"Among several well-known 'no-IPO' enterprises, Wahaha has long held a place. Now, breaking with tradition, it has exited the 'no-IPO' alliance and immediately become a hot topic in the capital market."

"At thirty, one stands firm." Wahaha seems poised for a major move. The creator of the Wahaha empire, Zong Qinghou, now over 72, changed his stance of "not short of money, not listing" at the 30th anniversary celebration, expressing interest in the capital market. Among several well-known 'no-IPO' enterprises, Wahaha was one of them. Now, breaking with tradition, it has immediately become a hot topic in the capital market.

Wahaha now sells over 30 billion bottles of various beverages annually, equivalent to 21 bottles per Chinese person. Although annual revenue has dropped by 30%, it still stands at 52.9 billion yuan, with over 30,000 employees, cumulative revenue exceeding 460 billion yuan, and taxes paid of 52.6 billion yuan. It remains one of China's largest and most profitable beverage companies.

Why did the "not short of money" Wahaha exit the "no-IPO" alliance?

Objectively speaking, China's A-share market has irrationalities in its institutional design. Because of this, the A-share market has been criticized as a place for some companies to raise money, with private enterprises rushing to list and raise funds, forming a unique "IPO backlog phenomenon." As well-known private enterprises, Laoganma, Wahaha, SF Express, and Huawei have all explicitly stated they would not list to raise money, earning them respect from investors.

So why was Zong Qinghou previously uninterested in listing? This may be related to Wahaha's early experiences. In the 1990s, Wahaha started as a school-run enterprise. When it hit a bottleneck, the government facilitated the introduction of France's Danone to form a Sino-foreign joint venture. However, this cooperation ended in endless lawsuits.

After Danone, together with a Hong Kong company, gained control of the joint venture, it attempted to oust the founder of Wahaha Group. The situation was once very passive, but fortunately, with the help of the Chinese trademark authority, the arbitration committee ruled in favor of Hangzhou Wahaha Group on the grounds that the trademark transfer had not gone through legal procedures. The unpleasant experience with capital operations made Zong Qinghou lose interest in listing Hangzhou Wahaha Group.

Life has its ups and downs, and so do enterprises. Founded in 1987, Wahaha took four years to reach an output value of 217 million yuan, broke through 10 billion in 2003, and peaked in 2013 with revenue of 78.28 billion yuan. The optimistic Zong Qinghou set a target of 100 billion for 2014. But contrary to expectations, 2013 became a turning point. From 2014 to 2016, Wahaha's revenue was 72.043 billion, 49.474 billion, and 45.592 billion yuan respectively, dropping from 31st to 104th place. The decline in Wahaha's performance is an indisputable fact.

The decline in sales of its original star products is the main reason for the overall decline. Its hit product "Nutrition Express" surpassed 10 billion yuan in single-product sales in 2009, peaked at 15.36 billion in 2014, and then began to decline, with 11.54 billion and 8.42 billion in 2015 and 2016 respectively, almost halving. In the bottled water market, Wahaha's ranking fell from fourth to sixth, and its market share dropped from 6.7% in 2015 to 5.9%.

Market competition is increasingly fierce. Old rival Nongfu Spring's annual revenue has exceeded 15 billion yuan, but Wahaha has seen almost no growth in the drinking water and beverage markets in recent years. This is mainly because Wahaha's products have not kept up with consumer demand. Packaging has remained almost unchanged for years, appearing very "rustic" to young people, directly leading to a decline in competitiveness. To overcome difficulties, listing has been put on the agenda.

The "Tencent" of the beverage industry

When mentioning Wahaha, the first products that come to mind are these classics: purified water endorsed by Wang Leehom, AD calcium milk loved in childhood, eight-treasure porridge, and the once-popular Nutrition Express. These products contribute most of Wahaha's performance. It seems like people haven't seen many other Wahaha products for a long time, but that's not the case. Wahaha has been continuously launching new products, with over 300 varieties produced.

So the question is: if it keeps launching new products, why do we never see them? This has to do with Wahaha's strategy and distribution system. Most of Wahaha's product routes and promotion methods are almost identical—copy and imitate. It finds successful beverages in the market as benchmarks, quickly replicates them, and then heavily advertises.

There's a saying in the industry: whichever beverage sells well in the market, Wahaha has a 90% chance of making a similar version. For example, Future Cola, iced tea, Youyou milk tea, and Qili all have prototypes. Therefore, Wahaha has another nickname in the industry—the "Tencent of the beverage industry," though this description is not complimentary.

Now let's talk about Wahaha's distribution system. Years of deep cultivation have created a powerful "joint sales" model. With nearly 10,000 distributors nationwide, hundreds of thousands of wholesalers, and over 3 million retail terminals, new products can be distributed to every small shop in rural areas within just one week. So during the era of野蛮 growth in the Chinese market, Wahaha's "copy and imitate" strategy allowed it to achieve great success.

