The Moderate Hawk Zong Qinghou

Click to read the original article for details Text | China Entrepreneur Magazine reporter Xie Yunzi In China's physical manufacturing sector, Zong Qinghou remains a distinctive and unique flag. In an era of dramatic changes in consumption and channels, can Zong Qinghou carry out a moderate transformation within Wahaha? A person's past determines their future. Wahaha Group's headquarters at 160 Qingtai Street, Hangzhou, is a gray, somewhat shabby six-story low-rise building. Even though Wahaha Group has dispersed its offices across various production bases, Zong Qinghou insists on coming to 160 Qingtai Street every day to "go to work." This is also the site of the school-run factory where Zong Qinghou initially started his business; he has never really left his entrepreneurial starting point. Wahaha Group's six-story gray building on Qingtai Street, Shangcheng District, Hangzhou, is also Wahaha's starting point—the original site of the school-run enterprise distribution department. Photo: Shi Xiaobing On Labor Day 1987, Zong Qinghou personally hung the sign "Hangzhou Shangcheng District School-run Enterprise Distribution Department" here. Perhaps Zong Qinghou never imagined at the time that his pedaling a tricycle to deliver school notebooks and stationery would deliver an empire with annual sales of tens of billions. The predecessor of Wahaha Group was the Shangcheng District School-run Enterprise Distribution Department, and Zong Qinghou was also the "school notebook manager" who delivered goods by tricycle. Source: Provided by interviewee The picture shows the economic contract for the Shangcheng District school-run factory. Source: Provided by interviewee In the modern business world, which is accustomed to using various financial means, Wahaha is an outlier. For 31 years, Wahaha has had an incredible tradition: insisting that the company does not take on debt, has never issued any bonds, and has never had a penny of bank loans. Over the years, Wahaha has relied entirely on its own funds for endogenous growth. Pan Jiajie, head of Wahaha's Materials Supply Department, told China Entrepreneur, "In the eyes of many financiers, this approach is not smart. If Wahaha set up a finance company, it could make at least several hundred million in profit a year. But Wahaha will not break the balance with its distributors and agents for the sake of these hundreds of millions. Wahaha has annual sales of tens of billions, but at the end of the year there are almost no accounts receivable or payable, and no capital holding costs." Wahaha's "conservatism" may have shown some advantage in 2018. The financial deleveraging that began in 2017 was widely implemented in 2018. In addition to the real estate industry, many physical enterprises also fell into difficulties due to lack of liquidity. Wahaha was less affected. But at the same time, Wahaha, now at the age of 30, faces a more complex situation than when Zong Qinghou started his business. For example, should it go public or not? Where is the next growth point? In November 2017, at Wahaha's 30th anniversary celebration, Zong Qinghou changed his previous attitude of "never going public" and publicly stated, "Going public can accelerate enterprise development, and we will consider it at an appropriate time." It is worth noting that the function of going public is to raise funds, which is somewhat contradictory to the previous stance of "not short of money." At the end of August, Zong Qinghou said in an exclusive interview with China Entrepreneur: "Wahaha currently has no definite listing plan. We are not short of money now. If there is a project that requires large capital investment in the future, we will consider listing. But once listed, we must be responsible to shareholders. If we only raise money without increasing corporate efficiency, and shareholders cannot get dividends, that would be too bad." In March 2018, media reported that Wahaha bought back employee shares at 2.6 yuan per share. This move was widely interpreted by the outside world as paving the way for Wahaha's future listing. The new Company Law stipulates that when a company applies to the CSRC for listing, the number of shareholders must not exceed 200. Wahaha was reported to have 15,000 shareholders, which could become a major obstacle to its listing. Regarding this news, Wahaha gave an official response to China Entrepreneur. "Although the company adjusts shareholding quotas every year based on employee performance, the overall trend is only rising, not falling. Therefore, there are cases where employees in the same position have significantly different shareholdings due to length of service, leading to a new 'iron rice bowl' phenomenon. To better motivate employees, Wahaha has bought back all employee shares at a high price, while the total annual dividend remains unchanged, and will be re-evaluated as dry shares based on position and performance." At one time, Wahaha was a potential market value king. In 2013, Zong Qinghou was named the richest person on Forbes' 2013 Chinese Billionaires List with a net worth of $11.6 billion. In the same year, Wahaha set a record high revenue of 78.3 billion yuan. However, after 2015, Wahaha's sales entered a downward channel, decreasing at a rate of 20% per year. In 2017, Wahaha's revenue was only 46.4 billion yuan. Wahaha faces more severe challenges than ever. To see a person's future, one must return to their past. Zong Qinghou is the eldest son in his family. To reduce the family burden, he went to the countryside after junior high school to the Mamu Farm in Zhoushan, and a few years later moved to the Shaoxing Tea Farm, staying in the countryside for 15 years. After returning to Hangzhou, Zong Qinghou took over his mother's position and worked as a salesman in a primary school factory. Perhaps to make up for the wasted