Has Wahaha's Third Venture Failed?

Source: Shangyin She Research Team Business Group (ID: shangyinshecj)

Recently, the rights protection incident involving Wahaha milk tea franchisees has caused a stir both online and offline, and Wahaha's milk tea business has fallen into a "store closure crisis."

Many franchisees have collectively accused Wahaha's milk tea business of false investment promotion, irregular franchising, and failure to fulfill franchise promises, resulting in large-scale sustained losses for stores.

Moreover, some franchisees revealed that starting from September, a large number of Wahaha milk tea stores have closed one after another. As a result, franchisees have organized collective rights protection actions to demand an explanation from the company, but have repeatedly been met with closed doors.

It has been over two years since Wahaha opened its first milk tea store. In the 2020 "Wahaha Natural Nutrition Good Tea Cooperation Manual," Zong Qinghou wrote: "This is Wahaha's third venture. I hope every partner can realize their self-worth and social value." The manual also stated that Wahaha milk tea plans to open 10,000 tea shops nationwide in the next 10 years.

However, based on the current reactions from all parties, the effectiveness of Wahaha's venture seems questionable.

Peak at Debut

As emerging internet-famous brands become increasingly favored by young consumers, old brands that have been abandoned have had to engage in cross-industry ventures, from beauty and clothing to beverages, attempting to save themselves through retro national trends.

Wahaha, which accompanied the childhood of the post-80s and post-90s generations, is no exception. Since Wahaha's "princess" Zong Fuli began bold youth-oriented reforms, Wahaha has paid no less attention to young people than major new consumer brands. In recent years, it has come up with various ways to make friends with young people.

For Wahaha, a phenomenon that cannot be ignored is that, at some point, AD calcium milk and Nutri-Express in supermarkets have become less attractive than before. The new generation of young people rarely even pays attention to these products; they frequent milk tea shops more often, and milk tea has almost become a daily necessity for them.

Nayuki's Tea released the "2019 New Tea Consumption White Paper," which showed that the total scale of China's tea market exceeded 400 billion yuan in 2019, and 70% of milk tea consumers are young women born after 1990.

Wahaha, labeled by outsiders as having a "midlife crisis," seems to have realized this is a good opportunity to "make friends" with young people and intends to enter the market. After all, other old brands such as Wanglaoji, Mengniu, and Weiwei Soy Milk are also gearing up.

Wahaha's offline tea shops began preparation in May 2019, and it wasn't until May last year that it opened its first chain store in Huai'an, Jiangsu, launching multiple milk teas made with AD calcium milk as an ingredient, emphasizing national trends, nostalgia, and nutrition.

Image source: Internet

At that time, the milk tea industry had entered a white-hot stage with giants everywhere. At the top, brands like Heytea and Nayuki's Tea occupied the minds of high-end consumers; mid-tier brands like Coco and Gong Cha each had their own positions; and Mixue Bingcheng and Yihetang took the lead in lower-tier markets.

Although Wahaha has a considerable reputation and strong capital, with fierce competitors outside and lack of innovation inside, Zong Qinghou's "milk tea venture" seems not so simple.

From a brand value perspective, although Wahaha's appeal to the new generation of young people has decreased, the accumulation of over 30 years of brand awareness made its early work not difficult to advance. With the "Wahaha + nostalgia" title, the milk tea shop attracted a wave of consumption as soon as it opened, becoming a highly watched topic in the catering industry. Internet celebrities flocked to check in on "childhood drinks," and the opening day was bustling.

Not only that, on the opening day of many new stores, the amiable Chairman Zong Qinghou personally promoted and drank milk tea with everyone.

The rare bustling scene and Chairman Zong's presence attracted many franchisees from Jiangsu and Zhejiang, and Wahaha milk tea shops began to expand rapidly. To date, the only official website page provided by "Wahaha Milk Tea" on WeChat shows that it has opened a total of 418 milk tea shops nationwide.

Image source: Wahaha Milk Tea official website

However, the good times did not last long. After the marketing gimmick of "childhood drinks" faded, problems such as insufficient product competitiveness, inadequate operations and management, and supply chain issues gradually surfaced. Consumers who had tasted the novelty gradually left, and few were willing to pay for nostalgia. This was reflected in store operations: a few months after opening, Wahaha milk tea shops encountered a cold reception.

Under this "cold wave," the first to bear the brunt were the franchisees. Some franchisees said that many stores initially performed well, and they thought they could continue to profit, but soon business declined, with losses increasing month by month. 70% of franchisees were in severe loss.

What made franchisees feel even more helpless was that they believed "Wahaha brand side turned a blind eye to this."

Multiple franchisees told Shangyin She, "Since the opening of the stores, the Wahaha brand side has had problems such as not fulfilling investment promises, chaotic operations management, and false investment promotion. They never solve store problems and never give direct answers to franchisees' questions."

