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GERALD YONG GAO JIANGYONG LU HUNG-GAY FUNG

WANG’S FORTUNE TEA FROM CHINA: COMPETING FOR A NEW ARENA OF THE BEVERAGE MARKET (A)
“I remember liangcha [herbal tea] being described as a sunset industry in the 1980s, when people rushed to taste foreign soft drinks and food like CocaCola and McDonald’s. I was once interviewed by the media to comment on it; I said that view was wrong. This is because the ingredients of liangcha really work to protect against climatic influences and relieve ailments caused by the stressful lifestyle, and they work with no side effects. Besides, the orders from overseas my company received have never decreased.”
- Agnes Wong, administration manager of Wong Lo Kat Trade Development Company1

In the spring of 2003, while China and the rest of the world were suffering from the sudden outbreak of the severe acute respiratory syndrome (“SARS”) epidemic, the 175-year-old Wang’s Fortune Tea found fortune itself, seeing a phenomenal increase in sales volume of 400% from previous years.2 Wang’s Fortune Tea was founded in 1828 in Southern China by Wang Zebang , who is considered to be the founding father of Chinese herbal tea, a highly regarded form of Chinese medicine. From 1997 to 2002, Wang’s Fortune Tea remained a strong regional brand in China with limited national market penetration. In 2003, following SARS and the company’s change in marketing tactics and positioning, Wang’s Fortune Tea saw explosive growth nationwide and was finally able to break out of its regional image to become a major national brand. In 2006, less than ten years after the drink started selling

Chung, O. (11 May 2007) “After the Coke Craze, It’s Tea Time in China”, Asia Times Online, http://www.atimes.com/atimes/China_Business/IE11Cb01.html (accessed 30 October 2007). 2 Translated from Chinese, Lin, S. (林思勉) (9 December 2004) “Positioning, Lifeline of Wanglaoji’s Success” (“定位,王老吉 的飙红主线”), Successful Marketing ( 成功营销), http://www.emkt.com.cn (accessed 7 August 2007). Linda Suen prepared this case under the supervision of Dr Gerald Yong Gao, Dr Jiangyong Lu and Professor Hung-Gay Fung for class discussion. This case is not intended to show effective or ineffective handling of decision or business processes. © 2008 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be reproduced or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise (including the internet)—without the permission of The University of Hong Kong. Ref. 08/372C

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nationwide, it became China's top soft drink giant, with around 90% market share of the herbal tea industry and sales revenue of US$512.16 million.3 In 2006, Wang’s Fortune Tea faced intense and rapidly growing competition in China from thousands of local brands as well as new major international players such as Coca-cola and Pepsi. Despite its success in China, Wang’s Fortune Tea was the company’s only soft drink product. It needed to expand its product line in order to maintain growth. In addition, Wang’s Fortune Tea faced many obstacles in becoming a major international soft drink brand. While most Chinese understood the functions of herbal tea, the rest of the world knew virtually nothing about this product. Should Wang’s Fortune Tea be marketed as medicine or a soft drink? At the same time, China’s food safety was becoming an increasing worry for international consumers following poisoning incidents and massive recalls worldwide. Could Wang’s Fortune Tea overcome these obstacles to become a successful international soft drink brand?

What is Herbal Tea?
“My parents and grandparents told me long ago that [western] soft drinks are not good for our body and have high calories, so I seldom drink cola. Drinking liangcha [herbal tea] could help remove the [spiritual] heat and dampness in my body, so when I have pimples on my forehead and cheeks, I immediately drink the herbal tea to speed up the elimination process.”
- Liu Yuexia, a 15-year-old from Lintan county in Guangdong province, China4

As early as the beginning of the 19th century, herbal tea had been consumed by the Cantonese (residents of south China or Guangdong province) [see Exhibit 1]. Ingredients and recipes varied from shop to shop, curing and preventing all kinds of ailments. However, outside of southern China and various indigenous groups native to the Americas, herbal tea was virtually unknown in the rest of China, let alone much of the rest of the world. 5 The Cantonese believed that herbal tea, as opposed to black and green teas, provided medicinal effects. They held a firm belief that certain foods, such as fried or grilled foods, produced excess yithei or “heat-evil” (one of the six climatic evils) within the body, and that a build-up of the evils in the body could cause “internal heat” or “internal fire”, which in turn could result in organ malfunction or diseases. It was believed that herbal tea could remove such heat [see Exhibit 2].6 In fact, the Chinese word liangcha literally meant “cooling tea”.7 Many Cantonese also believed that, particularly during the hot and humid summer months in southern China, the body stored “dampness” (another climatic evil), which could be removed by herbal tea to maintain a healthy balance of the “basic elements and fluids”.8

Translated from Chinese, China Food Industry Web (中国食品产业网) (14 September 2006) “An Uncertain Future: Coca-Cola vs. Chinese Traditional Herbal Tea” (“前程未卜:可口可乐火拼中国传统凉茶”), http://www.hc360.com (accessed 7 August 2007) and China Strategic Planning Club (中国策划俱乐部) (11 June 2007) “Red Can Wanglaoji Brand Positioning Strategy” (“红罐王老吉品牌定位战略”), http://www.ch1188.com (accessed 8 November 2007). 4 Chung, O. (11 May 2007) “After the Coke Craze, It’s Tea Time in China”, Asia Times Online, http://www.atimes.com/atimes/China_Business/IE11Cb01.html (accessed 30 October 2007). 5 Wong, M. (15 September 1998) “The Nutraceutical Buzz”, Beverage World, 117(1664), p. 114. 6 “What are the Six Evils?”, http://www.shen-nong.com (accessed 10 December 2007). 7 Stein, P. (7 June 1993) “Trouble Brewing—Herbal Entrepreneur Seeks Antidote to Slowing Market”, Asian Wall Street Journal. 8 Chung, O. (11 May 2007) “After the Coke Craze, It’s Tea Time in China”, Asia Times Online, http://www.atimes.com/atimes/China_Business/IE11Cb01.html (accessed 30 October 2007).

