From Zong Qinghou to Zong Fuli: Can Wahaha Rise from the Ashes?

Recently, Zong Fuli was appointed as the head of Wahaha Group's Public Relations and Brand Department, which is interpreted by the industry as a prelude to her full takeover of Wahaha. For over a decade, the Wahaha scepter has been held by Zong Qinghou on one end and his daughter Zong Fuli on the other. Meanwhile, the joint distribution model that once made Zong Qinghou proud is now facing challenges from the internet in the information age. How can Wahaha achieve rebirth and find a way out?

The Scepter Handover Faces Difficulties "I don't really like the title 'Princess.'" Princess is how Wahaha's veteran employees address Zong Fuli, while "Kelly" is her English name from her eight years of study in the United States. Zong Fuli believes that the title "Princess" implies she is merely the daughter of Wahaha's Zong Qinghou, but she wants to remove the labels of Wahaha and Zong Qinghou to start her own career. Her business cards do not bear titles, and she asks employees to call her Kelly or Fuli. Zong Fuli was born in January 1982 and went to the United States to study after finishing junior high school in 1996. Four years later, she entered Pepperdine University in Los Angeles, majoring in International Business. After graduating in 2004, she returned to China. Zong Qinghou arranged for her to gain experience at the grassroots level for several years, and in 2009, she took full charge of Hongsheng Beverage Group, which handles Wahaha's OEM processing business. Over the past decade or more, she has thoroughly understood every aspect of beverage production, including ingredient ratios, food disinfection processes, and safe distribution of tons of beverages. According to Zong Fuli, "In the Wahaha Group, my father and I have a rough division of labor: I am responsible for production management, and my father is responsible for marketing." Zong Qinghou is known for his sales channel system, while Zong Fuli focuses more on improving the entire industry chain. "My specialty is running processing plants; I opened five factories in one year." Zong Fuli's claim is not an exaggeration. Since 2007, her subordinate enterprises have expanded to 16 production bases and over 40 branch companies, covering almost all upstream and downstream links of the beverage industry, from food and beverage equipment manufacturing to bottle cap processing, printing and packaging, and flavor and fragrance processing, achieving considerable results. From 2009 to 2012, the annual revenue growth rate of Hongsheng Group, led by Zong Fuli, exceeded 30%. In 2012, Hongsheng's annual revenue reached over 8 billion yuan, accounting for one-fifth of Wahaha Group's total revenue. In 2015, in the evaluation of the top ten fiscal contribution enterprises in Hangzhou Xiaoshan Economic Development Zone, four Wahaha companies were listed. Zong Qinghou, who rarely publicly praised his daughter, posted on Weibo in February 2015 to commend her: "These companies are mainly managed by my daughter. As a father, I am very gratified!" In the face of achievements, Zong Fuli did not show traditional Chinese modesty but instead displayed Western directness: "Hongsheng's achievements were hard-earned by me alone, from negotiating land purchases with the government to buying production lines and even debugging; I did it all independently. My father didn't help me at all!" Perhaps influenced by the joy of victory, Zong Fuli's "ambition" grew larger; she wanted to remove the labels of Zong Qinghou and Wahaha. In July 2016, Zong Fuli developed a fruit and vegetable juice product named after herself, "KellyOne," and endorsed it herself. "This is the first product completely developed by me; it's a Hongsheng Group matter, unrelated to my father and unrelated to Wahaha." KellyOne, which carries no Wahaha genes, is not only disruptive but even "willful": it consists of various combinations of ingredients, such as apple and orange, or celery and pepper, allowing consumers to choose their own ratios. The packaging design is also thoughtful; by scanning a QR code, you can know if you are the nth buyer. Unlike Zong Qinghou's "rural surrounding the city" strategy, KellyOne's pilot was placed in first-tier cities, with a shelf life of only 7 days and a price as high as 28-48 yuan. "I don't want to be a small umbrella under the big umbrella of Wahaha and my father." To achieve this goal, on May 9, 2017, Zong Fuli launched a plan to acquire Hong Kong-listed company China Candy (HK 08182), even threatening, "I won't be a successor; I want to acquire Wahaha." "Of course, I hope Fuli can take over my position and continue Wahaha's legacy! But whether she takes over depends on her willingness; my daughter's happiness is the most important!" Although Zong Qinghou said this, he felt uneasy inside. No one wants the empire they built to change hands, especially since the Wahaha beverage empire was built from his early days of selling popsicles