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by guo jiayi

editor/zhang xiao

in recent years, nongfu spring's revenue from packaged drinking water has recorded a year-on-year decline only twice.

the first time was in 2020. affected by the epidemic, its revenue from packaged drinking water products was 13.966 billion yuan, a year-on-year decrease of 2.6%.

but at that time, judging from the group's revenue structure, packaged drinking water was still the company's mainstay, contributing 61% of nongfu spring's revenue.

the other time was in the first half of this year. according to nongfu spring’s 2024 interim performance report, nongfu spring’s packaged drinking water product revenue was 8.531 billion yuan, a year-on-year decrease of 18.3%.

although the revenue has also declined, the situation nongfu spring is facing now is more severe than that in 2020.

firstly, in the first half of this year, the packaged drinking water business not only experienced a decline in revenue, but the decline was even greater. its share in the company's total revenue also fell further to 38.5%, which was the first time that the business fell below 40%.

secondly, the revenue of the packaged drinking water business has almost fallen off a cliff - in the first two months of this year, the sales revenue of packaged drinking water increased by 19% compared with the same period last year.

for nongfu spring, this is a dangerous signal: its "base camp", the packaged drinking water business, is facing the threat of loss.

01

the online public opinion lasted for half a year, and nongfu spring lost at least 7 billion

in its interim performance report, nongfu spring attributed the decline in packaged drinking water revenue to the public opinion attacks it suffered in the first half of the year:

"since the end of february 2024, there have been a large number of public opinion attacks and malicious slander against our company and its founder on the internet, which has had a serious negative impact on our brand and sales."

in the first half of this year, due to the death of wahaha founder zong qinghou, nongfu spring founder zhong shanshan was caught up in a whirlpool of public opinion.

at one point, some netizens believed that zong qinghou and zhong shanshan were the real-life version of "the farmer and the snake", probably because zhong shanshan's "first entrepreneurial income came from wahaha", but later "was fired by wahaha for rushing products", etc.

zhong shanshan later responded with an article titled "a few things between me and mr. zong", denying that the first entrepreneurial income came from wahaha, and also denying that he was fired by wahaha for rushing sales. he also specifically said that zong qinghou hated cyber violence during his lifetime.

this response did not quell the public opinion storm, but instead became the focus of heated discussion among the public, spreading from the dispute between wahaha and nongfu spring to the nationality of zhong shanshan's eldest son zhong shuzi, and the presence of "japanese elements" on the packaging of nongfu spring's product "oriental leaves".

behind these controversies, the public's emotions that are difficult to calm down are directly transmitted to the sales volume of nongfu spring packaged drinking water.

photo/shenwan hongyuan securities

according to the interim performance report, in the first half of this year, nongfu spring's packaged drinking water business recorded a significant year-on-year decline of 18.3%, and its share in the company's total revenue also fell to 38.5%.

to make a simple comparison, from 2021 to 2023, the year-on-year revenue growth rate of this business was 22.1%, 7.1% and 10.9% respectively, and the revenue proportion contributed to nongfu spring was 57.4%, 54.9% and 47.5% respectively - although it showed a downward trend, it could still be maintained at around 50%.

and in this process, nongfu spring did not fail to make efforts.

in addition to clarifying the controversies surrounding it to the public many times, and its founder zhong shanshan also appeared in an interview on cctv's "dialogue", in april, nongfu spring re-launched green bottled pure water after 24 years. the company has also increased its external publicity efforts. in its performance report, nongfu spring mentioned that from april to may, nongfu spring increased its publicity of the water source, with more than 200 video materials released by various top vs, with a cumulative exposure of nearly 500 million times and a cumulative interaction of more than 10 million times.

at the same time, nongfu spring took the lead in launching a price war in the industry.

but it is clear that these actions have limited effect.

citing media reports, nongfu spring said:industry insiders estimated that this protracted public opinion controversy caused nongfu spring to lose more than 7 billion yuan in revenue in the first half of the year.

at the same time, the decline in performance in this segment also triggered a series of chain reactions.

on the one hand, nongfu spring's share in the packaged drinking water market has shown a downward trend.

according to huxiu, in february this year, the market share of nongfu spring packaged water was as high as 47.04%, but it fell sharply to 29.14% in april. it has been gradually recovering since then, reaching 34.89% in july.

on the other hand, pressure is being transmitted from top to bottom. china entrepreneur magazine recently reported that industry insiders revealed that the wages of nongfu spring's front-line sales staff have also been affected.

"recently, the monthly salary of nongfu spring's front-line salesmen is only around 5,000 yuan, while in previous years they could earn 9,000 to 10,000 yuan during the peak season. (they) are now arguing about wages, and the tasks are so heavy that they cannot be completed at all," said a supermarket owner.

