Wahaha goes against the grain with liquor venture

Beverage tycoon Zong Qinghou has announced a five-year, 5 billion yuan ($820 million) plan to diversify his beverage empire by collaborating with liquor producers in the hometown of the country's most famous liquor brand, Moutai.

Zong, who got his start as a frozen snack vendor in Hangzhou, has built an empire based on bottled water, soda and other nonalcoholic beverages. Now, his Hangzhou Wahaha Group Co Ltd will work with Jinjiang Liquor Co Ltd in Moutai county, Guizhou province.

The two companies will integrate local small and medium-sized distillers to develop a new brand.

His move into the liquor business comes as the sector struggles with sluggish sales amid a government crackdown on corruption and lavish consumption using public funds.

In the first three quarters, 13 listed liquor companies' revenue and net profits declined for the first time in nine years, according to Shanghai-based Wind Information Co Ltd.

Zhao Ping, deputy director of the department of consumer economics at the Chinese Academy of International Trade and Economic Cooperation, which is under the Ministry of Commerce, said that excess production and high prices were behind the sliding performance.

But Zong, now chairman of Wahaha, plans to follow a classic strategy of "buy low, sell high". He expects his opportunity to sell will come in about five years, when the industry revives.

"The liquor business has been greatly affected by policies recently," he said.

"But the culture of drinking liquor is deeply rooted in China, and consumers' spending on liquor won't decline."

Moutai's unique, finite resources and the complex procedures involved in producing the liquor also convinced him to make the investment.

But the marketing and distribution of the new liquor will rely largely on traditional sales channels and large dealers, instead of Wahaha's own vertically integrated distribution network. The company's nationwide sales network, which reaches down to even small outlets, is the foundation of his beverage empire.

Wang Lusheng, a former government officer in Guizhou province, said that an alliance of small distillers and large companies such as Wahaha will combine the strengths of both, in terms of capital and products.

The Wahaha group has made several attempts to diversify over the past decade.

In 2002, Wahaha announced plans to offer children's apparel. In 2010, it created a baby formula brand that hasn't created much of a stir in the market.

In 2012, Zong launched a new retail venture that included the WAOW Plaza shopping center in Hangzhou, which has failed to live up to expectations.

"Nowadays, you cannot build anything from scratch," said Zong, who was once ranked as the country's richest man.

"The markets don't allow a company to do that any longer. You have to work with an experienced partner in a new area. I don't select sectors. Where there is a demand, there is an opportunity for me."