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The Secret to Rags-to-riches Rise of Zong Qinghou, the Late Beverage Tycoon

When it comes to the success of Zong, it is impossible not to mention the “Joint Marketing” system created by him. In the Chinese market of 1993, the joint marketing system became one of the major drivers for the rapid rise of Wahaha.

BEIJING, February 27 (TMTPOST)—Zong Qinghou, the founder and chairman of China’s leading beverage company Wahaha Group, passed away at the age of 79 after "treatment for an illness proved ineffective", the company said on Sunday. 

In 1987, Zong founded the Wahaha Group, whose bottled water, soft drinks, tea and other products can be found in retail outlets across China now.

Chinese e-commerce behemoth Alibaba's founder Jack Ma sent an elegiac couplet to express his condolences: "It's never too late to fight at the age of forty, embodying the spirit of pioneers; Zong seeks innovation day and night despite all headwinds, showcasing the true essence of an entrepreneur." Alibaba is headquartered in Hangzhou, where Wahaha is also based. Both of them are two major sources of pride for people residing in the city, along with the West Lake.

Success of the Three-layer Direct Marketing System

When it comes to the success of Zong, it is impossible not to mention the “Joint Marketing” system created by him. In the Chinese market of 1993, the joint marketing system became one of the major drivers for the rapid rise of Wahaha.

Zong categorized distributors into first-tier, second-tier, and third-tier dealers, with the third-tier dealers corresponding to retail outlets. According to the requirements, first-tier dealers had to pay 10% of the next year's order payment to Wahaha as a deposit. Subsequently, first-tier dealers developed second-tier dealers within their responsible areas. Second-tier dealers had to make advance payments for orders, and Wahaha was responsible for doorstep delivery. Second-tier dealers then developed third-tier dealers, who distribute products to each retail outlet.

Zong believed that the creative concept of the “Joint Marketing” system gave Wahaha decisive power and effective control over distributors.

At that time, the Chinese market was vast, and retail outlets were fragmented. Therefore, most fast-moving consumer goods (FMCG) companies expanded their markets through multi-level distribution channels. The typical model was to deliver goods without prepayments. Wahaha achieved rapid growth by leveraging multi-level channels but faced setbacks due to the complex market hierarchy, lack of control over channels, and difficulties in collecting sales payments, putting tremendous pressure on Wahaha's development.

In 1994, Zong felt that Wahaha had been "hijacked" by distributors and decided to overhaul the distribution system. At the national distributor conference that year, Zong announced new regulations requiring the establishment of a deposit system and a payment-before-delivery model. He established a three-level wholesale system, defined sales areas as "territories," and named it the “Joint Marketing” system.

Faced with collective opposition from distributors and complaints from internal staff, Zong did not compromise. While firmly demanding the non-retraction of the new policy, he patiently explained it to distributors.

Zong recalled that the conference was extremely intense, with some even threatening to quit. The order for Wahaha's distributor conference in 1994 only increased by just over 60%, compared to the previous years when the growth doubled. However, Zong did not waver and continued to implement the new system. Ultimately, Wahaha's market sales boomed, and distributors had to accept this model.

Zhu Danpeng, Vice President of the Guangdong Food Safety and Promotion Association, said that at that time, the marketing regime was a special product of that historical period. It provided more detailed and controllable management for the distribution system. Although there were later issues such as excessive levels and mismatching with market development, it brought significant benefits to Wahaha's development, enabling rapid distribution of Wahaha's products even to villages, laying the foundation for Wahaha to build a 70-billion yuan FMCG empire in the future.

Xiao Zhuqing, founder of Wuhan Jingkui Technology Co., Ltd., who was previously the Planning Director at Wahaha Group, said that Zong seized the key points of the business – some were willing to buy because it was value for money, and some were willing to sell because there was a price difference. Channel partners could obtain profits only when there was a price difference.

For a long time, Zong worked almost every day from 7 a.m. to 11 or 12 p.m. He spent a considerable amount of time each year inspecting markets nationwide to collect first-hand market information for timely and accurate decision-making. Whenever Zong arrived at a new place, he would first visit officials, then distributors, and finally meet with consumers.As mentioned in Zong's autobiography, he did not oppose modern management systems, but in key decisions related to finance and sales, he adopted a hands-on approach.

