|Lifeway seems stalled.|
Worse than stalled.
What's going on at Lifeway Foods?
Even as the kefir company's sales have flatlined and earnings disappeared, Smolyansky family members are taking home salaries in the millions.
Crain's Chicago Business
August 24, 2018
Lifeway Foods makes kefir, a fermented dairy drink.
Julie Smolyansky is proud of what she's accomplished as a young female CEO of a publicly traded company: Since taking over her family's kefir company, Lifeway Foods, in 2002, it has grown from a $12 million business to a nearly $120 million one. Investors, however, are no longer impressed.
Even as Americans pay increasing attention to the importance of a healthy gut microbiome—something that the probiotic strains in kefir, a tart, tangy cultured milk smoothie, have been shown to promote—Lifeway's sales have flatlined for four years. More troubling, to some at least, are the salaries Smolyansky family members take home. Julie, her mother, Ludmila, and brother, Edward, received $6.3 million combined in compensation last year, even as Lifeway posted a loss.
"This company is being run like a personal piggy bank," says Paul McConnell, co-founder of Board Advisory, an Orlando, Fla.-based executive compensation consulting firm.
Lifeway's annual revenue has hovered around the $120 million mark since 2014; last year, sales dipped 4 percent to $118.9 million. Earnings, meanwhile, have evaporated. Lifeway swung to a $346,000 loss in 2017 from a $3.5 million profit the year before. And the company's stock has plummeted to around $3.70, the lowest it's been since 1997.
Smolyansky, a voluble advocate on social issues ranging from women's and immigrants' rights to mental health, says McConnell's conclusions "are demonstrably false." She also rails against what she considers the stock market's myopic obsession with short-term results and says the company is still positioned for long-term growth.
"Our product is a 2,000-year-old product that was considered a gift from the gods and is still very much in its infancy" in American market penetration, Smolyansky says of the fermented dairy drink her Ukrainian immigrant parents introduced to the United States in 1986.
At the same time, she acknowledges the kefir category is being rocked by several headwinds: first, the disruption in the traditional grocery sector as people shift to online ordering, which upends the store-based marketing strategies on which Lifeway and other food companies have long relied; second, what she calls an anti-dairy movement based on the notion that milk, cheese and other products can increase inflammation; and third, the proliferation of probiotic supplements that are elbowing into kefir's healthy-gut territory.
As an example, she points to the fact that Lifeway used to sell part of its children's ProBugs line at now-bankrupt Toys R Us. "When stores have a hard time, there are fewer points of distribution for me."
Smolyansky, who vehemently disagrees with the idea that dairy causes inflammation (a point backed up by randomized, controlled scientific studies), can't overcome Americans' interest in vegan and dairy-free diets. "At the macro level, dairy is seeing a dip and is expected to continue seeing that dip in the future," says Thomas Davenport, a director at Sikich Investment Banking in Chicago, who specializes in manufacturing and distribution.
MOVING INTO DAIRY-FREE
And so Morton Grove-based Lifeway will soon launch a pea-milk drink called Plantiful; flavors will include vanilla chai and others Smolyansky says taste markedly better than many of the "barely drinkable" milk alternatives on the market. Her retail customers are so eager for more palatable nondairy options, she says, that they placed orders without tasting it.
Beyond the foray into dairy-free beverages, Smolyansky gives other reasons she believes her company has plenty of runway: It just gained entry into 2,200 Rite Aid stores, as well as 108 Sam's Clubs.
More important, she says, Lifeway's stagnation isn't due to cresting interest in kefir but to the company's tapped-out production facilities in Morton Grove and Philadelphia. An additional facility in Waukesha, Wis., will solve that and allow Lifeway to fulfill its new customers' orders. "We only recently turned on the machines in Wisconsin," she says. "Now I have the capacity to go to $500 million (in sales). I 100 percent promise we will get there. It's just a matter of when."
But why has Lifeway, which acquired the former Golden Guernsey dairy plant in Waukesha in May 2013 and began producing kefir there in August 2015, taken so long to get the new facility up to speed—especially as production at the other locations stalled? "Turning on a machine does not equal fully operating," Smolyansky says. "The product that was coming out was garbage. It's taken at least a year to produce better product."
Smolyansky, 43, was a baby when her parents emigrated from the Soviet Union; they landed in a roach-filled Rogers Park apartment with $116, per family lore. Ludmila Smolyansky taught herself English by watching "General Hospital" and opened a Russian deli that evolved into a national importer and distributor of Eastern European foods. She encouraged her husband to produce and sell the kefir he missed from home.
Ludmila Smolyansky's presence remains strong at Lifeway. At 68, she is the company's nonexecutive chairman and a consultant focusing on international expansion. For that work, as well as for lending her likeness to Lifeway packaging, she earned $1.6 million in 2017. Her daughter and her son, Edward, Lifeway's chief operating officer, each received almost $2.4 million, including base salaries of $1 million and $575,000 apiece in stock awards. That brings the family's total comp to $6.3 million.
Julie Smolyansky says her mother is being appropriately compensated for a lifetime of intellectual property contributions and hard work. Corporate governance experts disagree.
McConnell, the compensation expert, compared Lifeway's executive pay to that of 15 food companies with median sales of $136 million. The median total compensation for these CEOs, including a median salary of $433,000 and long-term awards, was $845,000, or roughly a third of Julie Smolyansky's latest compensation. Given that the family already owns more than 50 percent of Lifeway's stock, the additional stock awards are "absurd," McConnell says. Lifeway's pay structure is particularly egregious, he says, given its recent performance and current market cap of just $60 million. "This is the kind of pay practice that gives executive compensation a black eye," he says.
Smolyansky pushes back, saying the peer companies and data McConnell invokes are "badly skewed" and include three companies that have revenues of $30 million or less—far under Lifeway's numbers. Furthermore, she says, "regardless of a named executive's equity stake in a company, equity awards are a feature of virtually every publicly traded company."
Smolyansky says money is not her main objective, in any case. "It's not about money, it's about healing people," she says. "I could have sold this company a long time ago and ridden blissfully off into the sunset. I want to bring the bacteria and cultures to as many stomachs as I can because it literally changes people's lives."