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REV: July 8, 2024

YUE FANG

GENG LIU

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XIAYAN HUANG

XINGHANG LV

Chi Forest: Taking on Coca-Cola

On April 26, 2023, Chi Forest (Beijing) Food Technology Group Co., Ltd. (hereinafter “Chi Forest”)

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unveiled its second-generation cola-flavored sparkling water at its fourth factory in Xianning, Hubei
Province. This factory, tasked with being the main producer of this new product, was adorned with
large, eye-catching posters on its exterior that read “Cola by Chi Forest is Here!” (see Exhibit 1).

Founded in 2016, Chi Forest was a beverage company that applied internet business-inspired
strategies to product research and development (R&D), manufacturing, and distribution. Its product
line included Chi Forest Sparkling Water, Alien Electrolyte Water, R Tea, and Milk Tea Classic. The
company set itself apart by quickly creating unique bestsellers. Its Sparkling Water, for example,
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immediately captured consumers’ interest following its 2018 launch and dominated the market since.
Over the following three years, Chi Forest experienced a remarkable 15-fold increase in sales from
¥160 ① million to ¥2.5 billion. 1 It became an emerging force in the Chinese beverage market and
attracted the attention of established industry giants.

In 2021, industry heavyweights launched their own versions of sugar-free sparkling water products
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while pressuring distributors and suppliers to cut ties with Chi Forest. Flush with capital and resources,
they posed a significant challenge to Chi Forest, reshaping the sparkling water market landscape it had
dominated. 2

In 2022, Chi Forest posted its slowest growth since inception, prompting a reevaluation of its
internet-centric strategy. Recognizing the limitations of its approach to outperforming established
competitors, Chi Forest sought the wisdom of seasoned players from traditional industries. Alongside
efforts to strengthen manufacturing capabilities, expand distribution networks, and address
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weaknesses, the company began working on a potential game-changer, putting cola at the top of its
innovation agenda.

In China’s carbonated beverage market, the cola segment had been long dominated by the duopoly
of Coca-Cola and PepsiCo. When Chi Forest, an up-and-coming brand that was yet to break into the
ranks of these industry giants, launched its cola-flavored sparkling water, it was more of a symbolic

① ¥ = CNY = Chinese yuan renminbi; ¥ 1 = approximately US$0.1436, US$0.1532, US$ 0.1574 by the end of 2019, 2020, 2021,
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respectively.

Professor Yue Fang, Case Researcher Dr. Geng Liu, Case Researcher Dr. Xiayan Huang, and Research Assistant Xinghang Lv of China Europe
International Business School prepared this case. It was reviewed and approved before publication by a company designate. Funding for the
development of this case was provided by China Europe International Business School and not by the company. CEIBS cases are developed solely
as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective
management.
Copyright © 2024 China Europe International Business School. To order copies or request permission to reproduce materials, call 1-800-545-7685,
write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized, photocopied,
or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

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 Chi Forest: Taking on Coca-Cola CB0318

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gesture than a strategic maneuver—akin to David brandishing his spear at the shadow of Goliath. Still,
this bold move sent shockwaves through the industry. Could Chi Forest’s dream of overtaking Coca-
Cola become a reality?

Prologue: Diversifying into the Beverage Sector

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Founder Tang Binsen
Chi Forest was established by Tang Binsen, a serial entrepreneur. In 2008, Tang set up Elex
Technology, a gaming venture that released its game “Happy Farm” in dozens of countries. Following
this, Elex leveraged its overseas operating experience to branch into the antivirus market. Once Elex
was acquired in 2014, Tang set up Challengers Venture. Consistent with its mission statement, “Long
China, challenge the giants, invest in good products, believe in young people,” the firm aimed to

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empower bright young sparks who dared to take on global giants. Through his ventures, Tang noticed
that while many countries boasted iconic beverages, China lacked a globally recognized super beverage
like Coca-Cola. This realization fueled his vision to create a quintessentially Chinese super-beverage.

China’s Beverage Market

In the Chinese beverage market, dominant brands were closely linked to specific product categories,
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representing their respective segments. In 2019, packaged drinking water emerged as the leading
category, capturing 34.6% of the market, followed by tea, fruit juice, and carbonated drinks at 21.1%,
15.6%, and 14.9%, respectively. 3 Several major brands dominated each segment: Coca-Cola and
PepsiCo controlled 90% of the carbonated drinks market; Nongfu Spring, Master Kong, Wahaha,
C’estbon, and Ice Dew held more than half of the drinking water market 4; while Master Kong, Uni-
President, JDB, and Wong Lo Kat controlled 70% of the tea drinks market. 5
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Growth in the domestic beverage market began to cool off in 2015 when soft drink sales increased
just 4% year on year. Beverage brands continued to roll out new products, but less than 5% of them
survived in this sluggish market. Tang concluded that traditional beverage products could no longer
meet the changing needs of China’s young consumers. As a seasoned investor, he decided to dip his
toes into the beverage industry to create a beverage that would better meet consumer demands.