To this end, they spontaneously formed a rights protection group of over 400 people and organized protests at the Guangzhou and Hangzhou companies, "hoping to get an explanation, but they were repeatedly turned away," with little effect.

Who Bears the Responsibility?

Who is responsible for the sustained losses of Wahaha milk tea shops?

When discussing this issue, franchisee Mr. Li said: "No matter which company, it is impossible for them to tell you that opening this store is a guaranteed profit. If you open 100 Wahaha milk tea shops and 10 have poor business, I think that's normal. But if you open 100 milk tea shops and 90 are losing money, then I think there must be a problem."

Regarding the operational issues of Wahaha milk tea shops, as early as last year, Wahaha's official Weibo stated: "Recently, many people have asked us about the milk tea shop. Let me explain here: the milk tea project is not our direct operation; it is authorized to a partner for operation."

Image source: Wahaha official Weibo

It should be noted that the "Wahaha" mentioned in this article refers to Hangzhou Wahaha Group Co., Ltd. The milk tea shop business partner mentioned by the official Weibo "Wahaha" of Hangzhou Wahaha Group Co., Ltd. refers to Guangzhou Wahaha Health Beverage Co., Ltd.

According to Qichacha data, Guangzhou Wahaha Health Beverage Co., Ltd. was established in October 2019 with a registered capital of 2 million yuan. The company has two major shareholders: the largest shareholder is Guangdong Guanhua Health Industry Co., Ltd., holding 75%; Wahaha Commercial Co., Ltd. is the second largest shareholder, holding 25%. The legal representative is Zong Qinghou, chairman of Hangzhou Wahaha Group Co., Ltd.

Image source: Qichacha

It can be understood that the milk tea shop project is operated by Guangzhou Wahaha Health Beverage Co., Ltd., and Hangzhou Wahaha Group Co., Ltd. authorized the brand to another company to recruit franchisees.

According to a person familiar with Wahaha milk tea contacted by Lianxian Insight, Hangzhou Wahaha Group Co., Ltd. did not send relevant operations personnel after the brand authorization.

This operation is exactly the same as the former "label king" Nanjiren.

In order to rejuvenate, Wahaha had previously invested heavily in developing new products. But whether it was KellyOne or AD calcium milk-flavored mooncakes, they did not make waves. Compared with high-investment, high-risk new product development and new business expansion, authorizing the brand to another company for franchising seems like a more cost-effective model.

The former Nanjiren took this "trademark authorization" business, with a gross profit margin of over 90%, to the extreme. However, only doing brand authorization and handing over operations, management, and production entirely to partners, although money was earned, brand trust crises, chaotic management systems, and frequent product quality problems became hard injuries.

These problems also appeared in the operation of Wahaha milk tea.

It is understood that Wahaha initially had high hopes for the milk tea business, planning to open 10,000 stores nationwide in 10 years. To achieve such a fast opening speed, it almost had to rely on the franchise model, so attracting franchisees became the focus of Wahaha milk tea, but the young company cooperating with Wahaha seems not good at it.

First, the investment promotion qualifications of Wahaha milk tea were questioned by many franchisees.

According to the "Regulations on the Administration of Commercial Franchises," a franchisor must have at least 2 directly operated stores with more than 1 year of operation, and must file with the commercial administrative department within 15 days from the date of the first franchise contract.

Some franchisees pointed out that before opening the first chain store in Huai'an, Wahaha did not operate a directly operated store and did not have the qualifications for investment promotion. In addition, some franchisees believed that during the investment promotion process, the staff deliberately "pumped up" and misled franchisees, issuing many "empty promises."

Franchisee Ms. Yang revealed: "Many people saw on Douyin that the Huai'an milk tea shop was very popular, so they contacted the investment promotion staff. When we went to Guangzhou for face-to-face talks, the staff kept urging us to sign. At that time, they promised store operation guidance, celebrity endorsement promotion, etc. Then we hurriedly looked for a location and signed in a daze. After opening, none of these promises were fulfilled. This shows that they do not have a mature franchise management method."

Second, Wahaha milk tea's supply model left many franchisees confused.

Some franchisees revealed that Wahaha milk tea's internal supply chain is not perfect, with only one warehouse in Guangzhou, "It seems that warehouses were built in Nanjing and Wuxi, but they were closed soon after."

The franchisee also said that the company currently requires all materials for milk tea shops across the country to be purchased from the Guangzhou company, and the material and logistics costs are much higher than the market. For example, the company sells tea leaves at 30 yuan per pack, but on Taobao, the same can be bought for 15 yuan. There are also occasional supply interruptions, severely compressing franchisees' profit margins.

