The Chinese beverage company’s expansion is no laughing matterIf you’ve traveled in China, chances are you drank at least one bottle of Wahaha brand water, or perhaps the company’s iced tea, fruit drinks, or its Future Cola. Once you returned to the United States, you may even have come across Future Cola in New York or Los Angeles, because the company that first set up shop in an elementary school in Hangzhou, Zhejiang, is going global.

From Hangzhou to huge

The Hangzhou Wahaha Group Co., Ltd., China’s leading domestic beverage producer, didn’t achieve success overnight. The company’s predecessor, the Hangzhou Shangcheng District School-Run Enterprise Sales Department, funded its start-up operations in 1987 with a government loan. Zong Qinghou, the company’s founder, and two retired schoolteachers initially sold milk products and popsicles out of a school store, but to benefit the students’ health the group soon began producing and selling nutritional drinks. The company’s success selling nutrition products in school shops led to its first big expansion: with Hangzhou government support, the company acquired a large, 30-year-old state-owned enterprise, the Hangzhou Canned Food Product Co., in 1991. The company then changed its name to the Hangzhou Wahaha Group Co. (The word “Wahaha” is meant to mimic the sound of a baby laughing and is taken from a children’s folk song.)

Wahaha’s second large-scale expansion occurred in 1994 when the company merged with three insolvent companies in Fuling, Sichuan, to set up its first factory in Chongqing. Establishing a factory in Chongqing helped the company in two ways. The location provided Wahaha with a manufacturing base in western China, enabling the company to reduce distribution costs. And the merger occurred when the central government was providing coastal companies incentives to invest in the west.

In 1996, Wahaha joined with Groupe Danone SA to form five new subsidiaries, of which Danone owns 51 percent and Wahaha the remainder; Danone now owns 30 percent of the whole company. With Danone’s assistance, the company was able to invest in advanced production lines and improve efficiency. Thanks to the mergers and joint ventures, Wahaha’s production doubled from 1996 to 1997.

Today, Wahaha’s corporate headquarters are still in Hangzhou, and the company has roughly 70 subsidiary companies and 40 manufacturing bases scattered throughout China. Wahaha employs about 10,000 staff and its sales networks cover every county in China. One-third of the company’s production occurs at its largest facility—in Hangzhou’s Xiasha Economic and Technological Development Zone.

Despite production difficulties because of severe acute respiratory syndrome, energy supply shortages, and raw material price increases in 2003, the company surpassed its sales target of ¥10 billion last year ($1.21 billion). In 2003 its total beverage production reached 3.7 million tons, up 14.6 percent over 2002. Wahaha accounted for 15.6 percent of China’s total beverage production. Last year marked the company’s sixth consecutive year as China’s number one domestic, nonalcoholic beverage producer in production volume, assets, sales revenue, tax, and profit. Its 2003 income from all products totaled ¥10.23 billion ($1.24 billion), of which ¥8.43 billion ($1.02 billion) was sales revenue and ¥1.37 billion was profit ($165.46 million). The company’s assets total ¥4.4 billion ($531.4 million).

Although the state owns a majority share, the company is also foreign- and group-invested. Perhaps because it is often said that the state holds a “passive stake” in Wahaha and because Zong—the company’s founder, chair, and general manager, who was sent to labor in the countryside for years during the Cultural Revolution and thus received only a junior-high-school education—has played such a large role in the company’s development, Wahaha is often regarded as a private enterprise.

Wahaha is now carefully expanding beyond the mainland. It works with a trading and distribution company in Taiwan and in July completed a factory for its cola products in Indonesia. Wahaha products are on sale in France, Germany, Hong Kong, Italy, Japan, Malaysia, the Netherlands, Spain, Taiwan, Thailand, and the United States. But Shan Qining, Wahaha’s Foreign Liaison Office vice director notes, “The hardest part of going global is handling new markets. For example, it would be easier for Wahaha to sell products in Southeast Asia than in the West. The move is less risky because many Chinese are already in Southeast Asia. To target US customers, we will likely need to alter products to suit their tastes.”

From milk to Future Cola

Wahaha currently produces 30 varieties of milk and yogurt drink, purified and mineral water, carbonated soft drink, fruit and vegetable juice, sports drink, and tea, as well as congee (rice porridge), canned food, and health products, such as children’s vitamins. In 2002, the company further diversified into children’s clothing. It may soon develop personal care products, including shampoo and toothpaste.

According to Shan, the company’s hottest-selling products in China are bottled water and vitamin-enhanced milk drinks (the state has approved the sale of Wahaha’s vitamin-enhanced milk in schools nationwide). He elaborated, “Wahaha’s milk products and bottled water are strong sellers—our main challenge is to increase our cola sales. Chinese consumers are gradually accepting colas, but which cola brand will they select?”

Wahaha started making its own cola in 1998. Feichang Kele (translated as Extreme Cola or, more commonly, Future Cola, for its sound) tastes like a cross between Coca-Cola and Pepsi, but bears a red and white label that strongly resembles the Coca-Cola Co.’s world-famous one.