youth, Zong Qinghou started his own business in 1987. In 1989, Zong Qinghou established Hangzhou Wahaha Nutritional Food Factory and successfully launched its first product—children's nutritional liquid. Once launched, the children's nutritional liquid was warmly received by the market. In 1991, Wahaha acquired the insolvent Hangzhou Canned Food Factory. The merger with the Hangzhou Canned Food Factory prompted Wahaha to move toward scale and, by chance, became the first shot in the reform and opening up. On October 20, 1988, Wahaha's first product, children's nutritional liquid, was officially put into production. Source: Provided by interviewee Through television screens, the slogan "Drink Wahaha, eat with a good appetite" entered the hearts of Hangzhou citizens, and the children's nutritional liquid sold well. Source: Provided by interviewee On October 6, 1991, the founding meeting of Hangzhou Wahaha Food Group Company was held at the Hangzhou People's Hall. Source: Provided by interviewee The success of Wahaha's children's nutritional liquid filled Zong Qinghou with hope, and Wahaha also completed its primitive capital accumulation. Source: Provided by interviewee In 1991, Wahaha merged with Hangzhou Canned Food Factory. The picture shows Zong Qinghou speaking at the first meeting of factory team leaders. Source: Provided by interviewee In 1994, Wahaha welcomed another important node. To solve problems such as bad debts and triangular debts, Zong Qinghou introduced the joint sales system. In the eyes of most people, the joint sales system laid the foundation for Wahaha's subsequent huge marketing network. Wahaha is a marketing-driven enterprise, and in this field, Zong Qinghou is still worshipped as a marketing genius by Wahaha employees. "For sales, President Zong has the most simple theory: everything is to solve the problem of buying and selling," Shen Jiangang, general manager of Wahaha's sales company, told China Entrepreneur magazine. "President Zong believes that if you want others to help you sell products, in addition to signing a contract with them, you also need to provide benefits. So how to bind the interests of manufacturers and suppliers together is particularly important. In other words, the essence of the joint sales system is to solve the relationship between manufacturers and suppliers." Under this premise, Wahaha signed joint sales agreements with nearly 8,000 distributors. A new product can appear in shops in remote mountain villages within just one week. From the beginning, Wahaha targeted the rural market. It can be said that Wahaha's growth is very Chinese. During his 15 years in the countryside, Zong Qinghou had memorized the "Selected Works of Mao Zedong." Xiao Zhuqing, general manager of Shandong Wenhe Liquor Group, joined Wahaha Group in 2000. According to Xiao Zhuqing, Wahaha never believed in CCTV's ratings survey companies. "Zong Qinghou said that the samples of CCTV survey companies are urban residents. Wahaha only advertises on CCTV and provincial satellite TV, which were the only two channels available in rural areas at that time." At that time, Wahaha had a very simple development strategy—"push-pull combination," that is, pulling through satellite TV and pushing through the joint sales system. "I was responsible for the promotion of 'Seven Cups of Tea.' At that time, we cooperated with Stephen Chow to help select actors for his new movie online and offline in seven cities across the country. At that time, there was no 'Super Girl' on Hunan Satellite TV. Unlike the current perception of Wahaha's brand aging, Wahaha is actually the originator of talent shows." In addition to the joint talent show with Stephen Chow, Wahaha's most successful promotion case was the signing of Wang Leehom. It is understood that Wang Leehom's endorsement fee was very low at the time, and he never actively asked for a raise. "Wahaha was a major client of CCTV at the time. With Wahaha's help, Wang Leehom appeared on the Spring Festival Gala, held concerts, and filmed music videos. At that time, Wahaha's offline layout was very dense, selling 2 billion bottles of purified water a year, each with Wang Leehom's face on it." In addition, another feature of Wahaha is its follow-up strategy, the most famous case being its imitation of Coca-Cola. In 1998, Wahaha launched Future Cola, mainly targeting the rural market. According to Xiao Zhuqing's recollection, at that time, distributors could earn two yuan more per box of Future Cola than Coca-Cola. Moreover, Coca-Cola and Pepsi used plastic packaging, while Future Cola used large red boxes as outer packaging, and advertisements mainly spread festive culture, meeting farmers' gift-giving needs. However, after cable TV became popular, Wahaha's old tactics no longer worked. In the eyes of more people, the fundamental reason for Wahaha's sales decline is that consumer demand has changed. An industry insider who requested anonymity told reporters, "It's not that Wahaha did anything wrong; it's mainly because the times have changed. Previously, consumers trusted advertisements very much; now consumers are very rational. The development of cold chain logistics has also made dairy products with shorter shelf life the market mainstream." In addition, the channels of the beverage market are also changing. Today's retail terminals mainly have three formats: first, international hypermarkets such as Carrefour and Walmart; second, standard supermarkets such as Lotus and Chaoshifa; third, chain convenience stores such as Quanshi and Haolijie. These new channels all require strong control and marketing support. An industry insider told reporters: "Compared with Coca-Cola and Master Kong, Wahaha's joint sales system is asset-light. With consumption upgrading, the 'heavy asset' advantage of Coca-Cola and Master Kong's retail channels is becoming more obvious." It