JDB Faces Its Biggest Crisis Yet

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Is JDB's Predicament a 'Natural Disaster' or 'Man-Made'?

At the end of August, a debt restructuring plan from a real estate listed company unexpectedly exposed the herbal tea giant JDB's 'underwear.' Although JDB quickly denied the financial statements showing it was insolvent, claiming the data was seriously inconsistent with reality, the exposure of a series of problems such as debts, factory closures, and supply shortages made it hard for JDB to hide its decline, and it is indeed a fact that the company's performance is poor. In early September, a reporter from Shijie (Market Street) visited JDB's Chaohu OEM factory - Anhui Jinhuangpin Food Co., Ltd., and found that it had long been deserted, with only one duty officer in the vast factory area. This duty officer told the Shijie reporter that the factory originally had more than 200 employees, but now only he remains. Anhui Jinhuangpin originally relied on JDB for its existence. A person related to the company told the Shijie reporter that at the beginning of the year, JDB's performance was poor, and the factory was subsequently closed. Recently, media reports have successively revealed that some of JDB's factories in Guangdong, Sichuan, and other places have also experienced closures and production halts. Regarding JDB's current situation, the Shijie reporter called the JDB Group phone number shown on Tianyancha, and the call was transferred to the relevant department, but after the front desk transferred, the phone remained unanswered. Previously, the Shijie reporter learned that JDB's public relations department had been disbanded. What exactly is wrong with the herbal tea giant? Debts, Factory Closures, and Shortages In early September, on a gloomy afternoon, financial officer Zhang Yong sat in his office as usual, waiting for JDB distributors to come and settle accounts. "I have distributors coming to make a fuss every day. Half an hour ago, a couple just left," Zhang Yong told the Shijie reporter. All he could do was help them clear their accounts. As for the debts, whether they would communicate with the company or file a lawsuit afterwards was not something he could control. In his account, there were more than a hundred such distributors. JDB was once the king of herbal tea. Since 2005, JDB and Wanglaoji have had constant friction, launching a 'trademark war' and a 'red can packaging dispute,' with price wars and channel wars never ceasing. During this period, JDB's performance continued to decline, and problems with distributors increased. ▲ JDB Red Can Packaging In JDB's business model, distributors must first pay the company for goods, and then the factory arranges shipment; sales expenses incurred in the sales process also need to be advanced by distributors and then settled and returned, known as advance expenses. Zhang Yong said that if the company operates normally, the distributor's advance expenses will remain basically unchanged during the cooperation period until the end of the cooperation, when the remaining amount is returned. But now, the distributor advance expenses shown on the books are like a snowball, growing bigger and bigger. Zhang Yong has been with JDB Group for many years, and in his view, the company is facing its biggest crisis yet. Since May this year, JDB's East China region has experienced supply shortages, including Anhui. Jiang Yan, a frontline salesperson in JDB's Anhui region, recalled to the Shijie reporter that sporadic shipments are still arriving, but far from meeting market demand. Previously, when inventory was down to three to five thousand boxes, distributors would start stocking up, but now stocking up is almost impossible. "Occasionally, two thousand boxes arrive, and before they can even be put into storage, they are already divided among distributors." Currently, only one JDB factory remains in the East China region, in Hangzhou, and its production capacity is far from sufficient for distributors who have already paid. Many people have to wait outside the factory for shipments. A screenshot circulating within JDB shows that people have started making trouble outside the Hangzhou factory, and the head of JDB's East China region is calming everyone down, saying 'Don't rush.' An internal video obtained by the Shijie reporter shows that recently, more than 70 employees gathered in front of the JDB building in Hangzhou to demand unpaid wages, shouting slogans like 'JDB owes wages, which is against the law and reason!' It is reported that workers at the Hangzhou factory have also begun to strike. Even if there are goods, they may not be shipped. The Shijie reporter confirmed from multiple channels that since the company began owing freight fees to logistics companies in May, some logistics companies have started refusing to transport goods for JDB factories, including the one in Hangzhou. It is difficult to transfer goods from other places, and JDB's local OEM factory in Chaohu, Anhui, was closed at the beginning of this year. In early September, the Shijie reporter visited JDB's Chaohu OEM factory - Anhui Jinhuangpin Food Co., Ltd. - and found it long deserted. Public information shows that Anhui Jinhuangpin Food Co., Ltd. was established in 2012, covering an area of 60,000 square meters, with production workshops, warehouses, and other factory buildings covering 20,000 square meters, and an advanced automated canned beverage production line. The Shijie reporter found that