Gary Hirshberg hates the beverage business.

It took a long time – nearly 20 years – for Stonyfield Farm CEO Gary Hirshberg to succeed in the yogurt business, and he’s the first one to tell you that he didn’t manage to do it until he stumbled through long periods of trial and error.

“We went through a very brutal nine year startup, and during that time we lost one heck of a lot of money,” Hirshberg says. “We had a lot of missteps and false steps.”

That might be true, but now they band is playing Hirshberg’s song. What had been a fledgling outgrowth of a small farm has now grown into a business with close to $200 million in sales. But it’s Stonyfield Farms’ new product lines – a fast growing set of organic yogurt smoothie drinks for adults and kids, as well as its longstanding milk business – that puts the company solidly in two important beverage categories.

But things weren’t always smooth as milk at Stonyfield Farms. In fact, it the New Hampshire native had to beg, during his own birthday party, for his friends to become consumer advocates on his behalf and demand his products at the Bread & Circus (now Whole Foods) in Cambridge, Mass. But once he gained shelf space in that natural foods Goliath, things at Stonyfield started (ahem) moo-ving.

But now, having ridden the growth of his yogurt line straight through the natural and Whole Foods channels into mainstream grocery stores in all 50 states, Hirshberg’s yogurt and yogurt drinks are well-recognized standard-bearers for organic consumer products that have become integrated across all channels. With Group Danone – Dannon, to you and me — taking a majority stake in the company in 2004, Hirshberg has finally found himself with the money, influence, and legitimacy to be not just an entrepreneur in the organic yogurt business, but also as a consigliere to those who operate companies outside of his core category.

And that means that the benefit of Hirshberg’s experience is now being injected into a pair of organic beverage companies, rising-star RTD tea producer Honest Tea, and a beer startup called Peak Organic, which is run by a former Stonyfield Farm employee, Jon Cadoux.

“Gary’s a great guy to call on,” Cadoux says. “He’s my uncle through marriage, but at Stonyfield, he sure made me give out a lot of beer. He made me learn it all.”

Hirshberg knows that it was his energy and enthusiasm that helped turn organics into a still-growing, $13 billion-per-year industry, and he says he believes strongly in products like beer – and other beverages – as avenues for increasing organic consumption patterns. But beyond that, he feels strongly that organics are going to be a prime mover when it comes to the beverage industry itself, and that smart retailers will recognize that sooner rather than later, before “organic” becomes as commonplace on a label as “fat-free,” and they’re left behind.

“I believe there’s a lot of people who would be interested in these products because they taste great and they’re relaxing,” he says of products like Peak Organic. “And there’s a growing number of people that would relax even more with the knowledge that what they’re using to drown their sorrows with is non-toxic.”

Beverage Spectrum interviewed Hirshberg in his office in Manchester, N.H., to learn his thoughts about the beverage business, as well as his own beverage-oriented goals.

Beverage Spectrum: What are your priorities with regard to the beverage business?

Gary Hirshberg: Well, really, I’m just now figuring out that I’m actually in the beverage business. But anywhere in the world – outside of the United States – that you could have traveled in the last three decades, you would have found a yogurt drink situated next to the spoonable yogurt. And it was always an enigma to us – and to everybody else – why that couldn’t be the case here.

We never entered the yogurt drink business – at least intentionally. Sometimes when we had bad runs of refrigerated yogurt it would come out as liquid. (laughs) It tasted very good but we didn’t want to market it to people with a spoon to slurp it out.

But we were always working on a recipe. To be precise, from about 1997 to about 2000, we were hard at work on it, because we knew that time would eventually come.

BS: How were you so sure?

GH: Yogurt is one of those bizarre cases where if you want to see what’s coming here in the U.S., you go to Europe. They have about a 300-year head start on us in terms of understanding probiotics or yogurts or healthy dairy in general. If you’re in Paris, and you go into a Carrefour [market], you’ll see about 100 meters of yogurt shelf space, compared to the 10 meters we might have in a typical supermarket here. And in that space, there’s all kind of variety, including plenty of drinks. And per capita consumption of yogurt has been on the rise here so much.

So we just figured that drinks would sooner or later emerge. You started to have yogurt showing up in tubes, you had yogurt showing up for babies, like our YoBaby, small cups, large cups, different formats.

The funniest thing was, in one year, suddenly, Yoplait, Dannon and Stonyfield, they all had drinks within about a month and a half of each other. There was no communication between the companies, but there was like this tipping point. All three of us launched, and suddenly, yogurt drinks had arrived.

