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Jia Duo Bao Group (JDB) – a Hong Kong-based enterprise established in 1995 focuses its business in the production and sales of specialized beverages. Currently, it is the largest nutraceutical drink manufacturer in China attributing its success to their main beverage product, a red-canned herbal drink called “Wong Lo Kat” (WLK). In efforts tie in with the nationwide market development strategy, the group set up 4 production plants in the different regions of China namely Beijing, Zhejiang, Fujian and Guangzhou to achieve greater reach within China. As of 2011, the group has managed to capture over 30 regions and provinces in China and exports to western countries such as the United States and Europe.
In the last five years, WLK allocated a huge portion of its budget to marketing. The strategy focused on mass marketing efforts indeed proved to be very successful in capturing the different target segments through various mediums used. This eventually translated to an all time high revenue of 17 billion yuan in 2010 and has made WLK a brand that consumers trust the most. However, in light of this success, WLK still needs to push ahead for further improvements in order to sustain its market position. Therefore, in doing this, we analyzed the internal and external business environment to better evaluate WLK’s position and ensure smooth execution of the proposed goals, strategies and tactics in the next 5 years. Vision: “To be the global market leader in the beverage industry” Mission: “Provide customers with high quality and best value herbal tea through the constant pursuit of innovation and excellence”
With the functional drink market enjoying greatest value and volume growth, many players have been focusing their efforts on differentiating their products. Today, there are over 50 other brands competing alongside WLK. However, the factor that distinguishes WLK from its competitors is their established brand name and customer loyalty. These two factors, coupled with a high set up cost and the inability to enjoy economic of scale (EOS) production acts as a deterrent for new entrants. WLK, being the market leader in the nutraceutical industry, significantly lessens the bargaining power of its suppliers as suppliers often like to leverage on the affiliation with big players and are unlikely to turn away from the huge income attached to such customers.
At a current price point of 3.5 yuan, which is considerably higher than its competitors, WLK is still able to enjoy a high take up rate because of the strong beliefs in the quality and effectiveness of the drink. The fact that people tend to buy the drink for its functional benefits also suggests that substitutes do not post any threat to WLK. Therefore, due to the strong demand and brand loyalty of consumers, the power of retailers and substitutes are weakened to a large extent. Overall, the competitive forces surrounding the functional drink industry in China is relatively low. In essence, we see that WLK is a rising star in this category in addition to it being the dominant player in China.
Pertinent to the first tactic of our first strategy, the following graph charts the increase in financial contribution of fountain sales by 1.11% to the goal of 15% CAGR growth yearly.
Strategy 1: Establish a stronger presence in the local functional drink market
1. Enter the fountain market by collaborating with established food-chains The crux of this tactic will be to enter the fountain market by tying up with established F&B brands specifically Yum! Brands, Little Sheep Group and KungFu Fast Food. These food-chains are selected due to their strong brand name, vast number of food-chains all over China and great strategic value. Having a collaboration with these three firms will allow WLK to gain access to their well-established distribution channels, build up their brand name as they are seen associated with well-known brands and finally, reduces their risk of entering the fountain market. On the flip side, WLK is desirable as a collaboration partner since they are currently China’s market leader in canned drinks. Besides, China consumers favour local products over imported/westernised products.
The entrance to the fountain market will be broken down into two stages. For the first three years, WLK will provide its product through the use of metal kegs. Concurrently, research and development will be in placed to produce a concentrate syrup that WLK is missing. This will eventually replace these metal kegs from the fourth year onwards. The additional labour and cost is justified as time is essential and WLK has to move into the fountain market while the other competing brands are not currently in. This will allow them to have the first mover advantage and ensure that these popular food-chains will not hold other brands with similar properties in the future.
Entering the fountain market will give WLK an increase in 8% of its revenue. Besides the boost in revenue, WLK also enjoys benefits such as increase in revenue streams, brand recognition and brand loyalty.
2. Introduce differentiated Wong Lo Kat product
The herbal tea market is one that is highly contested in China and coming up with a new line of products is certainly not one without risk/indeed unwise as many would think. However, WLK , being an established brand name in this market, will be able to leverage on this fact to win over consumers’ trust for these new and differentiated products (i.e. ginseng, red date and ginger tea). Currently, there are few small players carrying these products in ready to drink versions with most being sold in packet or raw form and because of the limited reach these players have, it hinders the product take up rate and henceforth its sales. Therefore, with WLK adopting this tactic, it will help to expand the ready to drink segment which acts to increase WLK’s brand appeal and additionally reap in a significant increase in revenue.
Strategy 2: Differentiate the Wong Lo Kat brand in the local market Similar to the soft drink industry, the herbal drink industry is also very competitive and their products are relatively easy to imitate. Strong branding lowers industry forces and ensures Wong Lo Kat remains dominant in this competitive industry. As a result, brand plays a crucial role in ensuring future success for Wong Lo Kat. Thus, our team aims to further differentiate the Wong Lo Kat brand from other smaller herbal brands over the next 5 years.
