Lifeway Foods, Inc.

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Lifeway Foods, Inc.

6431 West Oakton Street
Morton Grove, Illinois 60053
U.S.A.
Telephone: (847) 967-1010
Fax: (847) 967-6558
Web site: http://www.kefir.com

Public Company
Incorporated: 1986
Employees: 55
Sales: $14.9 million (2003)
Stock Exchanges: NASDAQ
Ticker Symbol: LWAY
NAIC: 311999 All Other Miscellaneous Food Manufacturing

Lifeway Foods, Inc. is the largest manufacturer of kefir, a specialty dairy product, in the United States. Kefir is a milk-based drink of Turkish origin, long popular in Eastern Europe and the Middle East. Kefir is somewhat similar to drinkable yogurt in taste and consistency. Kefir is credited with a variety of health benefits because, like yogurt, it contains a plethora of live yeasts and bacteria thought to enhance digestion and boost the immune system. Lifeway sells kefir in a variety of fruit flavors. Other products include drinkable yogurt, farmer's cheese, a soy-based kefir called Soy Treat, and Basics Plus, a line of kefir enhanced with extracts of the dairy product colostrum. The company began as a niche marketer, selling to specialty food shops and health food stores. Lifeway gained national distribution of its products, and sells in mainstream groceries as well as niche food purveyors. The company also exports to Europe and Canada. While still a very small company in the early 2000s, Lifeway was notable for its rapid growth and for the fact that it held the kefir niche virtually without competition. Members of the founding Smolyansky family hold roughly half the publicly traded company's stock, while the French yogurt maker Groupe Danone owns 20 percent.

Starting Over in the United States in the 1970s

Lifeway Foods, Inc. was founded in 1986 by Michael Smolyansky. Smolyansky emigrated from the Soviet Union in 1976, during an era when few Soviet Jews were allowed out of the country. With his wife and small daughter in tow, Smolyansky arrived in Chicago with only the proverbial dollar in his pocket. Smolyansky had been trained as a chemical engineer, and in Chicago he found work as a draftsman in a machine shop. He worked there for almost ten years, while his wife opened her own small business, a Russian delicatessen.

It was his wife's business that sparked Smolyansky's venture into kefir. The family traveled to Europe in 1985, where they visited a German food show in search of new products for Mrs. Smolyansky's deli. At the food show, Smolyansky sampled kefir, a product he had grown up with but had never seen in the United States. Smolyansky became convinced that he could make and sell kefir in Chicago. Smolyansky incorporated Lifeway Foods in February 1986. It was a tiny business at first. Smolyansky made kefir in his basement and then made the rounds of area groceries, asking them to try stocking his new product. Early on the business went well, however, as Smolyansky got shelf space at the gourmet and health food outlet Treasure Island. In addition, numerous small groceries that catered to Chicago's large Eastern European immigrant community were happy to sell Lifeway kefir. The company soon moved to its own small manufacturing plant.

Although kefir was unknown in the United States, it had a very long history in other parts of the world. Kefir originated in the Caucasus Mountains region, where shepherds had been making and drinking it for some 2000 years. Marco Polo mentioned kefir in his records, and people in Eastern Europe had long consumed it as a particularly healthful food. It was commonly given to the sick, both in hospitals and at home, and it was a standard food for nursing mothers. Thus when Lifeway started making kefir in Chicago, there were two obvious markets. One was Eastern European immigrants like the Smolyanskys, who were already familiar with the product. Kefir also appealed to consumers of health food. The health food segment of the American grocery market had been expanding since the 1960s. Dannon introduced yogurt to a very narrow market in the New York area in 1947, and it was only in the 1960s that that company was able to expand beyond urban areas on the East Coast. Yogurt had been marketed principally as a health food, before gaining more mass-market appeal. Kefir seemed likely to follow a similar trajectory. In terms of its claims to healthfulness, kefir had an even stronger argument than yogurt. It contained more types of live bacteria (the so-called "good" bacteria that flourish in the digestive tract) than yogurt, and also contained beneficial yeast organisms.