Now, one of those, Nouriche, Yoplait’s, has since bit the dust, but you know the others. Dannon’s Light and Fit Smoothie has done incredibly, our smoothie has been a rocket ship, and now our own light smoothie is up about 35 percent versus last month. The point is that I’ve been in business for 24 years, and I’ve been in the yogurt drink business for only about four years.

So I keep thinking I’m in the yogurt business, but it’s dawning on me that people are choosing this product as a drink against an energy drink, a soda, milk, or water.
BS: But it’s not just your company. You’ve found other ways to be in the beverage business, working with Honest Tea and with Peak Organic. What can you offer these companies as a board member?

GH: Well, hopefully they can learn from my mistakes, and if that’s the case I have an infinite number of things to teach them.

We went through a very brutal nine year startup, and during that time we lost one heck of a lot of money, we had a lot of missteps and false steps. Part of it was that the farm was a perfectly good place to make a product, but it wasn’t a great place to incubate and grow a new business. What I can say to young entrepreneurs is that I’ve done every single job in this company. I’ve manufactured, I’ve marketed, I’ve sold, I’ve shipped, I’ve run the quality control, I’ve been the banker and I’ve been the fund raiser. And I’ve come to learn that being an entrepreneur means that you have to be able to do all of these things; it means you have to be a generalist.

BS: Of the beverage companies you’re familiar with, who is doing things right?

GH: Seth Goldman (from Honest Tea) is definitely doing it right. He’s delivering on his promises, he’s staying within his means, he’s not being a lunatic and going out and buying millions of dollars of advertising for a big market share grab. I know a lot of companies do that and that’s the end of them.

He’s not compromising in any way on product quality; if anything, he’s improving the quality. He recognizes that his goal is to bring innovation to the market and he’s doing that in spades. He’s resisting endless temptation to lose focus. There could be Honest Tea water or smoothies, there’s a lot of different places he could go because the beverage industry is so diversified and so much about marketing, and he’s a good marketer. But a big part of what I’ve learned to do is to stay focused, to get the heck off of things that you don’t know about. And that’s what I’m trying to share with him.

One other rule: never underestimate the power of doing good. Whether it’s use of proceeds or healthier food, it’s a good advantage.

BS: What do you believe retailers will get out of carrying more organic beverages?

GH: Most people think organics aren’t proven. Actually, it’s chemicals that aren’t proven. You know, all food was organic until the early part of the 20th century, and we’ve now had about a 90-year run here where we’ve basically been guinea pigs for a great experiment for excessive use of ‘you-name-thesynthetic- ingredient,’ and the jury is still out, but we’re certainly facing new levels of health epidemics. You can’t say that’s from not eating organic food any more than you could say it’s from cell phones or just stressed out lives, but you also can’t rule it out.

So for the retailer, all you have to do is pick up a daily newspaper and see that there’s a discussion about things that are bad for your health or bad for the climate.

Organics is the solution for both. Most retailers don’t need me to say this, because they’ve already figured this out for themselves, but organics is here to stay.

Look at us. We’re in our 14th consecutive year of growth north of 26 percent. Our problems are more about supply than they are about demand.

The reason I’m saying this about retailers is that retailers depend on, if you’ll excuse the expression, “organic growth.” They have extremely slender margins, they have constant pressure on price from giants like Wal-Mart, or they have pressure on the other side from folks like Whole Foods, who are relatively price-unconscious but all about quality. And most retailers fall somewhere in between those two, they can’t compete adequately on either extreme, but they still need something that’s going to make next year’s sales bigger than this year’s, because this year’s cost is going up next year and so on.

And the only sure-fire, consistent trend that’s growing that I know of is organic consumption.

What I’m saying is it’s clearly not a fad. If you’re trying to decide how to merchandise, how to promote, how to position, how to stock, think about this: we’ve seen low-carb come and go. A lot of retailers put a lot of effort into something that was here one day, gone the next.

We’ve seen a lot of effort around diet, around calories or fat, fat or calories. It’s almost like it depends on what Oprah said the night before as to how you should stock your shelves.

But organics, you don’t have to worry about it going away if you put the energy into it. The smartest retailers we sell to in America, the best ones we deal with, have us integrated into their shelves. Organic yogurt sits right next to conventional yogurt, as opposed to over in this sort of ghetto. And I can demonstrate it. Our turns are much higher in those situations, and when our turns are higher, the retailer benefits because we have a higher penny profit.
BS: Seth Goldman has always talked about that, but seems to have been frustrated in many channels.

