Zhong Shanshan, the founder of Chinese beverage giant Nongfu Spring and China’s richest man, has seen his wealth decrease by $20 billion since early May due to investors questioning the company’s strategy of selling new bottled water products at heavy discounts. Despite this, Zhong still has a net worth of $54 billion, mostly from his stake in Nongfu Spring. The company’s shares have dropped almost 30% since the discount strategy began.
To combat the declining share prices, Nongfu Spring announced a HK$2 billion ($256 million) share buyback program, with Zhong planning to purchase additional shares within the next six months. The company is trying to appeal to budget-conscious customers in a weak economy, says Kenny Ng, a Hong Kong-based securities strategist at Everbright Securities International. Nongfu Spring is aiming to compete with other beverage giants such as China Resources and Wahaha Group by offering ultra-cheap purified water.
The concerns over profitability have arisen due to the ultra-low prices and fears of a prolonged price war in the market. Shen Meng, a managing director of an investment bank, believes that Nongfu Spring will continue the price war until it gains a significant market share in the purified water market. This aggressive promotion strategy is considered unprecedented in the industry.
Nongfu Spring has traditionally been a highly profitable company, with a price-to-earnings ratio of more than 30 times, comparable to tech giants like Google. However, sales have been impacted this year by consumer backlash, which began in March, against Zhong for alleged actions against his former partner, Wahaha Group. Additionally, some criticized the company for being “pro-Japan” due to the packaging of certain products.
Despite the challenges, Nongfu Spring still has strengths such as rapid growth in its tea-based products and a strong distribution network across China. The company has capitalized on the growing consumer awareness of health by promoting sugar-free bottled tea products. Sales of water products, which account for half of total revenues, slowed in April and May due to the backlash, but sales from other beverage segments are expected to remain strong.
In conclusion, Nongfu Spring is facing challenges in maintaining its profitability due to aggressive pricing strategies, consumer backlash, and market competition. However, the company’s strengths in other beverage segments and its strong distribution network provide a foundation for future growth. It remains to be seen how Nongfu Spring will navigate these challenges and continue to position itself as a leading player in the beverage industry.