on a bicycle, to a school-run small factory merging a state-owned large factory, to the property rights dispute with Danone, and until he topped the domestic rich list three times. Wahaha has cost Zong Qinghou too much effort. Although Zong Fuli claims that "Hongsheng's achievements were hard-earned by me alone" and "I won't be a successor," everyone knows that Hongsheng's foundation was laid by Wahaha, and in essence, Zong Qinghou has handed over part of the scepter to Zong Fuli. If one day, as Zong Fuli says, Hongsheng acquires Wahaha, it would still be Zong Fuli indirectly taking over Zong Qinghou's scepter. However, for now, Zong Qinghou does not seem willing to hand over the entire scepter to Zong Fuli at once. "I can still work for another twenty years and make Wahaha a century-old store." The over-seventy-year-old Zong Qinghou stated. This statement shows his reluctance to delegate power, perhaps mainly because he is not assured of delegating it! Zong Qinghou's reluctance to delegate power has its reasons. Although Zong Fuli has achieved results in leading Hongsheng, it is also noticed that her independent projects are hard to label as successful. The KellyOne fruit and vegetable juice product, named after Zong Fuli's English name Kelly, has very low visibility, only seen in small areas in Shanghai and Hangzhou, and hard to find elsewhere. When media asked Hongsheng's PR about KellyOne's sales performance, the answer was "not convenient to disclose." The China Candy acquisition also ended in failure. It was a highly controversial acquisition, and Wahaha officially even clarified that "it was just Zong Fuli's personal act, not representing company strategy." In 2012, Wahaha entered the commercial sector, opening the Waou Mall near Hangzhou's Qianjiang Third Bridge. The mall's emptiness contrasted sharply with the bustling MixC mall a kilometer away, and it closed in 2014. The project was handled by Wahaha Children's Wear, led by Zong Fuli, and the children's wear project has also been shut down. Under such circumstances, Zong Qinghou naturally is not assured of handing over the scepter of the Wahaha empire he built to Zong Fuli or allowing her to acquire it. But Zong Fuli said, "My biggest frustration comes from my father's lack of recognition. I don't want to live under my father's halo; I hope to lead Wahaha to achieve different results." Due to generational gaps and differences in educational backgrounds, the father and daughter also have huge disagreements on management style and business philosophy. Zong Qinghou, representing the traditional Chinese generation of private entrepreneurs, advocates "family culture," while the Westernized Zong Fuli advocates systems and efficiency. Compared to her father, she has a more international perspective and emphasizes the urgency of Wahaha's transformation. Unlike her father's seemingly tough but human-relations-based approach, Zong Fuli focuses more on systems and rules. She emphasized that the "old ministers" her father arranged for her should be a two-way choice, with the premise being "I want to use this person myself, not my father unilaterally arranging them for me; that is not assistance." Zhou Jiuming is one of the veterans Zong Qinghou sent to "assist" his daughter. In 1987, when Zong Qinghou started from scratch, Zhou Jiuming joined the then four-person "sea-jumping" small team. Initially communicating with Zong Fuli, Zhou Jiuming found it hard to bear: "When the big boss talks to us, there is room for discussion, but the little boss is more direct; once she decides, it's decided, without much explanation." The little boss's directness even made the "old ministers" feel ashamed; some repeatedly advised her to be more tactful. In the early days, Zong Fuli could barely listen to their nagging, but later she even refused to see them. "That was early on; now I basically don't see them. It's not that they don't see me, but that I don't want to see them," Zong Fuli once said. "She is tougher than me!" Zong Qinghou also evaluated his daughter like this. Zong Qinghou is not assured of handing over the empire he worked so hard to build to his daughter to toss around, while Zong Fuli is unwilling to live under her father's halo. This time, Zong Fuli's appointment as head of Wahaha Group's Brand Public Relations Department is generally viewed positively by the industry, but there may still be a long way to go before the scepter is fully handed over. The industry generally holds this view. Besides the difficult scepter handover, another focus of media and industry attention on Wahaha is its once-proud joint distribution model. The "Joint Distribution Model" Besieged by the Internet In 1994, due to traditional distribution models suffering from industry ills such as payment delays and difficult debt collection, which occupied a large amount of manufacturers' funds, time, and energy, and since Wahaha was in a high-speed development stage and urgently needed funds for expansion, Zong