Other franchisees reported that Wahaha milk tea is priced between 10-25 yuan, and the company's formula and production steps are very complex. The high material and labor costs do not match the product pricing, causing the gross profit margin to shrink from the initially promised 65% to about 40%. After deducting rent, labor, and material costs, "franchisees basically can't make money."

In addition, the company does not allow franchisees to purchase materials elsewhere, but since there are no supervisors to inspect, and some franchisees suffering long-term losses are overwhelmed, some franchisees can only choose to buy the same materials at lower prices on the market to save costs.

More importantly, post-franchise operations management and problem communication also seem inadequate.

"Although supervisors come to inspect operations from time to time, most just go through the motions, neither giving suggestions nor providing company feedback. They just have a meal and it's over," Ms. Yang said.

Some franchisees said that when they raised questions to the company, the brand's contact personnel were perfunctory. For example, when asked why material costs were so high, staff often said that some materials had already been reduced in price; when asked why the company had not yet done promotion, staff mostly said that promotion would come later.

Mr. Li told Shangyin She: "The Guangzhou company seems to be losing morale. Those who evaluate site selection, including investment promotion staff, have mostly left because it is now difficult for Wahaha milk tea investment promotion staff to recruit franchisees."

Shangyin She sought confirmation from Hangzhou Wahaha Group regarding issues related to the "Wahaha milk tea franchisee rights protection incident," but as of press time, no response had been received.

Generation Z Doesn't Buy It

With the supply chain, operations management, and other aspects not yet perfected, and franchisees' confusion unresolved, the operation of Wahaha milk tea shops is inevitably impacted.

It is understood that most Wahaha milk tea shops are located in pedestrian streets or shopping malls. Originally, these locations should have no problem with foot traffic, but compared with other brands in the same area that are "bustling with customers," Wahaha milk tea often has only a few customers.

Compared with other milk tea brands, first, the brand promotion of Wahaha milk tea shops needs improvement. The popularity of the first chain store in Huai'an served as an "advertisement" for franchisees, attracting many, but for consumers, brand awareness is still insufficient.

Some franchisees reported that the investment promotion staff promised to invite traffic stars to endorse and expand brand influence, but this was never realized. In addition, there are not many promotional activities in the stores, and many people do not know that Wahaha has opened milk tea shops. Some consumers even come to the store to buy mineral water.

Second, the product standardization of Wahaha milk tea needs to be strengthened.

Some insiders at Wahaha milk tea shops reported that there are differences in taste between stores. On the one hand, technical training is not in place; on the other hand, high material costs and manual production methods make it difficult for franchisees to bear, leading to multiple products being "cut corners" or even "removed from shelves." However, because management personnel do not seriously inspect, these behaviors are continuously "indulged."

Most importantly, Wahaha's target consumer group is young people, who change tastes quickly and pay attention to packaging, service, etc. However, Wahaha milk tea's pace of innovation is relatively slow. Whenever franchisees report to the company, they are told "it is under development."

Moreover, from the menu of Wahaha milk tea, most products are based on bottled Wahaha beverages, with the main product being the AD calcium milk series. The flavors do not bring much novelty to consumers. Other products such as taro, Oreo, cheese, and boba are all products that have been verified in the market. Compared with brands like Heytea and Yidiandian, there is no obvious advantage in product characteristics.

"The consumer repurchase rate is very low, and those who come to buy are mostly post-80s and post-90s," Ms. Yang said. Wahaha is a memory for the post-80s and post-90s, but this emotional card has minimal effect on Generation Z, the mainstream of new-style tea consumption.

Multiple franchisees said that when they initially joined, they valued the fact that the newly opened stores were very popular and that Wahaha's "decades-old brand" reputation was trustworthy, as they had grown up drinking it. "I never expected that the hard-earned money I saved over the years would be lost on a national old brand."

Franchisees vs. Brand Side

In fact, it's not just Wahaha; many old brands transitioning to the new-style tea industry have lost their way in "expanding franchise stores."

A few months ago, Wanglaoji's "1828 Wanglaoji Fresh-Brewed Herbal Tea" also faced collective rights protection from franchisees. Since 2019, Wanglaoji has been expanding on a large scale, stating that it would expand to 3,000-5,000 stores in the next 3-5 years.

However, according to multiple media reports, after aggressive investment promotion, the Wanglaoji brand side did not provide guidance or operations, and franchisees continued to lose money, eventually escalating into a rights protection storm.

The essence of franchising is a resource cooperation between the brand side and franchisees: the brand side authorizes its brand, outputs mature operational methodologies, and provides supply chain and system support; franchisees enjoy brand dividends and utilize their regional social and commercial resources. Both parties cooperate to grow the business faster and stronger.

Compared with the direct operation model, the franchise model is largely for "speed"—this has been verified by many catering industry brands. Taking Mixue Bingcheng as an example, in 2010, the company launched a "direct operation + franchise" market model, and the number of stores expanded rapidly, now exceeding 20,000 nationwide.

