China Consumer

Washed up

Bawang wins libel case but is it too late to revive its fortunes?

Hong Kong actor Jackie Chan arrives at the 18th Shanghai International Film Festival

Jackie Chan: endorsed Bawang

Bawang is China’s biggest domestic shampoo brand, although its cheerleaders thinned out in 2010 when it began a six-year lossmaking streak.

This week it may have finally turned the corner – though not because it has wrestled back market share from foreign competitors. Instead, it is thanks to a bitter-sweet victory in a defamation case against a Hong Kong publisher, which Bawang has blamed for its reversal of fortune six years ago.

Before founding Bawang in 1994 the company’s chairman Chen Qiyuan was a pesticide trader. Having tried to sell shampoo made from beer (considered a more natural formula) with little success, Chen turned to Chinese medicine in 1997. In 2004 Bawang hired Hong Kong movie star Jackie Chan to be the ambassador for Bawang’s herbal shampoo. At Rmb10 million ($1.5 million) a year the endorsement deal was not cheap but it worked. Bawang grew into the undisputed leader in the herbal shampoo segment, occupying half of the market. The company went public in Hong Kong in 2009 and within a year, its market value had climbed to nearly HK$20 billion ($2.5 billion).

Chen even planned to replicate his successful herbal formula in the drinks market. Bawang hired another action movie star Donnie Yen to promote its herbal tea – made with the same secret Chinese medicine recipes that Chen says he inherited from his ancestors.

Then came the pivotal moment: a damaging report from Hong Kong’s popular Next Magazine in July 2010 accusing Bawang’s herbal shampoo of being cancerous. The article was widely circulated by Chinese media outlets. Bawang’s sales dwindled as foreign competitors seized the chance to launch their own herbal products. From a company which made a Rmb364 million net profit in 2009, Bawang suffered a combined Rmb1.7 billion loss over the following six years. At one point its market capitalisation dipped to less than HK$800 million, or 4% of its peak value back in 2010.

Bawang responded by suing Next Media Group for libel, seeking HK$630 million in compensation. Following a lengthy tussle, Bawang finally won the lawsuit on Monday. The Hong Kong court ruled that Next Magazine’s report was “not a product of responsible journalism”.

The victory proved something of a pyrrhic one. Bawang was only awarded about HK$3 million in compensation (though the media firm must also pay 80% of Bawang’s legal costs, which Apple Daily, a sister publication of Next Magazine, says amount to HK$43 million). Bawang’s share price briefly surged 19% on Monday (ahead of the verdict), but then ended the session 6% lower after the judge’s verdict at 2pm.

Both parties could still appeal but 21CN Business Herald said Bawang is now prepared to move on. The company has recently moved its headquarters to Nansha from Guangzhou. It has also been cutting costs, with 21CN reporting that its sales team has downsized to 930 last year from its 20,000 peak in 2010. The drastic reduction, 21CN suggests, is because Bawang is skewing more heavily towards Amway-style direct selling. It is also ditching its past strategy of hiring celebrities like Chan and Yen to promote its products.

A more intangible gain from the defamation case: Bawang’s victory has put awareness of its products back on the radar of Chinese consumers. “Let’s go buy a bottle of Bawang shampoo,” one internet user wrote on weibo, rallying support for the national brand.

Other complained that Chinese consumers have been too easily swayed. “People flocked to buy Bawang’s herbal shampoo following Jackie Chan’s advertisement; people flocked to dump Bawang’s shampoo after Next Magazine’s report and now people are flocking to accuse Hong Kong media of being irresponsible,” another wrote.

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