Qinghou decided to launch a new channel reform plan—the joint distribution model. At the end of each year, special first-level distributors had to deposit 10% of that year's sales amount as a guarantee into Wahaha's account in one lump sum. Wahaha paid interest higher than or equal to bank deposit rates. After that, before monthly purchases, distributors had to settle payments in full at most twice, and only then would Wahaha ship goods. At that year's Wahaha distributor conference, Zong Qinghou proposed this channel reform plan, i.e., the joint distribution model. At the same time, Wahaha set sales targets for each special first-level distributor. Those who completed them received year-end rebates; those who failed were automatically eliminated. "This is like putting shackles on our heads; we can't do it!" At the meeting, some distributors shouted. The joint distribution model triggered large-scale protests from distributors, and even most people within Wahaha strongly opposed it. "This must be done! If we do this, we might struggle for a few months; if we don't, we are dead! Our scale is getting bigger, and we can't leave so much capital in the channels; if we drag on, we will be dragged down sooner or later. The industry's atmosphere will definitely change in the future; it must change. If they don't change, we will force them to change. If we don't change now, we won't be able to change later, and we might not even have the chance to change; we'll collapse." At that time, Zong Qinghou was tough and ignored all opposition. Although he was labeled a "dictator," the joint distribution model eventually succeeded. The joint distribution model put Wahaha on the fast track of development, with a compound growth rate of 18.89% from 2008 to 2013. The promotion and sales of its purified water, eight-treasure porridge, Future Cola, tea drinks, and fruit juice drinks were greatly facilitated, with the single product Nutrition Express selling nearly 20 billion yuan. Without the strong control of channels by the "joint distribution model," this would have been difficult to achieve. Wahaha quickly transformed from a small factory into a huge beverage empire, pushing Zong Qinghou to the peak of his life. The joint distribution model was even included in Harvard Business School's teaching materials as a case of retail channel innovation. But after 2012, Wahaha's wealth growth seemed to hit a ceiling. According to public data, in 2012, Wahaha achieved operating revenue of 63.6 billion yuan. That year, Zong Qinghou proposed a small goal of 100 billion, but in the following years, Wahaha could not break through 80 billion—2013: 78.3 billion, 2014: 72.8 billion, 2015: 67.7 billion, 2016: 52.91 billion, 2017: 46.45 billion... "Wahaha is troubled by 'aging.'" For Wahaha's stagnant performance, Changjiang Business Review commented that for the post-90s generation, Wahaha is a childhood memory. Under the impact of many high-end brands today, the post-00s generation generally has low awareness of Wahaha. Currently, Wahaha's brand positioning seems limited to children's products. As a mass-market brand, Wahaha's brand has actually aged long ago. Changjiang Business Review further pointed out that among Wahaha's products, few can be blurted out, and the three best-selling products—Nutrition Express, lactic acid bacteria drinks, and purified water—have all been on the market for over ten years. For products that change rapidly in the market, this undoubtedly indicates aging. In terms of channels, Wahaha has mainly focused on third- and fourth-tier markets for years, with little contact with popular e-commerce, the internet, or even convenience stores, so channel aging is obvious. In terms of customers, due to minimal product changes, Wahaha has hardly updated its customer base for a long time. This system was practical and successful in the 1990s, but now it is beginning to lag behind. Good management requires a wolf-like team, and a wolf-like team needs fresh blood. Looking at Wahaha's team, there is little innovation, and their vision and perspective seem unable to meet the needs of Wahaha's rapid development. "With the popularity of the internet and the gradual maturity of the information age, traditional channels, including the joint distribution model, have faced serious challenges." For Wahaha's declining sales, FMCG marketing expert Zhao Bo gave this fundamental explanation. In the mobile internet era, mobile phones occupy almost all of people's spare time, and even learning, socializing, entertainment, and work can be done through phones; the marginal cost of obtaining information online is almost zero. Where consumers' time is, there is the market and wealth. This is like animals migrating to warmer places during the Ice Age. Consumers' time has migrated online. If brand owners do not notice this change and follow, still sticking to traditional channels, sales will inevitably decline or even be eliminated. Wahaha's transformation is