Zong Qinghou built Hangzhou Wahaha Group into a beverage giant, and now he has his sights set on conquering the retail sector

07.03.2013 13:53

Time for a Transformation

Zong Qinghou built Hangzhou Wahaha Group into a beverage giant, and now he has his sights set on conquering the retail sector

By staff reporters Shen Hu, Zhou Qun and intern reporter Wu Yijing

(Hangzhou) — With nearly 70 billion yuan in personal assets, Zong Qinghou, founder and chairman of Hangzhou Wahaha Group Co., is China’s richest man and a talented salesman. Starting his business career by selling cold drinks and ice cream on a bicycle at age 42, Zong created Wahaha in 1989 and made the company the country’s largest beverage producer. Zong is well known for his toughness in business negotiations. In a dispute between Wahaha and its French partner, Groupe Danone, over branding issues several years ago, he mobilized resources in political, social, business and judicial arenas to win the argument. And yet he always says: “My wealth is accumulated by selling bottles of water.”The 68-year-old Zong must now consider how his company will be run after he steps down. “I’m older, after all, and later I won’t be able to do it. Selling is the most difficult to do. The market has changed so much.”

Intensifying competition and bottlenecks in the growth of the beverage industry have forced Wahaha to take steps to diversify. One area of particular interest to Zong is retail. In the next three to five years, Wahaha plans to open 100 shopping centers in smaller cities. The plan, Zong says, is straightforward: “My malls will certainly sell my own things.”

The following are excerpts of a conversation Zong had with Caixin.

Caixin: Has the beverage industry already moved past the high growth phase? Will Wahaha still be able to maintain fast growth momentum in the future?

Zong Qinghou: From January to April of this year, the National Bureau of Statistics reported growth of 20.1 percent, so the beverage industry is maintaining rapid growth. There are many varieties of Chinese beverages, and new products are constantly being developed in response to consumer demand. In the future, we’ll only be able to respond to consumer demand by shifting from quenching thirst to making healthy drinks. There is still great potential for development.

The beverage industry is relatively concentrated, with five companies accounting for about 60 percent of the entire industry. Big companies have carved up the market. It will be difficult for small companies to break through. And the beverage industry has always been highly competitive. State-owned enterprises haven’t participated in or monopolized the industry.

Before, Wahaha could achieve growth of several times. Now the base number is larger, and 20 percent growth is 10 or 20 billion yuan. We don’t want vicious competition, which would have a big impact on the entire industry. Fair and reasonable competition is better.

The next thing is differentiation and constantly developing varieties. This is something others don’t have, and it’s something we do better than others.

But Wahaha’s growth in 2012 wasn’t ideal.

Slightly negative growth was due to counterfeit products. At the time I thought cracking down on counterfeits was too troublesome and supervision was insufficient. We failed to fight against fake products and took a big loss with our trademark rights. Later, we focused on cracking down on counterfeits, and now we’re just starting to knock them out. We’ll gradually get better in 2013.

Foreign-invested companies are very powerful in the beverage industry, but Wahaha has become the market leader in China. Why?

When foreign companies entered the market, they went into big provinces and cities and worked on the end point. They didn’t go deeper.

They also didn’t understand China’s national conditions. In the United States, it’s mainly large supermarkets, which are very simple, unlike in like China where things are complicated. There are all sorts of channels and forms. The situation is very complicated.

We have a better understanding of the Chinese market. At the time, the state had established a good business network, and we initially used its channels. Then, because state-owned companies had bad service and the wholesale market was emerging, we quickly entered the wholesale market. There were too many players in the wholesale market, and after prices were messed up, the products wouldn’t sell, and we exited the wholesale market and looked for large brokers in prefecture-level cities to establish our own sales network. As our production continued to grow, we expanded into county-level cities where we looked for brokers and all of a sudden had a sales network set up.

Wahaha has no bank loans today. Is this a waste of resources?

Why would we borrow when we have money? If we don’t have the ability, faster expansion would be trouble. Second, my financial situation is relatively stable. The economic crisis didn’t affect me.

Right now we’re slowly diversifying, but we don’t do anything we can’t do. We didn’t get into real estate when profits were exploding. If we had done it, maybe we’d have grown huge. Local governments told us to go develop this piece of land or that, but we didn’t do it. We didn’t have the energy. We kept with our main business rather than trying to do a mess of different things. We didn’t do real estate, we didn’t speculate with our capital, so we have had quite stable development.

What plans do you have for the capital markets?

It is unnecessary for us to seek a public listing. We are wholly owned by employees. Listed companies have restrictions … How could I take away the shares of employees? I think it’s good for employees to hold shares so employees are the masters, and their interests are tied to the interests of the company. This also increases incomes. Employees with high incomes are more loyal to the company.

