Uneasy lies the head

Ranked by Forbes as China’s wealthiest person and the 103rd richest globally, Zong Qinghou’s position at the top of the Chinese food chain was fortified when the Hurun Research Institute, which compiles what is considered the most authoritative list of China’s wealthy, put Zong at the top of its own ranking.
 
Together with his wife and daughter, Zong, who has a personal net worth of US$12 billion, owns 60% of Hangzhou Wahaha, one of the country’s biggest drinks makers. This is the first time in 10 years that a property developer did not make the top five of the Hurun rich list, and Zong’s placement at the top of the league table points to the increasing might of consumer-driven, not investment-driven, growth.
 
Self-made man
 
What started out in 1987 as a school-run store selling bottled water and nutrition products in Hanghzou’s Shangcheng district is now a national beverage giant, part-owned by the local government, with expected profits of US$1.5 billion this year. According to consultancy United Wisdom, Wahaha is currently China’s market leader by sales for bottled water and yogurt drinks, number three in sodas, and fourth in fruit and vegetable drinks and ready-to-drink teas.
 
The company booked sales of about US$6.3 billion last year in a national market that is growing at about 20% per year. China’s total retail sales reached US$1.84 trillion last year, up 15.5% from the year before, and the Ministry of Commerce forecasts a 16% increase for 2010. This growth, together with rising urban and rural wages – and with them, rising disposable income – means good times for consumer-focused companies like Wahaha.
 
"The most important factor is the consistent improvement in economic development and higher living standards," said Mu Feng, a senior analyst at Pushway Consulting. "The variety and tastes in beverages is changing with this. And Wahaha has been at the top of China’s beverage industry for 12 years now." 
 
Shi Chunjiang, senior partner at consultancy United Wisdom, sees Wahaha as providing an unparalleled number of products, which he said is a crucial factor in ensuring market dominance.
 
"It boasts a huge business scale covering extensive segments and has an outstanding sales network," Shi said, noting that the company has strong cash holdings, near-zero debt and strong innovation.
 
Imitation limitations
 
Zhou Siran, a food and beverage analyst at CIC Industry Research Center, similarly sees Wahaha’s strong sales channel and wide-reaching national distribution network as important factors in the company’s growing strength. Yet Zhou does not share the same views on the company’s ability to innovate and create new market-leading products.
 
"Wahaha has a very good system of copying other products," said Zhou. The company’s ability to permeate the market, he said, is based on its ability to reproduce competitors’ products using local factories in different cities. This reduces distribution costs and undercuts peers in pricing structures.
 
Its strength in copying can be a weakness. Wahaha faces competition from other firms that are speeding up production in the beverage market and are broadening their product lines. "Wahaha also has a strong product line – water, teas, milk drinks – but some of its products are not of the same standard as its competitors," Zhou said. Wahaha’s Feichang Cola, for example, lags far behind the likes of Coca-Cola’s (KO.NYSE) flagship drink and PepsiCo’s (PEP.NYSE) Pepsi.
 
Copying has also landed the company in legal trouble. A joint venture with France’s biggest food and beverage firm, Danone (BN.EPA), fell apart in 2007 after the French company claimed that Zong had been selling Wahaha-branded drinks in contravention of joint-venture agreements. After two years of arbitration, involving over 30 suits in several countries, Danone sold its stake in the ventures back to Wahaha for what is believed to be US$416 million.
 
Danone continues to operate in the bottled water segment, and, according to management, is looking out for fresh acquisitions. Meanwhile, Wahaha faces a wealth of competition from other sectors. Coca-Cola, the mainland’s leading seller of soft drinks, said last year it plans to invest US$2 billion over a three-year period in the China market. It has already launched aggressive campaigns with its Minute Maid and Minute Maid Pulpy Super Milky (Guoli Naiyou) drinks. Not to be outdone, PepsiCo, which runs second after Coca-Cola in the carbonated soft drinks market and also sells Tropicana fruit drinks and Gatorade, said it will invest US$2.5 billion in the mainland.
 
Added to these foreign giants is Tianjin-based rival Tingyi (0322.HK), which is spending US$300 million on revamping its production facilities to keep up with the pace of market competition. Tingyi is the country’s leader in ready-to-drink teas and is snapping at Wahaha’s heels in bottled water.
 
Other players, such as state giant COFCO (0506.HK), Nongfu Spring, Japan’s Kirin (2503.TYO) and Suntory, as well as Nestle (NESN.VTX) and Chinese juice giant Huiyuan (1886.HK) are a growing threat to Wahaha’s market dominance, said Shi. Although the beverage market’s potential is huge, it also has a low entry threshold, meaning that more players are going to be battling for increased market share. Shi also notes that control over the beverage market does not depend solely on existing branding.
 
"The dynamics of sales channels are constantly changing and the emergence of a new economy shaped by logistics and technology adds to uncertainties and risks to the market."
 
Zong is steering Wahaha toward fresher product lines, including drinks for a more health-conscious market. As competition increases, however, Wahaha will need to improve product quality and push its brand to reach all levels of the market, not just lower-tier consumers. Zong may be on top of China’s rich list for now, but in China’s fluid beverage market, the title of "Beverage King" is always up for grabs.