LIFEWAYS LOOKS TO MILK NEW PRODUCTS FOR GROWTH

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Michael Smolyansky's upstart dairy business is looking for a new culture-something beyond the cultures in his signature product, a yogurtlike drink called kefir.

"We want to diversify," said Mr. Smolyansky, president-CEO of Lifeway Foods Inc., Skokie, Ill.

Since its inception in 1986, Lifeway's primary product has been kefir, a fermented, flavored drink whose taste is likened to sweetened sour cream. Sold through health food distributors, kefir is available in 30 states; locally, it's sold in Jewel Food Stores, Dominick's Finer Foods and Treasure Island.

The company, which went public in 1988, also makes a drinkable yogurt and several kinds of farmer's cheese. This year, Mr. Smolyansky hopes to buy another production facility in Chicago devoted exclusively to cheese production.

Lifeway's sales climbed to $3.5 million last year from $800,000 in 1988, an average growth of about 28% annually. Earnings last year totaled $215,600, or 6 cents a share.

Sales are projected to grow to $4.5 million this year. Mr. Smolyansky, a Ukraine native, attributes part of the current growth to his recent foray into Russia.

"We started selling $1,000 a week last September, but now, we've reached $10,000 a week in sales," he said, adding that everything sold in Russia is made in Skokie.

Although Mr. Smolyansky was hoping to open a factory in Russia, he's put that idea on hold due to cost. Likewise, plans two years ago to buy a facility in Ukraine were scuttled because of political instability.

That led to instability in Lifeway's stock, which rose as high as $4.50 when the Ukrainian project was announced, but then dipped to $1.50 after the deal fell through. The stock currently trades around $2.25.

Mr. Smolyansky hasn't ruled out selling more kefir in the U.S., where the yogurt category seems ripe for expansion. Sales grow 10% to 12% a year, according to Dairy News, Des Plaines.

But dairy industry observers question whether kefir will ever gain widespread acceptance, as it's mostly bought by hard-core yogurt lovers.

Mr. Smolyansky said Americans simply aren't familiar with the drink, which he said is popular in Europe. He points to a local cable TV advertising campaign for kefir that ran during last year's fourth quarter-and that he claims boosted sales 25% at Dominick's and Jewel alone.

But food industry consultants say it could take more money than Mr. Smolyansky, a self-described penny-pincher, can spend to pull kefir out of its niche and into the mainstream.

Drinkable yogurts, which are similar to kefir, have been tried in recent years by several bigger companies with little success.

He also would like to expand his company through acquisitions-a route he's traveled with mixed success. In 1988, he acquired the Tuscan drinkable-yogurt line from Johanna Farms of New Jersey, which he now makes under the Lifeway name.

But his bid last year for New Jersey-based Bosco Products soured. Mr. Smolyansky said he withdrew his offer after due diligence indicated that sales were less than he'd anticipated.M

Ms. Adler is a correspondent for Crain's Chicago Business.

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