the factory building of Jinhuangpin Food still hung a large JDB gold can signboard. Apart from this faded billboard, the factory management system in the guard room also showed JDB's former presence. The Shijie reporter called Anhui Jinhuang Food Co., Ltd., and the other party replied that Anhui Jinhuangpin originally relied on JDB for its existence. At the beginning of the year, JDB's performance was poor, and the factory was subsequently closed. An insider at JDB revealed to the Shijie reporter that in 2016 and 2017, the Chaohu OEM factory had a daily production capacity of about 200,000 cans of herbal tea. In August 2018, all personnel in the factory were cleared, and the two JDB managers originally left had also resigned. At the same time, JDB is also undergoing significant layoffs internally. Yang Fan, a regional sales supervisor, told the Shijie reporter that as of August 30, the entire East China region, including Shanghai, Zhejiang, Jiangsu, and Anhui, had only more than 700 employees left, while in the same period last year, a single region had nearly a thousand employees. Yang Fan has applied for resignation to his leaders, but no one has been found to replace him yet. On August 24, the group issued a notice that the stationed financial departments would be directly managed by each business division. The notice also mentioned that to control costs, all functional department personnel in the stationed financial departments would no longer be separated through agreement termination, but through natural attrition, and no economic compensation would be generated. "Layoffs without compensation are actually forcing employees to resign voluntarily," Zhang Yong said. Whether they leave or not, JDB employees have to face another annoyance: unpaid wages. JDB's internal staffing is divided into six levels from A to F, with A being the highest and F being the grassroots sales staff. In times of financial strain, the company prioritizes paying F-level sales staff. It is reported that in early September, the East China business division just issued June wages for E-level personnel, while higher levels would have to wait longer. Jiang Yan confirmed this to the Shijie reporter, but he does not plan to resign. Since graduating from university and joining JDB, he has worked there for nearly five years. "This is my first job, and I really have feelings for the company. The company's capital chain is a bit tight now, but such a big company won't collapse." Previously, the National Business Daily reported that JDB's factories in Dongguan, Qingyuan, and other places also experienced work stoppages and staff reductions. Among the multiple factories in Hubei, Zhejiang, Sichuan, and other provinces, only the Wuhan and Xiantao factories were still operating normally, while the rest had varying degrees of production halts or intermittent stoppages. All these undoubtedly make the outside world question whether JDB's capital chain may already have problems. Price War Plants Hidden Dangers JDB's senior management has also seen constant changes. In March this year, new president Li Chunlin took office. The group issued a notice reducing the distributor payment price for 24-can/case JDB drinks from 70 yuan/case to 50 yuan/case, seemingly reducing the initial payment pressure on distributors, but it planted hidden dangers. "This measure has a huge impact on the company's cash flow, directly reducing it by 40%," Zhang Yong told the Shijie reporter. In his view, this was almost fatal for JDB, which had already consumed too much money and time in lawsuits. As Zhang Yong said, two months after the price reduction, the company's capital chain problems emerged. Supply shortages, layoffs, and unpaid wages intensified. Sales supervisor Yang Fan also expressed helplessness: "Although the company lowered the purchase price for distributors, it also required distributors to pay a business deposit. Moreover, the proportion of advance expenses that should have been returned to distributors by the company was also reduced from the previous 50% to 35%, which most distributors resented." Unable to get advance expenses back, many distributors had to negotiate with JDB to convert the advance expenses into payment for goods, using goods as settlement. But this was not the final compromise. The factory supply shortage continued, and distributors could only continue to wait for the trickle-like shipping process. The Shijie reporter randomly visited several distributors in Anhui Province, and they all said that JDB's debts had not been settled to date. Even distributors who had terminated cooperation several years ago had situations where goods were used as payment but the goods were not received. Old Liu joined the ranks of JDB distributors in 2015. He recalled that at that time, JDB was not selling well. His main business was alcohol, and his promotional method was 'scratch and win drinks.' Originally, the prize was cola, but in order to consume the stock, he had to change the prize to JDB, which was slightly more expensive than cola. At that time, JDB and Wanglaoji were in fierce battle. At the end of 2014, the first-instance verdict of the 'red can dispute' between Guangzhou Pharmaceutical Group and JDB was announced, and JDB lost the case. The Guangdong High Court ruled that JDB must immediately stop using and producing related products, immediately destroy related infringing products and promotional materials, and compensate Guangzhou Pharmaceutical Wanglaoji 150 million yuan. In April 2015, JDB