02

the price war is fierce, but market share is hard to defend

despite the unfriendly public opinion environment, nongfu spring's business actions in the first half of the year were relatively aggressive.

a landmark event was the launch of a new green-bottle purified water product in april, marking its return to the purified water market after 24 years. in the early years (april 2000), nongfu spring believed that purified water was not good for the human body and announced that it would no longer produce purified water and would instead produce all natural water.

in the cctv program "dialogue", zhong shanshan admitted that many people within nongfu spring did not understand this approach.

"if it weren't for this year's online controversy, i might never have produced this water." zhong shanshan said that this was a reverse stimulus from some people who did not know the truth. he thought that his mistake was at most depriving consumers of the right to choose. since you want to choose, he will give consumers the opportunity to choose again.

from an industry perspective, nongfu spring’s purpose in restarting purified water is clear: outside of the natural water market, relying on purified water to help the company open up new situations and consolidate its market share.

compared with the natural water market, the purified water market segment has greater potential and has experienced higher growth rates in the past few years.

according to everbright securities, from 2018 to 2023, the market size of drinking purified water in china increased from 83.3 billion yuan to 120.6 billion yuan, and the market share increased from 54.6% to 56.1%. according to its forecast, from 2023 to 2028, the market size of drinking purified water will continue to expand, increasing from 120.6 billion yuan to 179.8 billion yuan, and the market share will also increase to 57.2%.

in comparison, in recent years, the share of the natural mineral water segment in the packaged drinking water market has remained at around 8.5%.

photo/everbright securities

from this perspective, nongfu spring's re-launch of green bottled pure water is not actually just a defensive move, but a proactive attack to re-shake up the pure water market.

according to media reports, on april 23 this year, someone from nongfu spring company quietly announced the launch of green-packaged purified water on their wechat moments. just 10 days later, green-bottled water was basically available in offline terminals across the country.

what is interesting is that at the same time, china resources beverage, another leading company in the packaged drinking water industry, submitted its prospectus to the hong kong stock exchange on april 22.

in china's drinking purified water market, china resources beverages has the highest market share, with a market share of 32.7% in this market segment in 2023. in terms of retail sales, it is nearly four times that of the second-ranked wahaha in the industry, and its market share is 23.8 percentage points higher than that of wahaha.

compared with nongfu spring, china resources beverage seems to be a purer "water seller". from 2021 to 2023, the proportion of packaged drinking water business in its revenue will be 95.4%, 94.3% and 92.1% respectively.

judging from the specific measures, nongfu spring’s method of disrupting the market is simple and crude: price war.

first, on the channel laying side, nongfu spring lowered the terminal purchase price for green-bottled pure water. the terminal sales prices of green-bottled water and red-bottled water are the same, mostly 2 yuan, but in terms of terminal purchase price, green-bottled water is cheaper.

since june, nongfu spring has taken the lead in lowering prices in the industry, launching an industry price war.

for example, during the 618 shopping festival this year, the price of a 12-pack of green bottled pure water in the official flagship store of nongfu spring even dropped to 9.9 yuan per case, with an average price of only 0.83 yuan per bottle. this has indeed produced some results. according to data released by nongfu spring, the cumulative sales of its green bottled pure water exceeded 1 million units from may 31 to june 3.

however, there is a high degree of uncertainty as to whether this strategy can be sustained and whether it can help nongfu spring gain a larger share of the pure water market.

on the one hand, competitors, under pressure from competition, have also begun to cut prices for promotions. according to media reports, brands such as china resources beverage, wahaha, and baishuishan have all cut prices for purified water products to varying degrees.

on the other hand, the price war is also weakening nongfu spring's profitability. under the pressure of market share and gross profit, nongfu spring needs to strike a balance.

photo/guolian securities

in the first half of this year, nongfu spring group's gross profit margin has shown a downward trend, falling 1.4 percentage points from 60.2% in the same period last year to 58.8%. the company pointed out in its performance report that the main influencing factors include the impact of new pure water product launch promotions, the increase in fixed cost allocation due to the decline in sales of packaged drinking water products, and the increase in the price of fruit juice raw materials.

in addition, in the first half of this year, nongfu spring's net profit attributable to its parent company was 6.24 billion yuan, an increase of 8.04% year-on-year, and the growth rate has also slowed down significantly. from 2021 to 2023, the year-on-year growth rates of this data are 35.71%, 18.62% and 42.19% respectively.

