In an improbable career spanning mushroom farming, journalism and selling erectile dysfunction pills, Zhong Shanshan says he has learnt the value of hype.

There was no shortage of it this week when Nongfu Spring, the bottled water company the 66-year-old founded in the the mid-1990s, as Beijing continued to open up China’s economy, floated on the Hong Kong Stock Exchange.

A euphoric reception sent Nongfu’s shares up more than 50 per cent on their debut on Tuesday, catapulting Mr Zhong into the rarefied club of Chinese multibillionaires typically reserved for tech luminaries such as Alibaba’s Jack Ma.

But as Nongfu begins life on the public markets, its founder will face pressure from investors, which include US asset manager Fidelity and Singapore’s sovereign wealth fund GIC, to not only sustain the growth that has turned its distinctive red-topped bottles into China’s best-selling water brand, but ensure its push into other markets, such as juices, reaps similar rewards.

Few dispute that marketing prowess has been at the heart of Nongfu’s success in the country’s bottled water market, the world’s biggest by volume and second only to the US by value, according to Euromonitor.

“Despite fierce competition, Nongfu Spring managed to build a meaningful difference in branding against the competition,” said Jason Yu, general manager at Kantar Worldpanel for Greater China.

Euromonitor puts the group’s share at 12 per cent, comfortably ahead of the western companies that have had a mixed record in China. Danone, the French owner of Evian, has the largest western presence with a 3 per cent share, while Coca-Cola, with brands such as Ice Dew, accounts for 2.5 per cent.

Nongfu Spring is China’s biggest selling bottled water brand

Bottled water has swelled his fortune, but it was not the first business foray for Mr Zhong, who dropped out of school at 12 when his parents were persecuted during the Cultural Revolution. He spent a decade working as a construction worker before sitting a university entrance examination twice, only to enrol in a community college because of mediocre scores.

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None of his early business ventures, ranging from a private newspaper to a mushroom farm, panned out until he began selling pills used to treat erectile dysfunction. As the effectiveness of the pills, which were made from turtle parts, drew regulatory scrutiny, he switched to bottled water.

The pivot appeared poorly timed as a handful of industry leaders dominated the market. His solution was to pitch Nongfu, which takes its water from natural lakes and springs, as a healthier substitute to the chemically purified water most competitors sold.

A marketing campaign, spearheaded by three televised experiments in 2000 comparing how purified and naturally-sourced water affect plant growth and animal life, proved so effective that the State Industry and Commerce Bureau, the nation’s business regulator, fined Nongfu for “malicious competition” following complaints from rivals.

China’s taste for bottled water

Mr Zhong did not back down. In a televised interview in 2015, he lambasted the country’s “outdated” legal system for why he lost the case. “Chinese law doesn’t allow advertising to compare products, which is a common practice in the US and Europe,” he said, “how can Chinese products improve if anything I said is considered malicious competition?”

While savvy marketing has reaped rewards, industry executives and analysts say Nongfu also boasts a highly efficient production and distribution process. It is one that has helped it “deliver higher margins than its nearest competitors”, said Mr Yu of Kantor.

Nongfu reported a profit margin of 60.9 per cent for its bottled water business last year, compared with 41 per cent for C’estbon, the nation’s second-largest bottled water brand owned by state-run conglomerate China Resources.

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A strong sales network also underpins its grip on the domestic market. Interviews with several bottled water distributors show they make a higher margin selling Nongfu than rival brands of a similar price range.

Zhang Yu, a former director at Nongfu Spring, said “revenue-sharing efforts have encouraged distributors to make greater sales efforts which could translate into higher margins for the factory given its relatively fixed costs.”

Mr Zhong is, unsurprisingly, happy to champion his own skills as a marketeer and salesman. “A company will become (as dead as) a mummy if it doesn’t know how to build hype,” he told a local publication in 2004.

He did not respond to a request for an interview for this article.

But the position Nongfu has carved out ultimately owes just as much to the rapid growth of China’s middle-income consumers and their pursuit of a healthier lifestyle.

Linda Huang, an analyst at Macquarie Group, noted Nongfu provides “the best proxy” for China’s growing consumption of bottled water, which has more tripled over the past decade.

Li Kun, a marketing manager based in the eastern city of Hangzhou and an avid consumer of Nongfu’s water, would agree. His daily consumption includes half a bottle for brushing his teeth, one for cooking and four for drinking.

World’s biggest consumers of bottled water

“I don’t trust the quality of tap water,” said Mr Li. “I want something more natural and I am willing to pay an extra price.”

With an expanded investor base, stretching from Singapore to Fidelity’s headquarters in Boston, experts say one of Nongfu’s most pressing challenges will be to shift the company’s products into higher-priced categories.

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Although rise of the Chinese consumer has been vital to its success, the brand’s popularity remains mainly in the lower-end of the market where consumers have a limited amount to spend on water.

At the Xingfu Supermarket in downtown Beijing, an employee said that the volume of sales of Nongfu Spring mineral water, which costs Rmb2.7 per bottle, were a fraction of the group’s standard product that retails for Rmb1.5. “It is very difficult to change consumer perception that Nongfu Spring shouldn’t cost much,” the supermarket employee added.

Diversification, another crucial part of Nongfu’s expansion strategy, has also had mixed results. The group’s successful launch of sugar-free tea drinks lifted its market share to 17 per cent in 2018 from less than 2 per cent just a few years ago.

Yet its performance in the juices market has proved less fruitful, with its market share remaining well below industry leaders. Despite that stumble, Nongfu is quickening its efforts to move beyond water. It now offers everything from instant coffee to yoghurt made of soyabean.

“The market for these products is either very crowded or requires a lot of consumer education,” cautioned Mr Yu of Kantor. “It remains a question whether Nongfu Spring could repeat its success,” he added.

Like many entrepreneurs, Mr Zhong insists on doing things his own way, earning him the nickname “the lone wolf” in the Chinese business world. His new investors will be hoping the approach can still pay off now that the business he built is a public company.

With additional reporting by Stefania Palma in Singapore.

Via Financial Times