Tang believed that sugar-free drinks would likely catch on in China. They received a cool reception
when first launching in China in 2002, and even by 2014, they only accounted for 0.27% of the entire
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beverage market (¥1.66 billion). In contrast, these drinks had a larger market share in the US, Europe,
and Japan. According to a 2015 market survey, carbonated drinks were increasingly considered
unhealthy as consumers became health-conscious, resulting in a shrinking market share. 6 At that time,
the sugar-free beverage market included options like Nongfu Spring’s Oriental Leaf (2011), Master
Kong’s Original Flavor Tea House (2012), Coca-Cola’s Coca-Cola Zero Sugar (2005), and Diet Coke
(1995). However, no single player stood out amid the shift in consumer preferences. Many “zero sugar”
drinks relied on artificial sweeteners such as aspartame. This drew criticism for their peculiar taste and
sparked debates about food safety.7
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In this context, Tang established the Chi Forest R&D Center at the end of 2015 to develop sugar-free
drinks.

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 Chi Forest: Taking on Coca-Cola CB0318

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A Rising Star: A Beverage Company with Internet Thinking
R&D Principles: Customer-first in An Era of Information Transparency
After its official establishment in April 2016, Chi Forest turned to a prominent consulting firm for
market research and product planning, just as traditional beverage brands would. The fast-moving

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consumer goods (FMCG) experts benchmarked Chi Forest against Coca-Cola, priced at ¥3.5 per 500ml
bottle, and recommended a maximum price of ¥4 for Chi Forest. With a 30% sales commission paid to
distributors and retail stores respectively, the production cost of a ¥4 drink should be no more than
¥0.5.

As a fledgling startup, Chi Forest did not have much bargaining power with OEMs, compelling it
to place a large ¥5 million manufacturing order for its new products: two sugar-free fruit tea drinks

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targeted at beauty-conscious young women, dubbed Chi Forest Slim and Chi Forest Beauty. 8 These
products underperformed in the market due to their unappealing taste, to the extent that even the
founding team members were reluctant to drink them. To prevent damage to the brand image, Tang
shelled out an additional ¥1 million to dispose of these unpalatable products. 9

This setback awakened Tang to the harsh reality of the beverage market: Under a traditional
business model, the sales success of a beverage depended primarily on the company’s distribution
network. Typically, beverage makers would set a price for a new product and then work backward to
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determine production costs and profit margins before finally settling on which ingredients to use. As
a result, the taste or quality of products often took a backseat. The gaming industry had undergone a
similar phase, where distribution networks held sway. However, as the internet leveled the playing
field regarding information asymmetry and distribution channels, consumers were spoilt for choice.
Putting customer needs front and center became imperative, and the beverage industry needed to
embrace internet-driven transformation.
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Recognizing the limitations of traditional R&D and value systems in the era of “new consumption,”
Tang gave young people free rein to explore and develop products they were passionate about, free
from conventional constraints. 10 In a departure from the standard practice of setting profit margins
before calculating costs, Chi Forest adopted a product-first mindset. It brought on board product
managers from diverse backgrounds, including the gaming industry, with an average age of 28. 11 These
young innovators adopted the R&D approach of gaming companies and fostered healthy competition
between parallel project teams. To improve collaboration and transparency, the company introduced
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Feishu, a collaborative application providing seamless access to schedules, journals, and OKRs across
the organization. 12

To produce healthier and more palatable sugar-free drinks, Chi Forest sifted through 100 or so sugar
substitutes. The company singled out erythritol, an organic, natural substance 60–70% as sweet as
sucrose. It had a cooling effect and left no bitter aftertaste. However, erythritol came with a price tag
50-70 times higher than other substitutes. With most traditional beverages costing ¥3-5, erythritol was
deemed too pricey for mass production. Staying true to its “customer first” value proposition, Chi
Forest became the first beverage maker in China to use erythritol in mass-produced drinks.
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Product Testing: Data-driven Rapid Iteration

The debacle with the first batch of products was a wake-up call for Tang about the exorbitant cost
of trial and error in the traditional beverage R&D process. He applied gaming strategies to the beverage
industry, emphasizing frequent, small-scale iterative testing to quickly identify and address

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 Chi Forest: Taking on Coca-Cola CB0318

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problems. 13 This approach allowed Chi Forest to strike a balance between cost-effectiveness and rapid
progress, powered by data-driven insights. 14

The company conducted taste tests every day or two and promptly adjusted its products based on
the results. After passing internal tests, new products were launched on leading e-commerce platforms
such as Tmall and JD.com, with mass production determined by back-end analytics. Following online

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testing, products moved to offline distribution channels. For example, Chi Forest positioned its new
products alongside its competitors in brick-and-mortar convenience stores to get a first-hand look at
consumer preferences. The company also created a series of advertising campaigns highlighting
different selling points and monitored click-through rates to identify the features that users preferred.
In 2020, Chi Forest decided to harness its own marketing and social media channels for product testing.
It frequently promoted free trials of new products through its WeChat Mini Program and engaged
loyal customers in trial offers.