is understood that Coca-Cola does direct sales globally. Considering the complexity of the Chinese market, it also does distribution in some non-key cities, but the proportion is minimal. Master Kong is a typical "grab the big and let go of the small," with direct sales in key cities and key customers, and agency distribution for half of the channels. More people believe that although the heavy asset model requires a large initial investment, after a certain period, the brand manufacturer's control over retail terminals becomes prominent. For new channels, "freezing," "vividness," and "refinement" management are very important, and these needs can only be met by direct sales organizations. First is freezing. To ensure the taste of beverages, brand manufacturers need to place freezers at offline terminals. Xiao Zhuqing told China Entrepreneur reporter: "In Hubei Province alone, Nongfu Spring has placed 180,000 freezers, and Master Kong has placed 220,000. Of course, these freezers only allow the display of the brand's products." In addition, for offline retail stores, brand manufacturers also need to do refined and "vivid" management. It is understood that for key customers, Nongfu Spring has three batches of salespeople serving them: "order taking and delivery, display arrangement, and promotional activities." "Vividness" is a concept invented by Coca-Cola, meaning that wherever consumers look, there are Coca-Cola display points. So where is the biggest drawback of the joint sales system? A person close to Wahaha told China Entrepreneur that it is precisely because of the binding of interests with manufacturers that Wahaha distributors face great performance pressure. In recent years, Wahaha has also been increasing its direct sales organizations, but the proportion is very low. This is also the reason why Wahaha's channel power in big cities is getting weaker. Another key to the smooth implementation of the joint sales system is the ability to maintain a balance between manufacturers and distributors, which requires sufficient price differences in products to meet the needs of both parties. The key to price differences lies in the ability to produce high-margin products, which may be a challenge for the entire industry. It is understood that Nongfu Spring CEO Zhong Shanshan once required that no matter how much Nongfu Spring reduced prices, each box should be priced two yuan more than Wahaha. But even so, it still cannot meet the needs of distributors. "Labor costs, supermarket and wholesale store rents have all increased, and two yuan can no longer support suppliers' expectations for price differences." For a long time, Wahaha has pursued being a brand that is good and cheap. "Wahaha has already optimized packaging cost control. There is a joke that even counterfeit water made by small factories cannot be cheaper than Wahaha. It can be said that bottled water is what Wahaha promoted in China," the above-mentioned person told reporters. This of course also means that Wahaha needs to develop new products that can increase prices more urgently than other brands. What is certain is that Wahaha is still the overlord of China's beverage industry, and Zong Qinghou is still the entrepreneur who best understands the attributes of Chinese channels. Third- and fourth-tier cities and rural markets can bring rich returns to enterprises, while high-profit products target first- and second-tier markets. But if Wahaha cannot upgrade its channels and management system at the same time, it will only "surround" the first- and second-tier markets, never capturing them. And any product has a life cycle. Product upgrading is the key to solving the aging of the brand matrix. Zong Qinghou has undoubtedly realized this. Wahaha's latest move is to re-enter the health market and launch products such as "meal replacement powder" and "probiotics" for adults. At the same time, Zong Qinghou is trying to build a social retail platform. Earlier, Wahaha had made many diversification attempts. However, business itself is the accumulation of trial and error. Regardless of market response, Zong Qinghou and Wahaha have never stopped. As the internet shifts offline, Alibaba's Retail Link and JD.com's New Path are also in direct confrontation with offline channels. In the eyes of more people, Wahaha still only has Zong Qinghou. In a TV interview many years ago, Zong Qinghou's daughter Zong Fuli was asked: "What does Wahaha minus Zong Qinghou equal?" Zong Fuli replied: "Equals zero." In the words of Shen Jiangang, Zong Qinghou is the kind of boss who is both feared and respected, strict yet hard to hate. No matter how complex the matter, he can unravel it and find the key to the problem. "He never uses WeChat, nor does he go online. Once he analyzed the essence of new retail for us and even drew a diagram to explain it." To this day, Zong Qinghou, who has been fighting for more than 30 years, still travels frequently on business and insists on working every day. However, in the past two years, Zong Qinghou has also realized the importance of delegating authority. Wahaha needs to "de-Zong Qinghou-ize"; this is an inevitable development. Zong Qinghou himself also admits that Wahaha, at the age of 30, suffers from a serious "big company disease." "They all say I am too autocratic. In the past, I managed too meticulously, causing employees to rely on me. Now I am gradually changing my management style and carrying out process reform. In recent years, Wahaha has also been cultivating middle management," Zong Qinghou told China Entrepreneur. Chi Yuzhou, in Zong Qinghou's biography "The Principle of Universal Gravitation," called Zong Qinghou a "moderate hawk." On the occasion of the 40th anniversary of reform and opening up, in an era of dramatic changes in consumption and channels, can Zong Qinghou carry out a moderate transformation within