Summary of Key Points
Nongfu Mountain Spring’s performance in the first half of the year was impressive (revenue increased by 16%, net profit increased by 16.6%, and gross margin reached a record high of 60.9%). However, its founder, Zhong Zhaozha, has criticized internet platforms as the “biggest middlemen.” Behind this apparent contradiction lies Nongfu Mountain Spring’s meticulous calculation of its interests: its high gross margin stems from heavy capital investment in the early years (tea beverages became the main category with higher profit margins), and strict control over online channels is aimed at protecting the offline pricing system and the profits of its partners. At the same time, to cope with competition and risks, Nongfu Mountain Spring has adopted defensive measures, but these have come with costs, and it also faces the long-term challenge of consumer digitalization.
1. High Gross Margin: Not “Fast Money,” but the Result of Heavy Early-Stage Investments
Nongfu Mountain Spring’s high gross margin (60.9%) is not achieved through price increases or squeezing of channels, but rather through sustained efforts:
- **Tea Beverages as the “Profit Engine”: In the first half of the year, tea beverage revenue amounted to 13.1 billion yuan (44.2% of total revenue), surpassing packaged water for the first time (9.6 billion yuan, 32.4%). The profit margin for tea beverages (48.8%) is 15 percentage points higher than that of packaged water (33.8%)—this is due to the recent popularity of sugar-free tea, and the research and development investments made in the early years have now begun to pay off.
- Delayed Returns from Heavy Capital Investments: Since 2011, Nongfu Mountain Spring has invested heavily in sterile technology (to ensure that tea products do not spoil over months) and built sterile production lines. It also spent seven years securing a water source from the Changbai Mountains. The first six years were not profitable, but now that sugar-free tea is popular and the scale has expanded, the fixed costs have been diluted, leading to higher profits.
- Cost Changes: The decrease in sugar prices has reduced the cost of sugary teas, and the increasing popularity of sugar-free teas has offset the impact of rising PET bottle prices on packaged water, allowing for a new record high in the overall gross margin.
2. Strict Control over Online Channels: Fear of Platforms Destroying Offline Business
Nongfu Mountain Spring limits its online sales to around 5% (a very low figure in the industry). This is not because it does not want to enter the online market, but because it fears that platforms could undermine its offline business:
- Online Low Prices Can Hurt Offline Stores: Online platforms use traffic to force brands to lower prices (e.g., through live sales promotions). If consumers get used to lower prices online, they will not buy products at the original price in offline stores. Offline stores, in order to retain customers, have to lower their prices, which compresses their profits and may lead them to stop promoting Nongfu Mountain Spring products or even switch to competing brands.
- Maintaining an Offline “Alliance of Interests: The cost of a 2-yuan red bottle of water is 0.7 yuan at the factory, with distributors and stores receiving 1.29 yuan (64.5% of the retail price). By controlling online prices, Nongfu Mountain Spring ensures the profits of its offline partners, maintaining a network of 5,000 distributors and 3 million retail outlets—this is its core business.
- Using E-commerce as a “Tool,” Not a “Main Force: Online channels are used solely for brand display, testing new products, and bulk purchases. Pricing is not allowed to be controlled by platforms; essentially, Nongfu Mountain Spring has “confined” e-commerce within its own framework.
3. Defensive Strategies, but with Costs
To counter competition and risks, Nongfu Mountain Spring has taken several defensive measures, but these have also brought potential drawbacks:
- Using Green Bottled Water as a “Price Barrier: In response to competitors’ pricing wars with 1-yuan water products, Nongfu Mountain Spring did not lower the price of its red bottles but launched green bottled purified water at lower prices, keeping the price war in the lower-end segment and protecting the high profits of its red bottles and tea beverages.
- Consequences:
- Slower Growth in Packaged Water: Revenue from packaged water increased by only 2.1%, and the profit margin decreased by 1.67 percentage points. The higher sales volume of green bottled water has dragged down the overall profit margin.
- Inability to Control Emerging Online Channels: While official brand stores can control prices, platforms like Meituan and Pinduoduo offer inconsistent prices (for example, 15 bottles of tea beverages can be sold for 27.95 yuan on Pinduoduo and 58 yuan on Tmall). Consumers bypass official stores to buy cheaper products, weakening Nongfu Mountain Spring’s online presence.
- Depreciation Risks: Depreciation of equipment increased by 200 million yuan in the first half of the year, with tea beverages accounting for an additional 130 million yuan. While the rapid growth of tea beverages helps to dilute these costs, a slowdown in growth could result in significant losses due to depreciation.
4. Long-Term Concerns: Defending Against Platforms, but Not Against Changing Consumer Habits
Nongfu Mountain Spring’s current defensive strategies are effective for now, but they may become ineffective in the long run:
- Irreversible Digitalization of Consumer Habits: According to iMedia Research, 59% of consumers will buy beverages online by 2026, and 48% will use services like Meituan and Ele.me for instant retail. Younger consumers are increasingly preferring to place orders on their phones and no longer visit small stores.
- Potential Loss of Offline Customers: By treating online channels as secondary, Nongfu Mountain Spring may lose future customers if the next generation of consumers all buy water online. If its 3 million offline outlets cannot reach them, even if it maintains its prices, it may gradually lose market share.
- Prevention Is Better Than Defense: While it is important to defend against platforms and price wars, it is more crucial to adapt to online consumption trends. After all, where consumers are, business must follow.
In summary, Nongfu Mountain Spring’s high gross margin is the result of past heavy investments. Strict control over online channels is aimed at protecting its offline business. However, as consumer habits become more digital, its defensive strategies may need to be adjusted to avoid losing younger customers in the future.