sorry, I have to run Fools, but I'll pass it over to Tim and Asit.

Asit Sharma: No worries, see you.