Thirty Years of Water Battles": The Grudges and Rivalries of the "Bottled Water Duopoly

Nongfu Spring is currently valued at approximately HK$535.894 billion, while YiBao's valuation is about HK$17.8 billion, a difference of over 30 times.

YiBao, the "ancestor" of Chinese drinking water, is sprinting towards a Hong Kong IPO.

According to the prospectus, in 2023, YiBao sold over 14.6 billion bottles of purified water. In terms of retail sales, it is the leading company in China's drinking purified water market, with a market share of 32.7%.

YiBao is also the only purified water brand that has not been defeated by Nongfu Spring.

In the intense battle of Chinese drinking water over the past thirty years, Zhong Shanshan has launched three rounds of attacks, not only defeating brands such as Nestle and Wahaha, but also crushing mineral water brands like Master Kong.

Backed by state-owned assets, YiBao has become increasingly competitive, gradually becoming the "industry leader". Currently, in the packaged drinking water arena, YiBao's market share has reached 18.4%, ranking second, second only to Nongfu Spring (23.6%).

Meanwhile, during the same period, Jingtian only occupied 6.1% of the market share, while Wahaha and Master Kong's market shares were only 5.6% and 4.9% respectively, making it difficult for them to pose a threat to the leading companies.

Although both companies sell water, the capital market has only given YiBao the valuation of a traditional company. According to trading information from Kirin Holdings, the second largest shareholder of YiBao, YiBao's valuation is approximately $2.275 billion, or about HK$17.8 billion.

In comparison, Nongfu Spring, known as a "cash cow," has a current market value of HK$535.894 billion.

The difference in valuation is more than 30 times. Why is there such a big gap between the industry leader and the second-place company?

01 Falling behind and counterattack

The reason is that YiBao woke up early but missed the boat.

In 1990, when China Longjiang Beverage (Shekou) Co., Ltd. produced the first bottle of YiBao purified water, Zhong Shanshan was still selling children's oral liquid, and Zhong Shanshan had just become the general agent of Wahaha in Hainan and Guangxi. They had not yet discovered the huge business opportunities in bottled water.

It was the real estate developer Wang Shi who noticed it first. The following year, Vanke acquired 51% of Longjiang Beverage's shares and took YiBao under its wing. However, by 1999, Wang Shi decisively divested non-core businesses, and YiBao was sold to China Resources.

At that time, China Resources was focused on the beer business, and combined with the setbacks in YiBao's diversification strategy, China Resources once wanted to use it to exchange for Danone's two breweries in Wuhan and Tangshan, but the deal fell through.

Due to multiple changes in ownership, YiBao lost its first-mover advantage, and the gap with its peers widened.

Wahaha, Master Kong, Nongfu Spring, and others had already expanded nationwide. Among them, Wahaha had firmly occupied the industry's top spot. Although Nongfu Spring was relatively unknown at the beginning, Zhong Shanshan launched a "quality debate" about purified water and natural water in 2000, which propelled it into the industry's forefront with mineral water.

Liu Hongji, the then general manager of YiBao, decided to catch up. In 2004, a strategic meeting was held in Xiamen, proposing a marketing strategy of "small market, large share" to first establish dominance in the Guangdong market.

This meeting, internally referred to as YiBao's "Zunyi Conference," marked a turning point in its fate.

After the meeting, YiBao launched a vigorous "street battle," with salespeople promoting the brand everywhere, and brand posters appearing from streets to alleys. By 2007, YiBao's market share in Guangdong had reached 50%, and to this day, its market share still ranks first.

However, YiBao was still not recognized in the national market. At that time, Master Kong, with its 1 RMB mineral water, seized the opportunity, dethroning Wahaha as the industry leader, while Nongfu Spring remained in third place.

YiBao, ambitious, was not content with being the "king of Guangdong." It hired McKinsey & Company to develop a development strategy of "expanding westward, expanding eastward, and advancing northward," and began to march nationwide.

In terms of tactics, YiBao borrowed from Snow Beer's successful experience and formulated the "mushroom tactics," which involved building factories in different regions and finding local contract manufacturers to quickly capture the local market using the "street battle" approach, achieving regional breakthroughs, and ultimately connecting independent regions into a whole.

The tactics quickly paid off, and YiBao embarked on a path of counterattack. In 2008, it was included in China Resources' first-tier profit center, and by 2010, its national market share reached 6.7%, surpassing Coca-Cola's Ice Dew in 2013, catching up with Nongfu Spring.

Zhong Shanshan, who had just become the industry leader, couldn't sit still and once again started a "water war."

Nongfu Spring took out pH test paper and launched an attack on YiBao's stronghold in Guangzhou. On March 15, 2013, Consumer Rights Day, Nongfu Spring held a promotion event in Guangzhou. For every purchase of Nongfu Spring products totaling 15 RMB, customers would receive a gift package.

The package included: a bottle of YiBao purified water, a book titled "Water and Health," two pH test strips, and a leaflet with content such as "Is the water you drink healthy?"

Some Nongfu Spring promoters even conducted on-site experiments outside Carrefour to educate consumers that YiBao's water is weakly acidic while Nongfu Spring's water is weakly alkaline, claiming it to be healthier.

Having experienced similar tactics twice before, YiBao directly complained to the Guangzhou Industrial and Commercial Bureau. Nongfu Spring was found guilty of "unfair competition" and fined 100,000 RMB. However, not satisfied, Nongfu Spring appealed to the Guangzhou court.

Interestingly, at this time, several media outlets, including the People's Daily-owned Beijing Times, began to criticize Nongfu Spring. The Beijing Times even published 76 articles across 28 consecutive days, criticizing Nongfu Spring's standards as inferior to tap water.