urgent. Facing the difficult scepter handover and the internet's "siege," where is Wahaha's "light at the end of the tunnel"? The Successor Should Boldly Delegate Power and Allow Trial and Error The first challenge Wahaha faces is the scepter handover, which is a common problem for all family businesses during succession. "People always get old; rationally, they know they should hand over power, but when it comes to actually handing over, they are a bit reluctant. After handing over, they feel empty, and some even take it back after giving it." Fotile Group founder Mao Lixiang once shared his feelings about succession with me years ago. In the mid-1990s, Mao Lixiang was deeply troubled by the inability to transform his industry. At that time, his son Mao Zhongqun had just graduated from Shanghai Jiao Tong University with a master's degree and was preparing to go to the United States to pursue a PhD. Mao Lixiang wanted his son to stay and take over his business. It took a lot of persuasion for Mao Lixiang to get Mao Zhongqun to stay. Mao Zhongqun proposed: "I can stay, but you must meet three requirements: first, move the new enterprise from the original small town to the development zone; second, except for people I choose, none of the original group's people should stay; third, decisions on new projects must be made by me." Mao Lixiang agreed to his son's requirements. After thorough market research, the father and son decided on range hoods as the second venture project. In 1995, Fotile Kitchenware Co., Ltd. was established, with Mao Lixiang as chairman, his wife Zhang Zhaodi as supervisory board chairman, and his son Mao Zhongqun as general manager. Talking about his son's contribution, Mao Lixiang said with emotion: "My son Mao Zhongqun gave up the opportunity to study abroad and teach at a university to devote himself to Fotile. Why? Because we share common ideals and interests, and we understand each other best and share risks. In the end, we have an unbreakable blood relationship. This is why the family system is the preferred enterprise model for most non-public enterprises in the early stage, and often the only choice." Years later, Mao Zhongqun evaluated his father: "My father is very open-minded and readily agreed to my three requirements. There are no relatives among our middle and senior management, and very few locals; they come from all over the country." Mao Lixiang's response: "As a chairman and a father, you must be open-minded and determined. So I proposed to hand over boldly, resolutely, and completely, so that you can cultivate your son or daughter." Mao Lixiang believes: "Private enterprises cannot do without the family system, but complete family management is also not feasible. We follow the path of downplaying the family system." This is somewhat like the golden mean, containing two meanings: first, acknowledging that its operation is family-based; second, its family system has its own characteristics and rationality, basically avoiding many drawbacks of the general family system. One of the biggest drawbacks of family enterprises is unclear property rights. Mao Lixiang once said: "How to clarify property rights? I have a theory called the 'pocket theory,' which is to put money in one pocket. Otherwise, it will plant a 'time bomb' for the enterprise, eventually leading to the split of the family and the enterprise. My wife and son are in the same 'pocket' as me; they won't fight with me for money; my son's expertise is suitable for kitchenware, so handing the company to him is most appropriate. As for my daughter and son-in-law, their money is not in the same 'pocket' as mine, so I allocated a sum of funds for them to start their own business, setting up a plastic products company unrelated to Fotile." "Since Fotile's founding, my daughter Mao Xuefei and her husband have not participated in operations, but they hold 14% of Fotile's shares. In a family enterprise, siblings can co-invest, but they are not suitable for co-management." Mao Lixiang's approach is to let them start their own businesses independently based on their abilities and strengths. In management, Mao Lixiang appears as chairman and does not participate in specific management. Among the company's middle and senior management, no family members or relatives are allowed; they are all introduced master's and bachelor's degree holders, giving Fotile's modern management a better start. Mao Lixiang believes that since China has not yet formed a professional manager class and the law is not yet complete, entrepreneurs cannot hand over their hard-earned assets to people outside the family to manage, so they will inevitably consider letting their children take over. "However, my suggestion is that in the early stage of succession, you can make up for the successor's lack of management and operation experience by adding general manager assistants or think tanks. Further, if China's professional manager class matures and the law is relatively