Haisheng Juice (HK:359)

Wahaha
The Chinese beverage company's expansion is no laughing matter
by Paula M. Miller


Wahaha's exhibition hall at its corporate headquarters in Hangzhou, Zhejiang.
Photographs: Paula M. MillerIf 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.)

The company's founder and two retired schoolteachers initially sold milk products and popsicles out of a school store.
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.


Wahaha's Hangzhou Xiasha Economic and Technological Development Zone Facility.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.
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.

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