FMCG
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The company began its change from exporter to supply chain expert in the 1970s, when it started acting as a regional sourcing specialist, matching overseas buyers with sellers not just from a nascent Chinese manufacturing industry but also Singapore, Korea and Taiwan. By now managed by the Harvard-educated brothers William and Victor Fung, the traditional broker role was nevertheless being squeezed from both ends (as had happened in western markets fifty years earlier). The Fung brothers decided to restructure; whilst the traditional middleman role of matching buyers to sellers was shrinking, there were many other value chain processes to consider. So the company spread its net, sourcing from countries closer to the buyers: Mexico, Honduras and Guatemala for the US and Turkey, Egypt and Tunisia for European markets. The business achieved true global scale when it tripled its size by acquiring Inchape Buying Services in 1995, giving it a substantial network in India, Pakistan, Bangladesh and Sri Lanka.
Li & Fung now had the ability to source essentially anything from whichever low-cost country most suited to the needs of its client and this it used as a springboard into more value-added activities. The company disaggregated the value chain into what it called ‘dispersed manufacturing’, designing product itself and then outsourcing the manufacturing to the appropriate country. It manufactured in China, for example, but managed quality control in Hong Kong. All the client had to do was specify the product requirements and Li & Fung did the rest. To achieve shorter order to delivery cycles, Li & Fung would extend its value chain reach upstream by managing production runs in its suppliers and further dis-aggregating production processes, so customers like Levis could have delivery only four weeks after passing colour sales trends to Li & Fung. The company also developed its IT: information between supply and demand was usually far better than anything its customers could do.
During the late 1990s, as private labels became the leading but still fragmented component of growth in developed markets, Li & Fung was perfectly placed to manage the rapid growth in SKU’s and supply chain complexity, cementing its position as the leading consumer goods trading company. It understood better than the rapidly evolving packaged goods value chain, saw where the value lay and how to increase its share.
Over the next decade sales grew seven-fold, reaching $14.3 billion by 2008 and giving the company enough scale to use acquisitions to extend its reach. In 2009 alone, Li & Fung acquired a British footwear company, a manufacturer of technical equipment for Nike, a major handbag maker along and the in-house sourcing divisions of Liz Claiborne and Talbots. It entered branding business via a recently launched U.S. division, LF USA. Royal Velvet, Cannon and the company that makes Vera Wang clothes for Kohl's are some of the brands the company now either owns or licenses. The company claimed it intended simply to add the front end of design onto the back end of sourcing, but the real reason was to grab the brand, the most valuable part of the value chain. An early exposure to the benefits of being the brand owner was Black Cat. This fireworks brand was introduced into the US in the 1940s, became a registered trademark in 1952, and is now the oldest and most highly recognized fireworks brand in the world, having gobbled up competitors such as Standard Fireworks, Britain’s long time market leader, in 1998.
In 2011 Li & Fung (Trading) Limited had a turnover of around $20 billion and employed about 28,000 people worldwide. It is a member of the Fung Group of companies, which also includes privately held retailing and publicly listed consumer-goods distribution businesses in Asia such as Toys R Us and the Circle K franchises. Today, Li & Fung sources from 45 countries, up from 13 in 1994, and is developing supply arrangements in new markets such as Sub-Saharan Africa, which it believes could one day replace China as the world's lowest-cost maker of consumer goods.
The company, whilst being highly decentralised (in effect, a business unit for every customer) is basically divided into three: Trading, Logistics and Distribution. Within the Trading arm, Li & Fung is the world’s leading consumer goods sourcing company across a wide range. The company is increasingly used by its customers to take an initial design idea all the way through to the finished product. With the product made, Logistics kicks in, offering warehousing, transport, repacking, customs brokerage, freight forwarding, hubbing and consolidation. Distribution, based primarily in the US and Europe, means much more than simply trucking product. It too is divided into three: private labels, proprietary brands and brand licensing. For private labels, Li & Fung takes on all aspects of the value chain apart from retailing, the second two the company develops exclusive lines of branded merchandise for brands owned either by itself or outside entities. Added to all this is the Fung business intelligence centre which, thanks to its enormous global reach, collects and analyses market data on China’s economy and other Asian countries.
