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Nongfu Spring’s profits soared in 2023 despite public backlash

Written by 36Kr English Published on   4 mins read

The decade-old “Oriental Leaf Tea” remained Nongfu Spring’s driving force in 2023, spearheading the company’s growth.

Nongfu Spring navigated a tumultuous yet immensely profitable 2023. On March 26, the beverage giant reported soaring revenue of RMB 42.67 billion (USD 5.8 billion), up 28% year-on-year, while net profit attributable to shareholders rocketed 42% higher to RMB 12.08 billion (USD 1.6 billion).

It was Nongfu Spring’s biggest year yet post-IPO, with sales and profits sustaining 30–40% growth rates. Notably, the company’s revenue from beverage sales eclipsed the bottled water segment for the first time, propelled by the meteoric rise of sugar-free tea offerings like “Oriental Leaf Tea.”

Though Master Kong’s beverage sales outpaced Nongfu Spring by RMB 8.2 billion (USD 1.1 billion), Nongfu Spring’s net profit was a mere tenth of Master Kong’s. Meanwhile, founder Zhong Shanshan cinched his status as China’s second wealthiest individual for the fourth consecutive year with a RMB 450 billion (USD 62.1 billion) fortune, despite a 9% dip in wealth.

So what fueled Nongfu Spring’s astronomical performance? Hint: it wasn’t bottled water.

The “Oriental Leaf Tea” juggernaut

While public sentiment briefly disrupted operations, it didn’t crack Nongfu Spring’s formidable 2023 financials covering the year through December 31.

In 2023, Nongfu Spring’s total revenue surged to RMB 42.67 billion, RMB 9.43 billion (USD 1.3 billion) higher than the previous year. This surge was largely attributed to the breakout success of Nongfu Spring’s sugar-free teas. Its tea beverage sales hit RMB 12.66 billion (USD 1.7 billion), soaring 83.3% year-on-year to contribute nearly 30% of the company’s total revenue.

Cha Pi and Oriental Leaf Tea were among the standout products for Nongfu Spring. Nielsen data indicates Oriental Leaf Tea notched triple-digit annual growth surpassing 100% last year, with a blistering compound growth rate exceeding 90% over the past three years.

Traditionally, the tea beverage market has been dominated by Master Kong and Uni-President, offering sugary iced teas priced at approximately RMB 3 (USD 0.4) per bottle. However, the market has gradually shifted, with young consumers increasingly inclined toward health-conscious choices.

While sugary drinks stagnated, Euromonitor found that sugar-free ready-to-drink teas maintained 7.9% growth between 2017–2022, far outpacing their sugary counterparts. Akin to Genki Forest’s billion-dollar subversion of Coke and Pepsi in sparkling water, Oriental Leaf Tea crashed the longstanding duopoly of Uni-President and Master Kong.

The outcome? An 80% jolt to Nongfu Spring’s beverage segment with Oriental Leaf Tea emerging as a near-billion juggernaut in the 2023 report.

Tempering expectations

In contrast to Oriental Leaf Tea, Nongfu Spring’s reliance on its bottled water cash cow sparked concern. While bottled water revenue was up 10.9% to RMB 20.26 billion (USD 2.8 billion), its share of the company’s total revenue dipped below 50% (to 47.5%) as other beverage categories, including ready-to-drink teas, functional drinks, and other new beverage products, collectively took the lead.

Since 2022, the revenue contribution of bottled water has dwindled annually while tea drinks showed a converse trend, signaling that Nongfu Spring ignited a second growth curve. However, identifying another major growth engine remains a challenge.

Even a longstanding hit like decade-old Oriental Leaf Tea proved an outlier – Nongfu Spring’s recent new product offensives underwhelmed. Other relatively new offerings like soda water and juices declined 3.1% amid struggles replicating Oriental Leaf Tea’s zest.

While bottled water is a mature, steady market, premium sugar-free teas have niche appeal given their subtle flavor profiles and higher price points around RMB 4-5 (USD 0.5–0.7) per bottle. Oriental Leaf Tea’s gargantuan growth rates seem unsustainable unless Nongfu Spring unearths another runaway hit quickly.

Functional beverages like energy drinks and fruit juices have yet to achieve significant traction either, despite trailing only tea drinks in revenue scale. According to Fortune Business Insights data, Gatorade commands a 70–80% share of the global sports beverage market, with annual revenue surpassing USD 6 billion worldwide.

In 2022, electrolyzed water and ibuprofen were listed as essential items for epidemic prevention, witnessing a surge in sales, with electrolyzed water even experiencing a tenfold increase in platform sales. While consumers stocked up on ibuprofen and toilet paper, there were minimal reports of hoarding of Nongfu Spring’s Scream, a sport beverage.

Juices also yielded slim margins due to high fresh supply chain costs and seasonality hurdles necessitating more capital expenditure. In its prospectus, the company once disclosed the gross profit margins of various categories, with bottled water, tea beverages, and functional beverages leading with 60.2%, 59.7%, and 50.9% profit margins, respectively. In contrast, juices yielded only 34.7%. Selling Oriental Leaf Tea is simply more lucrative.

Hence, Nongfu Spring is now focused on exploring new water applications like “baby water” for children and branded “cooking water” for culinary purposes, even lending its name to “Nongfu Spring stewed rice” dishes at restaurants.

Looking ahead to 2024, Nongfu Spring admitted “public opinion” challenges impacted operations but vowed proactive brand-building emphasizing its healthy, natural ethos to meet evolving consumer tastes.

Under Zhong’s stewardship, Nongfu Spring remains a formidable force in China’s consumer market. But whether it bottles another game-changing phenomenon remains an open question.

KrASIA Connection features translated and adapted content that was originally published by 36Kr. This article was written by Yang Dian for 36Kr.


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