China’s Richest Man Zong to Expand Into Department Stores

Chairman of Hangzhou Wahaha Group Zong Qinghou
Zong Qinghou, chairman of Hangzhou Wahaha Group Co. Photographer: Nelson Ching/Bloomberg

Billionaire Zong Qinghou, whose beverage maker Hangzhou Wahaha Group Co. has made him China’s richest man, said he plans to venture into retailing by opening 100 department stores.

“We are in talks with many local governments as establishing big stores require land,” Chairman Zong said in an interview in Beijing late yesterday. “By setting up our own shops, we can have more say in the distribution” of Wahaha’s products, including carbonated drinks and mineral water, he said.

Wahaha, founded in 1987 by Zong with a 140,000 yuan ($21,300) loan, aims to boost sales 27 percent this year to 70 billion yuan, he said. The closely held beverage maker in 2009 ended two years of legal disputes with Danone over control of the Wahaha trademark, with the Paris-based owner of the Evian and Volvic bottled-water brands agreeing to sell its stakes in their joint ventures.

Wahaha, the third-biggest soft-drinks maker in China by market share, will also invest in mining and high-tech industries, said Zong, 65, who is also a delegate to China’s parliament. The National People’s Congress, a meeting of the legislature, starts its annual session March 5.

“As for overseas investment, I’m not going to compete against foreign companies,” said Zong, whose wealth was estimated by Forbes at $8 billion last year. “What I’ll do is buy companies that make products that China lacks or China isn’t good at making and sell them back to China.” Wahaha already makes milk powder in the Netherlands, he said.

Coca-Cola, Tingyi

The beverage maker, whose name means “Laughing Child” in Chinese, competes against Coca-Cola Co. and Tingyi (Cayman Islands) Holding Co. in the world’s most populous nation, where retail sales grew by a monthly average of 18.4 percent in 2010.

Profit margins in the department store business are “much better than in manufacturing,” Zong said. “We’ll have opportunities for department stores and supermarkets in second-tier cities, which will also ensure our products are sold across the country.” He didn’t say when or where he plans to begin.

“As a sector, retail is a good one to explore, but it’s not easy to understand,” Shaun Rein, Shanghai-based managing director of China Market Research Group, said in an interview. “With no background in retailing and core expertise in beverages, the key for Wahaha to win is to hire the right management so that they can create the right concept.”

Fragmented Market

Building department stores may boost Wahaha’s revenue to 100 billion yuan, Zong said, without providing a time frame. Major urban centers like Beijing and Shanghai have already “been conquered by established players,” Zong said. “We’ll eventually come back to the big cities” after establishing a retail brand, he said.

“Most of Wahaha’s growth will come from new product development and widening of the distribution network,” Zong said.

The country’s retail market will remain fragmented because the size of the population and competition from local outlets prevent the dominance of one chain, Roger Wang, chairman of Nanjing, China-based department-store operator Golden Eagle Retail Group Ltd., said in September.

Golden Eagle, which made all of its 1.2 billion yuan first-half sales from 17 locations in China, had a profit margin of 40 percent in the period. Parkson Retail Group Ltd., the Beijing-based operator of 46 department stores in 30 cities, had a 26 percent profit margin on its 3.82 billion yuan revenue last year.

Milk and Soda

Zong’s company, based in Hangzhou in China’s eastern Zhejiang province, accounts for 9.7 percent of China’s dairy market, the third-largest share, according to data from Euromonitor International.

China Mengniu Dairy Co. leads the country’s dairy market with a 19.5 percent share, with Inner Mongolia Yili Industrial Group Co. at No. 2 with 15.7 percent, Euromonitor data show. Annual sales for the industry increased 73 percent to 175 billion yuan in 2010 from 2005, the research company said.

Wahaha also ranks third in China’s soft-drinks market with a 7.2 percent share at the end of 2010. Coca-Cola had 17.2 percent while Tingyi controlled 13.2 percent. PepsiCo Inc. was fourth with 6.6 percent, the researcher’s data show.

Sales of soft drinks, a classification that includes soda, juice and bottled water, almost doubled over five years to 270 billion yuan in 2010, according to Euromonitor data.

Zong topped the Hurun Rich List with an estimated wealth of $12 billion in 2010. He also ranked first in Forbes Asia’s China rich list last year.

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