Caixin
Apr 19, 2013 02:47 PM

Cola Wars, China Style

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(Guangzhou) -- Eighteen years ago, a Hong Kong businessman named Chan Hung-to took a sip of an herbal tea produced by a government factory in Guangzhou and tasted the future – a beverage that he imagined could be the Coca-Cola of China.

The sweet, cold drink called Wanglaoji herbal tea is an acquired taste, a blend of seven medicinal herbs and flowers, including honeysuckle, mint and chrysanthemum.

Chan succeeded in making it China's favorite drink. After licensing the tea's name and recipe, he took it out of its dowdy green package, put it in an iconic red can with a bold golden logo and spent millions of yuan on massive marketing campaigns. By 2009, it was outselling even Coke in the country.

Now, Chan and his erstwhile government partners are locked in a series of bitter trademark battles. While the court hearing for the latest lawsuit is waiting to be held, the real story of Wanglaoji may be that winning in the marketplace is more important than winning in court.

But whether Chan can maintain market share if he loses the rights to use the bright red can design is a question worth billions of yuan.

Feng Zhimin, a senior executive at Chan's firm, says they are almost ready to throw in the towel on legal action. "If we lose this case again, there is no justice. We will give up," he says.

Rapid Growth

Wanglaoji herbal tea was invented in 1837 by a Guangdong doctor named Wong Chatbong. Wong took traditional Chinese herbs believed to reduce inflammation and brewed them into a concoction that eventually sold throughout southern China. In Cantonese, the drink is known as Wong Lo Kat.

In 1956, the government took over all of Wong's assets related to the herb drink as part of a drive to nationalize private firms. The brand was idle until 1992, when the Yangcheng Tonic Factory, owned by the Guangdong government, began to produce the drink and sell it in a green package labeled with traditional calligraphy.

Then, the Guangdong government, seeking outside know-how, invited Chan to invest in the product. In 1995, Chan set up a company called Guangdong Jiaduobao Drink & Food Co. (JDB) as a wholly owned subsidiary of his Hong Kong Hung To Group.

JDB licensed the Wanglaoji name, agreeing to pay about 300,000 yuan a year for five years for the right to produce and market the drink. JDB invested US$ 20 million in a production facility in Guangdong and replaced the medicinal-looking green carton with a shiny red can.

While the licensing fee seems meager today, a former Yangcheng employee says: "The price was reasonable. At that time nobody could be sure it would be profitable."

Yangcheng was taken over by government-owned Guangzhou Pharmaceutical Group in 1997, which began to think that it wasn't getting its fair share as it watched Wanglaoji's sales grow.

Annual sales of Wanglaoji topped 100 million yuan by 2000. In 2003, Chan started marketing the beverage as a soft drink rather than as medicinal tea. And in the next year, Wanglaoji started to expand its market beyond Guangdong.

In 2008, sales of Wanglaoji exploded thanks to visibility and goodwill gained by a large charitable gesture. JDB donated 100 million yuan to victims of the Sichuan quake, and press coverage of the gift gave Wanglaoji nationwide exposure.

The company's sales surged to 15 billion yuan in 2008 and 17 billion in 2010, said Wan Yuegui, the product's marketing manager. The brand accounts for nearly 7 percent of soft drink sales in China.

The market value of the brand name itself was 108 billion yuan in 2010, said Guangzhou Pharmaceutical.

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