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Tang also took the concept of A/B testing directly from the internet sector playbook. A/B testing,
also known as split testing, is a way of pitting different versions of a product against each other to
single out the top performer. After introducing A/B testing, Chi Forest typically tested hundreds of
new products at a time, reducing the traditional product development cycle from one or two years to
three to six months. The cost of trial and error dropped to around ¥400,000-500,000 per batch of
products, less than one-tenth of the original cost.
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Since inception, Chi Forest developed hundreds of new products, with dozens of flavors for its
sparkling water line alone. However, nearly 95% of these products did not make it through testing.
Only a handful, including R Tea (2017), Sparkling Water (2018), Milk Tea Classic (2020), and Alien
Electrolyte Water (2021), passed rigorous evaluations, some with hundreds of trials, before hitting the
shelves of convenience stores, supermarkets, and smart refrigerators in retail outlets. 15

Marketing Communications: An Integration of New Media and Traditional Channels

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Chi Forest focused its marketing efforts on China’s first generation of digital natives, often referred
to as “Gen Z,” primarily female consumers living in first and second-tier cities and born between 1995
and 2009. 16 Through his market research on the gaming industry, Tang noticed the popularity of
Japanese culture among women aged 18-35. As a result, Chi Forest’s initial marketing strategy was
inspired by Japanese aesthetics, highlighting minimalist and refreshing Japanese-style color schemes. 17

New beverage brands found it difficult to break into supermarkets, which had long been a
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stronghold for established brands. In 2016, however, convenience store chains in China expanded faster
than supermarkets, creating a window of opportunity for Chi Forest. The company quickly secured
shelf space in modern chains such as 7-Eleven, FamilyMart, Freshippo, and Bianlifeng. The
demographics of convenience store shoppers—predominantly 20 to 40-year-olds and accounting for
88% of the consumer base 18—dovetailed nicely with Chi Forest’s target market of young professionals
with a high average transaction value.

Chi Forest strategically invested in “seeding” ① its products on social media platforms such as
Xiaohongshu, Douyin, and Bilibili, whose user demographics closely mirrored its target consumers.
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During Xiaohongshu’s rapid growth phase in 2018, Chi Forest capitalized by posting notes catered to

① “Seeding” is a Chinese internet slang, a metaphor for planting seeds of interest in the minds of others about a product or topic,
making them want to try or buy it. The term is commonly used on social media, BBS, and e-commerce sites, where people share
experiences, comments, or recommendations to positively influence others. For example, bloggers might share their love of a
cosmetic product to generate interest among their followers, a process known as “seeding”.

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 Chi Forest: Taking on Coca-Cola CB0318

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consumers’ paradoxical desire for sweet-tasting yet low-sugar beverages. By mid-2020, it had
published more than 5,000 seeding posts on Xiaohongshu alone, outdoing Nongfu Spring’s 1,600 posts
about Oriental Leaf. Platforms like Weibo and Douyin served as focal points for Chi Forest’s
community-focused marketing efforts. The company partnered with celebrity influencers such as
Wang Yibo to drive significant brand awareness and engagement.

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In May 2020, Chi Forest launched a major offline campaign by investing in elevator advertising
through Focus Media. Known for its wide reach, Focus Media placed ads prominently in office
buildings and residential areas along commuter routes. Internet traffic usually cost millions of yuan,
while the budget for placing Focus Media ads in first-tier cities ran into the tens of millions and
hundreds of millions for major cities nationwide.

In addition to massive product placement on popular variety shows and sponsorship of the Bilibili
New Year’s Eve Gala, 19 Chi Forest collaborated with top online influencer Austin Li Jiaqi. His

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livestreams consistently drove up demand for products, resulting in multiple sellouts. In 2020, Chi
Forest posted sales of ¥2.7 billion, with advertising expenses totaling ¥900 million, accounting for one-
third of total sales.20

Chi Forest Sparkling Water: Taking the Market by Storm

Chi Forest continued its “zero sugar” strategy with the launch of R Tea, a “zero-sugar, zero-calorie”
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tea drink, in 2017. This product targeted health-conscious, younger consumers concerned about weight
gain. While R Tea was Chi Forest’s first successful product, it was not a runaway hit.

In May 2018, Chi Forest launched a line of sugar-free sparkling water products priced at ¥6 for a
480ml bottle. Although Coca-Cola Zero Sugar had been on the market since 2005 at a lower price of
¥3.8 for a 500ml bottle, it never gained much traction due to taste concerns. With this in mind, Chi
Forest focused its R&D efforts on improving the taste of its sparkling water. Surprisingly, Chi Forest
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Sparkling Water became a blockbuster, driving impressive sales growth figures of 300%, 200%, 309%,
and 260%, respectively, for the years 2018 to 2021. This catapulted Chi Forest to fame in the consumer
goods sector. In 2020, sparkling water products accounted for more than 60% of Chi Forest’s revenue
before dipping to 54.8% in 2021. 21

Competing with Traditional Brands

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From 2018 to 2020, Chi Forest contributed significantly to the rise and expansion of the sparkling
water market, emerging as its dominant player. In 2020, Coca-Cola and PepsiCo held 4.5% and 1.8% of
the Chinese beverage market, respectively, followed by Nongfu Spring and Wahaha with 3.3% and
0.9%, respectively. Just five years in and Chi Forest already commanded a 0.4% market share. 22 On
Taobao and Tmall, Chi Forest’s beverage sales exceeded ¥560 million in 2021, overtaking Coca-Cola for
the first time and securing second place in annual beverage sales. 23 Chi Forest’s undeniable presence
made it a force to be reckoned with in the industry.