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Wang’s Fortune Tea
Wang’s Fortune Tea was founded in 1828 in Southern China by Wang Zebang , who is considered to be the founding father of Chinese herbal tea, a highly regarded form of Chinese medicine. There are no less than 3 versions of how the company got started, becoming somewhat of a Chinese legend. In its long and turbulent history, Wang’s Fortune Tea has experienced many ups and downs, including success, international expansion, near extinction during World War II, a company split in the 1950s and extraordinary national growth in 2003 and beyond. Early History: 1828 to 1938 How Wang’s Fortune Tea got its start is the stuff of legends, and there are many versions of the company’s beginnings. The following is the most common. In 1828, following a flu epidemic in southern China, Wang Zebang, nicknamed “Wang Ji” (thus resulting in the Chinese name of the tea, Wanglaoji, with the word “lao” meaning “old”, inserted), began to sell his special blend of herbal tea from a small shop in Guangdong province in bowls, freshly prepared daily. Because of his low prices and the right formula, Wang’s tea became popular throughout the region and business bloomed. In 1840, Wang added to his product offerings convenient herb packets for customers to boil his tea at home, while still selling bowls of tea at his shop. His three sons eventually opened up three branches in Guangdong while, at the same time, Wang’s tea sold in Guangzhou, Guangxi, Hunan, Hubei, Jiangxi, Shanghai and Beijing. Many Cantonese (people from Guangzhou) migrated to South-East Asia and the US, bringing Wang’s herbal tea packets with them. A generation later, Wang’s grandchildren opened up branches in Hong Kong and Macau. In 1938, while southern China was under siege by the Japanese military, all of Wang’s teashops were burned and destroyed, driving the brand to near extinction.9 State of Confusion: 1949 to 1994 After the Japanese military retreated from China, Wang’s teashop re-established itself in Guangzhou. In 1949, with the founding of the People’s Republic of China and support of the new government, Wang’s teashops flourished again. Improvements were made in production facilities and equipment, sales began to grow and the product again gained popularity among Cantonese consumers. In the early 1950s, Wanglaoji (Wang’s Fortune Tea’s Chinese name in Putonghua Pinyin) was split into two independent companies due to complex government politics and China’s isolation at the time. One company, Guangzhou Wanglaoji Pharmaceutical Co. Ltd, became part of a state-owned enterprise (SOE), which was licensed to sell Wang’s Fortune Tea in Mainland China. The other company, created by the descendants of founder Wang Zebang, was formed in Hong Kong and was licensed to sell Wang’s Fortune Tea outside of Mainland China. Regional Success: 1995 to 2002 In 1995, Wang’s descendants took resources from their Hong Kong-based company and formed Jiaduobao Soft Drink Ltd (“Jiaduobao”) in Guangdong, China, where they repackaged Wang’s Fortune Tea in red cans [see Exhibit 3] and reformulated the herbal tea to be sweeter in order to suit more consumers’ tastes. In 1997, Jiaduobao obtained licensing rights from Guangzhou Wanglaoji Pharmaceutical Co. Ltd to sell Wang’s Fortune Tea in Mainland China for 20 years, with Wang’s descendants providing the secret herbal tea formula.10 In 1999, the
Translated from Chinese, Truth about Brands (品牌真言) (13 May 2005) “Wanglaoji: Complementary ‘Red Flower’ ‘Green Leaf’ Key to Success for a Traditional Brand” (“王老吉:‘红花’‘绿叶’ 两相宜:百年老字号的品牌长青之道”), www.emkt.com.cn (accessed 7 August 2007). 10 Ibid.
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foreign-invested company headquartered in Hong Kong established manufacturing facilities in Dongguan, Guangdong.11 Unfortunately, sales of Wang’s Fortune Tea were flat outside of the southern provinces of Guangdong, Guangzhou and Zhejiang due to two major issues. First, most Chinese outside of these provinces had no concept of “fighting internal heat”, which was the major function of the herbal tea. Second, Wang’s Fortune Tea was perceived as medicine rather than a soft drink, which prevented widespread daily consumption of the product. Nevertheless, Wang’s was a hit in southern China, where residents had a regular habit of drinking herbal tea on a daily basis. Prior to 2003, Wang’s Fortune Tea remained a top-selling regional brand in south China, maintaining annual sales revenue of just over US$12 million.12 Explosive Growth: 2003 to 2006 In March 2003, SARS broke out in Guangdong, China. The pandemic eventually saw over 8,000 infected worldwide with a near 10% fatality rate, affecting people in China, East Asia and South-East Asia and reaching as far as the US and Canada.13 While this meant bad news for China and the rest of the world, it brought much relief to Wang’s Fortune Tea’s anaemic sales. Many people sought different ways to prevent themselves from contracting the fatal illness, including western flu prevention medications, Traditional Chinese Medicine (TCM), and drinking herbal tea. It was during this time of turmoil that Wang’s Fortune Tea’s sales volume exploded with an increase of 400% from previous years, despite its premium price tag of US$0.42 (Rmb 3.5), and sales revenue from the red can herbal tea alone reached US$72.46 million in 2003. 14 Sales of the herbal tea were further boosted by Guangdong respiratory expert Zhong Nanshang, head of the expert task force appointed to fight the disease, who announced on television that “Guangdong people have the habit of drinking herbal tea, which is quite effective against the SARS virus”.15 This was quite ironic due to the fact that people from Guangdong had been the first and hardest hit by the SARS virus. At the same time, Wang’s Fortune Tea changed its marketing tactics by hiring a marketing consultancy, Success Advertising Ltd. The company changed its brand image with a new marketing message that appealed to consumers nationwide, a massive advertising campaign and channel promotions through restaurants. To cope with nationwide growth, Jiaduobao created automated factories in Beijing in 2003, Zhejiang in 2004, Fujian in 2005 and Guangzhou in 2006 [see Exhibit 4].16 The company continued to offer its 310-millilitre red can in high-end markets. However, in 2004, Jiaduobao added a green, 250-millilitre boxed herbal tea [see Exhibit 5] to its product line, sold at a lower price of US$0.26 to reach the middle- to lower-income markets while the red can sold for US$0.46 (Rmb 3.7) as the premium product to be sold in high-end markets. 17 Wang’s Fortune Tea’s sales revenue skyrocketed as a result, reaching over US$512.16 million by the end of 2006 [see Exhibit 6], a staggering increase of 4,000% from 2002.18