Taking the Company Public in 1988

Lifeway Foods did so well initially that it quickly outgrew its manufacturing plant. Smolyansky knew he needed a strategy to take the company to the next stage, but he was unsure how to proceed. Smolyansky's daughter Julie, who became president of the company in 2002, remarked to the industry journal Dairy Foods (May 2003) that her father's naiveté about business may have helped him at that early stage. Not fully understanding the risks he was taking, he was unafraid to take chances. Friends advised him to take the company public. "Coming from the Soviet Union, and not having a business background, I'm not sure if he had any idea what they meant," Julie Smolyansky told Dairy Food. "He went down to the library and found out that he could print these pieces of paper and sell shares in the company." Smolyansky reckoned that he needed to raise about $600,000 in order to expand the company.

Lifeway Foods debuted on the NASDAQ exchange in early 1988. The market was still shaky after its sudden plunge in October 1987, and the Lifeway initial public offering did not make much of a splash. But the stock offering raised the minimum Smolyansky had calculated the company could make do with, and he soon set up a new factory in the Chicago suburb of Skokie. The Skokie plant was twice as large as the earlier facility. Smolyansky himself acted as general contractor in equipping the new plant. The new plant opened in 1989. Lifeway had sales of $800,000 in 1988, and with the bigger facility, the company hoped to double that figure. Smolyansky told Nation's Business (July 1989) that he had only one regret about his new Skokie factory. "I came to this country too late," he told the magazine. "I came 12 years ago. If I'd come 20 years ago, I'd probably have five plants like this."

Expansion in the 1990s

The company did indeed have an impressive record of growth. In 1990, Lifeway made an acquisition, buying up the drinkable yogurt business of Johanna Farms, Inc., a New Jersey company. Both sales and profits bounded upward as Lifeway's products moved into more markets. By 1991, the company needed to build an addition to its plant, doubling its production space again. Sales for 1991 hit $2.4 million, an increase of more than 60 percent over the year previous. The figures for net income were even more astonishing, with an increase of more than 450 percent over 1990. By this time, Lifeway was placing its kefir in more supermarket chains and major food distributors, allowing the company to reach beyond ethnic markets and health food stores.

Lifeway was able to distribute kefir through the Jewel and Dominick's grocery chains, two major players in the Chicago area. Lifeway also got the rapidly expanding health food market chain Whole Foods to stock its line of kefir products. With more and more outlets stocking Lifeway products, sales continued to grow in double digits through the mid-1990s. By 1997, Lifeway Foods had sales of $6 million. It was still a small company, but it was also still the only manufacturer of kefir around.

New Products and New Leadership in the Late 1990s and After

Lifeway Foods began marketing more vigorously in the late 1990s, coming out with new products and emphasizing the health food aspects of its line. The company invested in a new facility in 1997, increasing its production capacity. In 1998, Lifeway introduced Basics Plus, a new variant of kefir that was billed as the nation's first "functional food." So-called functional foods had been in the works for years from offshoots of both the food and pharmaceutical industries. A functional food was defined as providing a health benefit in addition to a nutritional benefit, and as such went a step beyond fortified foods such as calcium-enriched orange juice. Lifeway developed Basics Plus in a collaboration with GalaGen Inc., a small Minnesota biotech company that had been spun off from the dairy giant Land O' Lakes. GalaGen had patented a process for adding colostrum to dairy products. Colostrum is the milk an animal produces shortly after giving birth, and it is key to bolstering the newborn's immune system. Lifeway's new Basics Plus was fruit-flavored kefir blended with colostrum, and it was touted as boosting the human immune system. Lifeway had high hopes for the new product line, though it admitted it had few resources to back a major consumer education campaign.