Fierce Competition
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China’s sparkling water market was expected to reach ¥32 billion by 2025, drawing in established
players eager to capitalize on its rapid growth. In 2021, Coca-Cola introduced Aha sparkling water,
popular in Europe and North America, to the Chinese market, with the slogan “zero sugar, zero
calories, and zero fat” and a price of around ¥4.5 per 480ml bottle. Nongfu Spring launched four fruit-
flavored soda sparkling water options with “zero sugar, zero calories, zero fat, and zero potassium

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 Chi Forest: Taking on Coca-Cola CB0318

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sorbate,” priced at ¥4.5 per 500ml bottle. PepsiCo unveiled its sparkling water with “zero sugar, zero
calories, and zero fat,” priced at around ¥4.7 per 450ml bottle. Traditional brands like Nestlé, Master
Kong, Wahaha, and viral brands such as HEYTEA and Nayuki also took the plunge into sugar-free
beverages with their sparkling water offerings. 24 Based on incomplete statistics, at least 30 sugar-free
sparkling water products have launched since 2020.

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Amid an influx of competitors, Chi Forest maintained its position as the leading brand in the
sparkling water market, albeit with diminished dominance. Its market share slipped from a peak of
85% pre-2019 to no more than 50% in the second half of 2021, with Coca-Cola and Nongfu Spring
claiming 25% and 18% of the market, respectively.

In 2021, Chi Forest was prolific in terms of product launches, introducing yogurt, fruit tea, milk tea,
herbal tea, functional beverages, and more, with an average R&D cycle of 5.5 months. Undeterred by
the dominance of industry giants, Chi Forest expanded its offerings and introduced the concept of “soft

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mineral water” with its UCON bottled water. It would compete head-on with Nongfu Spring, a long-
time leader in the packaged drinking water market.

Supply Chain Crisis

Relying on OEMs for beverage manufacturing and bottling was a common practice internationally.
Initially, Tang had strongly advocated this approach, emphasizing that most in-house efforts should
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be devoted to product development and brand building. As Chi Forest’s sales soared in 2019, the
drawbacks of the OEM model were brought into sharp relief.

In March 2019, Chi Forest went through a rough patch as its orders with Jianlibao’s OEM factory
were repeatedly delayed and eventually canceled despite ample production capacity. In April, Tang
made a spirited personal appeal to the factory manager, even resorting to heavy drinking in a desperate
attempt to secure continued OEM services. However, his efforts were in vain, as the factory cited
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“insufficient order size” as the reason for its refusal. 25 While the landscape of China’s beverage industry
remained largely unchanged at the time, Chi Forest struggled to find beverage production lines with
spare capacity. Even after reaching an agreement with a suitable OEM factory, the company faced
another setback amid a last-minute cancelation on the day of scheduled production. This ordeal shed
light on the reality that most beverage production lines in China were in the iron grip of industry
giants. 26

“As a small and young company, we flew under the radar. But as we grew, we learned the
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intricacies of the supply chain,” recalled Li Bingqian, general manager of Chi Forest’s production
center. Despite modest sales of ¥200 million in 2018, Chi Forest boldly allocated ¥1 billion to build
factories, shifting from an asset-light to an asset-heavy model. In July 2019, the company began
building its first one in Chuzhou, Anhui province.

Nevertheless, Chi Forest continued to grapple with supply disruptions. In 2021, the company’s milk
tea products hit a snag when Master Kong’s senior management instructed affiliates to stop OEM
production for Chi Forest. Challenges also arose in the sparkling water production line when the OEM
factory for carbonated beverage preforms and caps abruptly ceased supply so it could prioritize major
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international players. Coca-Cola reportedly snapped up most of the factory’s preform and cap
inventory.

The OEM model also left Chi Forest vulnerable to frequent technical bottlenecks. Tang had hoped
that the steps necessary to bring a product to market could be completed within 48 hours. Chi Forest’s
in-house R&D, testing, and marketing teams were highly responsive and adaptive, but the OEMs’

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 Chi Forest: Taking on Coca-Cola CB0318

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response time was beyond the company’s control, hindering its ability to respond promptly. In
addition, OEMs could not meet Chi Forest’s need for product innovation. For example, the company
planned to introduce a high-milk dairy product, but few domestic plants could meet production
standards.

Faced with these bottlenecks, Chi Forest accelerated its factory construction. In July 2020, the

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Chuzhou factory went into operation; in April 2021, the factory in Zhaoqing, Guangdong province,
started production; in July, the factory in Xiqing, Tianjin, began operations; in December, the factory in
Xianning, Hubei province entered trial production; and in March 2022, the factory in Dujiangyan,
Sichuan province began trial production. With a total investment of ¥5.5 billion, these five factories
strategically spanned the “five super-city clusters” across eastern, southern, northern, central, and
southwestern China, serving 700 million potential consumers. This coverage enabled Chi Forest to
tailor product development and supply to regional needs and quickly adapt to market dynamics. Each

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of Chi Forest’s factories featured state-of-the-art aseptic filling technology. Despite the higher costs,
two to three times that of traditional lines, these aseptic filling systems ensured sterility across liquid
handling, packaging, and manufacturing. With the infrastructure in place, “zero preservatives”
emerged as the company’s new selling proposition following the “zero sugar” campaign. Its pace of
product iteration also picked up. In February 2022, Chi Forest agreed to build its sixth factory in
Taicang, Jiangsu province, focusing on the key markets of Jiangsu, Zhejiang, and Shanghai.