announced the launch of gold can packaging. ▲ JDB Gold Can Packaging In March 2015, Guangzhou Pharmaceutical Group increased its claim in the JDB trademark dispute case from 1 billion yuan to 2.93 billion yuan. In the previous first-instance judgment, the Guangdong High Court ruled that JDB's compensation was 150 million yuan in economic losses and more than 260,000 yuan in reasonable rights protection costs. In addition to lawsuits, the marketing war between Wanglaoji and JDB was also in full swing. Buy four get one free, buy three get one free, mix five boxes, mix ten boxes - the profits of both herbal tea companies gradually decreased. Yang Fan still remembers that during the five-year lawsuit between JDB and Wanglaoji, he and his colleagues were full of drive: "At that time, we worked overtime for free at night, sales and promotion were united, and we studied marketing strategies. No one complained about not getting overtime pay; everyone worked towards the same goal." He believes that was the release of JDB's corporate spirit. Then he sighed: "Now I'm really confused." In the accounts of JDB employees, during the price war period, JDB also experienced a period of tight cash flow in 2016, but it quickly eased. Even with layoffs at the end of the year, it was still within the normal range. The situation is definitely not as urgent as it is now. At the end of August this year, the debt restructuring plan disclosed by real estate company Zhonghong Holdings exposed a set of JDB financial data, which JDB quickly denied as authentic. The data showed that from 2015 to 2017, JDB Group's main business revenue was 10.042 billion yuan, 10.634 billion yuan, and 7.002 billion yuan respectively; net profits were -189 million yuan, 1.489 billion yuan, and -583 million yuan respectively. As of December 31, 2017, JDB's total assets were 12.715 billion yuan, total liabilities were 13.168 billion yuan, and net assets were -350 million yuan. On September 6, Li Chunlin also said in a media interview that JDB was adjusting its strategy and 'withdrawing from the price war.' Tax Issues Emerge In Zhang Yong's view, he has experienced the brand transition from Wanglaoji to JDB, the change from red cans to gold cans, and the change of group president. "I originally had deep feelings for the company, but this year I have completely lost confidence in it." In August 2018, JDB issued an internal notice that all financial departments, including the stationed financial departments, would be placed under the management of the major regional business divisions. This was almost a thunderbolt for the group's financial department, including Zhang Yong. "This means that when sales insist on taking those unreasonable expenses, we, including the supervision department, have no right to interfere," Zhang Yong said. Previously, the group's financial director had already changed twice in quick succession. In March 2018, the company issued a notice reducing the price per case from 70 yuan to 50 yuan. As a result, a price difference expense would arise between distributors and the company. The financial department required verification of the amount with each distributor. Zhang Yong told the Shijie reporter, "We check the market expenses proposed by distributors and the expenses for plan execution one by one. If after verification we believe the price difference expenses are real, we will compensate." But this requirement was rejected by the marketing department and distributors. In the early stage of verification, Zhang Yong carefully reviewed the amounts reported by several distributors and found obvious loopholes in the data. "The subsidy ratio for C24 (specification of 24 cans per case) is 179%, which means for every 100 cases sold, the company has to subsidize 179 cases. How is that possible?" Zhang Yong said with a wry smile. But all they could do was verify; they had no right to refuse payment. In early September, Zhang Yong logged into the JDB Group information system and found that the group's financial department had completely disappeared, and the company's internal structure only had several business divisions such as East China, Central China, and South China. With tight cash flow, in order to collect payments, the company began to play tricks on expenses. A screenshot of JDB employee medical reimbursement SMS obtained by the Shijie reporter showed that the reimbursement money had been sent to the company, but many employees had not received it for a long time. Starting in May this year, salesperson Jiang Yan found that his salary was paid into two accounts: the basic salary went through the company account, while the commission was paid through a private account. In this regard, Zhang Yong said that another reason for paying wages through private accounts was to avoid some personal income tax. Sales supervisor Yang Fan confirmed to the Shijie reporter that the company had notified that all sales staff would be transferred to distributor personnel, meaning wages would be paid by distributors. "The company is in difficulty, so sales staff have to work with distributors, earning some commission to make a living," Yang Fan said. Another internal group chat message obtained by the Shijie reporter showed that the company also had issues with using personal accounts for transactions. The company reminded that to avoid tax issues, cash transactions in personal bank card accounts must not include the company name or the words 'payment for goods.' Not only that, JDB Group also had irregularities