While Li & Fung has not yet become a major brand-owning company, it may represent their next logical step. The company has all the capabilities needed to be a successful brand owner; top-notch knowledge of market trends, world-class capabilities in product design, sourcing, logistics, retailer relationships and distribution. Were they to buy a major brand, or several, here is no reason why they could not or should not succeed in developing them. Their turnover already approaches that of Kellogg’s and Heinz combined, a clout that would leave a sizeable footprint in both major and emerging economies.
Head-on Competition
While many of the companies examined in this book are used to competing with local players in emerging markets, they are not accustomed to new competitors in these markets taking on their core brands. Although this is a commonplace in categories such as consumer electronics, it has hardly ever happened in packaged goods. But when it does, it comes as a major shock to the leading manufacturers. Senior executives in Coca-Cola and PepsiCo, marvelling at the annual sales increases from China in the latter part of the 20th-century, had no idea that their toughest new competitor for decades would come from a middle-aged salesman whom the cultural revolution had re-cast as a rural peasant for 15 years and who started in business delivering goods to retailers on his tricycle.
Wahaha
Zong Qinghou founded Wahaha in 1987, selling ice cream, soda drinks and school exercise books, all delivered by tricycle, in Hangtzhou, Zhejiang Province. In 1988 he moved into oral tonic and did very well. But he also realised that although the nutritional drinks category was swamped with competitors, none of them was targeted children. A year later he had set up the Hangzhou Wahaha Nutritional Foods Factory to make the Wahaha Nutrient Beverage for Children. Wahaha means ‘to make children happy’ and with an advertising campaign aimed squarely at China’s state-enforced one-child families - nothing was too good for these little emperors - it was an immediate success. Sales hit $65 million by 1990.
In 1991, Wahaha merged with an ailing foods business, which greatly enhanced its market capabilities. It wasted no time, launching a fruit-flavoured milk drink in 1991, soon followed by Wahaha Milk, enriched with vitamins and minerals, and this during a period when a staggering 3,000 companies had entered the children’s beverage market. Wahaha fended them off not by being the innovator, but the best and quickest, backed by a distribution network that extended deep into China’s rural hinterland.
Wahaha had more than its fair share of failures but maintained an increasing scale by buying up insolvent food and drink companies. The company’s finances were stretched, but the watershed came with the realisation that world-class production technology was needed, both to triumph over the tidal wave of local competitors and, more importantly, the multinationals now entering the Chinese market. After a prolonged courtship it decided to partner with the French giant, Groupe Danone. The two companies established several joint ventures, Danone owning 51% of the equity and Wahaha controlling local management, sales and marketing. The new venture’s key launch was Wahaha Pure Water (bottled water was a major product in Danone’s portfolio), which rapidly became the number one brand in the market. On the back of this success, Wahaha acquired over 40 c
ompanies in 22 provincial cities to become one of the country’s largest beverage companies. While the Danone relationship would later turn spectacularly sour, the relationship and the profits from Wahaha Pure Water would finance the company’s most ambitious move to date: into the cola market.
By 1998, both Coca-Cola and PepsiCo were well established in China. Coca-Cola, there before the communist takeover, was in 1979 the first western brand to re-enter the market; by the time Wahaha was contemplating entering the market, it had over 20 bottling plants. PepsiCo was only two years behind, establishing a joint venture bottling plant in Shenzhen in 1981, with ten plants running by 1998. Coke and Pepsi accounted for a quarter of China’s rapidly growing soft drink market and 80% of the cola category. The two companies had focused on snatching market share from local cola manufacturers even at the expense of their bottom lines.