Channel Competition
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At its 2020 annual meeting, Chi Forest’s management expressed concerns over the looming risk of
being squeezed out by industry giants. True to their fears, Chi Forest faced relentless pressure from
Nongfu Spring and Coca-Cola over the next two years. By 2022, both Coca-Cola and PepsiCo had
issued internal ultimatums signaling their intent to wipe out Chi Forest’s sparkling water line. 27

Beverage distribution channels in China covered various avenues, including traditional outlets
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(small grocery stores and non-chain convenience stores), modern retail channels (shopping malls,
supermarkets, and convenience store chains), catering establishments, e-commerce platforms. In 2019,
these channels accounted for 44.0%, 22.3%, 14.3%, 6.1%, and 13.2% of China’s total beverage sales,
respectively, 28 with traditional channels dominating. In 2021, some eight million traditional retail
outlets nationwide distributed beverages. Among them, Coca-Cola had access to over three million,
Nongfu Spring had more than two million, and Chi Forest only about one million. 29 Compared to
industry leaders, Chi Forest had much room to grow in terms of traditional channels, but these giants
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were reluctant to afford Chi Forest this opportunity. 30

In 2021, Nongfu Spring instructed its major regional distributors to stop selling Chi Forest
products. 31 In response, Chi Forest lured away Nongfu Spring and PepsiCo sales staff with higher
salaries and offered distributors rebates 33% higher than those of Nongfu Spring. In addition, the
company shifted its attention to freezers placed primarily in traditional channels such as small grocery
stores. As an incentive, Chi Forest rewarded relevant sales staff with ¥200 and supervisors with ¥100
for each freezer placed in retail outlets. 32 Tang emphasized the extensive support and benefits that Chi
Forest offered distributors. While other companies required a deposit of ¥2,000-3,000 for a freezer, to
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be refunded over three to four years, Chi Forest adopted a 5-4-1 strategy—returning 50% of the deposit
upon successful placement, 40% after three to four months of compliance, and the remaining 10% after
five years. 33 In 2021, Coca-Cola had 1.3 million freezers, Master Kong (including PepsiCo) 768,000,
Nongfu Spring around 650,000, Uni-President nearly 400,000, and Chi Forest 100,000. 34

In summer 2021, Nongfu Spring launched a campaign called “Godsend” in response to Chi Forest’s
freezer expansion efforts. For every bottle of Nongfu Spring sparkling water displayed in Chi Forest’s

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 Chi Forest: Taking on Coca-Cola CB0318

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freezers, retailers would receive a complimentary bottle of Changbai Snow mineral water priced at ¥3,
up to 48 bottles per store. This was a common practice in the FMCG industry, where leading brands
used their less popular or cheaper products to challenge competitors’ main offerings. 35 Coca-Cola also
devised a strategy called “Conquer Chi,” which targeted Chi Forest. Retailers could earn a ¥10 reward
by placing four rows of Coca-Cola sugar-free products on each side of Chi Forest products and
uploading photographic evidence to Coca-Cola’s Enterprise WeChat group. 36

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Drawing Insights from Conventional Companies
By 2022, Chi Forest faced a whopping 30% slowdown in sales growth, a sharp contrast to the 200%+
growth experienced in the previous four years. 37 Once acclaimed for its “internet genes,” Chi Forest
shifted focus to drawing lessons from conventional industries. The company claimed that “developing
our sales network through distributors is the optimal approach. So-called decentralization and internet

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thinking are counterproductive and reflect a misunderstanding of sales.” 38 In addition, Chi Forest
updated its company profile on its official website, changing from “an internet-based innovative
beverage company” to “a Chinese food and beverage company.”

Channel Restructuring
In 2022, Chi Forest grappled with distributor-related challenges in its offline channels, marked by
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excessive inventory pressure, channel conflicts, price fluctuations, and high sales staff turnover. “In
2023, Chi Forest will prioritize its distributors like never before,” said Tang, “Taking a page out of
traditional companies’ playbook, we recognize the critical role of channels and distribution.” 39

Traditional offline channels consisted of approximately 6.3 million small stores, with over 75%
concentrated in third-tier cities and below, 40 perfectly complementing Chi Forest’s focus on
convenience stores and supermarkets in top-tier cities. The lower-tier market was valued at a
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staggering ¥15.1 trillion, accounting for 79.2% of China’s retail market. 41 Chi Forest recognized that this
once-overlooked market was the real battleground for China’s soft drink industry. 42

