Why the Soy Milk King Still Reigns By selling out to the nation's largest dairy distributor, White Wave president Steve Demos turned Silk into a beverage for the masses.
By G. Pascal Zachary

(Business 2.0) – It's not easy being a soy-vangelist. But for more than 20 years, Steve Demos has been driven by a belief in the superior nutritional qualities of the waxy, green bean that's a dietary staple in Asia. He's tried to sell to U.S. consumers just about every kind of soy-related product imaginable, from tofu ice cream to soy bacon. None of it caught on in a big way--that is, until Demos came up with a new brand of soy milk called Silk.

Silk is a blockbuster. Not since yogurt's mainstream success in the mid-1970s has the health-food world spawned such a major hit. Silk is more than just America's most popular soy milk: Because there are no national brands of cow's milk--only local and regional ones--it's also the country's highest-volume brand of "white beverage," according to Information Resources. Sales of Silk now exceed $6 million a week and are expected to reach $400 million this year, after growing by 50 percent in each of the past two years.

And Demos says he's just getting started. He wants Americans young and old to drink soy milk. "The obsolescence of dairy is my goal," says Demos, 54, the president of White Wave, based in Boulder, Colo.

How does he aim to abolish dairy? Oddly enough, with the help of a dairy giant. To bring Silk--the name is a contraction of "soy" and "milk"--into direct competition with cow's milk, Demos did the unthinkable and, in 1998, partnered with national milk processor Dean Foods--eventually selling his entire business to the Dallas-based company, which owns dozens of milk brands throughout the United States, in 2002. That unlikely alliance has given Silk valuable shelf space nationwide, making it the first soy milk to move from the marginalized health-food aisles into the dairy section, where it's ever so slightly starting to cut into the market share of cow's milk. Last year alone, sales of soy milk increased by 16 to 20 percent.

Because White Wave's 191 employees preach such devotion to the cause, Dean has allowed it to remain mostly autonomous. Says Dean CEO Gregg Engles, "This is the most highly focused management team I've ever encountered."

Organic Origins

White Wave's devoted disciples are led by both Demos and his ex-wife, senior vice president and CFO Patricia Calhoun. She and Demos married and divorced in the 1970s, but the failed romance morphed into a New Age business partnership when they founded White Wave in 1977 to sell tofu-related products. The company's offerings, including baked tofu and tempeh, won a cult following around hippie-dippie Boulder, but White Wave got no national traction.

Then Demos turned to soy milk, the alternative of choice for vegans, health nuts, and lactose-intolerant consumers. Soy has nutritional benefits that milk lacks, Demos argues, but it couldn't triumph if the consumer couldn't find it. So in 1996, Demos had his eureka moment: He decided to begin selling the drink in conventional milk cartons. Until then, soy milk had been sold only in small, unrefrigerated boxes to devotees who so believed in the protein-rich product's nutritional qualities that they tolerated its odd, chalky taste and foreign packaging. Silk, on the other hand, would be shelved and chilled alongside cow's milk.

Demos didn't even own a soy milk product when he decided to revolutionize the category, so he contracted with a California company to actually make the beverage. But the arrangement meant that his margins were small and he couldn't control the product's taste. To correct both problems, he needed to process his own soy and manage the creation of Silk, from buying the raw beans to delivering the cartons to stores. To that end, Demos opened his own factory and began formulating his soy milk to achieve a better taste and mouth-feel. Over time he began, with some trepidation, to add new flavors and varieties, like chocolate milk and coffee creamers.

Despite Demos's lofty goals, Silk initially floundered, even while soy garnered attention from the mainstream press and began popping up in coffee shops. Silk sold well in natural-food havens like Wild Oats and Whole Foods, but Demos lacked the millions of dollars for slotting fees required to gain shelf space in major supermarkets. Fortunately, Silk's local popularity caught the attention of grocery giant Kroger, which offered to shelve it nationally. Demos accepted, albeit grudgingly, since the product remained mostly relegated to natural-food shelves, which Demos calls "the penalty box" because they reinforce the negative aspects of alternative foods. "Most natural-food products advertise, thinking consumers can push products onto the shelf," Demos says. "That doesn't happen. You need a popular product."

A Corporate Coup

To bring Silk into the mainstream, Demos decided to sleep with the enemy: He solicited an investment from Dean Foods, now the country's largest milk processor. In exchange for a 35 percent stake in White Wave, Demos received two investments from Dean totaling $15 million. The cash paid for slotting fees that put Silk in virtually every store in America, almost exclusively in dairy sections. Sales climbed, and the results encouraged many other national grocers, including Safeway and Albertsons, to stock Silk in their milk aisles.

But in 2001, Dean merged with another milk processor--and its new management promptly sought to exercise its option to purchase, at a prearranged price, the rest of Demos's company. With sales of Silk steadily rising, Demos balked at the terms. He sued Dean, lost in court--and prepared to lose Silk.

Following an appeal, Demos called Dean's top lawyer and talked settlement. Engles agreed to rip up the original contract and pay $190 million for the remaining 65 percent of the company--provided that Demos and Calhoun remain in charge. The cash offer was well above the original price. "We were buying this business early in its life cycle," Engles recalls. "Price wasn't all that important."

In April 2002, Demos and Calhoun signed a letter of intent, agreeing to remain at Silk's helm for two years--and then promptly disappeared for 10 days of meditation. Engles worried that the couple might have seller's remorse, but two years later, Demos and Calhoun remain in charge and say they're staying indefinitely.

Milking the Market

Under the new arrangement, Dean assumed the role of distributor for Silk in grocery stores around the country. Not surprisingly, Silk's national footprint made it a target of big-name food packagers looking to compete in the soy milk market. Heinz introduced a line of soy milk in 2000, then withdrew; breakfast giant General Mills is expanding its soy brand,

but its 12 percent market share is far below Silk's commanding 80 percent. Dean's 119 processing plants around the country give Silk an enormous capacity to respond to surges in demand, and the fact that White Wave buys more organically grown soybeans than any other U.S. company creates a significant barrier to entry. White Wave also recently inked an exclusive deal with Starbucks to act as the coffee chain's sole soy milk provider in the United States and Canada.

Still, Demos isn't content to sit on his soy laurels. He hopes to replicate the company's soy milk success with a new line of ready-to-eat tofu products, while launching Silk's first national TV ad campaign and expanding into foreign markets. And how does the corporate parent feel about the soy-vangelists' penchant for far-out meditation? "If it works," Engles says, "more power to them."