How does Nongfu Spring rescue itself amidst the storm of nationalism?

Nongfu Spring (9633.HK), a household name in China, is a leading bottled water and beverage company that has been quenching the thirst of the nation for over two decades. Founded in 1996, this powerhouse has grown exponentially to become one of the most recognized brands in the Chinese market.

However, Nongfu Spring has been enduring significant backlash in public discourse, after the late Wahaha founder Zong Qinghou passed away in February. Initially, Nongfu Spring's founder, Zhong Shanshan, was accused of disrespect towards the elder Zong, who had previously supported him. The criticism then broadened to its product design, accusing it of imitating Japanese cultural elements.

In March, online nationalists accused the packaging of "Oriental Leaves," a green tea beverage by Nongfu Spring, of containing Japanese elements and being "unpatriotic" and pro-Japanese. Nongfu Spring responded by stating that the architectural design on the packaging is inspired by Chinese temple architecture, not Japanese. Moreover, the packaging mentions the historical origin of Japanese matcha green tea from China, aiming to showcase the global influence of Chinese tea culture.

Some netizens argue that Nongfu Spring's "Oriental Leaves" design eerily resembles Japanese temple aesthetics.

As we discussed in a previous article, in China's consumer market, the "herd effect" is particularly pronounced: whoever manages internet traffic, controls the revenue. Often, the nature of this traffic doesn't matter; it can be nonsensical, tasteless, and typically, the more controversial, the more attention it garners. These events have had a substantial effect on Nongfu Spring's operations and the competitive dynamics of the entire beverage industry. Since March, Nongfu Spring's stock price has plummeted by approx 40%.

In this article, we will leverage BigOne Lab's unique offline consumption data (*) and give you a comprehensive analysis of two key areas: 1) the current intensity of public debate surrounding these incidents; 2) the proactive steps taken by Nongfu Spring and their impact on the company's business growth and competitive landscape.

*Baiguan Note: This article is based on BigOne Lab's extensive coverage of two key datasets from China's offline consumer market, encompassing both offline dining data and retail supermarket data. The dining sample includes an average of 45,000 to 60,000 active stores per month, while the offline supermarket sample boasts an average of 70,000 to 80,000 active stores monthly, spanning across all 31 provinces in the country. These datasets are capable of tracking the operational status of various sectors and brands, including alcoholic beverages, daily necessities, and condiments.

Wahaha benefits from public sentiment incident; however, impact diminishes from June

Source: Data collected and curated by BigOne Lab

Wahaha has been a direct beneficiary of the public sentiment incident; however, the impact has diminished since June. The incident began in early March, with the fervor of public outcry peaking by the end of March and then gradually subsiding, returning to the normal levels prior to the incident by June. Nonetheless, the impact on the market structure of the packaged water industry was quite severe—Nongfu Spring's market share dropped by 10%. In contrast, Wahaha's market share increased by 10%, and it has not reverted to its previous state to this day.

Marginally, since June, the rate at which Wahaha is gaining market share has slowed down, with a MoM decline, indicating a weakening of the impact. The reasons for this include not only the subsiding of the public sentiment but also the self-rescue actions taken by Nongfu Spring.

Source: Data collected and curated by BigOne Lab

Self-rescue: Nongfu Spring's future path lies in Green Bottle Water

According to Narrowcasting, a business media, in 2023, the packaged water market reached RMB 215 billion (USD 30 bn). It's further divided into purified water (RMB 120.6 billion, over 56% share), mineral water (RMB 18.2 billion), and other drinking water (RMB 76.2 billion, including natural water).

Nongfu Spring, known for its mineral and natural waters, lacks a purified water offering. Purified water, sourced flexibly from tap water, is the least costly and holds the largest share.

Nongfu Spring's Red Bottle natural water became the market leader in packaged water, taking over from Wahaha and Master Kong(0322.HK). It's a story of high-priced water winning over low-priced, but the core was health, not price, driven by two marketing campaigns in 2000 and 2008.

When the Red Bottle was launched in 2000, it faced a market dominated by Wahaha and Robust, which together held two-thirds of the market. Despite cost differences due to company size and between natural and purified water, the 2-yuan Red Bottle was not price competitive against the 1-yuan purified water. Yet, Nongfu Spring turned the tide with marketing and health messaging, aligning with rising material and transportation costs and consumer upgrade trends.

Recently, Nongfu Spring introduced a Green Bottle purified water in April and engaged in a price war in June, aiming to consolidate its market position. The Green Bottle, priced under 1 yuan, is a strategic addition to its product line. Wu You, founder of Mirror Lake Capital, believes this purified water battle could shape the drinking water industry's landscape for the next decade.

Nongfu Spring's natural water product

Nongfu Spring's mineral water product

Nongfu Spring's purified water product: newly launched in April 2024

Exclusive to our paid subscribers, the following content and data analysis will address these key questions:

• What role has the launch of Green Bottle Water played in Nongfu Spring's recovery from the nationalism crisis?

• How has the introduction of low-priced Green Bottle influenced the company’s profit margin?

• Has the aggressive pricing of the Green Bottle sparked a price war?