Tang personally visited distributors and acknowledged the company’s past neglect of its partners.
Unlike Nongfu Spring, which often had thousands of salespeople in each province, Chi Forest had only
a few dozen. Tang became known in the beverage industry as a boss who was willing to chat with
distributors and even crack jokes. Chi Forest’s marketing team and regional offices also humbly visited
distributors. These efforts gradually helped ease tensions between the company and its distributors. 43
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In 2023, Chi Forest implemented seven key channel strategies to further empower distributors. First,
the company prioritized customer profitability by providing distributors with millions of yuan in
subsidies. Second, it expanded service points to increase its presence across diverse retail outlets. Third,
it increased paid displays to secure contracts with premium retailers and command prominent in-store
placements. Fourth, it added more freezer displays to capitalize on opportunities in various social
settings. Fifth, it enhanced employee incentives to strengthen field execution and increase team
efficiency. Sixth, it deepened its commitment to the campus channel by maintaining a robust presence
on college campuses. Finally, it ventured into sports-related areas to tap into relevant distribution
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channels. 44

By June 2023, Chi Forest’s national inventory had fallen more than 40% in absolute terms from the
previous year. Distributors significantly accelerated shipments, reducing inventory days to 25.
Distribution channels reached their highest level of quality and robustness to date. 45

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 Chi Forest: Taking on Coca-Cola CB0318

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Organizational Restructuring
Chi Forest’s headcount quadrupled from early 2021 to over 8,000 in 2022. The company’s rapid
expansion led to significant changes in team size and product portfolio, resulting in management
disarray and communication barriers between employees and leadership. To tackle these issues, Chi
Forest implemented a restructuring plan to align traditional production and distribution processes

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with evolving trends in the internet-driven consumer marketplace.

First, all business units, except strategic ones, moved from closed-loop to open-loop management.
The restructured organization was divided into four divisions: Execution, Application Operations,
Support Functions, and Basic Operations. Execution implemented strategies, Application Operations
analyzed data, and Support Functions included departments such as Legal Compliance, Finance, HR,
and Security. Basic Operations underwent a significant overhaul, highlighted by the creation of a new

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middle office. This office performed critical functions, including enterprise data cleansing and metrics
definition, serving as the command center for the entire organizational structure.

Second, Chi Forest actively pursued comprehensive digital transformation to improve its
organizational structure and day-to-day operations. While the company initially embraced digital
technologies, especially in manufacturing, challenges persisted as the business and staff size expanded.
Data silos between departments hindered collaboration, and existing systems did not allow for efficient
storage or reuse of data once it had served its original purpose. Despite the potential benefits, the large
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middle-office model had only a limited impact on traditional processes such as manufacturing and
distribution. Problems such as a cumbersome offline sales chain, inconsistent production cycles, and
an oversized offline promotional team persisted. Chi Forest wanted to use big data to manage
traditional processes such as R&D, production, and sales, as well as marketing, personnel recruitment
and management, and internal resource allocation. 46

Third, Chi Forest deepened its transition to an open-loop management approach. Before 2022, all
tC

business units had operated independently under the amoeba model, with separate accounting and
personnel systems. As Chi Forest entered a critical growth phase, some prominent business units
evolved into internal power centers, resulting in an intricate personnel structure and diminished
efficiency in interdepartmental collaboration. Some key members even exploited closed system gray
areas for personal gain. 47 Chi Forest restructured several large business units into more streamlined,
product-based entities as a countermeasure. It also consolidated all e-commerce teams across business
units into one department to provide unified support for the entire company.
No

Fourth, Chi Forest focused more on boosting offline sales and improving end-user support. This
included restructuring the sales team’s personnel, organization, and compensation. All supporting
departments worked closely together, with each assigned specific sales-related metrics. For example,
sales forecasting became a priority for the supply chain department, while the branding department
focused on increasing terminal sales. This approach allowed these departments to provide specialized,
team-oriented support without disrupting day-to-day operations and facilitated communication
between regional sales teams and the head office.

Fifth, Chi Forest implemented an open innovation system illustrated by the “Be the Star” innovation
Do

contest, designed to spark creative ideas. Many of the company’s new products were the brainchild of
enthusiastic young people. However, as the company grew and acquired more resources and expertise,
it became increasingly challenging to stimulate and implement new ideas. This was because the
enthusiasm of young, innovative minds was dampened by challenges when gaining recognition,
navigating management protocols, overcoming financial constraints, and accessing distribution
channels. The “Be the Star” contest aimed specifically to spotlight young talent, foster creativity, and

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 Chi Forest: Taking on Coca-Cola CB0318

t
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break down hierarchical barriers. All employees could present their product ideas each month, with
Tang and department heads serving as judges. The company implemented a cycle of idea generation,
collection, and implementation by fostering communication and providing timely feedback and tiered
rewards. 48

Creating an Iconic Product

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Chi Forest found it hard to replicate the success of its sparkling water but remained committed to
product development. From November 2020 to October 2021, the company launched more than 30
beverage flavors, some of which hit shelves within three months of development. The diverse product
line included sparkling water, milk tea, electrolyte water, R Tea, Xian Tea, and Land of Promise. Chi
Forest also ventured into new categories such as coffee, alcohol, and light snacks. Of these, only the
Alien Electrolyte Water achieved a deal of success with sales of ¥1.3 billion in 2022. Chi Forest had yet

yo
to find another product as dominant as its sparkling water, which continued to contribute about 80%
of revenue. 49

