Steve Demos

The Soy Wonder:
Building a
"Right Livelihood"

"Everyone who touches the stream of revenue must be doing good for society."

—Steve Demos

www.WhiteWave.com

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Steve Demos

The Soy Wonder:
Building a "Right Livelihood"

In 1970, when Steve Demos graduated from Bowling Green University in Ohio, he knew everything he didn't want to do to make a living. However, like many of his generation, he also had no idea of what he did want to do—so he ended up dropping out for the next four years and traveling throughout India. There, he became a vegetarian and formulated his desire to construct a "right livelihood" where the Golden Rule could be applied to business. In his own words, this meant that

"Everyone who touches the stream of revenue must be doing good for society."

When he returned to the United States, Demos settled in Boulder, Colorado, and decided that the business of making healthy vegetarian foods, especially from soy products, had all the attributes to which he could apply his "right livelihood" philosophy.

Like many entrepreneurs, Demos tried various approaches before he hit on the one that would make him famous.

He started a natural nut butter company called Naturally Nuts. He ran a retail vegetarian delicatessen called The Cow of China. And he started White Wave Tofu, which today has become the largest soy foods and soymilk company in the world.

White Wave Tofu (now White Wave, Inc.) made its first sale of tofu on September 27, 1977, at 11:30 A.M. Tofu, also known as bean curd, is a soft, bland, custardlike food made from crushed soybeans. The tofu was made in Steve's apartment kitchen using $500 he borrowed from a neighbor to start the company. White Wave ran along for the next 20 years making various soy-based products, achieving sales of about $6 million in 1996. During those years, many products were tried and eventually dropped—like Polar Bean (soy) ice cream and ToFruzen—products that Steve didn't realize until years later were viable but were then simply too far ahead of their time.

In 1996, after a successful "getting rich slowly" philosophy that had sustained White Wave for almost two decades, Steve realized that packaged soy foods like tofu and tempeh were probably never going to make the impact on society he had dreamed of when he started his company.

Soy seemed to be a very narrow niche market limited to those vegetarians who knew about it. The company had tried veggie burgers, tofu hot dogs, ice creams, and countless other ideas in attempting to entice the American consumer to embrace soy. Over those years, Steve realized that the product he was searching for would be one that required no customer education—it had to be a "nonthinking" product containing "freshness, familiarity, and convenience." Steve came up with Silk soymilk later that year as the culmination of all of these insights.

Silk, a very fresh soymilk product made entirely from organically grown soybeans, is sold in freshness-dated, refrigerated cartons that look like quarts or half gallons of ordinary milk. It comes in plain, vanilla, chocolate, chai, and mocha flavors—and a companion Silk creamer product comes in Plain and French Vanilla. For the consumer, it is "fresh, familiar, and convenient," especially since it is now available in 91 percent of U.S. supermarkets.

In 1997, soon after launching Silk, White Wave sales rose 37 percent, from $6 to $8.2 million. Led by Silk, sales rose another 24 percent, to $10.2 million in 1998, and yet another 39 percent, to $14.2 million in 1999. Then the FDA and others began touting the benefits of soy products and sales more than doubled, to $29.6 million in 2000, and then almost tripled in 2001, to $80.5 million. Sales were $180 million in 2002, $240 million in 2003, and $362 million in 2004.

When I first phoned the main number for White Wave to set up an interview back in 2001, Steve's voice greeted me on the company's voice mail: "Welcome to White Wave. This is Steve Demos, company president. The following menu will assist you." Since I had read about Steve before calling him for the interview and had seen tapes of his appearances on CNN and elsewhere, I was not surprised to hear him humbly attribute the enormous success of Silk to "the market was ripe, there was nobody present, and we had all the elements."

I was surprised to find this former society dropout highly versed in the vernacular of modern business—so much so that I could have been talking to any Fortune 500 CEO or professor at Wharton or NYU business school. When I complimented him on this he explained, "If you are really and passionately committed to what you want to accomplish, you adjust to the language spoken."

But Steve has done far more than simply learning the language of business in the twenty-first century. He practices it at the highest levels—levels not usually found in a food company or with a startup entrepreneur.