For details, see Jiaduobao’s company website: www.jdbchina.com. Translated from Chinese, China Strategic Planning Club (中国策划俱乐部) (11 June 2007) “Red Can Wanglaoji Brand Positioning Strategy” (“红罐王老吉品牌定位战略”), http://www.ch1188.com (accessed 8 November 2007). US$1 = Rmb 8.28 on 31 December 2001. 13 World Health Organization “Summary of Probable SARS Cases” 14 Translated from Chinese, China Strategic Planning Club (中国策划俱乐部) (11 June 2007) “Red Can Wanglaoji Brand Positioning Strategy” (“红罐王老吉品牌定位战略”), http://www.ch1188.com (accessed 8 November 2007). US$1 = Rmb 8.28 on 31 December 2003. 15 Chung, O. (11 May 2007) “After the Coke Craze, It’s Tea Time in China”, Asia Times Online, http://www.atimes.com/atimes/China_Business/IE11Cb01.html (accessed 30 October 2007). 16 For details, see Jiaduobao’s company website: www.jdbchina.com. 17 US$1 = Rmb 8.07 on 1 January 2006. 18 US$1 = Rmb 7.81 on 31 December 2006.
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Success Strategies
While SARS was a serendipitous factor that helped Wang’s Fortune Tea’s sales soar in 2003, Jiaduobao’s employment of a marketing consultancy, Success Advertising Ltd and brand consultancy Trout & Partners was crucial to transforming its image and marketing message for the herbal tea to sell nationwide. Jiaduobao faced several issues that could affect its success from 2003 onwards. How could the herbal tea create a new brand positioning to educate consumers throughout China of its specific function so that they would accept it as a soft drink rather than medicine? Once brand positioning was fixed, what types of advertising campaigns should Jiaduobao roll out across China to raise brand awareness and reach out to different target markets? How could the company work with various channels and other promotions to make the product available not only in supermarkets and convenience stores but elsewhere? How could Jiaduobao use CSR (corporate social responsibility) to promote the Wang’s Fortune Tea brand? New Brand Positioning “At the beginning, we were requested to use “sports and health” as the main theme, to film a commercial to sponsor the 2008 Beijing Olympic games to solve the product’s advertising promotion issue. When we got this request, we discovered Wang’s Fortune Tea’s core problem was not easily solved by television commercials. The key was that there was no clear and firm brand positioning. Red can Wang’s Fortune Tea had been selling for 7 years, but the industry couldn’t answer what Wang’s tea was, even consumers couldn’t answer that question. However, annual sales revenue of over US$12 million made it clear that there was a market for the herbal tea. Wang’s Fortune Tea was definitely able to satisfy some kind of consumer need, and this need had not been clearly defined.19”
- Geng Yicheng, general manager, Success Advertising (Guangzhou) Ltd

Prior to 2003, Wang’s Fortune Tea had maintained steady sales and stayed strong as the number one regional brand of herbal tea in southern China. However, all over China, consumers were confused as to what exactly the drink was. Was it medicine or a soft drink? Consumers in the south were convinced that it was medicine, which contributed to the herbal tea’s steady but unremarkable sales while limiting its growth. In addition, Wang’s Fortune Tea’s advertising slogan of “Healthy family, always with you” was vague and did not enhance the herbal tea’s value proposition. Meanwhile, consumers surveyed in the north even thought that the herbal tea was cold water because the word liang (凉) literally meant “cold” in Chinese.20 Northern Chinese preferred to drink hot tea and had no concept of “internal heat”. However, most Chinese nationwide understood the concept of “internal fire”, an ageold concept in traditional Chinese medicine, which was akin to the body’s loss of balance due to consuming excessively fried food or hotpot, a hugely popular cuisine in China similar to fondue. Unfortunately, the need for lowering “internal fire” had already been satisfied in the market by various Chinese medicinal products in pill form [see Exhibit 7]. In order to educate consumers about its main value proposition, Success Advertising helped Wang’s tea reposition its brand positioning by changing its slogan to “Afraid of internal fire? Drink Wang’s Fortune Tea”. This new and simple marketing message accomplished three major tasks for the herbal tea. First, it made clear to consumers all over China what the
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Translated from Chinese, (林思勉) (9 December 2004) “Positioning, Lifeline of Wanglaoji’s Success” (“定位,王老吉的飙 红主线”), Successful Marketing ( 成功营销), http://www.emkt.com.cn (accessed 7 August 2007). [PLEASE TRANSLATE THE AUTHOR’S NAME] US$1 = Rmb 8.28 on 31 December 2001. 20 Ibid.

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specific function of herbal tea was and helped the product break out of its regional markets. Second, the new message changed consumers’ perception of the tea from medicine to soft drink; it was a drink, not the pill-form medicine people were used to taking for lowering internal fire. Third, it created the perception among consumers that Wang’s Fortune Tea not only lowered but also prevented “internal fire”, which meant it could be consumed in mass quantities on a daily basis, like taking vitamins or dietary supplements. When this new function became clear to the Chinese public, it also solved the herbal tea’s pricing problem; the premium price tag of US$0.42 (Rmb 3.5) in 2003 was no longer perceived as too expensive.21 “After we changed this promotional concept, as long as there are Chinese people, Wang’s Fortune Tea will live on.22”
Geng Yicheng, general manager, Success Advertising (Guangzhou) Ltd

Of course, the new marketing message wasn’t the only thing that boosted Wang’s Fortune Tea’s success from 2003 onwards. The herbal tea already had a few things going for it, while the new message helped to highlight these features. For one, Wanglaoji (Wang’s Fortune Tea in Chinese) was easy to remember and easy to write, which made it easy to market. Since competition abounded in the herbal tea market, a catchy name was important for consumer mindset stickiness. The brand name itself was also very auspicious since ji meant “fortune” in Chinese. Another advantage Wang’s Fortune Tea held was its red and yellow packaging, which traditionally represented luck and fortune to the Chinese. Also, the reformulated sweet taste differed vastly from traditional herbal tea, which was exceptionally bitter. The sweet taste made the herbal tea seem much closer to a soft drink than medicine. Finally, the ingredients in Wang’s Fortune Tea were similar to those in Chinese medicine, which made the herbal tea’s effect of lowering or preventing “internal fire” all the more credible.23 Television Advertising “Creating a new product category is always the first choice of brand positioning. After creating the new category, using advertising to communicate the new product is the most effective. The effect can be very surprising. Wang’s Fortune Tea is the first type of “preventing internal fire” soft drink in the market, entering people’s mental resource. Wang’s tea represents this type of beverage, following the growth of this industry, Wang’s tea will naturally receive the most profit.24”
- Chen Qifeng, planning director, Trout & Partners (China) Brand Strategy Consultancy Ltd