Nongfu Spring accused YiBao of manipulating behind the scenes, while the Beijing Times implemented public opinion violence. With no resolution in sight, each side stuck to their own arguments.

In the end, Nongfu Spring came out on the losing end. Its bottled water was ordered to cease production by the Beijing Quality Supervision Bureau, and it also lost the lawsuit in Guangzhou.

YiBao continued to advance rapidly, expanding its market share to 20.4% in 2015,

The gap in profitability is even greater.

From 2021 to 2023, the gross profit margins of CR Beverage were 43.8%, 41.7%, and 44.7%, respectively, while Nongfu Spring's gross profit margins were as high as 59.46%, 57.45%, and 59.55%. In 2023, the difference between the two was 14.85 percentage points.

The difference in gross profit margin mainly comes from partner production service fees.

Nongfu Spring sells natural water, digging its own "water mine" and building its own production base, thus avoiding this expense. But Yibao sells purified water, essentially filtering and distilling tap water. In the early years, it rapidly expanded nationwide through the "mushroom tactics" by building its own factories and adopting an OEM model.

As of now, Yibao has 12 self-built factories and 34 cooperative factories. Its factory density and transportation efficiency are much higher than those of Nongfu Spring, resulting in lower transportation costs but also generating partner production service fees.

From 2021 to 2023, Yibao paid 1.992 billion yuan, 2.04 billion yuan, and 2.067 billion yuan to OEM factories, accounting for 17.6%, 16.2%, and 15.3% of total revenue, respectively.

If this expense is removed, Yibao's gross profit margin would be roughly equivalent to that of Nongfu Spring.

Looking at the net profit margin, over the past three years, Nongfu Spring's net profit margins were 24.12%, 25.56%, and 28.31%, respectively, while Yibao's were only 7.6%, 7.8%, and 9.9%, about one-third of the former.

Excluding the factors affecting the gross profit margin, it is found that the difference in the proportion of distribution and sales expenses to total revenue between the two companies is quite significant. Yibao is 30.2%, while Nongfu Spring is 21.76%, a difference of 8.44 percentage points.

Perhaps it is related to employee costs. In 2023, the proportion of employee costs under the distribution and sales expenses of Yibao accounted for 11.6% of total revenue.

In May 2020, the proportion of employee costs under the sales and distribution expenses of Nongfu Spring was only 5%. Although the data differs by two and a half years, the decrease in the proportion from 2021 to 2023 did not mention the impact of changes in employee costs.

Looking at another fact, data from QCC shows that Nongfu Spring has a total of over 20,000 employees, but only 7,931 are insured.

As a state-owned enterprise, CR Beverage shows that all employees are insured. As mentioned earlier, Yibao adopts the "people's alley warfare" strategy to deepen the market, which is a manpower-intensive tactic, leading to its higher sales manpower cost ratio than Nongfu Spring.

In contrast, the progress of CR Beverage's diversification strategy has never been smooth.

As early as the 1990s, Yi Bao introduced products such as soy milk, fruit-flavored tea, and pure tea, but consumers at that time did not buy them, instead dragging down the main business of drinking water, almost leading to its sale to Danone.

In 2010, CR Yi Bao was full of vigor and proposed the strategic goal of "from single product to multiple products". The following year, it "joined hands" with the Japanese beverage giant Kirin Holdings Co., Ltd. to jointly launch products such as Afternoon Milk Tea, Fire Coffee, and Magic.

But to this day, there hasn't been a blockbuster product. Although the prospectus shows that CR Beverage ranks first in the chrysanthemum tea beverage market and second in the flavored water market, reflected in the financial report, beverages accounted for only 7.9% of total revenue in 23 years, while drinking water products still accounted for over 90%.

Perhaps disappointed with the diversification strategy, or fearing fluctuations in stock prices after listing, Kirin Holdings cleared its stake in CR Beverage for $994 million in February this year.

The crisis does not stop there, as the weakness of the main drinking water sector is gradually becoming apparent. In 2022 and 2023, Yi Bao's revenue growth slowed significantly, dropping from 10.06% to 4.54%.

This is related to changes in consumer trends. The "2022 Mineral Water Consumption Trend Annual Report" released by JD Supermarket shows that the sales growth rates of mineral water, drinking natural water, and purified water are 43%, 35%, and 31% respectively, with purified water having the lowest growth rate, and consumers preferring mineral water.

Yi Bao has been focusing on purified water, with almost no layout in this field. Although products like "Benyou" have been launched, the mineral water track already has strong competitors like Nongfu Spring and Jingtian, making it difficult to carve out a niche.

Yi Bao's core territory, purified water products, is also under attack.

On the same day Yi Bao submitted its IPO prospectus to the Hong Kong Stock Exchange, there was a circulating introduction of Nongfu Spring's purified water products on social networks.

Nongfu Spring stated that purified water still uses natural water sources, only with a different filtration method. The packaging has been changed to green, with a capacity of 550ml and a retail price of 2 yuan per bottle.

History repeats itself, as if a replay of ten years ago: Nongfu Spring has launched a precise sniper attack on Yi Bao, while it itself is caught in a whirlpool of public opinion.

But there are also slight differences. Ten years ago, Yi Bao faced a blue ocean. But now, Yi Bao has to face the problem of declining growth.

Ten years ago, the media criticized Nongfu Spring. But ten years later, consumers have become the main force of criticism, and the "hat" they wear is even bigger.

The "water battle" is reigniting, but times have changed, and the environment is different. For Yi Bao and Nongfu Spring, it is a huge test.

Note: The data is from public disclosure and does not constitute any investment advice. Investment carries risks, and caution should be exercised when entering the market.