1. Place strong emphasis on Corporate Social Responsibility by championing CSR initiatives Contrary to popular belief, Chinese nationals have a strong nationalistic culture due to the country’s communist past. In addition, Confucianism had an important part to play in shaping the belief system of most citizens. They were taught to place the interests of their country first, then family and finally themselves. Hence, Chinese nationals tend to believe that organizations in China should do their best to help fellow comrades in times of need. This is illustrated during the 2008 Sichuan earthquake when angry Chinese nationals ostracized many large International firms like Coca Cola and McDonalds for giving too little to help the victims of the earthquake.
These firms were called “Iron Roosters” for being stingy and their deeds were published on numerous media platforms like Weibo. This resulted in widespread protests and boycott of their products. Chinese nationals claim that these companies benefitted tremendously from their investments in China but are not giving back to the community. Based on such an experience, our team concluded that Chinese nationals have high expectations of firms operating in China. They demand that firms either give a generous part of their revenue back to the community or face widespread boycott of their products.
Our team plans to set aside RMB 0.20 for every can sold for a relief fund. Based on the number of cans sold in 2010, we estimate that the fund would raise RMB 500 million per year. Other than aiding in disaster relief efforts, the fund could be used to sponsor charity shows, campaigns and events. An example would be to organize an annual Wong Lo Kat marathon aimed at raising money and awareness for the terminally ill. Our long run objective is to have 2 new CSR initiatives on an annual basis.
2. Set up flagship store to allow consumers to identify themselves with the Wong Lo Kat brand One of the main stereotypes of Chinese companies is their inability to build brands as well as their Western counterparts. Other than the conventional adverts, we rarely see China firms engaging in other tactics to increase their brand value. It is hence not surprising to see that most flagship stores that are built in China belong to western corporations.
By being one of the first local brands to build flagship stores across China, Wong Lo Kat would clearly differentiate itself from other herbal drink brands. Having a flagship store also allows their customers to identify more closely with the Wong Lo Kat culture.
These flagship stores would be located in the three most populous cities in China, Chongqing, Shanghai and Beijing, with one store built each year from 2013-2015. These streets are chosen because they are the main shopping districts in each of the three cities and thus experience a huge volume of traffic daily. Other than brand differentiation, locating the store in a popular street also markets the product to a greater audience.
Strategy 3: Develop consumer base in other Asian Region
1. Enter joint venture in production and distribution facilities with favourable response As WLK is already the best-selling canned drink in China, the obvious strategy would be to conquer new markets and diversify their current portfolio of markets. We propose that WLK establish a concrete expansion plan that is ambitious yet conservative, that investment should only be taken when the management is sure that the market is receptive of WLK’s entrance. Currently we are already a major Chinese canned drink brand, in 5 years we hope to establish presence in 5 more Asian cities and use them as a base to expand into other Asian cities. By 2031 we hope to be a major canned drink player in Asia.
Asia: We propose an Asian-only expansion based on key factors that are vital to the profitability of WLK. 1. Understanding of medicinal effect of herbs and spices
Asians understand that that can balance their body and improve their health through consumption of herbs and spices. 2. Tea cultures that spanned over thousands of years
Tea has been part of Asian’s lifestyle for thousands of years. In many parts of Asia, there is a preference of tea-based drink over carbonated soft drinks (CSD). For example, Pokka Green Tea is the best-selling drink in Singapore and Vietnamese prefers bottled Lipton Iced Green Tea over CSDs. 3. Increasing trend of health consciousness in Asia
The rise of the new middle class in Asia is accompanied by the increasing trend of health consciousness in Asia. Many Asian governments discourage the consumption of CSDs and many Asians prefer tea based drinks as it is a healthier option.
Tactical Expansion Plan: Our expansion plan will be based on market studies focuses on two factors, preference of WLK in local market and correlation of product knowledge vs. preference. We believe that the demand for WLK can be explained by this formula:
D = I + cA
*Where D = Demand for WLK, I = Initial Demand, c = country’s correlation of product knowledge and preference, A = advertising expenditure. With this formula, we can estimate demand and to set up production only if it is profitable to do so.
Expansion Decision: We aim to set up joint venture in 5 major cities in different regions by 2017. The cities we choose will be the regional headquarter for expansion, acting as a base to penetrate other cities around the region in part of our expansion plan.
Production: As WLK do not use any preservative, they have very low shelves life of 2 months. Hence, to enter a market, it is vital to have production in close proximity to the city.
Joint Venture: We opt for joint ventures in our Asian expansion mainly due to 2 key reasons. 1. Lack of expertise in oversea expansion
JDB Group lacks the expertise needed in oversea expansion. Furthermore, there is a high tendency for Chinese companies to fail in the global market and having a joint venture will mitigate this risk. 2. The ability to use our JV’s distribution network and production
We foresee low demand in our initial years of production. Hence, it will not be justified to have our own production. In our initial years we will use our JV’s production and we can save substantial cost by using their distribution network.