Lifeway's sales rose roughly 13 percent in 1998, marking seven straight years of growth. Although milk prices had risen significantly that year, the company nevertheless continued to break its own profit records, with a rise of close to 30 percent over the year previous. Whether through its intriguing new product line or its impressive financial picture, the small Chicago company attracted the attention of the world's leading fresh dairy company, the French firm Groupe Danone. Groupe Danone manufactured the world's leading brand of yogurt, and its introduction of the Dannon brand in the United States had in some ways provided a parallel for Lifeway's kefir. Groupe Danone purchased 20 percent of Lifeway's stock in 1999. This still left half the stock in the hands of the Smolyansky family.

Company Perspectives:

We believe—even when no one else does. Lifeway Foods exists to create Possibility & Opportunity where there was none—for people, products, and partners. We believe.

Lifeway came out with several more new products over the next few years. In 2000 the company introduced SoyTreat, which it advertised as the first organic soy kefir. SoyTreat came out in a different flavor array than Lifeway's kefir, with fruit flavors like apple and peach, as well as caramel, coffee, and English toffee. Like BasicsPlus, SoyTreat sold itself on its healthfulness, which included the proven benefits of soy protein in addition to the benefits of kefir itself. The next year, the company unveiled a new kefir line aimed at the Hispanic market. The Hispanic market was the fastest-growing customer demographic in the grocery industry, and Lifeway hoped to sell its new line in specialty grocery stores and in urban markets with large concentrations of Hispanic customers. It test-marketed its new kefir under the name Yogurito, and then brought it out as La Fruta.

By 2001, Lifeway was the largest, and only, manufacturer of kefir in North America. Its sales passed the $10 million mark that year. The company exported its goods to Eastern Europe and to Canada. In 2001 the company signed an exclusive agreement with a specialty grocery distributor in Canada, Jelian Foods. Jelian served natural food markets as well as specialty groceries and kosher food outlets and some mainstream grocery chains. The company seemed bound to continue its rapid growth in sales and profits for 2002, as its new La Fruta line was doing particularly well. The company had slightly more than 50 employees, and it still had room to grow, with much unused capacity at its manufacturing plant.

The company suffered an unexpected blow in 2002 with the sudden death of founder Michael Smolyansky. Smolyansky had a heart attack at age 55 and died with no warning. His daughter Julie then became president and chief executive. Julie Smolyansky had grown up with the company, and after completing a degree in psychology at the University of Illinois in 1996, she became Lifeway's director of sales and marketing. Julie Smolyansky's goal had been to bring Lifeway's kefir products to mainstream groceries, and she had overseen significant sales growth and the introduction of a new organic product line. At 27, Smolyansky was one of the youngest people to head a public company in the United States. Although Michael Smolyansky had not anticipated his early demise, he had named Julie as his successor. She quickly gained the approval of Lifeway's board and of its investors, including major shareholder Danone. The company posted record gains for the quarter after Julie Smolyansky took over, which seemed to show that Lifeway would not falter under its new leadership. Julie Smolyansky's younger brother, Edward, was named Lifeway's financial director after the father's death.

The Smolyansky siblings were able to make big decisions for the company despite the loss of their father. The company made a major purchase in 2003, buying a new packaging system. The new packaging had more room on the label to print information about kefir, tailoring with Julie Smolyansky's desire to bring kefir to consumers in mainstream groceries. The company continued to show healthy financial results. In 2002, sales rose 14 percent, while profit rose by 25 percent over the year previous. Sales for 2003 climbed to almost $15 million, showing growth of more than 22 percent.

Up until 2003, Lifeway had held the kefir market alone in North America. That year, though, two large rivals began placing kefir on grocery shelves in the United States. Yoplait came out with a kefir line, as did Dannon Co., the U.S. subsidiary of Lifeway's major stakeholder Groupe Danone. The competition did not dampen Lifeway's sales, and the company's CEO was optimistic about future prospects. Lifeway was still too small to do a large-scale advertising campaign. But Smolyansky believed that if Yoplait and Dannon invested in marketing kefir, Lifeway also would benefit from increased public awareness.