sound, I also hope that enterprises can proactively introduce professional managers. At that time, I can step down as chairman of the board, my son can be chairman, and we can hire a general manager at a high salary, and also set up several independent directors to participate in decision-making. This can make our enterprise more dynamic." Mao Lixiang emphasized, "When it's time to hand over power, you should hand it over completely and thoroughly. Don't always be uneasy. Children will inevitably make mistakes when they first manage; this is the price that family business succession must pay. As long as it's not a major injury, the father should not interfere again." At that time, to let go and let his son do it, he started a training school to do his own thing; he called it a second venture. Mao Lixiang's views and practices may offer some inspiration to Zong Qinghou. Zhao Bo believes that "Zong Fuli is young, open-minded, has an international educational background and world-class management experience, and has a spirit of innovation and change. Zong Qinghou should boldly hand over the scepter to Zong Fuli, not dwell on small mistakes, and give her the opportunity to try and error." Recently, there were reports that Zong Fuli took the position of head of Wahaha Group's Public Relations and Brand Department and sent away several veteran officials and executives who had followed her father for years. Some in the industry believe this is to pave the way for Zong Fuli's succession and corporate transformation. "Zong Fuli's appointment as head of the Brand Public Relations Department shows that Wahaha is making a self-subversion in brand and marketing, hoping to break through in performance. Perhaps after the overall performance decline in recent years, Wahaha has made a decision after painful reflection." Zhu Danpeng, an analyst at China Food Industry, said. "The main reason for Wahaha's poor performance is that the marketing operators and market brand directors' thinking cannot keep up with the changes in the thinking and behavior of the new generation of consumers." Although Zong Fuli has not fully obtained the Wahaha scepter, she has certainly taken a big step forward. Facing Wahaha's trough, how should the princess of Wahaha save the entire "Wahaha system"? What changes need to be made now? The Successor Should Innovate Standing on the Shoulders of Giants The problems traditional FMCG enterprises face now are mostly caused by the wave of physical store closures. Goods in physical stores cannot be sold, and factory goods cannot be shipped. Tracing back to the source, the reason for the store closure wave is that the consumer group has changed. The post-80s and post-90s are the main consumers. In the future, the overall trend will definitely be branding, but not the brand as previously understood; the value of brands now and in the future lies in word of mouth. The direction is changing, the consumer group is changing, and lifestyle is changing. If you operate with traditional thinking, you can only fall into a deadlock. How to get out of the deadlock? FMCG marketing expert Zhao Bo believes that when enterprises start using internet marketing, they can accurately know who the consumer groups are, what consumption habits they have, and what personalized needs they have. Based on such a consumer big data database, enterprises can develop new products in a targeted manner and launch products that meet the market. In this process, enterprises should also focus on personalized services, providing high-quality services to different consumers, and ultimately win the market. Wahaha seems to be trying to make such adjustments. On November 21, 2018, Zong Qinghou, who had not spoken online for years, rarely updated his Weibo, calling out to his daughter Zong Fuli, with a playful knocking-head emoji, actually revealing his support for his daughter to the outside world. After Zong Fuli took over Wahaha's Brand Public Relations Department, she launched a limited-edition Nutrition Express. This time, Zong Qinghou's call-out was to create momentum for it. Zhao Bo also believes that the internet-based "new retail" brings not a tomb but a rebirth to physical stores. Physical retail will not die, but its technical means, business models, and spatial geographic layout will undergo major changes. "Wahaha not only has a strong manufacturing system but also a strong marketing system, and more importantly, it is a well-known brand. Zong Fuli should not remove the labels of Wahaha and Zong Qinghou; she should innovate standing on the shoulders of the Wahaha giant, using internet thinking to gradually build an internet + physical store marketing model." "With Wahaha's foundation, if Zong Fuli operates Wahaha and Zong Qinghou steers from behind, I believe Wahaha is fully capable of rising from the ashes in the information age." Zhao Bo is full of confidence in Wahaha's prospects. "Star" New Distribution Get FMCG industry insights at the first time -END-