Initiating a price war, the richest man hides in the smoke of the water battle

NONGFU SPRING had a tough year in 2024.

First, the public opinion incidents at the beginning of the year affected sales; then, it was recently named by the Hong Kong Consumer Council for exceeding the standard of bromate.

Although it ended with the Hong Kong Consumer Council issuing a clarification statement, "We apologize for the misunderstanding caused by the discrepancy in sample classification in this test."

But the "richest man" Zhong Shandeng seems unwilling to "let it go".

In a screenshot circulating on the internet, Zhong Shandeng attributed NONGFU SPRING's experiences from February to now to the "means of competitors": "Competitors are taking turns to attack, while NONGFU SPRING remains calm and composed, the monsters and demons, let's see who will have the last laugh!"

A bottled water war initiated by NONGFU SPRING has begun.

When China Resources Beverage, behind C'estbon, submitted documents to the Hong Kong Stock Exchange, NONGFU SPRING entered its territory and launched a purified water product (referred to as "green bottled water") with similar outer packaging colors to C'estbon.

NONGFU SPRING promoted the green bottled water through almost all channels.

Selling at prices like 9.9 yuan for 12 bottles, 17.6 yuan for 24 bottles, equivalent to less than 1 yuan per bottle, much lower than competitors like C'estbon selling at 2 yuan per bottle.

This aggressive promotion is actually "hurting oneself to hurt the enemy".

TradeWind01 from Wall Street News learned from a NONGFU SPRING distributor in North China that the discounts on green bottled water not only made NONGFU SPRING's competitors uncomfortable but also backfired on themselves.

The source said that in the first half of the year, NONGFU SPRING's overall packaged water sales increased by less than 10%. Due to the significant promotion of green bottled water, profits hardly increased.

In June this year, green bottled water accounted for 25% of NONGFU SPRING's packaged water sales, to some extent, seizing the market share of the original red bottled water (mineral water).

When TradeWind01 asked NONGFU SPRING personnel how long the promotion of green bottled water would continue, the response was unclear.

The secondary market seems to be concerned about NONGFU SPRING's profit performance.

As of the close on July 25th, NONGFU SPRING's stock price has fallen by 30.5% year-to-date. Even a HKD 2 billion share repurchase plan announced by Zhong on July 9th failed to stop NONGFU SPRING's stock price from hitting new lows consecutively.

The richest man's wealth is also continuously shrinking.

According to the Bloomberg Billionaires Index, as of July 25th, Zhong Shandeng's wealth is $49.6 billion, with a decrease of $18.1 billion year-to-date, slightly higher than Pinduoduo founder Huang Zheng's $45.7 billion.

If the price war continues, there is a possibility of narrowing the gap between the two or even changing positions.

In the new war of bottled water, Zhong Shandeng obviously cannot stand alone and has to immerse himself in the smoke of war.

Channel Anxiety of Market Share Grabbing at Low Prices

The launch of green bottled water by NONGFU SPRING was not a sudden move, but rather a long-planned move to seize the lower-tier market.

From 2021 to 2023, the growth rate of NONGFU SPRING's packaged drinking water business significantly slowed down. The revenue growth rates were 22.14%, 7.06%, and 10.9% respectively, and the revenue share decreased from nearly 60% to less than 50% At the 2023 performance briefing, TradeWind01 from Wall Street News·XinFeng (ID: TradeWind01) learned from NONGFU SPRING insiders that due to the absolute scale of the packaged drinking water business model, the business growth rate may further decline.

In the past two years, undoubtedly, the high-speed growth supporting NONGFU SPRING has been in beverage categories such as tea and fruit juice. In 2023, the revenue share of beverage products exceeded packaged drinking water for the first time.

The reason is that NONGFU SPRING can reuse existing channels and quickly launch new products at lower costs.

A typical case is the explosive growth of Eastern Leaves last year, riding on the wave of sugar-free trend.

Last year, including Eastern Leaves and Tea Pie, the total revenue contributed by tea beverage business to NONGFU SPRING was 12.659 billion yuan, a significant year-on-year increase of 83.3%, with the revenue share increasing by 8.9 percentage points to 29.7%.

However, channel expansion has a ceiling, and NONGFU SPRING is not only facing a slowdown in the growth of packaged drinking water but also pressure on the beverage business.

TradeWind01 from Wall Street News·XinFeng (ID: TradeWind01) learned from the above-mentioned distributor in North China that in the second quarter of this year, Eastern Leaves in North China grew by 35% year-on-year, a slowdown of 20 percentage points, struggling to maintain the guaranteed 30% growth target signed last year.

The distributor attributed the slowdown in Eastern Leaves' growth to a large base, channel sinking, and overall weak consumer purchasing power.

To seek growth, NONGFU SPRING needs to expand external channels.

Currently, in a horizontal comparison, NONGFU SPRING's channel coverage capability lags significantly behind established brands like Master Kong (0322.HK), Uni-President, and Wahaha.

