Wahaha, once a miracle in the beverage industry thanks to its 'joint distribution model,' now faces a bleak future as its diversification efforts have tarnished its image. Founder Zong Qinghou must confront the challenge of avoiding becoming a 'peculiarity' in an era of transformation.
By Liu Yanling, Liu Shuyan | Editor: Fu Yingshuang
Countless traditional enterprises are experiencing a severe sense of crisis in this era. The disruptive forces of the internet and new business models compel them to find ways to keep up with trends. However, in the process of transformation, setbacks are inevitable. Today, the Wahaha Group is experiencing the pain of transformation. Wahaha's founder, Zong Qinghou, and his company were once a miracle. In 1998, Wahaha leaped to become the leader in the beverage industry, and for the following ten consecutive years, it held the top position among China's beverage enterprises in various indicators. In 2010, Zong Qinghou topped both the Hurun Rich List and the Forbes Rich List, becoming a legend in Chinese business. In 2010, the year he became the double champion of wealth, Zong Qinghou set a military pledge to 'create another Wahaha' and set a revenue target of 100 billion yuan for 2014. Contrary to expectations, 2014 turned out to be the worst year for Wahaha's overall sales, with a decline of about 7%. In 2016, two lists pushed Wahaha into the spotlight. In October, the Hurun Research Institute released the 2016 Hurun Rich List, where the Zong Qinghou family ranked fifth with wealth of 112 billion yuan, a decrease of 23 billion from the previous year's 135 billion. Earlier, in August, the All-China Federation of Industry and Commerce released the '2016 China Top 500 Private Enterprises' report, stating that Wahaha's 2015 revenue was 49.4 billion yuan, a decrease of 22.6 billion year-on-year, marking a new low in years. Zong Qinghou is drifting further from his dream of 100 billion in revenue. What is the root cause? To realize his '100 billion dream,' Zong Qinghou made various diversification attempts. However, this commercial empire built by 'selling water' is now tarnished by its 'offshoot' diversified businesses. Has his sense of the market gradually failed? Is he 'too old'? Or is he at a loss in the face of the disruptive forces of the internet and new business models? This is also the common crisis faced by countless traditional enterprises in this era. Can Zong Qinghou, once described by the media as the entrepreneur 'closest to the market' and the 'dictator' who single-handedly built the Wahaha empire, continue his business legend? ****************The God of Management in the Era of Shortage In 1987, after eight years in sales, Zong Qinghou, at the age of 42, finally took his entrepreneurial step. The school-run enterprise distribution department in Shangcheng District, Hangzhou, was seeking to contract out, and Zong Qinghou saw this as possibly the most important opportunity of his life. At that time, the small distribution department with only 140,000 yuan in startup capital first sold textbooks and popsicles, then became an agent for an oral liquid product from Hangzhou Baoling Co., Ltd. The contractor had to bear an annual profit target of 40,000 yuan. Zong Qinghou returned to his old trade: sales. Eight years of sales experience had honed his skills, and his agency business went surprisingly smoothly. In the first year, Zong Qinghou made a small profit. Just as he was about to expand, he discovered a fatal flaw in the product: it contained hormones, which was deceiving consumers. Zong Qinghou, already past the age of confusion, was clear-headed: only by correcting mistakes could there be a future. He firmly stopped the original business. Operating a product with defects is unsustainable. This was a profound lesson for the newly entrepreneurial Zong Qinghou and injected a gene into Wahaha's future development: product quality must be flawless! 'Transformation, only transformation can ensure sustainable and long-term operation.' But how to transform? In his previous business, Zong Qinghou noticed a phenomenon: malnourished children often had poor appetites. In an era when only children were the apple of their parents' eyes, developing an oral liquid that could improve children's appetite would help anxious parents solve the problem of picky eating, and would surely have a broad market. Zong Qinghou saw the opportunity and seized it. In 1988, Zong Qinghou approached Zhu Shoumin, head of the Nutrition Department at Zhejiang Medical University, the only institution in the country with a nutrition major at the time, to help develop an oral liquid to correct children's anorexia. It was named Wahaha Children's Nutritional Liquid and successfully launched that year. Wahaha, the golden signboard that would bring Zong Qinghou immense wealth, started from such a simple and beautiful wish. The Wahaha Children's Nutritional Liquid received an excellent market response. Coupled with Zong Qinghou's skill in advertising, within just two years, the slogan 'Drink Wahaha, and meals are delicious' spread across the country, and the company's scale quickly exceeded 100 million yuan. In the early days of reform and opening up, this speed and performance were astonishing. The success of Wahaha Children's Nutritional Liquid made the local government see hope for rescuing struggling enterprises. The so-called 'small fish swallowing big fish' merger story was essentially Zong Qinghou, at the government's request, injecting new