Wahaha? The following is an exclusive interview with Zong Qinghou, chairman of Wahaha Group, by China Entrepreneur reporter: Photo: Shi Xiaobing CE: You started your business at 42, Ren Zhengfei at 43, and Liu Chuanzhi at 40. By today's investor standards, 40 is past the golden age of entrepreneurship. Where does your passion come from? What was the entrepreneurial environment like? Zong Qinghou: Before the reform and opening up, we had a planned economy. The people of the whole country were proletarians, and everyone ate from the same big pot. Working more or less, doing well or poorly, was the same. Therefore, there was no enthusiasm for creating wealth. It was only after the reform and opening up that entrepreneurial opportunities appeared, so we were already middle-aged when we started our businesses. In December 1978, the Third Plenary Session proposed shifting the focus of the Party's work to economic construction and carrying out reform and opening up. The mental outlook and enthusiasm of the people across the country were thus renewed, and the economy developed rapidly. In the winter of 1978, I returned to Hangzhou from Shaoxing Tea Farm. At that time, the countryside was also implementing the land contract responsibility system reform. Material conditions gradually became richer, and various "tickets" were abolished. The cities also implemented the factory director contract responsibility system, and more and more people began to start their own businesses. However, due to the social environment at the time, many private entrepreneurial enterprises hung the sign of "collective" or "whole people." Later, the State Council and the National People's Congress formulated laws again, stipulating that whoever invests owns the equity. Therefore, more and more "red hat" private enterprises were transformed from "state-owned enterprises" to private enterprises. I was born in 1945. In August 1945, the War of Resistance against Japan was won. Our generation was educated by the Communist Party, so the original intention of starting a business was simply to do something. At first, the money earned was not all our own. Since the enterprise hung the name of ownership by the whole people, we had to hand over 40% of the profits. I think many entrepreneurs who started businesses at that time, including Mr. Liu Chuanzhi of Lenovo, were the same. CE: In 1988, Wahaha's self-developed children's nutritional liquid sold over 100 million yuan, and the company thus completed its primitive capital accumulation. Did this lay the foundation for Wahaha's later company strategy driven by blockbuster products, brand power, and strong channels? Zong Qinghou: Children's nutritional liquid was our first product, and we thus obtained our first pot of gold. Wahaha started from scratch. Previously, we did consignment sales and small business. At the beginning of entrepreneurship, it was indeed difficult, and others looked down on you. But I think many entrepreneurial enterprises at that time were like this at the beginning. Wahaha initially affiliated with a school-run enterprise, so we had a good understanding of schools. At that time, I saw many children with sallow faces and thin bodies. At that time, the one-child policy was being implemented. With only one child per family, parental doting caused problems such as picky eating and malnutrition. At that time, there were many health products on the market, but none targeted children's picky eating and anorexia. We felt there was a huge business opportunity, so we decided to develop an appetizing product for children. We found experts from the Nutrition Department of Zhejiang Medical University at the time to help us develop an all-natural formula. Yu Ruomu, then president of the Chinese Nutrition Society and wife of Comrade Chen Yun, also helped us a lot. The product worked quickly; children drank it and became appetized. The children's nutritional liquid was in short supply. In 1991, Wahaha decided to expand production and needed to build factories. But we were not a planned economy unit, and our scale was small, so the land use indicator was never approved. Moreover, even if it were approved, building factories, buying equipment, and setting up production lines to form capacity would take a long time, and could not solve our urgent capacity gap. Just when we were at a loss, the Secretary-General of the Hangzhou Municipal Party Committee specifically talked to me, hoping that Wahaha could merge with the Hangzhou Canned Food Factory. The Hangzhou Canned Food Factory was one of the largest food enterprises in the country at the time, with products mainly for export. However, due to special historical reasons at the time, exports were suddenly blocked, products could not be sold, and the factory was insolvent. At that time, the Hangzhou Canned Food Factory had more than 100 mu of land, more than 60,000 square meters of existing factory buildings, and more than 2,000 employees. Moreover, the government's proposed merger plan did not require us to spend money; we only needed to accept four to five hundred workers. After inspection, I immediately decided to merge with the Hangzhou Canned Food Factory. But soon many people opposed it. Employees of the Hangzhou Canned Food Factory felt that a large state-owned factory being merged by a small factory was a loss of face, while Wahaha employees worried that they would be dragged down by the Hangzhou Canned Food Factory and their benefits would be reduced. Due to great resistance, the municipal government sent a working group to the Hangzhou Canned Food Factory, but they could not persuade them for a long time. Finally, the government asked me to go and talk to the cadres and employees of the Hangzhou Canned Food Factory. I mainly talked about three issues: First, the issue of who is bigger and who is smaller. Although the Hangzhou Canned