After selling milk products successfully in the United States in 2003, Wahaha, inspired by a US-based request, decided to try its luck in the US cola market this spring. In late April, Wahaha shipped 170,400 bottles of Future Cola to its US distributor, the Manpolo International Trading Corp., a small import-export company located in New York’s Chinatown. In June, Manpolo distributed the entire first Future Cola shipment to the small Chinese-American grocery store chain Hong Kong Supermarket, Inc., which has stores in New York and Los Angeles—the first time a mainland Chinese cola had hit US stores. Wahaha’s goal is to have Future Cola sit on the same shelves as Coca-Cola and Pepsi and sell for roughly the same price. But given its limited initial distribution, it looks like American Future Cola fans will have to wait a while before they will find it stocked at local convenience stores.

Competition

Wahaha considers its top cola competitors the Coca-Cola Co. and PepsiCo, Inc. followed by the Taiwan-founded companies Uni-President Enterprise Corp. and Tingyi (Cayman Islands) Holding Corp. Coca-Cola dominates the mainland’s soda market. According to PRC government statistics, it held a 24 percent market share in 2003 compared to Future Cola’s 7 percent share.

According to Shan, “Seven years ago, when Wahaha was preparing to launch Future Cola, people laughed because previously several Chinese companies had tried to sell cola, failed, and either went bankrupt or were bought out by Coca-Cola or PepsiCo.” But in 2003, he claims, Wahaha’s total beverage production [3.75 million tons] exceeded that of Coca-Cola in China.

Wahaha does not worry too much about domestic competition. It has had to battle imitations, however. Shan explained the company’s strategy. “The best way to fight counterfeit products is to lower your own prices. This pricing strategy will make fake-product makers drop out. Wahaha also reports intellectual property problems to local police.” According to Shan, Wahaha is able to keep costs low because the company produces its own bottles and caps.

Marketing a “patriotic” brand

Wahaha has employed three main marketing techniques. First, its advertisements, especially for Future Cola, promote its products as patriotic brands. Advertisements promote Future Cola as China’s own cola (never mind the foreign investment) and encourage consumers to support the nation, by selecting Wahaha over foreign competitors.

Second, Wahaha carefully chooses which regions it will target for each product. Shan explained, “Some products, such as our water, sell better in the city and some products, like our cola, do better in the countryside. Consumers in all areas will choose Wahaha water, but consumers in large cities are unlikely to choose Future Cola…. Wahaha’s focus on rural areas for Future Cola does not mean it has given up on cities—but city grocery stores have very high entry fees. For practical reasons, we wanted to introduce the product with lower costs.”

Because Coca-Cola and Pepsi were already strong in China’s cities, where fashion-conscious consumers have more to spend on food and drink, Wahaha launched Future Cola in the countryside in 1998. The relatively small price difference between Future Cola and the US brands makes a difference to many rural consumers (in China, Future Cola sells for about ¥2 [$0.24] per bottle—about 6 cents less than its US rivals), which is one reason that Future Cola has sold well in the countryside.

Third, the company frequently uses celebrities to promote its products. Hong Kong actor and comedian Stephen Chow promoted a series of Wahaha tea drinks, Chinese-American pop singer Wang Lihong promoted bottled water, and Taiwan’s Yu Chengqing (Harlem Yu) helped launch Future Cola. Wahaha runs frequent TV commercials that, according to Shan, mainly run on China Central Television Channel 1 around news time.

Distribution

Wahaha’s distributors in China are responsible for capital, storage, and delivery—but Wahaha dealers help them with management and marketing. The company maintains two grades of distributors: more than 1,500 first-level dealers that need to meet distribution targets and manage large networks and capital; and 12,000 second-level dealers that deal at smaller levels. The company has 35 provincial sales offices, 2,500 sales team employees, and more than 2 million sales outlets across China.

A bubbly future?

When asked about Wahaha’s future, Shan replied, “Our general manager doesn’t like five-year plans because the market changes so quickly. But the company hopes to increase this year’s sales revenue by 10 percent over last year.”

Though it seems certain that Wahaha will continue to grow in China, it will likely take a while for Wahaha products to develop a stronghold overseas. And if the company truly wants Future Cola to compete in the US cola wars, it may wish to adjust its US market-entry strategy. It is logical to launch Future Cola in Chinese-American grocery stores. Yet without expanding its distribution, the cola will remain unknown to many American consumers. Why not repackage the product as an alternative, “Indie” cola that the nontraditional-cola drinking crowd will enjoy? That, or price Future Cola below major US competitors. Or, because extreme sports are ever-more popular for young American athletes and fans, Feichang Kele’s translation “Extreme Cola” could entice a new generation of American youth looking for the latest trendy soft drink.

Paula M. Miller is assistant editor of CBR.

 

Posted by Paula M. Miller