Opportunity looms for premium Chinese water brands(2)

Brand recognition

But despite the industry's recognition, what nags Pang and other people in the business is the low recognition among ordinary consumers.

Industry experts said that the biggest challenge is to persuade the notoriously price-sensitive Chinese consumers to pay extra for high-end water.

"The biggest bottleneck for the development of the high-end water market is the poor recognition among consumers toward high-end water brands," said Liang Mingxuan, a food industry analyst with CIConsulting. "In mature markets, such as Europe, people have high requirements for water. But not here."

However, Liao of the China Mineral Water Committee cautioned that high prices do not necessarily mean high-end water.

China's water industry normally defines high-end water as products above 4 yuan per bottle of about 500 milliliters.

But to Liao, only mineral water can be called high-end water.

"At least 70 percent of China's surface water have been polluted. Unlike surface water, mineral water is usually hundreds of meters underground, so it's free from contamination," Liao said.

He added that, also unlike surface water, mineral water is considered a mineral reserve of the state and thus is subjected to an extra resources tax, which adds up to the cost of the water.

"People who have been to a decent mineral water production base would realize that the price they are paying is not too high," Liao said. "The Kunlun Mountains water is actually being sold at a low price."

Kunlun is sold at 4.8 yuan for a bottle of 510 ml.

At a Ito Yokado outlet in Beijing, most consumers surveyed by China Daily couldn't tell the difference between "mineral water" and "mineral substance water", a kind of water that is made of surface water with mineral substances added during processing.

"Isn't this mineral water?" a consumer asked, pointing to Nongfu Spring, a bestseller in the store, according to Ito Yokado's managers. Nongfu Spring is made of reservoir water.

Sales staff at a Ito Yokado's Beijing store said that bottled water with high-price tags is difficult to sell, including Kunlun Mountains water.

"5100 Tibet sometimes sell well, but only when there's a promotion," a staff member said. When there is a promotion, 500 ml of 5100 Tibet sells for 8.9 yuan, down from 10.9 yuan.

"I often quietly observe people's buying habits in stores. In most cases, after a long comparison, young men take the cheapest bottled water," Liao said.

In addition to the Chinese consumers' low loyalty to bottled water brands, there is widespread cynicism about the manufacturers' claims regarding the place of origin.

"I would pay more money to buy Kunlun Mountains water if it is really from Kunlun Mountains," a women in her twenties said. "But is it really from there?"

Better strategies

But despite the low recognition and trust, some brands were able to steer away from traditional sale channels, such as stores, and found opportunities elsewhere.

5100 Tibet Glacier Spring Water, the bestseller among domestic premium water brands, managed to grab a niche of high-end channels such as the high-speed railway. In 2007, it signed a strategic contract with China Railway Express, the purchasing agent for China Railways. The contract gave 5100 Tibet access to the high-speed train market and was decisive in the company's commercial success.

In 2010, the water sold to China Railway Express accounted for 81 percent of Tibet 5100's revenue, the company said. In its statement before the IPO, the company vowed to diversify its client base and reduce its reliance on CRE to 59 percent.

Tibet 5100 has since signed contracts with local governments, Air China, China Mobile and BP Plc. In its latest marketing campaign, it's selling a "water card" through online retailers. Customers who buy the prepaid card get a home-delivery service.

In its 2011 financial report, Tibet 5100 said its reliance on China Railway was reduced to 62 percent.

Kunlun Mountains water is clearly lagging behind.

"You can't expect to recover costs within three to five years," Pang said, indicating the business is still operating at a loss.

The water's place of origin, a long distance from major markets in eastern China, means expensive transportation costs. Heavy marketing was another major cost for the brand.

For JDB - which also produces the popular herbal tea Wanglaoji, with more than 18 billion yuan in sales last year - the huge investment in Kunlun Mountains water is bearable, at least for now. JDB said it has hopes of making a profit due to economies of scale, by expanding production capacity.

But finding a way to develop the brand in a competitive niche market - like its rival Tibet 5100 - is perhaps a more important question.