Food Factory had many employees, it had no good products, no good sales channels, and was heavily in debt, with weak capabilities and a small market. Wahaha, although a small factory, had best-selling products, good economic benefits, strong capabilities, and a large market. Therefore, from this perspective, Wahaha was not smaller than the Hangzhou Canned Food Factory, and even bigger. Second, after the merger, all employees' income would increase. At that time, Wahaha employees received 70-80 yuan in bonuses each month, while Hangzhou Canned Food Factory employees earned only about 30 yuan per month. After the merger, I promised to first give employees three months of bonuses. After three months, it would depend on their own efforts. As long as they worked hard, I guaranteed to treat employees from both sides equally. Third, I assured the original cadres of the Hangzhou Canned Food Factory that their positions would remain unchanged after the merger. Of course, those who performed well would be promoted, and those who performed poorly would be laid off. Hearing these three points, everyone was very happy and applauded to pass the decision to merge with the Hangzhou Canned Food Factory. CE: From 1991 to 1992, there were many discussions in public opinion about "socialism or capitalism." Some private entrepreneurs had already prepared to hand over their assets to the state. Did these debates affect your confidence? Zong Qinghou: At the time of the merger in 1991, Comrade Xiaoping had not yet made his Southern Tour speech. Urban enterprise reform had not really started, and society's thinking was indeed relatively rigid. So many people said we were undermining the state-owned economy and restoring capitalism. But we were determined to continue firmly, and we also received affirmation from the main leaders of the province and city at the time. Mainstream media such as the Liberation Daily also published articles in support. It can be said that our merger with the Hangzhou Canned Food Factory fired the first shot in urban enterprise reform and opening up. Of course, during this process, relevant government leaders also talked to me, and they felt great pressure due to various social opinions. Later, I also made a very straightforward statement: we would not merge for free; we would simply spend money to merge according to the asset value. In the end, we spent more than 80 million yuan to fully take over all assets and liabilities of the Hangzhou Canned Food Factory, and also took over all active and retired employees. Although the cost was relatively large, only three months later, we turned the Hangzhou Canned Food Factory from loss to profit. That year, it had a profit of 22 million yuan, and the next year it reached more than 70 million. It can be said that the merger with the Hangzhou Canned Food Factory was a key node for Wahaha to achieve scale operation. CE: After 1997, Wahaha developed steadily, but the "Danone-Wahaha dispute" was sensational at the time. In hindsight, was the "Danone-Wahaha dispute" a relatively big lesson for you? Did it make you understand the rules of the capital game? Zong Qinghou: Wahaha initially hoped to develop faster and better, so it allowed Danone to invest. At the beginning of the cooperation, we mainly insisted on four points in negotiations: first, the right to operate must belong to us; second, we must use the "Wahaha" trademark itself; third, Danone could not arbitrarily fire employees; fourth, we must bear the social responsibility for retired employees. At that time, we really did not understand capital operations. Now it seems we did suffer a loss. First, our joint venture with Danone calculated Wahaha's net assets, while general corporate joint ventures calculate price-earnings ratio, so Danone got a bargain. Also, at that time, Hong Kong's Peregrine company introduced Danone to discuss cooperation, so we always thought it was a three-party joint venture. The two sides sometimes had different opinions, so at that time it was agreed that Danone and Peregrine together held 51% of the shares, and Wahaha held 49%. I thought we were still the largest shareholder relatively, so I agreed. But it was only when signing the contract that we learned that Peregrine and Danone had established an investment company in Singapore, and the investment company invested in the Wahaha joint venture. Not long after, due to the Asian financial crisis, Peregrine went bankrupt and sold its shares in the Singapore company to Danone, making Danone the largest shareholder of the Wahaha joint venture. Because benefits grew year by year, our relationship with Danone was good at first. But because Danone did not understand the Chinese market and was not at ease letting us operate freely, it set many obstacles. It did not agree to our requests to set up new factories to increase capacity, but instead asked us to find OEM factories. On the other hand, it also invested heavily in and even took controlling stakes in Wahaha's main competitors such as Robust and Bright. Since we could not find OEM factories that met our output and quality requirements, to protect the market, our cadres and employees raised funds to build a batch of factories to process products for the joint venture and also share sales expenses. These were all done openly under the noses of the financial controllers sent by Danone, and the accounting firm designated by Danone clearly listed these non-joint venture companies in the audit memorandums given to Danone every year. Danone never raised any objections. But later, because companies such as Robust, in which Danone invested, suffered losses year after year, to improve its own performance, Danone's Asia-Pacific management began to covet Wahaha's non-joint venture companies, saying that our non-joint venture companies infringed on the interests of the joint venture and demanding