03

beverage products play a major role, but the challenges ahead are also great

although the revenue from packaged drinking water has declined significantly, the growth trend of beverage products has helped nongfu spring stabilize the situation.

in the first half of this year, the revenue of nongfu spring beverage products increased by 36.7% compared with the same period last year, and its contribution to the company's total revenue also increased to 61.1%.

specifically, the tea beverage segment, which mainly includes the two products of oriental leaves and tea pi, contributed more growth. during the reporting period, the revenue of tea beverage products was 8.43 billion yuan, an increase of 59.5% over the same period last year, accounting for 38.0% of the total revenue.

among them, the star product oriental leaves is the main driving force for the performance growth of this sector. according to nielsen data, from january to june this year, oriental leaves' sales increased by more than 90% year-on-year, almost doubling compared with the same period last year. its current share of the sugar-free tea market has exceeded 70%.

in addition, although functional beverage products and fruit juice beverage products also grew, their growth rate was weaker than that of tea beverage products, and their contribution to revenue was not outstanding:

the revenue of functional beverage products was 2.55 billion yuan, a year-on-year increase of 3.8%, contributing 11.5% of the revenue; the revenue of juice beverage products was 2.114 billion yuan, a year-on-year increase of 25.4%, contributing 9.5% of the revenue.

from this point of view, the online public opinion in the first half of the year did not have much impact on nongfu spring’s beverage product line.

from the perspective of the tea beverage sector, compared with other industry players, nongfu spring's growth performance is more impressive.

in the first half of the year, master kong's beverage revenue increased slightly by 1.7% year-on-year, contributing 65.7% of the group's revenue. however, when broken down, the revenue from packaged water, juice, carbonated and other beverages all declined. only ready-to-drink tea achieved year-on-year growth, but the increase was only 13%, far less than nongfu spring's tea beverage segment.

of uni-president china's beverage business with a revenue of 10 billion yuan, tea beverages contributed 4.647 billion yuan. it also increased in the first half of this year, but the growth rate was only 11.8%, which is also far less than nongfu spring.

nongfu spring's biggest competitor in the pure water market is china resources beverage, whose revenue growth rate of beverage products is higher than that of nongfu spring. the growth rate in 2023 is 48.67%, and the growth rate in 2024 is expected to reach 53.27%, but its base is lower. the revenue scale in 2023 just exceeded 1 billion yuan.

however, what is really worth discussing is whether nongfu spring can maintain its relatively stable market position in the tea beverage industry in the future?

photo/huatai securities

the rise of nongfu spring's tea beverage business has actually only been around for the past two or three years. in 2022, the company's revenue from ready-to-drink tea business was only 6.9 billion yuan, but last year alone, the business's revenue grew by 5.8 billion yuan, driven by oriental leaves and tea pi.

but in fact, the growth cycle of these two drinks is a bit too long. for example, oriental leaves was launched in 2011, but it has not been widely liked by the outside world for a long time. in 2016, it was rated as one of the most difficult drinks.

from this point of view, a large part of nongfu spring’s growth logic in the tea beverage market can actually be attributed to the change in the growth logic of the tea beverage market.

looking back over the past decade, the tea beverage track entered a period of adjustment from 2015 to 2019, during which the industry's sales volume accelerated its decline. the main reason was that the industry began to accelerate structural adjustments as consumers' health awareness awakened. consumer demand gradually shifted from fruit tea and flavored tea to sugar-free tea, milk tea, and pure tea, driving tea beverage products to upgrade to health and quality.

however, in the early stages of this structural transformation, the overall growth rate did not explode on a large scale, but continued to be in the market education stage.

in 2020, affected by the epidemic, the size of the tea beverage market fell by 15.4% year-on-year. however, from 2021 to 2023, the industry's growth rate began to pick up. until last year, the market size of the tea beverage track reached 119 billion yuan, but it also only recovered to 97.6% of 2019.

in other words, behind the rapid growth of nongfu spring tea beverages from 2023 to the present, the release of market demand itself and the high prosperity of the track are also particularly important reasons.

of course, this is also inseparable from nongfu spring's own large-scale layout. according to media reports, in june this year, a supermarket owner said that in order to complete the promotion of oriental leaves, nongfu spring encouraged supermarkets to purchase more and gave them great purchase discounts. for example, if you bought 18 boxes of oriental leaves and 6 bottles of water, you would get 6 boxes of oriental leaves for free.

based on this background, in the long run, nongfu spring will need to be wary of more and more competitors in the tea beverage industry.

for example, some media statistics show that in the current sugar-free tea market, traditional companies such as vitasoy international, coca-cola, uni-president, wahaha, c'estbon, yinlu, yili, dongpeng special drink, and tsingtao beer have entered the market, as well as new brands such as yuanqi forest, guozishule, rangcha, and cha xiaokai.

price wars over sugar-free tea have also begun. according to china news weekly, in a 7-11 convenience store in chaoyang district, beijing, as many as seven companies, including oriental leaves, suntory, ito en, fruit ripe, cha xiaokai, vitasoy, and dongpeng, were competing with each other. among them, oriental leaves, which cost 5.5 yuan per bottle, dongpeng pu'er shangcha, which cost 5 yuan per bottle, and fruit ripe (970ml large bottle), which cost 9 yuan per bottle, all offered half the price for the second piece.

under this situation, nongfu spring will have to face a difficult and long-term battle in the tea beverage market.