in VAT payment. An internal approval document obtained by the Shijie reporter showed that the advance expenses of a subsidiary under Shanghai Kangmei would be converted into payment for goods, and 'the company will not issue invoices to Kangmei. The taxes arising from this will be borne by each office.' The reporter consulted a senior financial professional and confirmed that this operation was problematic. Many old employees at JDB still remember the peak period in 2012. Data released by the China Industry Enterprise Information Center, a subsidiary of the National Bureau of Statistics, showed that in 2012, JDB occupied 73% of the herbal tea market share. Since then, the red can dispute, lawsuits, and internal management chaos have meant that JDB is no longer in its prime. "JDB is definitely at a critical moment now. In my view, the hope of survival is very slim," Yang Fan said. However, a JDB distributor told a China Business Journal reporter that to soothe distributors' emotions and alleviate financial pressure, the company proposed that distributors 'produce and save themselves.' JDB also set up 'special funds' for each distributor to ensure that distributors could receive goods on time after paying for them. In 2018, JDB experienced great ups and downs. From the upstream supply chain to the downstream distribution channels, from internal personnel turmoil to external litigation claims, JDB's hidden mines were detonated one after another. "At first, consumers also recognized JDB, but JDB's internal contradictions, employee adjustments, and later disputes with COFCO were not handled properly, which actually gave Wanglaoji a development opportunity. If the dispute with Wanglaoji is attributed to 'natural disaster,' then JDB's predicament was caused by itself," Lu Shengzhen, an FMCG marketing expert, told a China Business Journal reporter. Lack of Internal Order Although JDB's president said in August that JDB's financial problems had returned to normal, various incidents caused by financial problems continued to be exposed. Not long ago, an internal employee of JDB revealed that the Hangzhou branch had a multi-day work stoppage, and the reason for the stoppage was simple: they demanded that JDB pay wages on time and fulfill the overtime pay in the labor contract. It is understood that ultimately Wu Yuhao mediated and the incident was resolved. A person familiar with the matter told a China Business Journal reporter that due to the large-scale layoffs earlier, existing employees were under greater work pressure. Moreover, by September, August wages had not yet been paid, which caused dissatisfaction among many employees. Not long ago, the media also questioned that JDB's core factory in Dongguan was nearly at a standstill. JDB later admitted that it had begun to significantly reduce staff, including at the Dongguan factory, in order to increase revenue and reduce expenditure. According to multiple sources, due to long-term arrears of payment, many upstream suppliers now require JDB to pay in cash. On the financial issue, although JDB president Li Chunlin said in August that JDB's cash flow had returned to normal, in reality, JDB has not been able to effectively solve the debt problem. Some distributors told reporters that after Li Chunlin took office, JDB lowered the purchase price and tried to reduce the intensity of distributors' advance payment of sales expenses, which won praise from distributors. But after JDB's red can was announced to be launched, JDB required distributors to pay a deposit, recovering the original concessions through the deposit. At the same time, JDB began to call on distributors to carry out production self-rescue. "Now the red can goods are in short supply everywhere, and JDB's factories are short of money everywhere. The goods we order with our payments are often taken by other regions," a distributor told reporters. Before the previous payments were settled, JDB again required distributors to pay 'special payments,' meaning that whoever paid for the goods would have the factory ship directly to them, and it would not be transferred to other departments or regions, in order to stabilize distributors' emotions. Previously, due to lack of money, JDB's internal capital system was chaotic. Often, the goods that needed to be delivered for payments made by Region A might be sent to Region B, but the funds for producing these goods came from Region C, and in the end, it was unclear who should receive them. The distributor also told reporters that under this background, JDB was forced to take the special fund measure to correct the situation. The internal chaos at JDB also put pressure on distributors. Another distributor told reporters that he was currently burdened with hundreds of thousands of yuan in debts from JDB, and had tried to transfer them at a low price to get out but no one was willing to take over. "JDB's current situation makes outsiders dare not enter, while insiders are dragged down by debts and cannot leave." In the past month or so, a large number of negative news has shrouded JDB. Previously, this newspaper reported on the supply shortages of JDB in some parts of the country and the poor distribution of red cans. After that, Li Chunlin admitted in a media interview that JDB had the problem of 'abnormal supply, affecting the pace of red can distribution,' and said that 'the differences in cooperation with COFCO have not been properly handled.' Constant News Although COFCO Packaging and ORG did not directly issue statements