But many brands fall into the trap of "unrealistic" pursuit of speed, especially since opening chain franchise offline stores is itself one of the most difficult things in retail.

Brand franchising requires not only whether the brand is well-known, but also whether a robust supply chain, strong product R&D system, standardized management, and standardized operation model have been formed before opening franchises.

During the franchising process, from early-stage franchising, site selection, decoration, to later operations, supply chain, delivery, and marketing, guidance at every step is indispensable for the brand side.

Almost all enterprises with more than 10,000 chain franchise stores initially succeeded by running a single-store business model and then replicating it 10,000 times.

In contrast, Wahaha milk tea, under the trend of fast-money internet-famous milk tea flooding the market, seems to have lost patience. From preparing the milk tea business to the opening of the first chain store, it took less than a year. Whether Wahaha ran a complete business model through a directly operated store in between is questionable.

Currently, milk tea companies in the market expand in two ways: direct operation and franchising. These two models have different profit methods. Under direct operation, the company's income relies on store revenue, meaning the more milk tea sold, the higher the company's income. Under franchising, income mainly relies on franchise fees, management fees, and material price differences from franchisees.

This is where the conflict of interest between Wahaha franchisees and the brand side lies.

For the brand side, Wahaha, the sales and profits of milk tea shops are not directly related to the brand side. Wahaha first obtains franchise fees from franchisees, then material fees, equipment, store decoration, plus a small price difference in between. These major revenues are basically fixed from the moment the contract is signed.

According to Mr. Li, Wahaha milk tea franchising requires a bank card with at least 600,000 yuan as asset proof, then pay 250,000 yuan first, including 130,000 yuan franchise fee, equipment fees, and operations management fees. In addition, decoration costs 150,000 yuan, and material fees 80,000 yuan, "spending a lot of money in total."

But for franchisees, the sales of milk tea shops are closely related to their profits. The company's products and operations management determine whether a store has the ability to sustain profitability. Since the brand side and franchisees "do not wear the same pants," it is easy to "drop the ball" at critical moments for franchise stores.

Why Is It Hard to Create a Hit Product?

In business history, Zong Qinghou and Wahaha are undoubtedly "outstanding," but there are also many cases of "failed ventures."

Public data shows that in 2013, Wahaha's revenue reached a record 78.28 billion yuan, making Zong Qinghou the richest man in China. He stated that he would not only achieve the 100 billion yuan goal but also "create another Wahaha."

To achieve the 100 billion yuan goal, Wahaha adopted a diversification exploration strategy, but whether it was infant formula, retail, or liquor, few truly opened up market prospects or achieved breakthrough progress.

The fundamental reasons may be multifaceted.

For example, Wahaha's proud operating model cannot be directly transplanted to other product areas, and its once-powerful traditional channels have gradually lost advantages in diversified market development.

For example, products in different fields have vastly different operations and consumer consumption patterns. Wahaha, which started with beverages, has become a "novice" in the new consumer industry operations.

Another example is that with product aging, lack of innovation, and the shift of the main consumer group, Wahaha, after accompanying the post-80s and post-90s, cannot keep up with the pace of Generation Z.

Wahaha has actually been trying to innovate. In 2016, the trendy and foreign-educated elite Zong Fuli led the launch of the customized fruit and vegetable juice brand "KellyOne," positioned in the high-end market, priced at 28-48 yuan. Initially, KellyOne juice received much attention, and its exquisite packaging and industrial design won international awards multiple times.

However, because the price was too high, the shelf life was only seven days, and the high-end customized beverage approach was too idealistic, KellyOne fell from grace within just two or three years, with sales in the flagship store remaining in double digits.

In 2019, Zong Fuli directly terminated the contract with spokesperson Wang Leehom, who had been with the brand for 20 years, citing that Wang was "too old and caused aesthetic fatigue," which was hard for consumers of Wahaha purified water to accept.

After that, Wahaha also collaborated with brands favored by young people such as Zhong Xue Gao and Pop Mart to launch new products, but the results were unsatisfactory, and it was even labeled with a "midlife crisis."

Looking at the past decade or more, from diversification into milk powder, liquor, and retail, to Zong Fuli's bold reforms and frequent launches of new beverages, to now crossing into milk tea and other industries, Wahaha seems to have struggled to accurately capture the hearts and stomachs of young people, create hit products, and become a "down-to-earth" brand loved by young people, caught between lack of product innovation and overly avant-garde product innovation.

According to current popular saying, Wahaha's so-called "midlife crisis" may be that it has a loud name to pave the way, but "seeks speed over stability," and cannot open up a "second curve." If it removed this name, reset to zero, and worked solidly, would it be better?

We do not know the answer. As for the current situation, milk tea cannot save Wahaha from its "midlife crisis" for now.

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