TradeWind01 from Wall Street News·XinFeng (ID: TradeWind01) learned from the distributor in North China that among the 6.8 million terminal retail stores nationwide, established brands like Master Kong, Wahaha, and Coca-Cola can cover 6.5 million, while NONGFU SPRING can only cover 3.5 million to 3.6 million, an increase of over 1 million compared to before its listing in 2020.

The difference in channel coverage capability mainly lies in the sinking market.

Regarding the direction of "steady growth" for natural water products, NONGFU SPRING's management clearly stated that in 2024, NONGFU SPRING will accelerate its penetration into county-level and circulation markets.

Low-priced products are obviously the "lever" to drive penetration into the sinking market.

In almost all channels, NONGFU SPRING is promoting green bottled water, with promotional prices of 9.9 yuan for 12 bottles and 17.6 yuan for 24 bottles, equivalent to less than 1 yuan per bottle.

The distributor mentioned above told TradeWind01 from Wall Street News·XinFeng (ID: TradeWind01) that currently, 70%-80% of the discount costs for green bottled water are provided by the manufacturer.

The distributor also stated that in recent years, NONGFU SPRING has occasionally initiated price wars, with natural water products originally priced at 2 yuan per bottle often discounted to 1.8 yuan per bottle, or even 1.5 yuan per bottle, "forcing the 2 yuan purified water into a difficult situation."

The source also mentioned that the discounted green bottled water has indeed attracted some customers from Yi Bao, Master Kong, and Wahaha In June this year, it was rumored that NONGFU SPRING launched the "Send Children Home" campaign against Wahaha: as long as distributors can replace Wahaha's water in supermarkets or convenience stores with NONGFU SPRING's, they can receive a reward of 50 yuan, with no limit.

Under NONGFU SPRING's aggressive expansion actions, the effects still need to be tested over time.

The above-mentioned distributors told TradeWind01 of Wall Street News that even with channel sinking through low prices, some higher unit prices may also face certain resistance. Due to the poor consumption situation, the effect of channel sinking is not good. "The price war for bottled water this year will not end throughout the peak season."

Test of Multi-line Operations

In the current consumption environment, NONGFU SPRING leveraging the market with low prices is not necessarily a bad choice.

However, the green bottled water has become a "Seven Injuries Fist" for NONGFU SPRING. It is not only grabbing market share from competitors but also competing with its own red bottled natural water products.

Distributors in the North China region told TradeWind01 of Wall Street News that the overall sales of NONGFU SPRING's packaged water increased by less than 10% in the first half of this year. The sales volume of green bottled water accounted for only 10% of the total volume of NONGFU SPRING's packaged water in May, but by July, this proportion is expected to increase to 30%.

In the beverage market, NONGFU SPRING is also facing pressure from multi-line operations.

In the ready-to-drink tea sector, NONGFU SPRING's Oriental Leaf faces increasing competition. Traditional giants like Master Kong and Uni-President have successively launched sugar-free tea products, and their channel capabilities are not weaker than NONGFU SPRING's.

To cooperate with channel sinking, the once popular Oriental Leaf has started discounting, with the marked price of 6 yuan per bottle often discounted to 4 yuan.

In the functional beverage sector, it is the main battlefield for Dongpeng Beverage (605499.SH) and Yuanqi Forest.

TradeWind01 of Wall Street News learned from sources close to Dongpeng Beverage that by 2024, Dongpeng Beverage's revenue target for electrolyte water is 1 billion yuan. It will differentiate itself from Alien and Bao Mineral Water by focusing more on operations in high-tier cities and sinking channels to third- and fourth-tier cities, towns, and rural markets.

NONGFU SPRING's own energy drink, Jiaoscream, has been lukewarm.

The above-mentioned distributors in the North China region told TradeWind01 of Wall Street News that although Jiaoscream still grew by 15% year-on-year in North China in the first half of the year, Dongpeng Beverage's second-year product, Boshuola, doubled in growth, and Alien also grew by over 35%.

"It may be fate, just like Coca-Cola's unsuccessful attempt at tea drinks," the source admitted.

In the situation of "multi-line operations," whether it is subsidies for new pure water products from NONGFU SPRING or increasing investment in ice cabinets to seize channels, it means more market investment costs, thereby eroding profit performance.

Although NONGFU SPRING achieved a historical high net profit margin of 28% last year, sales expenses also reached a historical high of 9.284 billion yuan, an 18.7% increase year-on-year During the performance briefing in 2023, NONGFU SPRING's management also admitted that the 28% net profit margin has a certain degree of contingency. They believe that the long-term, stable, and sustainable net profit margin level is between 23% and 25%.

This is exactly what the secondary market is concerned about.

NONGFU SPRING faces both growth and profit pressures.

Twenty years ago, NONGFU SPRING was able to rise in the bottled water market by pioneering the natural water category. However, in today's increasingly stable bottled water market landscape, price wars have become rare