But this approach has been used for over 20 years and now seems somewhat outdated. When traditional sales systems and channels are challenged, consumers become increasingly picky about brands, and the beverage market becomes more segmented, Wahaha's products become harder to sell.

Frequent cross-industry attempts end in failure

Cross-industry expansion is what Wahaha has done most in recent years, but it can be said to have "hit a wall." Children's clothing has been on the market for 12 years, with annual sales hovering around 200 million yuan, with no breakthrough. In 2010, it entered the milk powder industry, launching the high-end infant formula "Edison," which still holds less than 1% market share. Then in 2012, it ventured into retail, opening its first Waou mall, which quietly closed after less than three years of operation. In 2013, when the liquor industry bid farewell to its "golden decade," Wahaha high-profile entered the liquor industry, launching Lingjiang Guojiu, but the results were unsatisfactory, and there were rumors of forced internal purchases.

Facing bottlenecks, Wahaha recently turned to middle-aged and elderly health products and traditional Chinese medicine food therapy products as new breakthroughs, and attempted to reform channels. Earlier, Zong Qinghou dismissed Ma Yun's "new retail reform" as nonsense, retorting that Ma Yun was talking nonsense. At that time, Ma Yun had called out to Zong Qinghou, "It's not technology that eliminates you, but outdated thinking; it's unwillingness to learn and self-righteousness." Now, Zong Qinghou has also taken the initiative to cooperate with Alibaba, with Nutrition Express and AD calcium milk already piloting with Alipay.

Wahaha has been constantly trying a "diversification" strategy to save performance, but it can be said to have failed repeatedly, becoming a drag. The simple and crude "tycoon-style" spending, trying to leverage the strong channel advantages of beverages into new industries, has been proven wrong. Blind diversification has instead dispersed resources and energy.

Zong Qinghou cannot help but be anxious. At the 2015 distributor annual meeting, Zong Qinghou boasted that in 2016, Wahaha would strengthen development and penetration of core city markets, march into cities, and weave an "eternal youth, king's return" myth. But the actual results were unsatisfactory. The "2016 China Private Enterprises 500 Report" showed that in 2016, Wahaha ranked 70th with revenue of 49.4 billion, a direct decrease of 22.6 billion compared to the previous year.

Listing may have other implications; obstacles remain

For a beverage empire like Wahaha, established 30 years ago with sales of nearly 60 billion, the long-standing product thinking and sales system are hard to overturn. Consumers' perception of Wahaha remains stuck many years ago. China's consumer market is becoming increasingly mature, and the beverage market is changing rapidly. Consumers have more choices, and products that fail to keep up with the times are inevitably eliminated. To get consumers to pay, you must cater to their preferences.

According to a report from the Quality Association, with the upgrade of health consumption awareness, healthy beverages such as fruit juice and drinking water are showing rapid growth. In 2016, the most preferred beverage was packaged water, and the least preferred was carbonated drinks, indicating that carbonated drinks are gradually being neglected. The big health concept is a mainstream trend, and consumers' preference for high-sugar, high-calorie beverages is also declining.

To upgrade, you have to be willing to spend money. It is an indisputable fact that Wahaha's growth has slowed in recent years. With multi-line development and comprehensive upgrades, it undoubtedly needs a large amount of capital. At this time, introducing external capital is actually a measure to reduce corporate risk. But as for when and where Wahaha will list, Zong Qinghou has not clearly stated.

Another major obstacle is that Wahaha has 15,000 shareholders. To list, it must face the legal requirement that shareholders cannot exceed 200. Integrating so many shareholders is difficult and will be a huge project.

In fact, rumors of Wahaha listing have been around since the first half of the year. On April 1 this year, China Candy, listed in Hong Kong, announced that Hengfeng Flavor & Fragrance Co., Ltd. planned to acquire no less than 50% of its voting rights. The ultimate beneficial owner of Hengfeng Flavor & Fragrance is Zong Qinghou's only daughter, Zong Fuli. The outside world speculated that this acquisition was Wahaha seeking a backdoor listing, but the acquisition ultimately failed.

Wahaha's pursuit of listing may also have another meaning. Last month, when Zong Qinghou was asked about succession, he said, "Now, more than half of private enterprises will not be taken over by children; ultimately, management will take over, because children mostly return from studying abroad, have different perspectives, and are unwilling to do physical industries."

And precisely because of the consideration of management succession, the interests of management must be considered. In this way, relying solely on annual dividends is difficult to satisfy management's interests. Only listing can maximize management's interests.

Source: Pintu Business Review (ID: pintu360) -END-