So why would Wahaha even think of entering this market and risk the wrath of these two global titans with their bottomless pockets? Zong Qinghou, after years of exile in the countryside, was something of an expert on the country’s rural market and he knew very well that the cola giants had thus far restricted their efforts to the major cities where they could access large and well-established distribution networks and retailers. The hinterland was still mostly virgin territory. And it contained 1.1 billion people who, despite their lower per capita income, still accounted for two-thirds of consumer spending. As might be expected from a man who started his business delivering products on a tricycle, Zong Qinghou had by now established a superb distribution network to the smallest Chinese towns and villages. He saw multinational firms as nothing to be scared of, believing that local knowledge and expertise, a good enough product, great marketing and distribution, could trump global reach He also had a healthy disregard for the Chinese market research industry. Feedback from his village-visiting sales people was what counted.
Wahaha spent two years developing the product, consulting with the best R&D and flavour houses, and conducted thousands of taste tests worldwide. The product was as close as possible to Pepsi and Coke but tweaked sweeter and stronger to suit Chinese tastes. Wahaha Future Cola was launched during the 1998 World Cup, 25% cheaper than the major brands and exploited the company’s widespread distribution outside the Coke and Pepsi big city heartlands. The brand was marketed as a patriotic cola, packaged with symbols of happiness and good luck - crucial in appealing to traditional rural families - and the company negotiated preferential advertising spots and rates. Demand soon outstripped supply. Wahaha approached third-party bottlers. Coca-Cola and PepsiCo strong-armed their bottlers and distributors to say no, threatening them with dire consequences if they took on Future Cola and its new line extensions, a caffeine-free children’s cola and Future Coffee Cola.
Wahaha’s big advantage was the unique set of relationships its sales offices had developed in over thirty provinces where over 1,000 local distributors delivered its product to the remotest corners of the country, where 70% of Future Cola’s sales were taking place, mostly in rural areas where Pepsi or Coke had yet to appear in any great strength. Between 1998 and 2001, sales of Future Cola increased almost ten-fold giving it a market share of 14%; a year later share was up to 18%, with the extra 4% coming straight off Coke’s leading market share of 47%. In some provinces, Future itself was the market leader.
By this point Wahaha was China’s largest soft drink producer with sales of around $1 billion. Over forty subsidiaries operated over 60 modern production lines in fifteen of China’s twenty-two provinces and five autonomous areas. On the success of Future Cola, the company launched Future branded tea and fruit juice lines which, when combined with the company’s water sales, meant that in 2002 Wahaha’s total soft drink output in China exceeded that of The Coca-Cola Company. Wahaha was also one of the top ten advertisers in China, outspending Coca-Cola by around 20%, as they increasingly pushed their products into the supermarkets and hypermarkets of the major cities.
As might be imagined, this finally caught the attention of the two giants who began undercutting the selling price of Future in their original big-city key markets and taking a more localised approach to their marketing against what was firmly seen as China’s cola. Coca-Cola belatedly took the fight to Future in the rural areas, which slowed, but did not stop Future’s growth, which reached 650,000 tons by 2005. Tit for tat, Wahaha cheekily launched Future in the US, selling through small convenience stores in New York City and Los Angeles. By 2008, Wahaha’s Future Cola was a firmly established number three player in the Chinese cola market with a market share not far behind that of Pepsi. Wahaha in total was ranked the number five global beverages company.
Even after a somewhat acrimonious split from Danone, with Wahaha winning the argument that the Wahaha name never belonged to the joint water venture, Wahaha is still China’s biggest beverage producer with sales approaching $10 billion. The company now has 30,000 employees and has expanded way beyond its water, dairy, tea, juices and cola drinks into children’s clothing. It has even built a shopping complex and a Future Cola factory in Indonesia. It exports not only to other Far Eastern countries but also to France, Germany, Italy, Spain and The Netherlands and has recently signed a sponsorship deal with Manchester United. The fact that the founder and CEO, Mr Zong Qinghou, is now China’s richest man shows what can be achieved when an enterprising local business in an emerging market dares to take on the global giants.