GH: It’s not really him, it’s the retailers, and that’s really what I’m trying to speak to right here. And what I’m trying to tell them is, don’t banish these guys off to the corner like it’s the fad du jour. Do what Wal-Mart is doing, do what the smart guys are doing, like what Mejier in Michigan, or HEB in Texas or Harris Teter in North Carolina are doing: put organics right in there and you will see tremendous growth. Because the consumer is going to the yogurt case for yogurt, and if you can trade her up to a higher price or a higher quality for a product that delivers on taste, or quality, then you’re serving her, she’s going to come back, she’s going to be loyal to you.

That’s the thing with beer. The irony of all this extra advertising is that, while it builds name awareness, it does not build loyalty. Everyone wants to feel like they’ve discovered their own product. You know, it’s like the last thing that feels cool is to walk out of a store with a Bud or a Bud Light. Show me a regionally-produced beer that’s organic with a charming story of a young entrepreneur who’s put his heart and soul into it – and it’s delicious – and that’s pretty neat. It’s not for everybody, and it’s not going to win on price, but it’s a winner.

BS: What areas of the Beverage Industry would you say have the most potential for organic or health to become a prime growth area?

GH: I can’t say why one would be any stronger than another. I’d look to the kids for that. I mean, take energy drinks, where kids know a lot more than adults know. Sit them down, they get what’s going on, especially the athletes, they know. I can’t rank beer over sports drinks over energy drinks over sodas.

One of the hottest items of 2005 was organic cat food. Who’d have thought that?

BS: Do you think there’s a market for alternative milk drinks, the Kool Cows and such?

GH: Yeah. We’re not into it because of the shortage of organic milks. Beverages are, I think, probably more prone to great marketing than lots of things. I don’t know why that is, I think it’s just an image thing. Years ago I was involved with a guy who did flavored milks, and he’s still doing pretty well. As a father, anytime I can see something that coerces or seduces kids into consuming more calcium and protein as opposed to, you know, junk, I’m in favor of it. I mean, there’s so much in the beverage industry that’s just pure b.s.!

I coach three soccer teams, and I watch my kids consuming empty calories and sugar on the sidelines, and I’m just horrified by it. I mean, they see these ads where some color splashes over some $70 million-a-year athlete, and they buy it for a moment of feeling like they’re Michael Jordan, and it’s a crock. Give me a couple of grams of calcium, and I’ll get these kids so that they’re having better bone health, fewer injuries, and so on. And we know right now that nine out of 10 young girls are calcium deficient in this country because they’re giving up calcium and drinking diet soda to look like Britney Spears.

So, I mean, there’s a lot about the beverage business in this country that I absolutely detest. And much of it is the lack of morals and lack of principals and the guileless seduction in the name of exploiting kids for money. We have an obesity crisis, a diabetes crisis and an osteoporosis crisis in this country, for starters, and I believe a whole lot of it is due to conventional beverage companies targeting these kids. So if you can flavor a milk, even if it’s not organic, it’s better than “fill-in-the-blank” soda.

BS: So is that what accounts for your continued interest in the beverage business?

GH: Well, it’s also a very convenient way to get yogurt in. I have three little yogurt eaters, and I’m very conscious of getting breakfast into them – it’s borderline insane, I’ll wake them up from wherever I’m traveling from to make sure they eat in the morning. And it’s far easier for me to get a drink in them than a food. There’s also this whole one-handed eating thing, this eating on the fly. For the young people, it’s kind of hip and sexy to glug it down.

BS: Beyond yogurt, what keeps you interested in the beverage companies whose boards you sit on?

GH: I’m not involved with them because they’re beverages, I’m involved with them because they’re great entrepreneurs with great stories, and I can help. I wouldn’t say it’s only because it’s beverages. If Seth had an excellent granola, I think I’d probably be with him. These are younger versions of me, if I may be so bold. These are guys who have it, who have the instinct to be successful while at the same time making a positive effect on the world.

It helps to love the products. I’m a real believer in loyalty brands. I think that as you’ve heard me reference it a couple of times, the challenge organic companies pose to retailers is that the retailers are used to seeing big ad programs and how we’re going to pull it through your store, and by definition, organic brands cannot afford that level of advertising.

I’m bigger than a lot of people, and even at my scale, I’m suffering a lot compared to say, Danone, whose margins I now know, right? The thing is you just have to get a lot better at your story, at expressing who you are, and about being a genuine and positive experience at every possible touch point. You’ve got to strike an emotional chord, and that’s what these guys do.