vitality into a struggling enterprise with over 2,000 employees. In 1991, with the government's facilitation, Zong Qinghou, with remarkable courage, used his small factory of over 100 people to merge with the Hangzhou Canned Food Factory, which had over 2,000 employees (including over 700 retired workers) and assumed nearly 70 million yuan in debt. With the large factory acquired, relying solely on the children's nutritional liquid was not enough to keep it running. To provide work for the workers and fully release production capacity, Zong Qinghou decided to develop new products: he developed eight-treasure porridge, allowing customers to conveniently enjoy traditional cuisine; and added fruit juice to bland milk to create a flavored milk that children would love—fruit milk. In particular, Wahaha Fruit Milk was welcomed by children as soon as it hit the market, and Zong Qinghou thereby stepped into the beverage industry. Upon entering the beverage industry, Zong Qinghou unexpectedly discovered a new world with unlimited space and promising prospects. So he devoted himself wholeheartedly to the beverage industry. Zong Qinghou proposed implementing the 'Three Full Strategies': 'fully develop the market, fully develop product varieties, and fully activate the market.' Since then, Zong Qinghou has introduced new products every year, including purified water, Future Cola, Nutri-Express, Youyou Milk Tea, Qili, and oxygen-rich water. Hard work and dedication yielded fruitful results—Wahaha 'advanced step by step' in the beverage industry, climbing from a few billion to over ten billion, 10 billion, 20 billion, 80 billion in performance... In 1998, Wahaha's beverage production and sales surpassed all competitors, ranking first in the industry, a 'hegemony' it has maintained to this day. ****************Failed Attempts at Diversification To achieve the 100 billion target, 'diversification' became another label for Zong Qinghou after 'beverage king.' In Zong Qinghou's view, the beverage industry had become highly concentrated after years of development, with the top five companies holding 60% of the market share. It was difficult for companies to achieve rapid growth, so diversification was the best path. In fact, as early as 2002, Wahaha entered the children's clothing industry, taking the first step toward cross-industry and diversified development. In 2010, Wahaha partnered with Royal FrieslandCampina to launch the high-end infant formula Edison; in November 2012, Wahaha leased 3.05 million square meters of property to open the WAO Plaza; and in November 2013, it invested 15 billion yuan to enter the liquor industry. Additionally, Wahaha tested the waters in children's clothing, dairy, and liquor, and invested heavily in commercial retail. Zong Qinghou's idea was to leverage Wahaha's brand and accumulated channel advantages to graft onto new industries, quickly achieving synergy and completing the diversification layout and breakthrough. Wahaha undoubtedly had its reasons for its love and persistence in retail. As the main business, beverages accounted for over 98% of the group's turnover. However, due to market competition, profit margins in the beverage industry were thinning, and last year Wahaha even experienced negative revenue growth. In light of this, Wahaha hoped to use retail to open new profit channels, diversifying business while spreading operational risk. But reality often differs from ideals. The WAO Plaza, which had been open for over eight months and mainly operated 'European boutique high-end department store,' not only lacked foot traffic but also had 'miserable' operations. After 2012, Wahaha's sales revenue declined, and its diversification pace accelerated sharply. However, many industry insiders said that from the current situation, Wahaha's diversification had not helped its main business but might instead become a drag. Behind the 'failure' label of diversification, Zong Qinghou often mentions: 'Wahaha has no bank loans and has over ten billion yuan in deposits.' Every time he says this, Zong Qinghou feels 'proud,' and this is perhaps his confidence to keep trying and failing in diversification. Zong Qinghou said: 'We have strong economic strength and abundant capital. It doesn't matter if we lose a bit. So if there's a problem, we stop and continue exploring.' Therefore, in practice, Wahaha's diversification is more of a profit-driven approach than a strategic one. Zong Qinghou himself has said that he never made strategies because he believes that three-to-five-year strategies are meaningless. This 'Zong-style logic' can be seen in the 'aftermath' of the WAO Plaza. There are reports that Wahaha plans to transform the WAO Plaza into an education center. Zong Qinghou may have seen the recent boom in the education market. Luo Jianxing, who served as Zong Qinghou's personal marketing secretary for four years and is now an associate professor of management at Zhejiang University of Media and Communications, once pointed out that Wahaha's strong product market share has been declining, and the probability of new product success is also decreasing. 