or take measures such as cutting off supply to JDB, in mid-September, ORG said externally that it was actively communicating with JDB on related matters and gradually resuming business cooperation. However, Li Chunlin once said that since August, can suppliers had gradually resumed normal supply to JDB. Therefore, it was confirmed that ORG and COFCO had indeed stopped providing iron cans to JDB after the dispute with JDB. But for JDB, the sanctions of cutting off supply by COFCO Packaging and ORG hit its 'lifeline.' In June this year, newly appointed president Li Chunlin announced that the company would begin to fully promote red can JDB, hoping to reverse the decline that began in 2015. At this juncture, the attacks from COFCO Packaging and ORG caused JDB's 'first battle' for red cans to ultimately fail. Li Chunlin admitted externally that the red can did not achieve the expected market effect. This was not good news for Li Chunlin, who took over as president of JDB Group in March under emergency orders. The previous president, Wang Qiang, was dismissed by Chairman Chen Hongdao, who was fleeing abroad, and this was widely believed in the industry to be related to JDB's declining performance over the years. "JDB played its worst cards at the best time," Lu Shengzhen said. In August 2017, JDB announced a marriage with COFCO, with COFCO Packaging investing 2 billion yuan in Qingyuan JDB and holding a 30.58% stake. At the same time, the Supreme People's Court made a final ruling on the 'red can dispute,' determining that the red can herbal tea packaging was jointly owned by JDB and Guangzhou Pharmaceutical Group, with no infringement and no compensation. At that time, the voice that JDB would overcome its difficulties reached its highest point. But it turned out that in 2018, JDB was still in decline, and after Li Chunlin took office, all problems erupted again. COFCO, once considered JDB's backer, turned its spearhead against JDB, and ORG followed closely. The problems in the upstream production supply chain spread to the downstream, and finally in June, during the peak season, some JDB distributors were forced to search for sources of goods everywhere. The temporary falling out between JDB and COFCO and ORG ultimately left JDB in the shadows during this year's peak season. Partner fallouts, distributor supply shortages, factories nearly at a standstill, employee strikes - these became the keywords for JDB throughout the summer. And now, the only thing that can comfort JDB is that on August 16, the Supreme People's Court upheld the ruling that JDB and Wanglaoji share the red can. But for JDB now, obtaining the red can cannot reverse the situation. Is Listing a Redemption? Recently, Li Chunlin once again clarified that JDB wants to list early and has a clear plan to list within three years. As for the reason for rushing to list, Li Chunlin's external view is that 'the other party is a listed company, while JDB is just a private enterprise.' Therefore, from a competitive perspective, JDB urgently needs to list. In this regard, Lu Shengzhen believes that Li Chunlin's statement has some truth, but it is not the root cause of the problem. "The root cause is that JDB's own team has collapsed, and the market cannot keep up. In the dispute with Wanglaoji, JDB's handling also had problems, causing it to lose its original sympathy points." Lu Shengzhen also said, "Listing cannot solve brand problems or credibility issues. Treating listing as a self-redemption method is just a rhetoric." From a capital perspective, JDB's rush to list cannot fully release its brand value. Shen Meng, director of Chanson Capital, told reporters that JDB is likely eager to list from an operational perspective, but for its behind-the-scenes capital forces, such as COFCO, it is not a good thing. "Capital groups like COFCO are not short of money and do not need JDB to quickly securitize and cash out. In addition, a hasty listing may lower JDB's valuation, which is not beneficial to COFCO in the long run." The Rashomon incident between JDB and penny stock Zhonghong Holdings at the end of August pushed the topic of JDB's listing to a small climax. The JDB performance exposed by Zhonghong Holdings was far below market expectations, causing an uproar. Although JDB subsequently denied any connection with Zhonghong Holdings, Zhonghong insisted that the materials came from Chen Hongdao's agent. To this day, the two sides still have no unified and clear statement. "The purpose of JDB's listing is to raise funds. If it can successfully list, whether through IPO or backdoor listing, it can enhance its ability to obtain credit or equity financing, but whether it can solve JDB's funding gap is uncertain. Therefore, we cannot pin JDB's hopes on listing," Shen Meng told reporters. (At the request of the interviewees, Zhang Yong, Jiang Yan, Yang Fan, and Old Liu in the article are pseudonyms.) This article is sourced from: China Business Journal, Shijie October 23-24, during the Autumn Sugar and Wine Fair, the '2018 China FMCG City Distribution Logistics Conference' hosted by New Distribution will invite industry experts, FMCG warehousing and distribution specialists, and distributors who have transformed to unified warehousing and distribution platforms to discuss and answer questions about the future development trends of FMCG city distribution logistics and practical cases of distributor transformation to unified warehousing and distribution, hoping to bring you different inspiration and thinking! -END-