There was an unwritten rule in the beverage industry that a product had to reach ¥1 billion in sales
to be considered a success. Chi Forest had reached this milestone with Sparkling Water and Alien
Electrolyte Water. The company’s much-anticipated third product, cola-flavored sparkling water,
embodied its ambition to carve out a niche in the territory of industry giants. However, this was a fierce
battlefield. A dozen brands, from Laoshan Cola to Wahaha Future Cola, had attempted to enter this
op
market, only to face stiff competition from Coca-Cola and PepsiCo and eventually withdraw. As a
result, the cola market became daunting territory. 50 “Surprisingly, no one has successfully ventured
into a category as big as cola,” Tang said. 51 While any trendy category typically attracted a swarm of
imitators or followers, the cola market remained a fascinating exception.

Challenge: Could Chi Forest’s Cola-Flavored Sparkling Water Beat Coca-

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Cola in China?
In 2016, when the company was just starting, Tang boldly declared, “We’re going to make cola.” In
August 2022, Chi Forest launched its cola-flavored sparkling water. However, aside from sponsoring
a variety show, the company did not do much marketing for the product. As a result, many consumers
were unaware that Chi Forest had introduced a cola product. 52 By April 2023, when the posters reading
“Cola by Chi Forest is Here!” were unfurled at the Xianning factory, the cola-flavored sparkling water
No

had already reached version 2.0. The upgraded beverage boasted an even stronger “throat hit” and
was “fizzing with every sip.” 53 In July 2023, Chi Forest launched a lemon-flavored cola, further
targeting the cola market.

Tang deliberately downplayed the invincibility of cola, referring to it as “just a flavor.” Chi Forest
avoided labeling its product as a traditional cola, opting instead for “cola-flavored sparkling water” to
compliment its strength in sparkling water products. Nevertheless, any association with cola inevitably
led to competition with the two industry giants.

To create a cola with simple and healthy ingredients, Chi Forest removed traditional chemical
Do

preservatives like sodium benzoate and potassium sorbate. It eliminated the main acidifier phosphoric
acid, replaced controversial artificial sweeteners like aspartame with natural sweeteners like erythritol,
and used more expensive Paraguayan tea extract instead of traditional artificial caffeine. Launch
attendees praised it as potentially the best-tasting cola in the eastern hemisphere. 54

10

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 Chi Forest: Taking on Coca-Cola CB0318

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In JD convenience stores, Chi Forest Sparkling Water Cola Flavor was priced at ¥6 per 480ml bottle,
compared to Coca-Cola Classic at ¥3.5 per 500ml bottle and Coca-Cola Zero Sugar at ¥3.8 per 500ml
bottle. Tmall Supermarket data showed that Chi Forest Sparkling Water Cola Flavor (480ml*15 bottles)
sold over 2,000 units per month, Coca-Cola Classic mini (300ml*24 bottles) over 30,000 units per month,
and Coca-Cola Zero Sugar mini (300ml*12 bottles) over 10,000 units per month.

rP
Chi Forest elevated Chi Cola version 2.0 to its flagship product, surpassing Alien Electrolyte Water
and tea drinks (see Exhibit 2). 55 In 2023, the company devoted significant marketing and sales
resources to expanding its consumer base. By August 2023, Chi Cola rivaled its best-selling white
peach-flavored sparkling water in terms of popularity.

Industry insiders viewed Chi Forest as the “underdog in this fight.” 56 Nevertheless, history showed
that Coca-Cola was not invincible. At product launch on April 26, 2023, the heads of Laoshan Cola and
Tianfu Cola recalled the heyday of Chinese cola and discussed questions such as “What led to cola’s

yo
phenomenal success?” and “Are there any contenders for the throne?” In the 1980s, a dozen local cola
brands emerged, with Tianfu Cola briefly commanding 75% of the national market 57 of which Laoshan
Cola secured 20%.58 However, Coca-Cola and PepsiCo reshaped the landscape by acquiring Chinese
cola companies in the 1990s. By 2022, Coca-Cola held 59.5% of the Chinese market, while PepsiCo held
32.7%. According to Curt Ferguson, former president of Coca-Cola Greater China, Coca-Cola internally
discussed buying a 20% stake in Chi Forest in 2017. However, the company missed out on the
opportunity due to disagreements over the offer (ranging between ¥40 million to 50 million). 59
op
After seven years of growth, Chi Forest emerged as one of the few Chinese food and beverage
companies with a complete supply chain, a diverse product portfolio, and nationwide brand
recognition. Guided by its mission statement, “Long China, challenge the giants, invest in good
products, believe in young people,” the company produced a world-class Chinese beverage,
challenged Coca-Cola’s market dominance, prioritized user-centric product development, and
empowered young talent. However, Tang felt there was room for improvement in every area. Despite
tC