Even after his success, Zong continued to lead a simple life. Except for special occasions that required him to wear a suit, he mostly dressed modestly. Even when after he was named mainland China's richest person by Forbes in 2012, Zong still led a frugal life, traveling by economy class or second-class seats on high-speed trains.

 

A Humble Beginning

As a late bloomer, Zong worked mostly in farms and primary school-run companies before venturing into the business world at the age of 42.

Born in 1945 in Xuzhou city, China’s southeastern province of Jiangsu, Zong lived in poverty in his early years. In 1961, due to his family’s KMT background, he left school to earn money, taking on odd jobs and repairing cars to support his family. Zong demonstrated an extraordinary business acumen during this period. He engaged in various entrepreneurial ventures, from selling roasted rice on the streets to cooked sweet potatoes to hungry travelers at late-night train stations.

In 1978, at the age of 33, Zong returned to Hangzhou, taking over his mother's struggling factory at the Shangcheng District Post and Telecommunication Road Primary School. For the next eight years, he worked as a salesperson for the school-affiliated factory, running operations on the front lines of the market. However, Zong, an ambitious salesman, was not content with merely selling paper boxes. He engaged in sericulture, set up an electric meter factory, produced electric fans, and conducted business transactions nationwide.

In his autobiography, Zong asserted that these experiences at grassroots in the business world allowed him to accumulate insights into the Chinese market, laying the foundation for Wahaha's future.

Zong's life took a significant turn at the age of 42 in 1987. The Shangcheng District Education Bureau, the local government authorities, decided to adopt a contract-based operation for a vocational school-affiliated enterprise's distribution department. Despite stringent requirements, Zong volunteered to "give it a try" and borrowed 140,000 yuan (US$ 19,449) to take over the loss-making school-affiliated enterprise. This marked the beginning of Zong's entrepreneurial journey in a small six-story building located at Qingtai Street in Hangzhou.

Over the next few years, Zong, driven by passions, transformed the struggling school distribution department step by step. Starting from selling stationery and ice cream on a tricycle, he gradually turned the department's fortunes around, expanding the workforce.

In 1988, sensing the lucrative market for oral liquids, Zong jumped on the opportunity. Despite initial skepticism from Zhu Shoumin, a professor and nutritionist at Zhejiang Medical University, who doubted the capabilities of Zong's modest school factory, Zong persisted despite headwinds. He convinced Zhu through visits and, unlike traditional product launches, boldly decided to advertise on Hangzhou TV, using up almost all of Wahaha's funds totaling 21 million yuan.

This risky move paid off as the advertisement, featuring the slogan "Drinking Wahaha makes your meal delightful," quickly led to a revenue of 4.88 million yuan within a few months. By 1989, Wahaha's revenue had soared to 27.13 million yuan.

"David Versus Goliath" Merger

One of the most significant chapters in Wahaha's history that Zong often recalled was the acquisition of a much larger state-owned enterprise—the Hangzhou Canned Food Factory. This daring move marked a crucial step for Wahaha's transformation from a small enterprise to a major player in the beverage industry.

In 1990, after identifying the struggling state-owned Hangzhou Canned Food Factory as a potential acquisition, Zong faced mounting challenges. The factory, despite its impressive 60,000 square meters of space and over 2,000 employees, was burdened by debts exceeding 67 million yuan. Zong, however, was resolute in his decision and spend 80 million yuan to acquire the entire factory, absorbing all its employees.

This acquisition faced intense scrutiny, with Zong, a private entrepreneur, purchasing a state-owned enterprise, sparking skepticism and opposition. Even within Wahaha, concerns arose about the possibility of the company being dragged down by the substantial debt of the canned food factory.

Undeterred, Zong chose sincerity and persistence. In the first meeting with over 300 representatives of the canned food factory, he gave a reality check by presenting Wahaha's sales figures, offered a three-month bonus (for what), and patiently explained his vision. Zong instilled the Wahaha work ethic into the canned food factory, working long hours and inspiring the employees. Within just 28 days, the factory established new production lines, turning its annual loss of 40 million yuan into a profit.

