20 October 2018

Can Wahaha avoid getting another big hangover in Baijiu market?

Just in March, Wahaha Group boss Zong Qinghou {宗慶后} swore in an interview that he would never again try to enter the market of Baijiu, a kind of Chinese distilled spirits, even if a great opportunity presents itself. Eight months later, China’s second richest man had to eat his words.

A leading figure in the domestic yogurt beverage industry, Zong said on Tuesday he has agreed to set up a joint venture with a Guizhou-based distiller, in which Wahaha will have 80 percent stake. Zong did not deny the deal was a buy on the dip, and he expects the Baijiu industry will get out of the trough soon.

What happened in the past couple of months that led Zong to make a turnabout on his investment strategy? Perhaps Wahaha has sensed the climate is turning unfavorable for its main business – yogurt drinks – after state-backed rival China Mengniu Dairy (02319.HK) linked up in August with Zong’s partner-turned-enemy, the French food giant Danone, to expand their chilled yogurt operations in the country. The growing sense of crisis may have prompted Wahaha to seek diversification.

This was not the first time for Wahaha to develop new income streams. The beverage maker is known to have invested in kids’ wear, motor manufacturing, retailing and infant formula production. Yet all these non-beverage operations turned out to be unimpressive.

The Hangzhou-based company is also no stranger to Baijiu operations. In 2002 and 2004, it tried its hands in the business but to no avail — it was just hard for alcoholic drinks and milk beverages to share a common marketing channel. This time around, Wahaha said it will spend 15 billion yuan (US$2.46 billion) on the Baijiu business. But marketing channels may still prove to be a big hurdle.

Of course, it is too early to tell how Wahaha will fare on its third attempt. But the market terrain has become tougher; the sector’s decade-long profit binge may be over after Beijing banned cadres from boozing up at state expense.

– Contact the writer at [email protected]



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