Bitter blow for Vitasoy

SOYA beans - tiny, round, and whitish-yellow - may not seem like the stuff fortunes are made of. But for Lo Kwee-seong, that is just what they became when he turned a backstreet operation making soya milk drinks into a multi-billion dollar stalwart of Hong Kong life - the ubiquitous Vitasoy. When Mr Lo died last May at 85, the company had profits attributable to shareholders of $122 million and turnover of $1.25 billion for the 1994-95 financial year. Mr Lo had become a Commander of the British Empire, had a fine collection of Chinese art, contributed substantially to the Hong Kong Museum of Teaware and had made millions from his famous soya beverage. After his official retirement from Vitasoy - set up as the Hong Kong Bean Product Co - at the end of 1993, he weathered some controversy over a huge $45 million payoff he received during the company's public flotation in 1994. But the product itself retained its image of wholesome goodness and efficient production. Now, however, the company is suffering a severe bout of indigestion that some management experts reckon will take months - or even years - to shake off. Problems with sour milk and production faults have dogged the company at both its Tuen Mun and Shenzhen plants for the past three months. With the recall of all 30 million carton drinks from both factories in the past 10 days, the firm now faces a long convalescence and rehabilitation period once products return to shop shelves. Analysts and management experts point out the similarities with the Perrier debacle in 1990, when traces of benzene were found in the formerly lauded mineral water. Perrier's market share in the UK, for instance, plummeted from 60 per cent before the crisis to 25 per cent afterwards. Vitasoy, with a 90 per cent share of the soya milk market - Watson's, Hi-C and Nestle being its strong competitors - may suffer a similar fate. The firm has been praised for taking all its paper-packed products off the market, despite finding flaws only in the Shenzhen plant and in one of its 13 production lines at Tuen Mun. But a build-up of various problems since last October has left a perception of disarray at the firm, says director of the Hong Kong Institute of Marketing, Henry Steele. 'It's gone from one day to the next getting worse and worse. The impression they have conveyed is not very good. There hasn't been a lot of indication that a similar problem isn't going to happen again. 'There hasn't been a great deal of reassurance to the public, it seems there hasn't been a lot of effort to publicise this to the retailers. It's come across as piecemeal action,' he says. And the process of recalling the drinks has been 'messy', according to Chinese University senior lecturer in management, Dr Robert Westwood. He says it will do little to rebuild confidence, despite the popularity of the drinks. 'Companies are not very customer-sensitive,' he says, adding that consumers could have been better informed about the problems with the drinks. Directors at the firm, which employs 1,500 people, say they have been too busy trying to put the problems right to spend much time talk publicly about the affair. Four of Mr Lo's six children remain directors. But Vitasoy spokesman Stella Lung Mun-yee says directors do appreciate the public's concern. 'All I can say is that the investigation [by two Swedish food technology consultants] is continuing. Until we have concrete evidence of the cause and how it happened we can't tell the public anything more,' she says. Old Mr Lo was known as a man of strong Confucian values. Elsie Tu, who worked with him as a Legislative and an Urban Councillor, described him as 'humble and hard-working'. 'I don't think he would be very happy about all this. He was a very nice man. It was a bit of a shock to me to hear this had happened,' she said. Mrs Tu has fond memories of sipping Vitasoy drinks as part of a hurried lunch during Legco sittings. 'On a Wednesday and Friday I wouldn't have time for a lunch. I would run to the Mandarin for a sandwich and run to the hawkers in Statue Square for a Vitasoy. 'I didn't drink it for health, but because I don't like fizzy drinks. I like the texture.' But with little information given to the public in the present controversy, speculation and rumours abound, including suggestions of sabotage. Company directors say the possibility of tampering cannot be ruled out, though they describe it as remote. Ironically, mainland-born Mr Lo's first major headache when he started his business in 1940 was similar to that troubling the company now - the drink going off. Mr Lo was 30, with three children under three years old and an economics degree from Hong Kong University, when he decided to branch out on his own. The territory was much less healthy than now, with malnutrition and beriberi common, particularly among the poor. Mr Lo's idea was to take soya - the nutritious bean packed with protein that had sustained Chinese for thousands of years - and use it to produce a cheap, affordable drink. Known as 'China's cow', soya is about 40 per cent protein, compared with about 18 per cent in meat or fish. Making soya milk, then as now, is a simple business: boil up the beans in water to extract the goodness, filter off the solid waste, sweeten and bottle it. On his first day of operation, Mr Lo sold nine bottles of his new health drink at six cents each. But without sterilisation techniques, the milk spoiled quickly, so it had to be sold fresh by boys on bicycles, holding back the company's growth rate. When the war halted production in 1941, Mr Lo's small Causeway Bay plant was making 1,000 bottles a day. 'Relaunching Vitasoy after the war was an act of faith on Lo's part,' says the company's brochure The Vitasoy Story. But Mr Lo changed tactics to sell the milk as a soft drink rather than a milk substitute - and in 1950 pasteurisation meant the drink could be kept without refrigeration, opening it up to the mass retail market. In the 1960s the United Nations Childrens' Fund, Unicef, recognised the drink's usefulness, recommending that developing nations adopt soya milk drinks to fight malnutrition. Malt Vitasoy multiplied turnover from $5 million to $30 million a year through the 1960s. And in 1975 paper-packaging was introduced, which meant that - bar the current problems - the milk would keep for months. The company later diversified into Vita fruit juices, the world's first ready-to-drink lemon tea - and even into real milk. It listed, opened a plant in China and went international: its products now sell in North America, Europe and Australasia. But recently things have turned for the worse. Flattening sales have forced the firm to warn of falling profits. Now analysts reckon the bug crisis may lead to losses. Salomon Brothers retail analyst Kent Chan thinks it will take a year for the company to get back to normal. James Capel analyst, Abbott Lawrence, says: 'It's very unfortunate. They were not very forthright and it's snowballed. 'They gave signals that things were OK or limited when they weren't. 'I think it's going to have a long-term noticeable impact on the market share in Hong Kong.' Robert Allinson, author of Global Disasters. Inquiries Into Management Ethics, says it is crucial they re-label their products. 'People have to feel comfortable enough to buy the product again. If they use the same label, that would be dreadful,' he said. Mrs Tu, expressing her sympathy for the company's plight, also expects to see the product in new packages to help rebuild public confidence. 'I do hope people go back to it. I would,' she said. 'I would choose it every time.' What went wrong Autumn 1995: Vitasoy pulls new formulation of malt milk drinks from shelves after undisclosed production problems. Oct 24, 1995: Complaints of sour taste or kerosene-like smell in soya milk products from Tuen Mun plant leads to recall of 50,000 cartons. Vitasoy blames fault in steam filter used in sterilisation. Jan 3, 1996: Vitasoy promises to step up monitoring of Shenzhen plant after complaints of sour taste in malt soya milk. Jan 4: All seven production lines in Shenzhen halted. Eight million cartons of paper-packed drinks recalled, although complaints relate to about 9,000 250 ml malt soya milk packs from two production lines only. Company blames fault during packaging and says investigation will last a month. Share price drops 8.5 per cent. Jan 5: About 42,000 250 ml malt drinks made at Tuen Mun plant recalled after two complaints of sour taste. Jan 9: Closure of all 13 paper-packaging lines at Tuen Mun and worldwide recall of 30 million carton drinks, covering all milk, tea and juice products. Company expects investigation by Swedish food experts to take two to four weeks. Bottled drinks unaffected. Share trade suspended. Non-pathogenic bacteria found in four milk samples.