With the new factory in place, Wahaha's revenue reached 250 million yuan in 1991. In 1992, the company entered the market for fruit-flavored milk and other beverages, marking a giant leap forward for the group.

The Dispute With Danone

In 1996, the group entered into a partnership with Danone, the renowned French food company famous for its yogurt, establishing the Wahaha Joint Venture Company. Specializing in yogurt drinks, carbonated beverages, and food items, the venture garnered a 15% share of China's beverage market by 2012, ranking behind only Coca-Cola and Tingyi Holdings.

However, conflicts broke out after 1998 when Danone acquired the shares held by Peregrine, becoming the majority shareholder with a 51% stake in Wahaha. Over the next three years, disputes intensified due to Danone's acquisition of Robust (LeBaiShi), operational restrictions imposed on Wahaha, and escalating contradictions between Zong and Danone's management.

A critical flashpoint emerged regarding the attribution of non-joint venture companies. Despite Wahaha's rapid business growth, Danone opposed expanding investments and building new factories under the joint venture, prompting Zong to establish non-joint venture companies for additional production capacity.

The conflict culminated in 2005 when Danone's then-Asia Pacific President, Emmanuel Faber, launched investigations into Wahaha's non-joint venture companies. Faber alleged that these companies deprived the joint venture of its rightful market share and profits. Danone demanded the purchase of 51% stake in Wahaha's non-joint venture companies for a staggering 4 billion yuan.

Zong vehemently rejected this proposal, leading to a legal battle that lasted for 1,000 days. Danone filed eight arbitration applications with the Stockholm Chamber of Commerce Arbitration Institute on May 9, 2007, taking Wahaha and Zong to court. Wahaha responded by expressing its determination to fight until the end.

Amidst accusations of misconduct leveled against Zong by Danone, he retaliated with an open letter, alleging that Danone was spreading false information about his company's business practices and tarnishing his family's reputation. Wahaha officials conducted news conferences, vehemently denouncing Danone officials as "rascals."

Ultimately, Danone divested its stake for approximately $500 million, a value significantly lower than analysts had estimated.

Diversification Attempts and Setbacks

After liberating Wahaha from Danone's constraints, Zong led the company into a period of rapid growth. In 2010, Zong became the wealthiest person in China when perching on the Hurun China Rich List for the first time. By 2013, Wahaha's sales revenue reached its peak at 78.3 billion yuan.

However, from 2014 to 2015, Wahaha's total revenue began to decline. In 2022, the company's revenue stood at 512.02 billion yuan, representing a decrease of approximately 30% from the 2013 peak.

Zong attributed the company's significant challenges to a rumor in 2015 that claimed Wahaha's beverages were unhealthy. The false information, spreading 170 million times, resulted in substantial losses, with the flagship product, Nutri-Express, witnessing a sharp decline in sales from an anticipated 5 billion yuan to 1.5 billion yuan.

To reverse the downturn, Zong implemented reforms, including transforming the three-tier distribution system to a two-tier system and initiating institutional changes within Wahaha.

Beyond the beverage business, Wahaha Group explored diversification into sectors such as children's clothing, real estate, liquor, intelligent robotics, new energy vehicles, and private equity investments. However, these ventures failed to replicate the success achieved in the beverage industry.

The foray into children's clothing marked the first step in diversification, potentially driven by the high overlap between the consumer base of children's clothing and Wahaha's beverage products. Despite Zong being 57 years old at the time, he expressed his ambition with the slogan "Building the Nation's Top Children's Clothing Brand."

In 2002, Wahaha Children's Clothing Company was established in Hangzhou, with Zong entering the children's clothing industry through a partnership with Hong Kong's Dali Group. However, the children's clothing business struggled for over a decade, with revenue consistently decreasing as a percentage of the group's total business. In 2017, Wahaha Clothing was renamed Hangzhou Hengli Beverage Co., Ltd., and it was officially deregistered in 2021.

