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Product price cuts at the retail level are undoubtedly a 'high-stakes gamble' for companies. On multiple social platforms, the question "Why hasn't Coke raised its price in 20 years?" has become a perennial topic. After rounds of discussion, the conclusion is that "the benefits of not raising prices outweigh the benefits of raising them," and some have even concluded that price increases in the beverage industry are like "touching a tiger's rear" (not to be meddled with).

Recently, Kangshifu announced that its bottled water would shed its original low-cost image of 1 yuan per bottle and officially enter the 2 yuan price tier, explicitly targeting mainstream products like Nongfu Spring and C'estbon.

Conversely, Dongpeng Special Drink announced at an internal meeting a comprehensive price cut of 1.5 yuan for its canned products, signaling its determination to declare war on Red Bull.

For most companies, the raw material cost of beverages is not the core of operating costs; sales expenses, labor costs, etc., account for the majority of operating costs.

Therefore, rising raw material costs are not the main reason for price increases; rather, they are more due to fluctuations in sales expenses. Thus, changes in beverage prices are a direct reflection of changes in a company's operations. In fact, for many giant companies, price changes are more like a "high-stakes gamble."

Price Hikes Only to Benchmark Against Competitors?

Regarding why Coca-Cola stubbornly maintains a 3 yuan per bottle price, people from all walks of life always have different views and interpretations. The official statement from Coca-Cola is that its pricing strategy in China's system fully evaluates and considers various local operating costs and market dynamics, and does not depend on a single factor.

"In the terminal market, prices of beverage products, including bottled water, are extremely sensitive. Price changes will cause consumers to seek substitute beverages to reduce their purchase costs," said Lu Shengzhen, a FMCG expert. "Price changes are very cautious measures for companies. Changes in channel prices can create gaps between distributors, dealers, and the company, making it easy for other competitors to take advantage."

Even so, since the beginning of this year, many companies have still made significant moves in pricing. Kangshifu announced at the beginning of the year that it would adjust the channel prices of some beverages upward. Recently, Kangshifu also announced that the terminal price of its bottled water would be raised from 1 yuan to 2 yuan.

Regarding the reason for the price increase, Kangshifu explained externally: "In the context of consumption upgrading, due to rising R&D costs, raw material prices, transportation costs, and many other reasons, bottled water brands in the market face the challenge of upgrading. To adapt to market development, companies have to make the decision to raise prices."

Currently, price changes in domestic FMCG are mainly divided into two categories: one is based on cost changes, where companies adjust prices; the other is to follow up on competitors' products.

The former's price changes are mostly concentrated in distribution channels, with few cases of significant terminal price changes due to cost increases, while the latter has become the main reason for beverages and bottled water.

According to Euromonitor International market data, in the 2017 bottled water market, C'estbon and Nongfu Spring have always occupied the top two positions, but their market shares are almost the same, each around 10%. Following them, Kangshifu's bottled water market share is 7.3%.

According to Kangshifu's Q1 2018 financial report, its beverage business performance overall rose, but water sales fell 21.4% year-on-year. The report stated that it would upgrade packaged drinking water and launch high-end bottled water.

According to dealers, Kangshifu's bottled water price increase has been implemented, but there are currently no corresponding incentive or preferential policies for dealers.

"From a pricing strategy perspective, initially setting beverage prices slightly higher, but during operations, adjustments may be made based on actual conditions, with the focus on promotional adjustments. Lowering prices through promotions is more common in the market, but directly raising prices is not a wise move, such as with bottled water, especially purified water," Lu Shengzhen said. "Over the years, various brands of purified water have established price positioning in consumers' minds. Those who originally chose Kangshifu did so because of its price. If Kangshifu's price rises to 2 yuan, consumers may not necessarily still buy it; they are very likely to choose other 1 yuan products. For most consumers, for 2 yuan bottled water, they would still choose Nongfu Spring or C'estbon."

But it is worth noting that products seeking to benchmark through price increases are often not the so-called hit products.

At the beginning of this year, news that Nutrition Express would comprehensively raise prices once made the industry believe it, and finally Wahaha officially had to deny it. "Products like Wahaha's Nutrition Express are severely aging. Seeking to enhance the brand by raising prices is actually one of the few options available for such severely aging products," said FMCG expert Feng Qi. "For most companies, rising raw material costs are just the most official excuse for price increases; behind it, most are the result of necessary measures forced on the company."

