China’s Thirst Makes Wahaha’s ‘Poorest Boss’ the Richest

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

Zong Qinghou, China’s richest person with a fortune estimated to be at least $8 billion, says his personal spending averages $20 a day. The soda and juice magnate doesn’t gamble, drink or play golf and eats his meals at the company canteen.

Zong’s frugality extends to how he runs Hangzhou Wahaha Group Co., the third-largest soft drinks company in China. Its headquarters for more than two decades have been in a six-floor gray building next to a railway station in the eastern Chinese city of Hangzhou. Former Wahaha marketing director Shang Yang said he remembers Zong, a Communist Party member, personally reviewing every expense, including the purchase of a broom.

“One of the reasons he’s been so successful is he keeps costs down, making sure every dollar spent goes toward making more money,” Shaun Rein, Shanghai-based managing director of China Market Research Group, said. “He doesn’t show off his wealth. He toes the party line.”

Zong, 65, says he’s now ready to spend. Closely held Wahaha has accumulated $2 billion in cash for expansion, including a foray into retailing with a planned 100 department stores. The company he started with a 140,000 yuan ($21,300) loan in 1987 aims to boost sales 27 percent this year to 70 billion yuan, he said in a March 1 interview in Beijing.

Market Share

“I want Wahaha to be among the world’s top 500 companies within five years,” said Zong, a delegate to China’s parliament whose ranking shot up from No. 63 on Forbes’ list of richest Chinese in 2007 to the top slot last year.

Wahaha will initially set up stores in second-tier or third-tier Chinese cities, Zong said, following the strategy he used to turn an ice-pop and soda shop into a beverage company with a higher market share than PepsiCo Inc. in the world’s most populous nation.

The maker of Wahaha-brand juices and mineral water controls 7.2 percent of China’s soft-drinks market, according to data from Euromonitor International. It trails Coca-Cola Co., with 17.2 percent, and Tingyi (Cayman Islands) Holding Co., with 13.2 percent. PepsiCo ranks fourth at 6.6 percent. Building department stores and supermarkets across China will help widen Wahaha’s distribution network, said Zong.

China’s biggest urban centers such as Beijing, Shanghai and Guangzhou have been “conquered by established players” such as Parkson Retail Group Ltd. and there’s greater potential for a new business in the smaller cities, he said. Beijing-based Parkson, which has a profit margin of 26 percent, quadrupled net income in the five years through 2010 to 992 million yuan.

Mao’s Strategy

Zong uses Mao Zedong’s strategy of “surrounding the cities from the countryside,” said Shang, Wahaha’s national marketing director from 1998 to 2003. Mao, the founder of the People’s Republic of China, won the country’s civil war at least partly by strengthening his position in rural areas.

The Wahaha chairman said his first job after finishing middle school at 18 was to collect brine at a salt farm in the port city of Zhoushan in eastern Zhejiang province. The son of a government clerk, Zong said he heeded Mao’s call to work in China’s countryside. A year later, he moved to an agricultural farm, where he worked for 14 years.

“Zong knows China’s rural markets and if Wahaha were to go into retail it would make sense for them to go into retail in second-tier, third-tier or even fourth-tier cities, because land prices are much lower, especially in central and western China,” said Jason Yuan, a Shanghai-based analyst at UOB-Kay Hian Holdings Ltd.

Cash Pile

Wahaha is already in talks with some city governments as it may need to buy land to open stores, Zong said. The expansion into retailing may further lift sales to 100 billion yuan, he said, without providing a timeframe. The company’s revenue grew 27 percent to 55 billion yuan last year.

“Sitting on a big cash pile of 13 billion yuan, it’s very difficult to know what to do with it,” said Rupert Hoogewerf, founder and compiler of the Hurun Report, which estimates Zong’s wealth at $12 billion, 50 percent more than Forbes’ approximation. “His key business doesn’t need that much extra money to invest.”

Still, Rein said Wahaha has no experience in retailing, a business that’s “not easy to understand.”

Wahaha will expand into retailing because the margins are “much better than in manufacturing,” according to Zong, who said he works every day including the Lunar New Year holidays, when most of China shuts down.

No Time

While Zong is wealthy, his personal annual spending doesn’t exceed 50,000 yuan, he said. “I spend less than my employees, simply because I have no time.”

When he isn’t traveling to meet distributors, he gets to work at 7 a.m. daily and finishes about 11 p.m. His office, a triangular 650 square foot room, has a bed for when he can’t make it home.

“Zong is like a general in the army,” said the Hurun Report’s Hoogewerf. “He dresses very low key, he doesn’t have any luxury habits with exception of drinking a certain type of tea and smoking a certain type of cigarette.”

Zong said he prefers Dragon Well green tea and chain smoked Davidoff cigarettes during the March 1 interview.

He was also chain smoking in 2007 when he first met Qian Weiqing, a senior partner of Beijing-based Dacheng Law Offices who represented Wahaha in its legal battle with Danone, the lawyer said. Zong was embroiled in more than 30 lawsuits with Danone, which accused him of selling Wahaha-branded juice and tea outside of their partnership formed in 1997.

The billionaire had feared he might lose his company, Qian said. “He didn’t know what the odds of winning were.”

Danone Buyout

Wahaha bought Danone out of their ventures in a 2009 deal brokered by the Chinese and French governments. Danone had no further comment, said Sabrina Schneider, a spokeswoman.

Wahaha benefited from Danone’s initial investment and expertise, said Shang, the former Wahaha executive.

“If Wahaha had built the business by itself, it would have been as slow as a rolling snowball and it may have caused delays in capturing market opportunities.”

After working in the countryside for 15 years, Zong returned to Hangzhou, Zhejiang’s capital, and moved from job to job before borrowing money from relatives and friends to set up a store. He also sold snacks and drinks while pedaling around on a tricycle before going into beverage making in 1988.

“I started my business career as China’s poorest chairman,” he said. “Making money to me means realizing the value of life.”

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