Sales pressure is increasing, and conflicts with distributors are ongoing. Six Walnut, which made its third IPO attempt at the end of last year, is facing challenges.

On May 2, a distributor of Six Walnut in Henan province told Interface News that the brand's company, Hebei Yangyuan ZhiHui Beverage Co., Ltd. (hereinafter referred to as Yangyuan Beverage), allowed products to expire in warehouses without handling them during the transition between old and new distributors.

Zhang Deling, a first-tier distributor in Pingdingshan, Henan, still had over 200,000 yuan worth of expired Six Walnut inventory a year after exiting the distribution.

Halved Sales

In 2015, Zhang Deling signed a contract with Yangyuan Beverage with a sales target (purchase amount) of 7 million yuan. However, feeling sales pressure, Zhang only paid less than 2 million yuan for goods and stopped distributing Six Walnut products in March 2016. Subsequently, when transitioning between old and new distributors, Yangyuan Beverage did not have the new distributor take over his stock but instead shipped new goods to the new distributor, leaving his inventory unsold.

It is said that some first-tier distributors in Lushan and Baofeng areas under Pingdingshan had similar experiences. At their peak, these distributors had sales ranging from 10 million yuan at most to 2-3 million yuan at least.

Xu Jianzhuang, the person in charge of Yangyuan Beverage's distribution in Henan, refused to answer why the old distributors' inventory was not resolved in an interview with Interface News, stating that these were the distributors' own matters.

According to the contract provided by Zhang Deling, if a distributor fails to meet the agreed monthly purchase volume for two consecutive months, or the cumulative purchase volume for three consecutive months is less than 80% of the agreed total, Six Walnut has the right to unilaterally terminate the contract without bearing liability for breach of contract.

However, the distributor conflicts signal increased sales pressure; Six Walnut is no longer selling as well as before.

Yangyuan Beverage, formerly known as Yangyuan Health Beverage, was established in 1997 and initially a wholly-owned subsidiary of Laobaigan Group. In 2005, it was divested by Laobaigan Group due to being on the verge of bankruptcy. At that time, Yangyuan Beverage's enterprise value was only 3.99 million yuan, which was taken over by 58 employees led by Yao Kuizhang (general manager of Yangyuan Beverage) who pooled their money.

After regrouping, Yangyuan Beverage launched the new brand "Six Walnut," targeting the market leader at the time, Hebei Chengde Lulu. Leveraging the liquor distribution channels of Hengshui Laobaigan, it first entered the market through the catering industry and achieved sales of 30 million yuan by 2006.

Marketing with Iron Cans

In 2010, Six Walnut invested 60 million yuan to have TV host Chen Luyu endorse the product and air advertisements during prime time on CCTV. The slogan "Use your brain often, drink more Six Walnut" targeted students, mental workers, and other frequent brain users, refining the audience.

In addition to advertising endorsements, Six Walnut sponsored CCTV's "Super Brain," "Challenge Impossible," Hunan TV's "Learn Well," and Shandong TV's "I Am a Teacher," among other educational programs, using precision marketing to cater to the market pain point of "brain nourishment."

In 2012, Six Walnut became popular in the market. Zhang Deling recalled that from 2013 to 2014, the value of goods shipped from his own store alone exceeded 4 million yuan.

However, in 2015, sales began to decline and distributors started to exit, including Zhang Deling, who left in March 2016.

Corroborating Zhang's account, Yangyuan Beverage's prospectus from the end of last year showed operating revenues of 7.4 billion yuan, 8.3 billion yuan, 9.1 billion yuan, and 4 billion yuan for 2013, 2014, 2015, and the first half of 2016, respectively; net profits were 1.6 billion yuan, 1.8 billion yuan, 2.6 billion yuan, and 1.3 billion yuan.

This means that by 2016, Six Walnut's revenue and net profit had significantly declined compared to previous years.

Another data point also signaled a crisis. Six Walnut disclosed in its prospectus that inventory was 507 million yuan in 2013, 943 million yuan in 2014, 696 million yuan in 2015, and as high as 786 million yuan in the first half of 2016. If distributors fail to complete sales tasks, inventory will further increase.

Behind the high inventory is the fact that Six Walnut, which once became popular through new concepts like brain nourishment and high-density marketing investment, is no longer selling well, which is the direct cause of conflicts between distributors and the manufacturer.

Accustomed to lavish advertising and marketing, Six Walnut still adheres to its previous style. According to Yangyuan Beverage's prospectus, market promotion expenses were 256 million yuan, 320 million yuan, and 377 million yuan from 2013 to 2015. However, although investment is still increasing, the methods remain the same, with little innovation in marketing strategy beyond advertising endorsements and TV program sponsorships.

What hasn't changed is its neglect of product research and development. In 2013-2015, R&D expenses were only 1.29 million yuan, 2.47 million yuan, and 5.45 million yuan, respectively, while marketing expenses were a hundred times higher.

Products have not been innovated for years, while similar competitors in the market are increasing. Yangyuan Beverage also stated in its prospectus that well-known brands such as Yili, Mengniu, Sanyuan, Wahaha, and Panpan have all entered the walnut milk industry, intensifying industry competition.

Troubles don't stop there. Since 2012, Yangyuan Beverage has frequently been involved in lawsuits. Public information shows that in 2012, a Beijing consumer sued Yangyuan ZhiHui Company for "false advertising," claiming that "Six Walnut" did not actually contain six walnuts. Since then, there have been about 10 similar lawsuits. The publicity disputes were once speculated to be one of the reasons for Six Walnut's two IPO suspensions in 2011 and 2012.

At the end of 2016, Six Walnut made its third IPO attempt. Whether it can succeed amid increasing inventory and sales pressure remains unknown.

Comment: As a frontline marketing professional, I have never seen such shameless manufacturer personnel. What makes Six Walnut's personnel so arrogant? Probably because they are still accustomed to the saying that Six Walnut dominates the north and south, still immersed in their brief glory.

You say it's the distributors' problem. If one or two have problems, how can so many have problems? Distributors in Pingdingshan, because the manufacturer didn't handle old goods, collected customer prepayments and bought land; the distributor in Lushan even encountered a windfall—a logistics driver hired by Six Walnut, unaware of the change in distributor, delivered a truckload of goods to the old distributor's warehouse, who detained it. The old distributor hoped to use this truckload to demand Yangyuan Company handle the issue, but Yangyuan chose to pursue the logistics company for the loss of the goods.

The distributor in Baofeng market had peak sales exceeding 10 million yuan, but last year sales were only 3 million. At the beginning of the year, the business asked the customer to pay 500,000 yuan to boost performance, then turned around and told the distributor they couldn't continue.

In 2016, the distributor in Yanling collected a large amount of prepayments and fled. A new customer took over the market and had goods detained three or four times. However, after the Spring Festival, Six Walnut replaced this customer, citing qualification issues. Someone used a Spring Festival to help the company resolve market legacy issues, only to be discarded afterward. How can distributors not feel disheartened?

These are real problems existing among distributors in the market. Have you solved them? Six Walnut is so popular; why, when others take over the market, are products still 8 months from expiration, and yet you don't hand over?

Please don't dwell in your past glory. Walk the market, listen to distributors' opinions, solve market problems. Don't rush the IPO; do your basic work well, and what belongs to you will still be yours. Don't turn a good business into a "Ponzi scheme."

If you don't believe, look up; heaven spares no one.

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