to acquire these non-joint venture companies at low prices. We firmly refused, of course. Danone finally initiated arbitration and litigation against us in many countries around the world. After receiving the litigation materials, we were initially nervous because we had never fought an international lawsuit. Later, I thought, with reason, you can travel the world; there is nothing to fear. The most important thing was to clarify two issues: who was engaging in horizontal competition? Who was abusing the trademark? I believe we did nothing wrong on these two points. It was precisely because we clarified these two issues that Wahaha won both domestic and foreign lawsuits. Through this incident, I also understood two truths. First, corporate cooperation should still be complementary and honest. Second, we must also dare to confront head-on. In the past, Chinese enterprises were very afraid of fighting lawsuits abroad. Our language was not fluent, and we were not familiar with the law, but I believe that if we have reason, we should still appeal. CE: The joint sales system has always been considered by Wahaha as its core competitiveness. How did Wahaha establish the joint sales system and the offline supply network? Zong Qinghou: Wahaha initially used the national sales network: first-level stations, second-level stations, county companies, fourth-level wholesale, and then to terminal retail. Later, when the nutritional liquid was launched, we began to use three channels: the sugar, tobacco, and alcohol company; the non-staple food company; and the pharmaceutical and health products company. The sugar and alcohol company controlled urban retail stores, the non-staple food company controlled rural supply and marketing cooperatives, and the pharmaceutical and health products company could sell health products. After the reform and opening up, a large number of agricultural wholesale markets appeared, and the state-owned network was impacted. We then entered the agricultural wholesale markets. Later, as markets increased, competition led to price wars, and Wahaha's sales were affected. We then began to build our own distributor network. It can be said that Wahaha has continuously changed its marketing model with market changes. In 1994, most business forms in China were to deliver goods first and settle accounts later. This situation caused many problems such as bad debts and triangular debts. We were determined to change this situation and, under pressure, began to implement the joint sales system, requiring distributors to "pay on delivery." Wahaha stipulated that at the end of each year, first-level distributors must deposit 10% of the year's sales amount as a deposit into Wahaha's account at one time. Wahaha pays interest higher than bank deposit rates for this. During the operation process, distributors must settle payment before purchasing goods each month. In addition, Wahaha also formulated a strict price difference system. Distributors corresponding to each provincial branch are uniformly divided into first-level wholesale, second-level wholesale, and third-level wholesale. Each level must strictly implement the corresponding sales price and strictly limit sales to their own sales area. It is strictly forbidden to sell Wahaha products to markets outside the area. Wahaha's products are very popular and funds are abundant. We united thousands of distributors in the market, turning individual fighting into joint competition, and our competitiveness was a notch higher than others. CE: The foundation of the joint sales system is blockbuster products and strong brand value. So is it only by working hard on brand and products that the long-term balance of the joint sales system and Wahaha can be maintained? Zong Qinghou: Yes, the most important thing about the joint sales system is maintaining balance. Wahaha is Party A, and distributors are Party B. Only with blockbuster products and strong brand power can the relationship between the two sides be maintained. This requires Wahaha to have more best-selling explosive products. CE: Data shows that Wahaha created a business achievement of 78.3 billion yuan in 2013, but by 2017, Wahaha's revenue was only 46.4 billion yuan. Among them, Nutri-Express had the largest sales decline. What do you think caused this? Zong Qinghou: It was mainly the damage caused by online rumors. The melamine incident affected the entire food and beverage industry. In fact, our decline in 2014 was not large, but starting from 2015, rumors attacking Nutri-Express and Wow Wow appeared online, saying that consumers would get leukemia, osteomalacia, and botulinum toxin. At that time, internet management was also chaotic, and rumors could not be effectively stopped. In those years, our annual sales decline significantly increased. We started from the district public security bureau, reported to the city and provincial public security bureaus, and finally to the Ministry of Public Security, but no case was filed. Who created the rumor has not been found out to this day, but it really caused a significant decrease in the sales of Wahaha Nutri-Express and Wow Wow. However, since 2018, Wahaha's overall sales have resumed growth, but the growth rate is not fast enough. I hope that in 2019, Wahaha can return to the sales level of 2012, returning to 70 billion yuan in sales. CE: It is said that Wahaha's channel network was measured by your feet, and Wahaha is also a marketing-driven enterprise. In your view, what is the essence of marketing? Zong Qinghou: The essence of marketing is to solve the problem of "who buys and who sells." "Who buys" means understanding the real needs of consumers. For example, children's nutritional liquid was to solve the problem of children not wanting to eat, and Nutri-Express was to solve the problem of young people not eating breakfast. "Who sells" refers to how