'There are both chance and necessity here. If diversification had not diverted Zong Qinghou and management's time and energy, Wahaha's beverage main business would certainly have done better in recent years.' In the eyes of outsiders, Zong Qinghou is just an opportunist, and Wahaha has no diversification strategy; it's all whimsical. ****************The Dilemma of Transformation Zong Qinghou is well aware of his company's problems. At the 2015 annual meeting of the China Beverage Industry Association, Zong Qinghou said: 'I often tell R&D personnel that an important reason for Wahaha's past glory is continuous innovation. But in recent years, our R&D personnel have mainly stayed in the lab, working behind closed doors. The products they launch cannot meet consumer needs and struggle to open the market.' Wahaha's brand and product aging are fatal to the beverage market. From Zong Qinghou to executives and market R&D personnel, everyone is trapped in the dilemma of brand aging, and the 'winter' of the beverage industry adds insult to injury. Indeed, the entire beverage industry faces a severe situation. The beverage industry used to grow at over 20% annually, but in recent years, growth has slowed to single digits: 5.8% last year and only 2.8% in the first half of this year. Although Wahaha remains the industry leader, it has also experienced negative growth. Not only Wahaha is struggling; other beverage companies are also having a tough time. Coca-Cola, Master Kong, and other beverage companies have seen unsatisfactory performance in recent years. Due to changes in consumer habits and lifestyles, they prefer to buy juicers and make juice at home. Some consumers carry tea cups and brew tea instead of beverages, and many have turned to purified water. Along with industry changes, China's demographic dividend has disappeared, the growth of the core beverage consumer group has stagnated, the market cake is no longer expanding, consumption is segmenting, and young people are less sensitive to beverage prices. Wahaha's price weapon, which served it well on the battlefield, is becoming less useful. Additionally, with channel changes and the decline of wholesale markets, Wahaha's once-proud joint distribution system is gradually collapsing. Zong Qinghou also deeply understands that Wahaha's success is inseparable from advertising and marketing. In the early days, Wahaha invested heavily in advertising and created many classic ads. With the continuous development of the market economy and the impact of the internet, the consumption concepts of the main consumer groups, such as the post-80s, post-90s, and even post-00s, have changed. Behind any product, there must be a precise understanding of the core consumer group's needs. For example, Xiao Ming Tong Xue used entertainment marketing to win the favor of young consumers. In the era of media fragmentation, advertising effectiveness is declining. With the decline of television and the rise of the internet and mobile internet, and the booming of Weibo and WeChat, Wahaha's old strategy of blitzing TV ads is outdated. Integrated marketing communications and topical event-driven PR are not Wahaha's strengths. Wahaha has become unable to do advertising, Zong Qinghou said. In recent reports, it is not difficult to see some changes in Zong Qinghou. He admitted that he plans to focus on the food and beverage industry, develop new products around this sector, and that health drinks and health products will be a future direction for Wahaha. In terms of marketing, Wahaha will also make more use of new media marketing methods to attract young consumers. ****************Where to Go from Here? From becoming the double champion of the Hurun and Forbes rich lists in 2010 to again in 2012, Zong Qinghou seems to have reached the peak of his life. Under the tide of the internet economy, the winter of the beverage industry has arrived. Will Zong Qinghou continue his 'Zong-style approach' of no strategy and opportunistic diversification? Where is Wahaha's future? Wahaha faces internal and external troubles, but opportunities remain: compared with companies like Coca-Cola and Master Kong, which have relatively complete strategies and management but stagnant growth, Wahaha has many areas for internal optimization and improvement. Wahaha needs a series of adjustments, including strategic restructuring, brand and category restructuring, channel restructuring, organizational restructuring, human resource restructuring, and corporate culture restructuring. These might help Wahaha emerge from the winter. All these restructurings and changes require the determination of the head of the family, Zong Qinghou, to cut off his own arm, and the courage to deny himself. 'The Long March is like iron, but now we cross from the beginning.' This is the usual oath used in Wahaha meetings. It is time to act and implement. Source: Lishi Business Review (ID: libusiness) -END- The best learning platform for FMCG distributors in China Focusing on providing professional, practical, and applicable tutorials for enterprises and distributors Committed to helping Chinese FMCG distributors grow rapidly The most professional and practical knowledge base in the FMCG industry Reply with the red number below to get corresponding content Reply with number 1 to view the complete knowledge base | 001 Excellent article selection | 002 Distributor market operations | 003 Terminal visit management | 004 Sales supervisor skills | 005 Sales improvement techniques | 006 Channel expansion | 007 Managing distributors | 008 Distributor development | 009 Distributor internal operations management | 010 Team management | 011 Efficient distribution techniques | 012 Sales manager's eighteen skills | 013 KA operation methods and strategies | 014 First lesson for new salespeople | 015 Internet, brands | 016 Distributor B2B transformation | [Long press QR code to follow]