During Spring Festival (or Lunar New Year) 2003, Wang’s Fortune Tea unveiled its new marketing message to the whole of China in the form of a massive advertising campaign. In spring 2003, following the onset of the SARS outbreak, Jiaduobao aired a series of primetime television commercials on China Central Television (“CCTV”), China’s major public access TV network. In November 2003, the company bid for and won CCTV’s primetime television
US$1 = Rmb 8.28 on 1 January 2003. Translated from Chinese, (林思勉) (9 December 2004) “Positioning, Lifeline of Wanglaoji’s Success” (“定位,王老吉的飙 红主线”), Successful Marketing ( 成功营销), http://www.emkt.com.cn (accessed 7 August 2007). [PLEASE TRANSLATE THE AUTHOR’S NAME] US$1 = Rmb 8.28 on 31 December 2001. 23 Translated from Chinese, Cui, W. (翟文熙) (11 December 2006) “Wild Red: 400 Times Faster—Wang’s Fortune Tea’s Success Story” (“红色狂飙:400 倍速王老吉成功学”), Global Brand Web(全球品牌网), http://www.globrand.com (accessed 7 August 2007). 24 Translated from Chinese, Lin, S. (林思勉) (9 December 2004) “Positioning, Lifeline of Wanglaoji’s Success” (“定位,王老 吉的飙红主线”), Successful Marketing ( 成功营销), http://www.emkt.com.cn (accessed 7 August 2007).
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commercial spots from March to August 2004. The commercials helped create a new image for Wang’s Fortune Tea, aimed at younger consumers with young people having fun eating hotpot, watching football late at night, eating fried foods and barbeque or sunbathing, etc., — activities which were thought to require the lowering or prevention of “internal fire” [see Exhibit 8]. In August 2004, Jiaduobao co-operated with Guangzhou Wanglaoji Pharmaceutical Co. Ltd and CCTV in creating a popular television series based on the legend of Wang’s Fortune Tea’s founder, Wang Zebang [see Exhibit 9]. The combined spending by all three parties on the show’s production was US$1.45 million.25 In 2006, Jiaduobao again aired a series of television commercials during broadcasts of the premiere international soccer event, the FIFA soccer World Cup, on CCTV. Channel Promotions and CSR In addition to television advertising, Jiaduobao also promoted Wang’s Fortune Tea in a variety of other ways. In addition to enormous outdoor advertising in major cities and towns throughout China [see Exhibit 10] as well as point-of-purchase displays in supermarkets, convenience stores and kiosks, Jiaduobao also sought out restaurants and bars throughout China to partner with in order to create a larger distribution channel for Wang’s Fortune Tea. The company sought out restaurants that served Hunan and Sichuan cuisines (which mostly feature spicy dishes) and hotpot, all foods which were thought to create “internal fire”, and showered them with free promotional materials such as LCD displays, red lanterns, toothpick holders and menus, etc. with Wang’s Fortune Tea’s logo and slogan [see Exhibit 11].26 In August 2004, Jiaduobao partnered with Kentucky Fried Chicken (fried food is also thought to bring out “internal fire”) to sell Wang’s Fortune Tea at 200 outlets throughout Guangdong, with plans to penetrate all their outlets throughout China.27 Other than restaurant channels, Jiaduobao also created a lucky draw scratch card promotion in the summer of 2004 with the slogan, “To soothe the summer heat with Wang’s Fortune Tea, to blue waters and green hills I go!”, which offered the winners free trips to cooler destinations for two nights [see Exhibit 12]. 28 Finally, Jiaduobao promoted the herbal tea through a CSR initiative with the slogan, “Wang’s Fortune Tea cares for scholars” and gave away scholarships and built schools [see Exhibits 13 and 14]. Jiaduobao’s massive promotional efforts also helped Wang’s Fortune Tea’s sales soar after its brand positioning was fixed. In all, the company’s promotional spending skyrocketed fivefold from US$4.83 million in 2003 to over US$25.61 million in 2006 [see Exhibit 15].29

China’s Soft Drink Industry
As China’s population, economy and consumer spending grew, the Chinese domestic beverage industry also benefited, particularly the herbal tea market. Although China’s population growth of 1.8% was lower than the world average of 5.89%, China was still the most populous country in 2006, with 1.3 billion people comprising 21% of the world’s population. Following this growth trend, China’s population would grow to 1.37 billion in

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Translated from Chinese, Cui, W. (翟文熙) (11 December 2006) “Wild Red: 400 Times Faster—Wang’s Fortune Tea’s Success Story” (“红色狂飙:400 倍速王老吉成功学”), Global Brand Web(全球品牌网), http://www.globrand.com (accessed 7 August 2007). US$1 = Rmb 8.28 on 1 August 2004. 26 Ibid. 27 Translated from Chinese, Lin, S. (林思勉) (9 December 2004) “Positioning, Lifeline of Wanglaoji’s Success” (“定位,王老 吉的飙红主线”), Successful Marketing ( 成功营销), http://www.emkt.com.cn (accessed 7 August 2007). 28 Ibid. 29 Translated from Chinese, Cui, W. (翟文熙) (11 December 2006) “Wild Red: 400 Times Faster—Wang’s Fortune Tea’s Success Story” (“红色狂飙:400 倍速王老吉成功学”), Global Brand Web(全球品牌网), http://www.globrand.com (accessed 7 August 2007). US$1 = Rmb 8.28 on 31 December 2003. US$1 = Rmb 7.81 on 31 December 2006.