to quickly push products through sales channels to consumers after development, and how to do publicity in the process. In the past two years, the marketing environment has also changed. Now consumers do not watch TV or read newspapers, and the effect of traditional media publicity is much worse than before. We have turned to doing more outdoor advertising at high-speed rail stations and airports, which can be seen everywhere. CE: We have also noticed that Wahaha is doing social retail. How do you understand this model? Zong Qinghou: I hope Wahaha can unite with physical economy enterprises to build a platform. Consumers can scan a QR code to become our members, purchase our products at preferential prices, and also have them delivered to their homes. I hope to bring real benefits to consumers, so that the physical economy will not be disrupted and will still have its own channels and sales. Of course, social retail is just a new model, and we are still in the trial stage. CE: Now e-commerce giants such as Alibaba and JD.com are turning to offline, and New Path and Retail Link are even extending their tentacles to the rural market. These areas were originally Wahaha's channel advantages accumulated over many years. How do you view the head-on competition with the internet? Zong Qinghou: I am not opposed to the internet. E-commerce is a new sales model that can bring more convenience to consumers, especially in the rural market. E-commerce can help farmers sell products online. These are all good. In fact, what I have always opposed is the internet's large-scale burning of money to buy traffic, selling the hard-won achievements of the physical economy at low prices, disrupting the market prices of the physical economy. In fact, the physical economy has been relatively difficult in the past two years, but what enterprises need to face is nothing more than how to upgrade products to meet the increasing demands of consumers. Traditional physical enterprises are different from internet enterprises. Traditional enterprises solve people's basic needs of clothing, food, housing, and transportation, and truly create wealth. If everyone goes into the business of "making money from money," I think society will not be able to survive in the end. CE: Hangzhou has produced three Chinese richest people. Besides you, there are Alibaba's Jack Ma and NetEase's Ding Lei. Do you have any interactions with them? Zong Qinghou: Among Zhejiang businessmen, many outstanding entrepreneurs have emerged, making good achievements in their respective fields. This is something we are very proud of as Zhejiang businessmen. As for the title of "richest person," I think it is more of a symbol, a representative of the Zhejiang business community. Mr. Ma and Mr. Ding and I, because our industries are quite different, and we are all usually very busy, and I am not very fond of socializing, so we indeed do not have much interaction. CE: You previously insisted that Wahaha would not go public. Why did you mention the listing plan recently? Zong Qinghou: In fact, we do not have a clear listing plan. Some time ago, a reporter asked me why I did not go public. I replied that if necessary, if there is a large project that needs investment, I would consider listing. In the process of enterprise development, there will inevitably be choices. I think when doing business, you should not spread the tentacles too wide. Regarding listing, we are not short of money now. If there is a project that requires large capital investment in the future, we can consider listing. But once listed, we must be responsible to shareholders. If we only raise money without increasing corporate efficiency, and shareholders cannot get dividends, that would be too bad. Simply raising funds and packaging for listing is definitely not acceptable; that would be cheating the people's money. CE: Did Wahaha's Food City attempt to go public in 1997? Zong Qinghou: At that time, the country had just started the stock market. We were a pilot unit in Zhejiang Province, so we publicly raised funds to establish the Food City. But public fundraising requires approval from the China Securities Regulatory Commission. In fact, at that time, even the government did not understand the concept of listing. The CSRC finally rejected the listing application of this project, and the Food City did not successfully go public. CE: Wahaha has always maintained a large amount of capital surplus, insisting on not borrowing, with no bank loans and no bonds issued. For so many years, it has relied entirely on its own funds for endogenous growth. This is very surprising. Why do you do this? Zong Qinghou: Our enterprise has had good benefits for so many years, with abundant primitive accumulation. We have always followed the business philosophy of "small steps, fast running," not doing things beyond our capabilities, and not blindly expanding. Therefore, Wahaha is not short of money, and if not short of money, there is naturally no need to borrow. Before products are sold, Wahaha collects the money first. Our packaging material costs in 2018 were settled at the end of each month, directly paid with goods payments, so we do not need to occupy too much cash. CE: What is your future plan for Wahaha? What major projects will be implemented? Zong Qinghou: Wahaha will insist on developing its main business, and the product concept will also shift from "safety" to "health." Now many young people have sub-health problems, and diseases of affluence are increasing. We hope to develop some health products through the concept of traditional Chinese medicine diet therapy and bioengineering technology. Wahaha has currently developed solid probiotic drinks for adults, meal replacement powder, goat milk powder, etc. At the same time, Wahaha is also looking for opportunities to enter high-tech industries, but we are very