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China’s fast-growing sparkling water maker Genki Forest wants to grow faster, will it succeed? (Part 2)

Written by Qianyu Han Published on     6 mins read

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The beverage maker has been galloping since its foundation, showing no sign of slowing down.

Part 1 covers Genki Forest’s gallop in its early days and how it expanded sales channels both online and offline to reach a wider customer pool.

An aggressive boss

As the founder of one of the most popular beverage makers in China, Tan managed to keep a low profile, rarely making public appearances.

Those close to him described him as a forward-looking man but also an aggressive control freak. Overall, Tang was not a nice guy, according to some of those who have spoken with 36Kr, with one person saying Tan is “very capable with a terrible personality.”

An early employee of Genki Forest said that even though Tang Binsen did not know well about how the fast-moving consumer goods (FMCG) industry works at the beginning, he insisted on his own judgments anyways. “What he needs is not a strategist or an adviser, but an executor who carries out his orders.”

As someone who has made his fortune in game development, Tang values a return on investment and cost accounting. An anonymous employee told 36Kr that when the company was trying to figure out whether it should enter the milk drinks market, Tang did all the financial and data calculations himself. He used a joint venture company between Coca-Cola and Mengniu Dairy as a model, conjecturing whether he had a chance to win given the same amount of capital and resource investment. After concluding that it’ll be difficult for Genki Forest to out-compete in this subcategory, he called off further investments into the area.

His forward-thinking and judgment are reflected not only in steering towards the right direction but also in setting goals. “For someone who made their fortune overnight from gaming, his value judgment and mindset would be different from the others. For example, he believes that 1x growth won’t work. It’s a target too small to motivate his team,” an investor told 36Kr.

Heavy costs

Marketing and advertising are not the only places where Genki Forest pumped in money. The company aims to innovate its products so they stand out from the competition, which translates to heavy costs on time, raw materials, and manufacturing.

In its early years, even after repeated trials, Genki Forest failed to produce a hit product in the market. It has taken a toll on the company’s finances and upset the founding team’s morale, leading to a few key members’ departures in frustration.

During the development of its sugar-free sparkling water, the product division was once hesitant about the high cost of the change to erythritol, a sugar substitute that tastes better and costs more than traditional substitutes such as aspartame and acesulfame, but Tang was adamant. He advocates making quality products first and then calculating the cost.

The annual gross profit margin is around 60% and 55% for Coca-Cola and Nongfu Spring, respectively. Marketing agency GrowthBox pegs Genki Forest’s profit gross margin at about 28%, much lower than its peers.

Despite that, Genki Forest is not shy about spending money on where it should, such as building its own factories.

In the past, outsourcing production has hindered the innovation of Genki Forest. Zong Hao, vice president of Genki Forest, illustrated this with an example for 36Kr: Genki Forest once proposed to some domestic factories to produce a kind of fizzy water called “Manfen Juice (Ace Juice).” This is the first time that Genki Forest launched a beverage that mixes fruit juice and carbonated gas in China and would require a new mixed bottling technology.

Many local factories turned down the offer because it’ll require them to refit their production lines that come with additional costs.

So, unlike major players such as Coca-Cola, which built its own factories in China after years of outsourcing production, Genki Forest set up its own factories in its early days to ensure products are made according to its own plan and to protect its recipe from leaks. In addition, erecting factories across different market regions can also help it optimize its regional supply chain and save on logistics costs.

Genki Forest has so far put five production plants into operation, and it is expected that by the end of 2021, 80% of the production of Genki Forest products will be done in its own facilities. Its Tianjin plant cost RMB 500 million (USD 78 million), and the Anhui plant’s initial cost was RMB 450 million (USD 70 million), about a third of its latest funding round of USD 500 million.

“Unlike others, in the beverage industry, independent R&D and production capacity are crucial when developing offline channels, which requires a strong and steady power chest for businesses,” a manager in the beverage industry told 36Kr.

According to data obtained from the interview, 36Kr estimated that the company’s annual cost, which includes marketing, distribution, production, plants, etc., should be no less than RMB 5 billion (USD 781 million). Unfortunately, as it might have been expected—it seems that Genki Forest is still in the red.

Full speed ahead

Genki Forest is aiming to reach the scale of other beverage heavyweights, including Coca-Cola and Nongfu Spring.

According to 36Kr, Coca-Cola’s annual beverage sales volume in China averages RMB 30 billion (approx. USD 4.7 billion). And according to Nongfu Spring’s financial report, its annual sales of drinking water and beverage products in 2020 reached RMB 14.3 billion (approx. USD 2.2 billion).

Genki Forest sets its sales target at RMB 7.5 billion (USD 1.1 billion) offline and RMB 800 million (USD 125 million) online for 2021, while its sales volume in 2020 was between RMB 2.3 and 2.5 billion (approx. USD 359–391 million). Tripling its sales in one year is undoubtedly a radical goal.

However, its distributors agreed with this seemingly unattainable goal. “This is how you hit a home run. New products and replacements are flooding in, and if you settle for the step-by-step growth of 10% every year, your product might survive a decade or two and soon get washed out,” one of the distributors said.

To carefully plan out a course to arrive at its offline sales goal, the company has set up a yet-to-be-named new department to specifically handle financial accounting and strategy making.

36Kr learned that Genki Forest’s sugar-free sparkling water accounted for more than 70% of its total sales in 2020. But the product is slowly approaching the growth ceiling. On top of that, the concept of “zero-sugar, zero-fat” is being challenged by state media for its exaggeration. “Even if we sail through this year, it is completely normal to see a 30% drop next year,” one distributor said.

Given the circumstances, developing and diversifying product lines has become a critical component to its 2021 sales goal.

Sparking water aside, the milk tea line and other products accounted for about 20% and 10% of Genki Forest’s sales, with much room to grow in these two categories.

Before the growth ceiling for its sparkling water drinks loomed, Genki Forest channeled most of its resources into producing and promoting its sparkling water. Now with a pumped-up target, the company will have to switch gears. A number of distributors who spoke with 36Kr said that since the beginning of this year, they have been asked to more actively prioritize and promote the milk tea line.

Genki Forest is also expanding through investments, with Challenjers Capital backing the push. A beverage industry insider told 36Kr that launching a multitude of independent brands and acquiring sub-brands will be an important next step for the company this year to help it deliver part of its sales KPI (key performance indicator).

Other places to look for further growth are lower-tier and overseas markets; both are challenging markets to enter. Distributors of Genki Forest said that besides sparkling water drinks, other products are difficult to promote in the backwaters of China, partially because of their higher price tag. A bottle of Genki Forest milk tea could cost RMB 10, or USD 1.54.

Going overseas, at the same time, is no easy task. To start with, building factories remains a challenge for the company as a result of hindrance from local laws and regulations.

Under the pressure of rapid-fire growth, Genki Forest also faces the problem of balance between sales volume and profit, an issue that might lead to a “sell more, lose more” conundrum.

Competition in China’s beverage industry is also getting hotter. Now that Coca-Cola, Nongfu Spring, and other industry giants are gradually recovering from the blow of the pandemic, they are poised to go head-to-head with Genki Forest. Coca-Cola recently launched AHHA, a fruity sucrose-free fizzy water drink, at half the price of its Genki Forest counterpart for a mere 3 yuan (USD 0.46). The product has been promoted prominently and heavily throughout convenience stores in first-tier Chinese cities.

Genki Forest will undoubtedly find itself in a bloody battle first before it could deliver its growth target this year.

 

This piece originally appeared in 36Kr, and was written by Peng Qian.

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