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2010, 1.46 billion in 2020 and 1.5 billion in 2033.30 With the largest consumer market in the world and growing, the future looked bright for China’s beverage industry. Economists also estimated that China would experience the fastest growth in income per capita from 2006 to 2016, with at least 100 million households (an estimated 300 million people) earning an annual income of over US$10,000, which naturally meant an increase in food and beverage spending.31 In 2006, the average Chinese consumer spent an average of US$572.98 per year in cities and US$276.70 in rural towns on food and beverages, amounting to a national annual food and beverage spending of US$524.97 billion. 32 This huge consumer spending also brought opportunities for the domestic beverage industry. While China’s food and beverage processing in 2006 resulted in US$3 trillion in revenue (number one in the world) for China, all but 5% of which were exported, compared to the world average of 21%.33 It followed that there was much room for growth in the domestic food and beverage industry. Another piece of good news for the food and beverage industry was the potential growth opportunities in domestic consumer spending. While most developed countries’ consumers spent 80% of their country’s GDP and consumers in developing countries spent 74% of their national GDP, Chinese consumers were only spending 57% of China’s GDP in 2006. In addition to the country’s overall growth, China’s beverage industry in particular experienced tremendous development. Beverage production grew at a phenomenal rate from 1999 to 2005, with average annual growth of 19.7% [see Table 1]. Sales revenue of beverages also swelled from 1999 to 2004, with average annual growth of 18.8% [see Table 2]. 34 On 15 August 2005, Zhao Yali, secretariat of the Chinese Beverage Industry Membership Committee, announced at the Third Annual Chinese Beverage Industry Membership Committee Conference that China’s beverage production and sales revenue were continuing to expand; though carbonated drinks were on the decline, sales of juices and bottled water were continuing to grow.35 In fact, no less than 90% of growth in beverage consumption from 2005 to 2008 was to come from non-carbonated drinks, with carbonated drinks’ market share falling from 33% to 21% from 1999 to 2005. According to a study by Morgan Stanley in 2005, China was forecast to contribute one-fourth of the beverage industry’s growth worldwide from 2006 to 2010. 36 While this extraordinary development spelled good news for the beverage industry, Chinese consumers became much more wary of what they ingested following a series of contaminated food and drink incidents in 2004, including those of milk powder, beer, wine, eggs, ham and noodles, etc. Even though Chinese authorities had stepped up efforts to curb these incidents, Chinese consumers wanted safer and healthier foods and cared more about brand reputation. Year 1999 2004 First half of 2005 Production Volume 11.86 million tons 29.12 million tons 15.57 million tons Percent Increase 145% (from 1999) 8.77% (from 2004)

Table 1: Beverage Production Growth in China

Translated from Chinese, United Securities Industry Research (王爱景) (4 August 2007) “Getting Ready for a Golden Development Period: Food and Beverage” (“‘迎接本土黄金发展期: 食品饮料’, 联合证券行业研究”). 31 Ibid. 32 Ibid. US$1 = Rmb 7.81 on 31 December 2006. 33 Ibid. 34 Translated from Chinese, Chinese Food News (中国食品报) (19 August 2005) “China’s Beverage Industry Continues Rapid Growth” (“中国饮料行业持续快速增长”), http://www.cnfood.cn/ (accessed 7 August 2007). US$1 = Rmb 8.28 from 31 December 1999 to 30 June 2005. 35 Ibid. 36 Ward, A. (21 September 2005) “Coke Wakes Up to Waning Thirst for Cola”, Financial Times, http://search.ft.com/nonFtArticle?id=050921004695 (accessed 30 October 2007).

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Year 1999 2004 First half of 2005

Sales Revenue37 US$4.48 billion US$10.6 billion US$6.78 billion

Percent Increase 136% (from 1999) 19.87% (from 2004)

Table 2: Beverage Sales Revenue Growth in China China’s Herbal Tea Market As Chinese consumers became more health conscious, tea drinks and herbal tea sales benefited in the process. According to AC Nielsen, the tea drinks market (including herbal teas) in China exploded from 200,000 tons in production volume in 1997 to three million tons in 2001, becoming the second-best selling soft drink category, following carbonated drinks.38 The forecast in 2002 was that tea drinks would overtake carbonated drinks to become the best selling soft drink category in China. Indeed, sales revenue of herbal teas alone in 2004 was more than US$483.09 million, growing to US$619.58 million in 2005.39 On 1 August 2006, Guangdong Province Food & Pharmaceutical Industry Association chairman Zhang Junxiu announced that the total sales volume of herbal teas in 2006 would reach four million tons, overtaking Coca-Cola’s entire sales volume in China in 2005 (3.17 million tons).40 Total sales revenue from herbal teas in China had reached US$96.62 million in 2004, blasting to US$371.75 million in 2005. Experts estimated China’s herbal tea market capacity to be US$675.68 million.41 Industry insiders predicted that, in the few years following 2005, sales of herbal teas would grow by 20–30%.42 Analysts forecasted that China’s herbal tea sales could even reach US$1.25 billion by 2011.43

Domestic Competition
In 2006, Wang’s Fortune Tea was the number one selling herbal tea by far, with 90% market share of the herbal tea market in China.44 With the huge potential for growth in the herbal tea market, competition was heating up for second place. Thousands of domestic companies large and small, Hong Kong-based players, Singapore soft drink company Yeo and beverage giants Coca-Cola and Pepsi were all vying for a piece of the US$675 million to US$1.35 billion herbal tea market pie in China.45
37 38

US$1 = Rmb 8.28 from 31 December 1999 to 31 June 2005. Translated from Chinese, Liu, S. (刘世雄) (29 August 2002) “New Trend of Coca-Cola’s Marketing Strategy” (“‘围魏救 赵’ ——可口可乐营销战略新动向”), http://www.emkt.com.cn (accessed 7 August 2007). 39 Translated from Chinese, Manager’s Daily (经理日报) (8 April 2006) “2006 China’s Herbal Drinks Market Faces Uncertain Future” (“2006 年中国市场下火饮料前途难料”), http://www.newssc.org/gb/Newssc/meiti/cjb/index.html (accessed 7 August 2007). US$1 = Rmb 8.28 on 31 December 2004. US$1 = Rmb 8.07 on 31 December 2005. 40 Translated from Chinese, Wu, M. (吴明中) (11 August 2006) “Coca-cola Beating Wang’s Fortune Tea?” (“可口可乐 PK 王老 吉?”), http://www.51cmc.com (accessed 7 August 2007) 41 Translated from Chinese, China Food Industry Web (中国食品产业网) (14 September 2006) “An Uncertain Future: CocaCola vs. Chinese Traditional Herbal Tea” (“前程未卜:可口可乐火拼中国传统凉茶”), http://www.hc360.com (accessed 7 August 2007). US$1 = Rmb 7.40 on 8 December 2007. 42 Translated from Chinese, Manager’s Daily (经理日报) (8 April 2006) “2006 China’s Herbal Drinks Market Faces Uncertain Future” (“2006 年中国市场下火饮料前途难料”), http://www.newssc.org/gb/Newssc/meiti/cjb/index.html (accessed 7 August 2007). 43 Translated from Chinese, Cui, W. (翟文熙) (11 December 2006) “Wild Red: 400 Times Faster—Wang’s Fortune Tea’s Success Story” (“红色狂飙:400 倍速王老吉成功学”), Global Brand Web(全球品牌网), http://www.globrand.com (accessed 7 August 2007). US$1 = Rmb 7.40 on 8 December 2007. 44 Translated from Chinese, China Food Industry Web (中国食品产业网) (14 September 2006) “An Uncertain Future: CocaCola vs. Chinese Traditional Herbal Tea” (“前程未卜:可口可乐火拼中国传统凉茶”), http://www.hc360.com (accessed 7 August 2007). 45 US$1 = Rmb 7.40 on 8 December 2007.

