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Nongfu Spring: Drinking Water Leader – Initiate with Buy [2/3]
COVID-19 and China
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This article is part II of our analysis on Nongfu Spring – check out part I before you read. 

► Packaged drinking water is the largest and fastest-growing segment in the soft drink industry in terms of market size, with a compound growth rate of 11%.
► Superior profitability was driven by leading market dominance in packaged drinking water products (1st in china). Nongfu also has shown innovation: a fruitful product mix spans from functional items to tea and juice beverages (all 3rd). In the context of consumption upgrades and raising awareness of health, Nongfu Spring's sugar-free beverages are catching customers.
► Acquiring customer mindshare with a marketing campaign and good product quality. With people's current emphasis on product quality and health, Nongfu Spring predicted customers’ potential needs on natural, healthy beverages faster than the rest of the market and are devoted to product research. With excellent product lifecycle management and distribution channel management, it aggregated market shares continuously. For instance, it took the firm four years to build its tea into a product with CNY 3.1 billion annual sales.  

Demand side - Packaged water

In 2019, the packaged drinking water market size reached CNY 2017 billion, the largest and fastest-growing subsegment of the soft drink industry, with a compound growth rate of 11%. The sales volume of packaged water has increased since 2010, from 17.5 billion liters to 43.6 billion liters, with a CAGR exceeding 10%.

According to Euromonitor, China's per capita consumption of packaged water in 2019 was only 31.2 liters, which is far lower than the United States (108.7 liters), Europe (98.4 liters) and other developed Western countries – it is also lower than South Korea (51.9 liters) and Japan (35.6 liters). Taking the markets of developed countries as a reference, China's packaged water industry still has growth potential.

In the context of consumption upgrades, rising income levels make consumers less sensitive to the price of packaged water. According to the 'China Public Health Drinking Water Blue Book,' the most crucial factor for consumers purchasing packaged water is water quality, which accounts for 41%, followed by personal habits, water source, brand and taste. Price only ranks sixth, indicating the advantages of Nongfu Spring's high-quality products have been revealed.

However, the current competitive landscape in the packaged water market has not yet stabilized. According to Frost & Sullivan, the top three market shares of China's packaged water in terms of retail sales in 2019 were Nongfu Spring, CR and Ganten, which accounted for 21%, 13%, and 8% of the market, respectively. And 21% is not a safe number for Nongfu Spring, so the company is developing towards a multi-category strategy.

Category expansion

The company first launched the 'Oriental Leaf' (东方树叶) and entered the territory of sugar-free tea beverage in 2010. At that time, the mainstream products in the market were Master Kong's Ice Tea. Although various beverage companies tried to launch sugar-free tea beverages, they generally withdrew from the market due to low consumer acceptance and pricing levels that did not meet the consumption power at that time. Oriental Leaf has become the brand with the largest market share of sugar-free tea in 2019. As a result, there is a lot of room for growth.

Driven by the increasing health awareness of Chinese consumers, the tea beverage industry has now entered a mature period of relatively slow growth. The retail sales of sugar-free tea beverages increased against the trend. In 2019, the market size of sugar-free tea beverage was CNY 4.1 billion, with a five-year CAGR of 32.6%, making it the fastest-growing segment of the tea beverage market.

Unique advertising skill

Nongfu Spring makes good use of the concept of 'natural' to occupy the minds of consumers. The company uses program naming, movie placement, celebrity endorsements, sports events, social media marketing, cross-industry cooperation and other marketing methods to further bind products to the concept of 'natural.' For example, through the micro-film 'Porters' to show Nongfu Spring's brand spirit and propositions for pragmatic work. Besides, the TV show 'Nature' shows the natural ecological environment of Nongfu Spring's water source. With people's emphasis on product quality and health, the advantages of Nongfu Spring's advertising language have become prominent.

The company signed a strategic cooperation agreement with the Pharmaceutical Research Institute of Yangshengtang, responsible for beverage-related research. A series of beverage products – such as the 'Oriental Leaf' – emphasize raw materials, and the 'vitamin water' emphasizes the addition of natural juices. All of this helps the marketing drive around the 'natural' tone of the parent brand, which is synergistic with the packaged water brand and has a bright image.

According to the Kantar Index Chinese Consumer Survey, the rank of consumer preference drawn to the Nongfu Spring brand has risen from the 24th in 2014 to the 7th in 2019, which is conducive to the rapid market opening sub-brands.

This article is part II of our analysis on Nongfu Spring. Please continue to part III.

Editor: Luke Sheehan
ANALYST
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