Chi Forest’s impressive market debut, maintaining its momentum would be an enormous challenge.
How could the company prevent its rapid ascent from being fleeting? Where had Chi Forest succeeded,
and where had it stumbled amid actions taken by traditional beverage giants to thwart its growth?
How could Chi Forest draw lessons from traditional companies to refine its organizational structure
and operating model at this critical juncture? As the company was venturing into the global beverage
arena, what essential steps must it take to realize its vision of “creating a world-class Chinese cola”?
No
Do

11

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 Chi Forest: Taking on Coca-Cola CB0318

t
os
Exhibit 1: Launch Of Chi Forest’s New Cola-Flavored Sparkling Water

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yo
op
Note:
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Top left: Painted posters adorning the exterior walls of the Xianning Factory.
Top right: Yu Haiyu, brand manager of Chi Forest Sparkling Water, with the screen displaying “Zero Sugar, Zero Fat, Zero Calories.”
Bottom left: Xu Hui, product manager of Chi Forest Sparkling Water, with the screen displaying “Dreams that are not laughed at are not wo
rth pursuing.”
Bottom right: Chi Forest Founder Tang Binsen in conversation with Curt Ferguson, managing partner of Ventech China and former preside
nt of Coca-Cola Greater China, Korea, and Mongolia: What led to the cola’s phenomenal success? Are there any contenders for the throne?
Source: Chi Forest’s official website
No
Do

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 Chi Forest: Taking on Coca-Cola CB0318

t
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Exhibit 2: Chi Forest’s Major Products

Product Example Distribution channels Unit price

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480ml bottle Online + offline ¥5-6

Sugar-free sparkling
water 330ml can Online ¥5

yo
1.25L bottle Online ¥12

Electrolyte water 500ml Online + offline ¥7-8

op
Sugar-free tea (R Tea) 500ml bottle Online + offline ¥6
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Sugar-free milk tea 400ml bottle Online + offline ¥12

Sugar-free herbal tea

No

500ml bottle Online ¥7-8

(Xian Tea)

Iced tea 450ml Online + offline ¥5-6

Do

Microbubble juice 380ml bottle Online + offline ¥ 10

Source: created by the case authors.

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 Chi Forest: Taking on Coca-Cola CB0318

t
os
Endnotes
1 Dong Jie, Chi Forest completes a new round of financing with $15 billion post-investment valuation, led by Temasek, 36Kr，2
021-11-02[2023-10-11]. https://www.36kr.com/p/1465984276401152
2 Lu Siye, Chi Forest says goodbye to high growth, guancha.cn, 2022-04-24[2023-09-08]. https://www.guancha.cn/economy/2

022_04_24_636615.shtml

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3 Peng Zhiwei, Analysis of the development status of China’s soft drink industry in 2020: Coca-Cola holds the largest market,

huaon.com, 2021-06-20[2023-09-08]. https://www.huaon.com/channel/trend/725240.html

4 FUTU, Nongfu Spring: Industry leader with a long and stable growth path, strong brand as a moat, finance.sina.com, 2021-03

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5 Xu Yao and Zhang Anqi, Chi Forest: Changing the beverage market, Enterprise Management, 2023-02-06[2023-09-08]. https://

mp.weixin.qq.com/s/nLENxF_vrbyZ_5lKc_wDEw
6 Foodaily, Top 100 Internet+ beverage & drinking water producers 2015, foodaily.com, 2015-12-16[2023-09-08]. https://www.

foodaily.com/articles/10565
7 Shu Kangjun, Why doesn’t Zero Coke taste as good as Coca-Cola? zhihu.com, 2018-04-06[2023-09-08]. https://zhuanlan.zhih

yo
u.com/p/35722363
8 Food Production Scrolls, Chi Forest started out with a wild, money-burning advertising and marketing spree? Here are some

facts you might not know, sohu.com, 2020-10-31[2023-09-08]. https://www.sohu.com/a/428551531_350931

9 Wu Tian, Chi Forest’s tough journey to expand overseas: A summary of hard-earned experience from many pitfalls, City

Horizon, 2022-06-13[2023-09-08]. https://new.qq.com/rain/a/20220613A07AKG00

10 Wu Tian, Chi Forest’s tough journey to expand overseas: A summary of hard-earned experience from many pitfalls, City

Horizon, 2022-06-13[2023-09-08]. https://new.qq.com/rain/a/20220613A07AKG00

11 Chu Qing, From ¥300 million to ¥7 billion: How did Chi Forest use an Internet-based organizational structure to drive brand

growth? DigipontClub, 2022-09-15[2023-09-08]. https://www.foodtalks.cn/news/38206

12 Pintu Business Review, New consumption: Breaking down organizational barriers, qq.com, 2022-01-18[2023-09-08]. https://n
op
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15 Runwise Innovation Consulting, Chi Forest: An Internet + beverage company disrupting traditional sector, zhihu.com, 2022-

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No

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tps://www.sohu.com/a/508536594_121124625
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ml
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Do

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14

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Permissions@hbsp.harvard.edu or 617.783.7860
 Chi Forest: Taking on Coca-Cola CB0318

t
os
29 Decode, Chi Forest: High-stakes battle to protect the freezer, The Paper, 2022-08-03[2023-09-08]. https://m.thepaper.cn/baijia
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yo
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op
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Do

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915105648&wfr=spider&for=pc
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15

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