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Regional Players Since the southern Chinese had been consuming herbal tea for nearly two centuries, it naturally followed that domestic competition was most heated in this area of China. Thousands of teashops large and small had been selling tea freshly prepared and in herb packages. Ever since the SARS outbreak in 2003 and the boom of the herbal tea market that followed nationwide, many pharmaceutical companies had also entered the herbal tea market, competing for the number two position after Wang’s Fortune Tea. However, since Wang’s market share was so overwhelming, it was hard to tell who would win out. The major players in southern China included Wangzenglong Tea (黄振龙凉茶), Zhenglao Tea (邓老凉茶), Xuqixiu Tea (徐其修凉茶) and Pangaoshu Tea (潘高寿凉茶). All of these teas were traditional brands that had remained strong as regional brands but had not captured market share nationwide. In 2006, Wangzhenlong Tea had its eye on three major cities in Guangzhou province, with plans to expand to 700 shops selling its herbal tea. The company also planned to franchise its brand to set up shops in rural towns in the south and the rest of China. Meanwhile, Zhenglao Tea had announced franchising its tea nationwide and invested over US$1.28 million to expand its facilities and promote its brand.46 At the same time, Xuqixiu Tea boasted it had more than 800 chain stores in more than 100 large- and medium-sized cities in south China and had plans of opening more than 200 outlets in Guangzhou in the next two years.47 The company announced plans to make its herbal tea the company’s major focus in the coming years, investing US$3.84 million and 500 mu48 of land for growing its own herbs.49 Also in 2006, Pangaoshu Tea’s CEO Wei Dahua broadcasted the company’s plans to partner with an Australian company to sell US$64 million of its herbal tea in the next five years.50 National Brands Wang’s Fortune Tea’s domestic competitors also included such strong national brands as Chunhetang (春和堂), Three-Nine Lower Fire Tea (三九下火王) and Coconut Palm Lower Fire Tea (椰树下火茶), among others. Chunhetang, in a creative and risky move, was the first to promote its herbal tea in popular media to the national market in early 2003, sponsoring the modelling competition, Elite Look Model China 2003. 51 The company’s marketing message focused mainly on the southern Chinese people’s familiar concept of “internal heat”, saving the company the trouble of consumer education while limiting itself to the regional markets of the south. The company adopted the slogan of “Healthy healthy, Chunhetang”, which further confused consumers nationwide since it didn’t explain the function of the drink. In the meantime, Three-Nine Company invested US$128 million in 2006 to introduce its Three-Nine Lower Fire Tea. Unfortunately, the herbal tea’s sales were anaemic in Fujian and Zhejiang provinces in the south, and the company moved its entire inventory to Hunan province with the low price tag of US$0.24 (Rmb 1.9) per can. The company invested an
Translated from Chinese, Cui, T. (崔涛) (14 August 2006) “How Long will Wang’s Fortune Tea be on Fire?” (“王老吉还能 火多久?”), China Marketing Communications Web (中国营销传播网), http://www.emkt.com.cn (accessed 7 August 2007). US$1 = Rmb 7.81 on 31 December 2006. 47 Chung, O. (11 May 2007) “After the Coke Craze, It’s Tea Time in China”, Asia Times Online, http://www.atimes.com/atimes/China_Business/IE11Cb01.html (accessed 30 October 2007). 48 1 mu is equal to 667 square metres. US$1 = Rmb 7.81 on 31 December 2006. 49 For details, see Quangxing Herbal Tea Company’s website: http://www.xqxlch.com/. 50 Translated from Chinese, China Food Industry Web (中国食品产业网) (14 September 2006) “An Uncertain Future: CocaCola vs. Chinese Traditional Herbal Tea” (“前程未卜:可口可乐火拼中国传统凉茶”), http://www.hc360.com (accessed 7 August 2007). 51 For details, see Chunhetang’s website: http://www.chunhetang.com.cn.
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additional US$640,000–768,000 in advertising to strengthen its position in Lingnan and Fujian.52 By 2006, Coconut Palm Company (a beverage company based in Hainan Island that was famous for its canned coconut juice) had three types of herbal tea in the market nationwide: Coconut Palm Lower Fire Tea (椰树下火茶) in cans and PET (Polyethylene terephthalate) plastic bottles and Coconut Palm Herbal Tea ( 椰 树 凉 茶 饮 料 ) in box packaging. The company had 100 different food and beverage products with sales volume of 300,000 tons and aimed to increase annual revenue growth by 10% to US$878.38 million and sales volume to one million tons from 2006 to 2011.53 International Brands In the meantime, Wang’s Fortune Tea also faced intense competition from companies based in Hong Kong and Singapore. Herbal tea chains had flourished as early as 1989 in Hong Kong with an average of 50 health-related beverages launched annually. Major players in Hong Kong included Hung Fook Tong, Hui Lau Shan, Hoi Tin Tong and HealthWorks, all with an eye on penetrating the mainland market. 54 Also based in Hong Kong, Vitasoy International controlled 40% of the non-carbonated beverage market in 2006 and was ready to make changes to its product line to suit consumers’ ever-changing tastes. Out of Singapore came South-East Asia’s foremost beverage player, Yeo Hip Seng, which dominated the herbal tea drinks market throughout Asia. Yeo’s managing director, Alex Chan, maintained that, in China, young people were more open to traditional beverages. As early as 1997, the company’s water chestnut drink was already popular with teenagers throughout China. 55 Malaysia Dairies’s Marigold brand, with its wholesome and traditional image winning over customers in South-East Asia, was also a potential threat to Wang’s Fortune Tea with its focus on how Asian drinks could be an alternative to other beverages in the market. “The creative idea is to bring ‘alive’ the natural ingredients in HealthWorks’ drink through the captivating portrayal of a beautiful natural environment to show how the goodness of it all is encapsulated in a single drink. We combined that with the understanding of the target audience, aged 25 to 39. These are consumers who generally lead busy lives in an urban environment. We aimed to reinforce how HealthWorks brings them the goodness and metaphorically ‘transports’ them back to nature as they consume the product.56”
- Patrick Chow, business director, Leo Burnett Shanghai

