Siggi's builds a niche market from an ancient Icelandic yogurt recipe.

How to start and grow companies.
Aug. 13 2010 10:00 AM

The Yogurt Chronicles

Siggi's builds a niche market from an ancient Icelandic recipe.

(Continued from Page 1)

And, in just two years, Hilmarsson would have a problem many founders wish for: too much demand. In a "free is the future of business" twist, Hilmarsson donated his yogurt to a Hamptons retreat, where a Whole Foods employee fell in love with it. A few weeks later, Hilmarsson was in Austin, Texas, presenting his skyr to Whole Foods. Hilmarsson would supply half the country's Whole Foods with five flavors of yogurt, beginning in January of 2008. Unprepared, he shut down and expanded his plant so he could accommodate a jump of about 15 stores to about 100. The main problem was that he couldn't cool the product fast enough in large quantities.

Aside from the product's popularity, unlike the failed Social Bomb app and numerous other startups, Hilmarsson hasn't had too many bad surprises, unless you count his failed honey raisin experiment—the raisins in the yogurt expanded and became too grapelike. He also had to stop producing pear mint because the pears had a short shelf. And at first he was startled by the direct American way of doing business, such as single line e-mails involving multimillion-dollar deals and the lack of emotion involved. "They really push, and they don't hold it against you if you push back," he said.

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Ultimately, the many devotees of siggi's directly benefit from Hilmarsson's obsession with sugar. siggi's pomegranate and passion fruit yogurt, for example, has 11 grams of sugar, sweetened with agave, which, while high in fructose, is a low-glycemic sweetener. Yogurt is often deemed healthy but can contain up to 35 grams of sugar per serving—akin to a candy bar. And aside from the nostalgia for his homeland, it's this aspect of American life that compelled Hilmarsson to create the yogurt in the first place. He had an epiphany when he found a loaf of whole wheat bread that looked fantastic but didn't taste right. When he looked at the ingredients, he couldn't believe the amount of sugar per serving. "Americans went bananas in the '80s and took the fat out of everything, but that's not palatable, so they just added sugar," he said.

Having a loyal, health-conscious fan base is one thing, but it won't solve issues involving scale. The skyr company is still in the low-to-middle range of food startups, and Hilmarsson won't reveal financial details, such as profit margins. But one of the company's biggest challenges going forward will be managing the supply chain. "The cost of distributing a refrigerated product is very expensive and compromises profit margin," said Adam Borden, managing director of Bradmer Foods, a venture capital firm that focuses on specialty food businesses.

Hilmarsson's real hurdle is to grow without compromising his values—and his ingredients. There are many examples of small companies with ethics-minded brands that, when positioned for the mass market, lose the authenticity that attracted customers in the first place. Ben & Jerry's, now part of a Unilever, is the classic example. But there are others like Green & Black's chocolate, now owned by Cadbury, a subsidiary of Kraft, that stay true to their roots. Earlier this year, Green & Black's pledged that all its products would obtain Fairtrade certification by the end of 2011.

siggi's albatross is its price, which is $2.69 for a 6-ounce cup at Whole Foods. While skeptics question whether that will play beyond the confines of upscale urban life, so far it hasn't stopped him. It's unlikely growing pains will, either.

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