In summary, the unique scale of the Chinese market and its speed of growth is creating a hothouse; new competitors can appear seemingly from nowhere, in rapidly conditions last seen in the latter part of the 19th-century and long since forgotten. Mengniu seems to be well on the way to joining Dean Foods and Arla at the pinnacle of the global dairy industry. The domination of Li & Fung in those major parts of the value chain that were previously the domain of the branded giants might well be a Trojan Horse containing a global competitor with all of the advantages and none of the drawbacks. And the success of Wahaha in competing head on with the most powerful brand in the world shows that no one is guaranteed an easy ride when faced with a Chinese packaged goods manufacturer. However, and as we shall see below, it is not just in China where new players are emerging
Emerging Market Companies: The Rest of World
Will new packaged goods giants rise from the emerging markets? That is not the question: they are already doing so, in countries whose development just preceded archetypal emerging markets like China and India. Here we consider three companies from three different countries, each of which has taken a very different approach on their path to greatness.
Brazil: BRF-Brasil Foods SA
Where Did They Come From?
In 1934, two Italian immigrants, Saul Brandalise and Angelo Ponzoni opened a grocery store in Vila das Perdizes, in the far south of Brazil, almost equidistant from São Paulo and Buenos Aires. The partner’s first aim was to establish a fledgling retail empire simply by merging with a store in a nearby town. However, within a year they had switched careers and were in meat production. This decision was aided by their location - the state of Santa Catarina was awash with livestock farms run by European settlers. In 1941 the firm of Brandalise, Ponzoni and Cie launched their first pork products under the Perdigão brand name.
How Did They Evolve?
Under Saul and Angelo’s energetic leadership, the company rapidly expanded into adjacent business sectors. They acquired a tannery to process their own pig skins, then branched into flour milling and even bought a saw mill. During the 1950s, the company, by now renamed Brandalise, Ponzoni SA Comércio e Industria, concentrated its expansion efforts on vertical integration. This would become an enduring hallmark. By the mid-1950s the company was farm-rearing its own pigs and its chickens were fed from its own feed mills. The resulting products were distributed by its own subsidiary, which included two Douglas DC-3 aircraft to get fresh produce to the São Paulo markets 1100kms away. Their Perdigão brand name (meaning partridge) became so popular t
he company adopted that as its official name in 1958.
The 1960s saw the company’s establishment in the large Brazilian cities of São Paulo and Rio de Janiero, and during the 1970s they developed a national presence across Brazil. Soon after, Perdigão made its first foray into a production of branded processed meat products such as hamburgers and salami. They were also steadily increasing investment in R&D capabilities. R&D came up trumps in 1981 when the company launched chickens under the Chester brand name. These had been specially bred to have a greater proportion of meat in the breast and thigh portions, and were quickly followed up with low fat versions. In the mid-1980s Perdigão withdrew from a number of what were now non-core operations, such as the saw mill and retail outlets. By expanding into the beef category, they became a dedicated food producer. The company increasingly added brands to its portfolio through: a combination of its own efforts, the use of established children’s characters such as Turma da Mônica, and acquisitions such as that of Swift canned vegetables in 1989.
Unfortunately, the apparently irresistible force of Perdigão’s constant expansion hit the immovable object of the Brazilian economic crisis of the early 1990s. It very nearly bankrupted the business. In 1994, the Brandalise and Ponzoni families sold out to a consortium of pension funds. They wasted no time in seeking to turn around their investment.
How Did They Build the Modern Business?
The transition from being a family-run to professional manager-run business can be a slow and tortuous process. Not so with Perdigão. The new owners had a clear out at the top and hired a team of seasoned executives to embark on an extensive restructuring of the company, both operationally and financially. This resulted in a tighter definition of what were the core operations, with the outcome that non-core activities like the animal feed divisions were sold off.