Besides, I’m cooperating with a number of parties right now.

I’m not short of money, but to truly invest in the retail industry and build our own shopping malls will require big investments. At that time we might list to raise some funds so we can develop quicker. Without scale you can’t make money, nor can you keep operating.

Wahaha’s industry diversification is still developing, mainly from three aspects. First is machinery. I have two machine plants, all with first-class equipment. There is also technology, making our molds. We made the key equipment ourselves. We made our robots, but key components are purchased. We can’t get the cost down, so we are researching and developing our own components. Second is biological engineering. Beverages need to be upgraded and updated and go from thirst-quenching to healthy. Third is the retail industry. In addition, we might develop our raw materials bases to ensure the safety of raw materials, which is actually related to our upstream and downstream aspects.

The main focus of our retail development is tier-three and tier-four cities, where we mainly engage in comprehensive shopping centers that combine eating, drinking, and shopping and entertainment.

Wahaha has announced that it will open 100 shopping centers in three to five years. Is this too radical?

Business is interlinked. For me, it’s not unfamiliar. Right now we’re just starting to operate, and the team is a little lacking. We need to train some people. But we still need to move quickly. If we’re too slow we’ll be squeezed out.

The plan for 100 shopping centers isn’t too radical. You can’t do this without scale. If we have a hundred, we can package our factories’ products and there will be no selling costs. We can still make money at a lower price and be more competitive in the market. We can’t do that if we’re small.

In your ideal situation, how much of the group will beverages and retail each account for?

In the future, retail may be the largest segment. But it doesn’t mean Wahaha is changing its core business; it is to ensure the development of the core business. Retail ensures the sales of my products. My malls will certainly sell my own things.

I’m older, after all, and I won’t be able to do this forever. Selling is the most difficult thing to do. The market moves so fast. To make a judgment requires not only accumulated experience, but also talent.

Why should we build our retail business? If I can no longer work, it can ensure the development of the company. We are now asking for our foundation industry to be everlasting. We want to be a hundred-year-old company. It’s now our 26th year, and if I work for another 20 years it will be 40-something years old. While I can work, I need to lay the proper foundation so that later, anyone can take over without issue. Otherwise, right now succession is an issue.

How are you designing your international acquisition strategy?

To acquire large companies and bankrupt companies internationally right now I think would be giving people money that they couldn’t manage well. The last time I went to visit factories in Europe, they only wanted to work with me because the European economy was really bad. I want to find ready-made technologies and products in order to cooperate. I want to acquire small companies with products and technologies and then let them to manage themselves.

Many successful private companies are facing succession problems. How do you view this?

Among the second generation children of private enterprises in China, less than half are capable or willing to take over their parents’ business.

The first generation was starting from scratch, and they were all in relatively low-end industries. The second generation has all had a higher education, and there are some low-end things that they aren’t willing to do. This is normal, and there’s no need to worry. You haven’t seen the potential of young people. They’re cleverer than our generation, and better educated. They just haven’t gone through hard times, and there are fewer opportunities. Market competition is fierce, and being an entrepreneur is harder.

The survival of the fittest is normal in market competition. We’re doing everything we can to make our foundation business everlasting and enduring. I think that there will certainly be more management successions in the future. In developed countries, management is done by managers, and the boss isn’t the true manager. But China is just starting out, and the bosses have all created their own businesses. In the future, it will certainly be managers doing the managing, and they’ll be given stakes in the company just like they are abroad. This is the only way to incentivize them to run the company well. The post-1980s generation does not have the money to be entrepreneurs, but managing is also entrepreneurial. This is definitely the trend.

At this year’s legislative meetings in March you talked about eliminating the differences between state-owned and private companies. Has this been a problem in the development of Wahaha?

There aren’t many state-owned companies in the beverage industry. Because the government isn’t investing, they also don’t care what you do. So relatively speaking we’re well adapted to the market economy.

In other industries, the competition between state-owned and private companies is unfair. They don’t need to turn over profits; they are all theirs to use. Getting bank loans is easier, and interest rates are lower. They are allowed to do some things others aren’t. If the administrative approval system is done right, it will break up monopolies.

You brought up reform of the administrative approval system. Do you have any specific expectations?

Too many things need approval. You need approval to enter an industry and to make a new product on the same product line. You need inspections and professional certification, and all of this costs money. So China’s administrative approval reform is key, and the key is whether it is done right or not.

Change like that happening now is definitely not enough. This year there were orders to abolish or transfer to a lower level some 100 items, but these are all superficial things, so there’s no real meaning to it. If they want to reform, they should just do it. Some people say there are more than 15,000 items requiring approval. I say leave what’s necessary, but the rest can be abolished.