Cola Wars in China

Wahaha, China's largest soft drink producer was founded in 1987, when it began selling bottled soda water, ice cream and stationery to the children in Hangzhou, Zhejiang province. Founder Zong Qinghou and two employees discovered in 1988 that although there were 38 companies producing nutritional drinks nationwide, none was specifically targeted towards children. The company went on to develop a nutritious drink called Wahaha Nutrient Beverage for Children and aggressively pursued the children's market. The product was an instant success; propelling corporate revenues to RMB400 million and profits to RMB 70 million by 1990.In 1991 Zong decided to expand the product range by entering the fruit-flavored milk drinks market because management realized that it was not easy to sustain growth with a single product that had low entry barriers and low technical content. In 1996, amidst concerns over polluted tap water in several provinces, the company launched Wahaha purified water, which rapidly achieved leading market share, contributing to corporate sales revenues of over RMB 1 billion in that year. Despite their excellent performance, management also realized that it needed to scale its operations quickly and obtain world-class production technology if it was to survive competition from both local and multinational competitors. It chose to partner with French food company, Groupe Danone, and the two companies established several production-oriented joint ventures. Danone eventually held a 51 percent share of the joint ventures but Wahaha retained control of management and marketing. In 2002, among Wahaha Group's 42 companies and RMB3.5 billion registered capital, Danone's investment was 32 percent. With the injection of capital from Danone, Wahaha launched Wahaha Future Cola and introduced advanced production lines for bottling water, milk and tea. Prior to the joint venture, the annual increase in revenues and profits was about RMB100 million and RMB10 million, respectively. Since 1996, both revenue and profit had grown even more rapidly.

SITUATION ANALYSIS

The term "soft drinks" refers to beverages that do not contain alcohol, and includes packaged water, carbonated drinks, juices as well as sports and energy drinks. In 2000 global soft drink consumption reached 320.2 billion liters. With the entry of multinationals into the Chinese market in the 1980's, marketing, advanced production technology and cutting edge management expertise were injected into China's soft drink industry, spurring its development. Over the past 20 years, the industry had grown at an annual rate of over 21 percent, and annual output had increased from 0.288 million tons (261 million liters) in 1980 to 16.69 million tons (15.141 billion liters) in 2001. Despite rapid growth China's national per capita consumption was still only 20 percent of the world average and the United States average. Growth potential for all categories remained high, and with China's entry into the World Trade Organization in 2001,its soft drink industry was expected to develop even more rapidly and competition was already intensifying as restriction on foreign investment were lifted. Cola was the most popular drink worldwide thanks Coca Cola and PepsiCo. It accounted for 20 percent of all soft drink sales, and after Coca Cola and PepsiCo entered China in the 1980's they dominated China's carbonated drink market with overall sales of Cola. In 1998 some domestic soft drink producers, attracted by the growing market, launched their own Cola brands. Among them were Wahaha Future Cola from Wahaha, and Fenhuang Cola from Guangzhou Fenhuang food Company. Both advertised heavily on CCTV. Wahaha launched its Wahaha Future Cola brand during the soccer world cup and utilized its well established distribution channels. Fenhuang Cola signed up the famous martial arts actor Jackie Chan to endorse its