cautious and must fully consider not to drag down the main business. CE: Wahaha is already 31 years old. Have you encountered any problems in corporate governance? What is your management philosophy? Zong Qinghou: They all say I am quite autocratic. When the Hangzhou Canned Food Factory was merged, it also had factions and systems, but when it came to me, they all disappeared. In fact, Chinese people are relatively difficult to manage. Mao Zedong's management style was "centralize major powers, decentralize minor powers." Wahaha also has a highly centralized management model. Wahaha has more than 80 production bases with independent accounting, but the entire sales, supply chain, and finance are centralized. Subsidiaries just need to manage production well and ensure product quality. This centralized system has two advantages: first, your strategies can be implemented efficiently; second, unified thinking. But leaders still need to be open-minded and let everyone express innovative ideas. Chinese people say "stand firm at thirty," but Wahaha now suffers from a serious "big company disease." We are also carrying out process reform, implementing post responsibility systems, and hierarchical authorization. In recent years, Wahaha has also been cultivating middle management. In the past, I managed too meticulously, causing employees to rely on me. Now I am gradually changing my management style. CE: There are generally two models for family business succession: the heir is both the largest shareholder and the company manager, or the company is managed by professional managers, and the heir is only the representative of the largest shareholder. Which one will Wahaha be in the future? Zong Qinghou: In China, the professional manager class has not yet formed, but it will get better in the future. The second generation of private enterprises are not necessarily all successors. Many of them are returnees and are unwilling to take over. My daughter currently manages one-third of Wahaha's enterprises, but she still likes to try new things. She now also serves as the head of our Brand and Public Relations Department, which is also responsible for product packaging and design. At the same time, KellyOne juice has been ongoing. She has her own company, and I support her to try and explore, and I will not interfere. From October 23 to 24, during the Autumn Sugar and Wine Fair, the "2018 FMCG City Distribution Logistics Conference" hosted by New Distribution will be held. At that time, we will invite industry bigwigs, FMCG warehousing and distribution experts, 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, around the theme of "New Distribution, New City Distribution." We hope to bring you different inspiration and thinking! The specific meeting topics are as follows: List of participating companies In no particular order Hunan Zonglan Diandan Network Technology Co., Ltd. Jingbang (Wuhan) International Freight Forwarding Co., Ltd. Mengniu Dairy Qinghai Hanxiang E-commerce Co., Ltd. Unilever Service (Hefei) Co., Ltd. Shanghai Branch Huicong Hunan Xuanang Food Co., Ltd. Guangzhou Tongdaoren Information Technology Co., Ltd. Qingdao 888 Trading Co., Ltd. Uni-President Enterprises (China) Investment Co., Ltd. Hunan Province Zhongxiang Gongpei Logistics Co., Ltd. Shenglong Ingredients COSCO Shipping Logistics Warehousing and Distribution Co., Ltd. Guangxi Yongpai Liquor Co., Ltd. Shangqiu Kangrong Trading Co., Ltd. Jinan Dingzhong Economic and Trade Co., Ltd. Liaoning Bimai Agricultural Technology Co., Ltd. Kunming Xiongjia Trading Co., Ltd. Shaanxi Houheng Trading Co., Ltd. Guangzhou Dingwo Enterprise Information Consulting Co., Ltd. Shaodong Jiajiale Commercial Firm Boda Trading Industrial Bank Changsha Branch Wuhan Muchen Convenience Store Chain Co., Ltd. Fujian Fuxing Yuncang Logistics Co., Ltd. Guizhou Yilimi E-commerce Co., Ltd. Jiangxi Xiao Laoer E-commerce Co., Ltd. Jinshankoufu Shanxi Taihang Yuanjing Supply Chain Management Co., Ltd. Shanxi Dezhun Supply Chain Management Co., Ltd. Shaoyang Tongdeli Trading (Xiangbang Logistics) Huanfu Tongda Express City Distribution Beijing Xinjingxiang Food Co., Ltd. Wuhan Huizhong Tianhong Liquor Co., Ltd. Changsha Paide Biotechnology Co., Ltd. Chaoan Tuqiang Guizhou Yihe Bopin Supply Chain Management Co., Ltd. Jiangxi Kang'en Industrial Development Co., Ltd. Xiangtan County Yisuhe Town Yuhua Paper Store Luoyang Yuanlang Trading Co., Ltd. Tongchuan Yaozhou District Huayuan Supermarket Co., Ltd. Hunan Yongfu Jiujiu Trading Co., Ltd. Zhejiang Chengchengtong Logistics Co., Ltd. Chongqing Kaiguo Materials Trading Co., Ltd. Beijing Xianmaixianmai Data Technology Co., Ltd. Hanchuan Qixing Trading Co., Ltd. Tongxin Jiuzhiru Trading Co., Ltd. Guizhou Meiguo Guoguo Network Technology Co., Ltd. ...... Representatives of distributor transformation (draft) In no particular order Jiangsu Huashang City Distribution Network Co., Ltd. Chairman Rong Jun Hubei Yijiaren Logistics Co., Ltd. Chairman Wang Bo Sichuan Chengdu Xingrenxing Trading Co., Ltd. General Manager Jiang Shuming Shandong Yunbang Warehousing and Logistics Co., Ltd. Chairman Liu Jichen Chongqing Lingyu Consumer Goods Supply Chain Management Co., Ltd. Chairman Tu Mingyu Guangzhou Zhongshan Wanrong Marketing Co., Ltd. Chairman Yang Su Sichuan Bajie Supply Chain Management Co., Ltd. Chairman Yuan Xia Hubei Pengdun Meiyitian Supply Chain Management Co., Ltd. Co-founder Li Qiangyun Henan Xuchang Jiulegou E-commerce Co., Ltd. Chairman Zhang Jianyong Hebei Changyi Logistics Co., Ltd. Founder Ma Haichao Hebei (Chengde) Wulian Yuncang Co., Ltd. General Manager Meng Yucun Xinjiang Urumqi Su'an Jinchi Logistics Co., Ltd. Chairman Zhang Xun Jilin Sansheng Lianguo Chairman Zhang Hailing Hebei Dunjie Supply Chain Management Co., Ltd. Founder Qiang Huitao Hunan Damei Supply Chain Management Co., Ltd. General Manager Liao Lei ...... -END-