According to Steve, "Most entrepreneurs are prepared for failure but not for success. Thus, when they succeed, they end up handing their business over to a competitor."

In 1998, Steve realized that he had a tiger by the tail and began to prepare for success. First, White Wave identified several strategic targets as investors—targets that could provide capital and operational support if Silk sales continued their meteoric rise. Then, after identifying the proper targets in its industry, White Wave hired an investment banker to execute the transaction and sold a minority interest in the company for $15 million to the second largest dairy in the United States, Dean Foods, Inc. But White Wave never used the operational resources of their new dairy partner.

Instead, Steve retooled the Silk manufacturing process into a virtual process modeled on the best aspects of both the dairy industry and the much more profitable soft drink industry. White Wave began making high quality soymilk extract at three 20,000-square-foot, company-owned facilities that are strategically located in New Jersey, Colorado, and Utah. This highly valuable extract is then shipped in milk-type trucks to five major dairies that make and package the Silk—dairies carefully chosen to ensure that White Wave is an important part of their overall volume and a profitable customer. These dairies not only guarantee Silk virtually unlimited manufacturing capacity, they already have the trucks and sales organizations to keep Silk in the dairy case at the local supermarkets. As Steve explained in our first interview, White Wave has a totally scalable model: "We draw a 500-mile radius around extraction, find facilities, and then expand."

Although most people see Silk as an alternative to cow milk, Steve doesn't see the dairies as his competition. "We're not an alternative to milk," said Steve, "we're an option. I don't want to be dairy's nemesis—I want to be so superior that there is no comparison. I'm after Coca-Cola as much as I'm after milk."

In this regard, White Wave makes an 11-ounce plastic bottle of Silk soymilk packaged like a soft drink but with a 120-day nonrefrigerated shelf life. The average person in the United States consumes 24.2 gallons per year of cow milk, and that same average person also consumes 54.6 gallons per year of soft drinks.

In 2003, Steve made a deal with Starbucks to create an exclusive version of Silk to complement their espresso and chai drinks.

In 2002, soon after I first wrote about Steve Demos in the first edition of this book, his company was sold to Dean Foods, Inc. in a highly publicized $295 million transaction. At that time White Wave had about 150 employees, of which 100 had worked for the company for 2 years or more. In an unprecedented move for a packaged foods business, Steve and his managers refused to sell unless every employee who had been with the company for 2 years or more received something from the sale. The lawyers were astounded by Steve's request—it took them three months to work out the legal mechanics, which could have jeopardized the sale of the company. In the end, $15 million of the sale price was handed out to about 100 people, many of whom didn't speak English. One, a truck driver named Pete, received almost $400,000. There was no legal obligation to do this, and Steve lights up when he speaks about handing them the checks and sometimes having to explain through a translator why they were getting this money.

Reflecting back on the sale, Steve said: "This event was a cause and effect circumstance (proving) that if you choose to do something the right way you end up at a certain point. The ultimate message is that there is a path, and that path is Right Livelihood, to create wealth without guilt or negativity."

After the sale, most people expected the culture at Dean's Foods to decimate White Wave. Instead, the opposite occurred. Steve made new deals with his management team to stay on for at least $1 million each, and together they earned out an additional $35 million in sales proceeds by exceeding the new owner's expectations. Steve was promoted to manage not just White Wave, but he became president of the Refrigerated Products Division of Dean's Foods, with sales of $1.2 billion, including Horizon Organic Milk. Steve's favorite speaking topic from 20022004 was "Who Bought Into Who?"

The story of "Who Bought Into Who" appeared on the front page of The Wall Street Journal on February 1, 2005. Steve was a national celebrity and, although he was only running a $1.2 billion division of a $10 billion company, he was more popular than the chairman and the board of directors. In a surprising move, just one month after the glowing story in The Wall Street Journal, the board fired him.

Steve has agreements with White Wave and Dean Foods that prevent him from speaking freely or going into competition until Spring 2007. He just recently completed an 11-month trek in Asia and the Himalayas, and we are expecting more great things from this Soy Wonder when his noncompete agreements expire, just about the time this book is expected to be published.

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