Herbal Medicine Man
Can Bob McGraw find the right formula to make 1,000-year-old Chinese remedies popular all around the world?
(FORTUNE Small Business) – Bob McGraw would seem an unlikely peddler of an ancient herbal remedy from China. After all, McGraw, 49, is a grandson of the founder of publishing empire McGraw-Hill, on whose board he serves. And it would be hard to accuse him of just dabbling, given that he has spent $17 million over the past five years in a venture that carries two names: Longjiang River in the U.S. and Dragon River in Asia. Based in Irvington, N.Y., 20 miles north of New York City, McGraw's company began selling luo han kuo—which users believe maintains respiratory health and strengthens the immune system—in China in 2002 and is expanding into the U.S. and Europe this year. By December, he's projecting the 44-employee company will reach sales of $15 million. McGraw first encountered traditional Chinese medicine in 1986, when McGraw-Hill acquired a magazine called Medical China. Traveling frequently to Asia, McGraw began to develop sinus infections and bronchial problems, which led him to try remedies containing luo han kuo. But clearing his sinuses was only one of the effects the herb had on him: In 1998 he quit McGraw-Hill, where he was executive vice president of international operations, and started researching the possibilities of traditional Chinese medicine. Baby-boomers like himself, he discovered, were much more receptive to alternative and herbal remedies than previous generations had been. But he also learned why no entrepreneur had successfully created a Chinese-remedy empire: Though consumers are increasingly receptive, they not only need to be educated about the product but also want to be convinced that such loosely regulated remedies are safe and effective. "It was key that we meet the global demand we were hearing for quality and safety," says McGraw, whose research included holding focus groups of consumers. McGraw got the idea for his initial product from studying Chinese remedies, 40% of which contain luo han kuo, a sweet, green fruit about the size of a tennis ball. Because of its popularity, the fruit was scarcer and costlier than other ingredients. To manage that cost, McGraw spent $4 million building a farm in Guangxi province so that he could grow his own supply of the ingredient, which he combined with herbs into a powdered beverage mix. Though no Western tests have proved that lo han kuo relieves respiratory ailments or bolsters the immune system, Japanese tests have verified that it acts as an antioxidant. The Food and Drug Administration has not evaluated the company's medicinal claims. To counter consumer concerns about the paucity of government oversight of the herbal-supplement industry, McGraw built rigorous testing labs in Singapore. He also assembled an advisory board of doctors in China to establish the authenticity of his company's products. "We are taking ancient formulas and using technology to understand them and to standardize them," he says. McGraw projects that traditional Chinese medicines will grow from a small niche into a $650 million business in the U.S. within the next decade. He anticipates revenues of at least $35 million by 2005. Another factor he sees working in his favor: The ailments the herb addresses—coughs, congestion, and sore throats—are aggravated by pollution. And consumers are ever more focused on strengthening their immune systems against such viruses as SARS. For now, Longjiang River's biggest challenge may be figuring out how to sell the same product to disparate Western and Asian consumers—which means not just taking different marketing approaches but also reformulating the product. McGraw says focus groups revealed that "Americans and Europeans have entirely different perceptions of medicine than the Chinese do: In the U.S. and Europe people won't take something if it doesn't taste good, and the Chinese believe if it doesn't taste like hell, it can't be good for you." The company also changes the format of the product to fit local tastes—a liquid in Asia, effervescent tablets for Europe, and pills or a patch in America. A dual identity is also part of its marketing strategy. It uses the name Dragon River in Asia to imply an American scientific rigor, and the name Longjiang River in the U.S. and Europe to suggest authenticity. Getting those names known requires a $5 million annual advertising budget, McGraw says. In Asia, where such products are commonplace, Dragon River uses mass-market advertising and sells in mainstream stores. In the U.S. and Europe the focus is on educating consumers, with informational magazine and radio ads, and products that are primarily sold in specialty stores. While the company currently has four beverage products in stores, it has a pipeline of 27 remedies based on its star ingredient, which is naturally sweet. McGraw is adding luo han kuo to everything from candy and noodles to face cream and wine. With that kind of range, McGraw could find himself building his family's next empire. |
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