The biggest competitor Wang’s Fortune Tea faced in China could come from the major international beverage giants Coca-cola and PepsiCo. While both companies were hesitant to enter the herbal tea market and continued to proceeded with caution in 2006, there was no denying that they had to try to capture part of the huge pie. In fact, by 2005, China had surpassed Germany to become Coca-cola’s fifth-largest market, with 24% of Chinese

Translated from Chinese, Manager’s Daily (经理日报) (8 April 2006) “2006 China’s Herbal Drinks Market Faces Uncertain Future” (“2006 年中国市场下火饮料前途难料”), http://www.newssc.org/gb/Newssc/meiti/cjb/index.html (accessed 7 August 2007). 53 For details, see Coconut Palm Group Company’s website: http://www.yeshu.com. US$1 = Rmb 7.40 on 8 December 2007. 54 Chung, O. (11 May 2007) “After the Coke Craze, It’s Tea Time in China”, Asia Times Online, http://www.atimes.com/atimes/China_Business/IE11Cb01.html (accessed 30 October 2007). 55 Warner, F. and McDermott, D. (18 February 1997) “Packing a Punch: Traditional Drinks Battle for Share of Bubbly Market”, Asian Wall Street Journal. 56 Hargrave-Silk, A. (25 August 2006) “Coke Makes Herbal Offer”, Media, p. 12.

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consuming a carbonated soft drink at least once a week.57 The company had no choice but to pursue the non-carbonated beverage market in China. As early as 2001, Coca-Cola had introduced a line of various teas into China without much fanfare. In 2003, Coca-Cola again tried to enter the market by starting talks with HealthWorks based in Hong Kong to form an alliance. In November 2005, Coca-Cola finally announced a formal strategic partnership with HealthWorks to introduce a line of herbal tea drinks. Until the first half of 2006, HealthWorks had only been sold in the Hong Kong market. In July 2006, Coca-Cola highly publicised its entry into China with two flavours, Qing Liang Yuan and Mei Li Yuan. HealthWorks utilised the messages of “Close to nature, feeling natural and healthy” and “More modern, more fashionable, more healthy” to appeal to younger consumers and further differentiated itself with PET bottle packaging [see Exhibit 16]. The soft drink giant hired Leo Burnett, one of the largest and most successful advertising companies in the world, to create a campaign for its new line of herbal teas with a 40-second television commercial, supported by outdoor ads on buses and bus shelters and radio and print ads.58 PepsiCo, in the meantime, seemed more cautious to enter the herbal tea drinks market. In 2005, PepsiCo partnered with Lipton Tea under Unilever to introduce herbal tea bags to Chinese consumers in four flavours, with the target market of young white-collar workers. The focus was on nature and health, with different specific functions for each flavour: boosting energy, lowering “internal fire”, protecting the skin and losing weight.59 By the end of 2006, PepsiCo had yet to introduce its own brand of ready-to-drink herbal tea. On 10 June 2006, the eve of World Cultural Heritage Day, China’s Ministry of Culture detailed the first ever National Intangible Culture Heritage list, which included herbal tea. A total of 18 brands from 21 herbal tea companies with 54 formulas from Guangzhou, Hong Kong and Macau made the list, including Wang’s Fortune Tea. These companies and their recipes were thereafter protected under the World Cultural Heritage Protection Convention and China’s preservation laws.60 This distinction brought good news for Wang’s Fortune Tea in terms of domestic competition in that these 54 secret formulas made from 200 approved herbal ingredients could only be used by these 21 companies. Under the new protection, only these approved companies could advertise the specific functions of “clearing the liver and eyes, moisturizing the lungs and soothing intestinal tracts”.61 Other than these 21 herbal tea makers, players entering the industry could no longer declare their products to be “herbal tea”.

The Future for Wang’s Fortune Tea in China
While Wang’s Fortune Tea held the coveted position of the number one soft drink in China in 2006, it could be said that staying on top was harder than getting there. Intense competition was heating up from regional players with strong traditional branding, national brands with a diverse line of products, Hong Kong and South-East Asian based players with a steady foothold in Asia and international heavy hitters like Coca-cola and PepsiCo with tremendous resources. How could Wang’s Fortune Tea cope with such pressure to maintain its market share and grow profitability? With only one product in two different packages as of 2006, what type of expansion in its product line was needed to reach other target markets? With the various modern designs other companies were creating for their herbal tea products, what
Ward, A. (21 September 2005) “Coke Wakes Up to Waning Thirst for Cola”, Financial Times, http://www.ft.com (accessed 30 October 2007). 58 Ibid. 59 For details, see Unilever China’s website: http://www.unilever.com.cn. 60 Translated from Chinese, China Food Industry Web ( 中国食品产业网) (14 September 2006) “An Uncertain Future: CocaCola vs. Chinese Traditional Herbal Tea” (“前程未卜:可口可乐火拼中国传统凉茶”), http://www.hc360.com (accessed 7 August 2007). 61 Ibid.
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packaging modifications would Wang’s Fortune Tea need to make in order to reach out to young people? How could Wang’s Fortune Tea cope with competition from international players in terms of resources, branding and advertising budgets? Finally, what innovations would Wang’s Fortune Tea have to create in order to maintain its number one position in China?

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EXHIBIT 1: MAP OF CHINA

Source: Asia Case Research Centre, The University of Hong Kong

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EXHIBIT 2: SIX CLIMATIC EVILS The six climatic evils are: wind, cold, summer heat, dampness, dryness and fire. The Pathogenic Features of the Six Traditional Chinese Medicine Evils

The Six Evils Related to Elements and Seasons Evil Wind Cold Summer-heat Dampness Dryness Element Wood Water Fire Earth Metal Season Spring Winter Summer Late Summer Autumn

Source: Http://Www.Shen-Nong.Com/Eng/Principles/Whatsixevils.Html (accessed 10 December 2007).