In late 2022, "Wahaha Children's Clothing" reappeared in the consumer spotlight, engaging in live-streaming e-commerce. While there were signs of a potential revival, a review of Wahaha Children's Clothing's flagship store on Taobao revealed modest product sales, with most items garnering single-digit monthly payments, and the highest-selling product reaching just over 600 units.

Despite challenges in diversification, Zong continued expanding his business into the real estate, liquor, intelligent robotics, venture capital, and more. In 2012, the ambitious "Wao Market" was launched, with plans to open 100 Wao Markets within three years. Zong invested 1.7 billion yuan in the project, aiming for a total operating area of over 17,500 square meters. Unfortunately, both Zhejiang Wao Business Co., Ltd., and Zhuzhou Wao Business Co., Ltd., were deregistered in 2014, signaling the project's failure within a brief two-year period.

In March 2019, Wahaha Intelligent Robotics Co., Ltd., was established, indicating Zong's interest in the burgeoning field of robotics. As early as March 2017, Zong publicly mentioned collaborating with Israeli universities and the Chinese Academy of Sciences to research and develop core components of robots.

Transition to the Next Generation

In recent years, Zong Qinghou's daughter, Zong Fuli, has stepped into the spotlight. Acknowledging the importance of an innovative, trustworthy, and hardworking successor, Zong Qinghou expressed satisfaction with his daughter's mature approach to managing the company. In December 2021, Zong Fuli was appointed Vice Chairperson and General Manager of Wahaha Group, effective immediately, while Zong Qinghou retained his position as Chairman.

Zong Fuli's ascension to a leadership role within Wahaha was met with approval from Zong Qinghou. In various interviews, he commended his daughter's growing entrepreneurial prowess, describing her as an increasingly mature businesswoman. Zong Fuli has not only managed the company independently but has also demonstrated a level of competency that Zong Qinghou humorously admitted surpassed his own.

In terms of expectations for a successor, Zong Qinghou emphasized the importance of innovation, integrity, and diligence. He highlighted the necessity for the successor to be diligent, intelligent, and capable of enacting positive change. Zong Fuli's return to Wahaha, after completing her education abroad, exemplified her commitment to learning from existing management methods and experiences while incorporating reformative elements.

As Wahaha transitions into the future, Zong Fuli embraces a long-term perspective. In her own words, "The most important aspect of running a business is to do something valuable in a sustainable way. If you look at the next three years, there are many competitors on the same stage. But if you look at the next ten or twenty years, the competition dwindles. The longer the vision, the firmer the steps. This is the principle of 'slowness is fast.'"

On December 12, 2023, Wahaha Group held its 2024 National Sales Work Conference in Hangzhou, marking the last public appearance of Zong Qinghou alongside his daughter, Zong Fuli. The event features outstanding distributors nationwide, capturing a moment where Zong Qinghou, with a somewhat diminished appearance, wore a simple black cotton jacket — a testament to his unpretentious lifestyle.

As one of the pioneering entrepreneurs who rose from humble beginnings during the era of reform and opening up, Zong Qinghou's departure adds another chapter to the ongoing narrative of China's business landscape. Some current affairs commentators, including former Phoenix TV’s commentator Yang JInlin, lamented that his departure marked the end of an era, in which private businessmen prospered in many sectors across China. His relentless pursuit of success, transformative leadership during disputes with Danone, and commitment to Wahaha's growth have left an indelible mark on the country's fast-moving consumer goods industry.

In his autobiography, Zong Qinghou humbly downplayed his intelligence, attributing his success to a single-minded drive to accomplish a goal and a willingness to take risks. His ethos of seizing opportunities and embodying a "never say die" spirit resonates with those who find inspiration in the entrepreneurial journey.

As Wahaha ventures into the future without its visionary founder, Zong Qinghou's legacy persists, reminding aspiring entrepreneurs of the tenacity required to navigate the complex and dynamic landscape of business in China. The baton is now in the hands of the next generation, with Zong Fuli poised to lead Wahaha into a new chapter, carrying forward the values and principles instilled by her father.

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