"Kangshifu's bottled water price increase is entirely a choice made to benchmark against competitors. It is not difficult to judge that Kangshifu will continue to increase its channel promotion expenses for bottled water in the future, which will then be converted into product costs," Lu Shengzhen said.

Price Cuts Are a Gamble?

For most beverages and even bottled water, daring to significantly adjust prices is nothing more than two possibilities: one is that they occupy an absolutely dominant position in this product category, and consumers have no other choice; the other is that performance has declined significantly, falling short of expectations, so they change prices to take a gamble. Price changes also include increases and decreases. This kind of price change, besides Kangshifu's price increase competition, also includes significant reductions in terminal product prices.

Not long ago, Dongpeng Special Drink announced at an internal meeting that it would comprehensively lower the price of its canned Dongpeng Special Drink from the original 5 yuan per can to 3.5 yuan. The significant price change means that Dongpeng Special Drink will drop from benchmarking against Red Bull at the terminal price to the same price as products like Lehu.

Even so, Dongpeng also lowered prices in all channels, with each can priced 2 yuan lower than Red Bull, and clearly stated at the meeting its intention to take advantage of the Red Bull dispute to enter the market.

An industry insider told China Business Journal that this significant price cut by Dongpeng did not directly harm the interests of dealers and distributors, and most of the cost of the price cut was borne by the company itself.

The purpose of Dongpeng's move, as stated at its meeting, is to seize as much market share as possible while the industry leader Red Bull is in turmoil.

But looking at the functional beverage market, it is not difficult to see that Dongpeng Special Drink's canned price cut is still a 'gamble.'

Dongpeng Special Drink initially entered the market with bottled products and only later launched canned products to benchmark against Red Bull. Although Dongpeng Special Drink is currently the second brand in functional beverages, according to Euromonitor International market statistics, Red Bull, as the industry leader, has a market share of over 70%, while Dongpeng Special Drink is only 11.2%, and Lehu follows closely with a 10.7% share.

Opinions within the industry are also divided on Dongpeng Special Drink's gamble. Some believe that its canned products have not performed as well as bottled ones in the market and show signs of marginalization, so it might as well cut prices to impact market share. "Dongpeng Special Drink was originally an OEM for Red Bull, and its taste is closest to Red Bull," said an industry insider.

"Canned products are not the core of Dongpeng Special Drink's business, or rather, the market performance of canned products is not good. To 'loosen the soil' for Red Bull, it bet on price cuts. This is actually betting on consumers. If it wins, Dongpeng Special Drink can gain a significant development opportunity during Red Bull's internal strife; if it loses, canned products will sink to fourth- and fifth-tier markets, becoming products benchmarked against Lehu," Feng Qi said.

But there are still many voices of doubt in the industry about the move to directly reduce retail prices.

According to its plan at the meeting, Dongpeng will complete inventory clearance by mid-September and distribute the new version of canned Dongpeng Special Drink. However, Zhu Danpeng, a researcher at the China Brand Research Institute, believes that requiring dealers to clear inventory and implement new price policies in a short period will, to a certain extent, still impact the interests of large dealers and distributors. Moreover, with significant reductions in both channel and terminal prices, Dongpeng may ensure dealers' interests are not harmed in the short term, but in the long run, it is hard to predict.

"Price cuts also mean that dealers' commissions and rebate ratios directly decrease. If the goal of small profits but quick turnover is not achieved, it will affect dealers' confidence."

In the current bottled water market, there has not yet been a case of achieving huge benefits through terminal market price cuts. However, the case of Evergrande Spring Water, which was eventually forced to be sold off after continuous price cuts, is well known in the industry.

Evergrande Spring Water was positioned as high-end bottled water from its launch, but due to market response far below expected returns, its price gradually decreased from 5 yuan per bottle at launch to 2 yuan per bottle at the end, ultimately being divested by the Evergrande Group.

"The direct trigger for Evergrande Spring Water's failure was the price issue. The continuously declining price not only completely made dealers lose confidence but also made consumers question the product. Therefore, product price cuts at the retail level are undoubtedly a 'high-stakes gamble' for companies," Zhu Danpeng said.

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