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EXHIBIT 3: RED CAN PACKAGING

Source: http://www.tthao.com.cn/images/upfile/2007040938445033.jpg (accessed 8 November 2007).

EXHIBIT 4: TABLE OF FACTORY INVESTMENTS, 1995–2006 Year 1995 1999 2003 2004 2005 2006 Investment in US$ $20 million $30 million $30 million $25 million $30 million $100 million Factory Location Dongguan, Guangdong Province (Phase 1) Dongguan, Guangdong Province (Phase 2) Beijing Economic & Technology Zone Shaoxing, Zhejiang Province Shishi, Fujian Province Nansha, Guangdong Province

Source: China Strategic Planning Club (中国策划俱乐部) 11 June 2007. “Red Can Wanlaoji Brand Positioning Strategy” (“红罐王老吉品牌定位战略”), http://www.ch1188.com/yxbd/ShowArticle.asp?ArticleID=7046 (accessed 8 November 2007).

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EXHIBIT 5: GREEN BOX PACKAGING62

Source: http://www.tthao.com.cn/images/upfile/2007040938480609.jpg (accessed 8 November 2007).

62

Green box packaging is sold by Guangzhou Wanglaoji Pharmaceutical Co. Ltd, which owns the brand name of Wang's Fortune Tea in Mainland China.

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EXHIBIT 6: TABLE OF SALES REVENUE, 2002–2006 Year 2002 2003 2004 2005 2006 Sales Revenue in US$63 $21.74 million $72.46 million $172.71 million $309.79 million (including green box)64 $512.16 million (including green box)

Wang's Fortune Tea 2002-2006 Sales Revenue
4500 4000

Sales Revenue in Rmb millions

3500 3000 2500 2000 1500 1000 500 0 2002 2003 2004 2005 2006

Year

Source: China Strategic Planning Club (中国策划俱乐部) 11 June 2007. “Red Can Wanlaoji Brand Positioning Strategy” (“红罐王老吉品牌定位战略”), http://www.ch1188.com/yxbd/ShowArticle.asp?ArticleID=7046 (accessed 8 November 2007).

63

US$1 = Rmb 8.28 from 31 December 2002 to 31 December 2004. US$1 = Rmb 8.07 on 31 December 2005. US$1 = Rmb 7.81 on 31 December 2006. 64 Green box packaging is sold by Guangzhou Wanglaoji Pharmaceutical Co. Ltd, which owns the brand name of Wang's Fortune Tea in Mainland China.

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EXHIBIT 7: EXAMPLES OF CHINESE MEDICINE IN PILL FORM

Source: http://www.xuyangpharm.com/product.php (accessed 4 January 2008).

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EXHIBIT 8: TELEVISION COMMERCIAL SCREENSHOTS

Source: China Strategic Planning Club (中国策划俱乐部) 11 June 2007. “Red Can Wanlaoji Brand Positioning Strategy” (“红罐王老吉品牌定位战略”), http://www.ch1188.com/yxbd/ShowArticle.asp?ArticleID=7046 (accessed 8 November 2007).

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EXHIBIT 9: CCTV TELEVISION SERIES STILL SHOTS

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Source: http://yule.sohu.com/7/0504/69/column220046983.shtml (accessed 4 January 2008).

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EXHIBIT 10: OUTDOOR ADVERTISING

Source: Jiaduobao company website: http://www.jdbchina.com (accessed 8 November 2007).

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EXHIBIT 11: PROMOTIONS IN PARTNER RESTAURANTS

Source: China Strategic Planning Club (中国策划俱乐部) 11 June 2007. “Red Can Wanlaoji Brand Positioning Strategy” (“红罐王老吉品牌定位战略”), http://www.ch1188.com/yxbd/ShowArticle.asp?ArticleID=7046 (accessed 8 November 2007).

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EXHIBIT 12: SCRATCH CARD LUCKY DRAW PROMOTION

Source: China Strategic Planning Club (中国策划俱乐部) 11 June 2007. “Red Can Wanlaoji Brand Positioning Strategy” (“红罐王老吉品牌定位战略”), http://www.ch1188.com/yxbd/ShowArticle.asp?ArticleID=7046 (accessed 8 November 2007).

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EXHIBIT 13: SCHOLARSHIP PROMOTION

Source: Jiaduobao company website: http://www.jdbchina.com (accessed 8 November 2007).

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EXHIBIT 14: CSR SPENDING, 1998–2006 Year 1998 2001 2002 2003 2004 2006 Spending (US$)65 $12,077 $6,642 $8,696 $63,406 $72,464 $166,453 Cause Building of a school in Wenzhou, Zhejiang province 11 need-based high school scholarships in Wenzhou 24 need-based university scholarships in Wenzhou 105 need-based university scholarships in Wenzhou, Lisui, Taizhou 120 need-based high school scholarships in 10 cities 240 need-based scholarships to students in 24 cities

Source: Jiaduobao company website: http://www.jdbchina.com (accessed 8 November 2007) and translated from Chinese, Lin, S. (林思勉) (9 December 2004) “Positioning, Lifeline of Wanglaoji’s Success” (“定位,王老吉的飙红主线”), Successful Marketing ( 成功营销), http://www.emkt.com.cn (accessed 7 August 2007).

EXHIBIT 15: TABLE OF PROMOTIONAL SPENDING, 2003–2006 Year 2003 2004 2005 2006 Spending (US$)66 $4.83 million+ $12.08 million+ $12.39 million+ $25.61 million+ (estimated)

Source: Translated from Chinese, Cui, W. (翟文熙) (11 December 2006) “Wild Red: 400 Times Faster—Wang’s Fortune Tea’s Success Story”, (“红色狂飙:400 倍速王老吉成功学”), Global Brand Web( 全球品牌网), http://www.globrand.com (accessed 7 August 2007).

65 66

US$1 = Rmb 8.28 from 31 December 1998 to 31 December 2004. US$1 = Rmb 7.81 on 31 December 2006. US$1 = Rmb 8.28 from 31 December 2003 to 31 December 2004. US$1 = Rmb 8.07 on 31 December 2005. US$1 = Rmb 7.81 on 31 December 2006.

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EXHIBIT 16: COCA-COLA’S HEALTHWORKS HERBAL TEAS

Source: http://www.coca-cola.com.cn/ourbrand_products_still.htm#8 (accessed 7 November 2007).

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