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HONG KONG — China Resources Enterprise Ltd, the country’s largest brewer, will buy control of Hong Kong’s second-largest coffee chain, aiming to expand and surpass Starbucks Corp on the mainland.
Chevalier Pacific Holdings Ltd said in a statement on Tuesday that China Resources will pay HK$326.6 million ($42 million) for 80 percent of Pacific Coffee Group. The chain has 83 outlets in the city, compared with more than 100 for Starbucks, the largest coffee-shop operator in both China and the world.
China Resources plans to expand Pacific Coffee into the mainland’s largest chain from five existing outlets, in part by opening branches in its 200 hypermarkets, Deputy Managing Director Frank Lai said on Tuesday. Starbucks now has about 380 stores in the mainland, and plans to have “thousands” there eventually, Chief Executive Officer Howard Schultz said in April.
“With the extensive distribution network of China Resources, Pacific Coffee can expand its business in China a lot faster than it could by going solo,” said Kenny Tang, a Hong Kong-based analyst at Redford Asset Management Ltd, who rates China Resources a “buy”. “They could compete with Starbucks for market share.”
Pacific Coffee is “complimentary” to China Resources’ more than 2,800 retail stores in the mainland as it may attract “more sophisticated consumers”, the company’s Lai told reporters in Hong Kong on Tuesday.
Retail focus
State-controlled China Resources is concentrating on consumer businesses to tap increasing spending in the mainland. Monthly retail sales in the mainland have risen an average of 17 percent from a year earlier in the past 12 months, according to government data.
American technology executive Thomas Neir founded Pacific Coffee after being unable to find a good cup of coffee in Hong Kong. The chain opened its first outlet in 1992, eight years before Starbucks arrived in a venture with Jardine Matheson Holdings Ltd unit Maxim’s Caterers Ltd. Neir and his partners sold Pacific Coffee to Chevalier for HK$205 million in 2005.
In addition to 86 company-owned outlets in Hong Kong and the mainland, Pacific Coffee has four shops in Singapore and five franchised outlets in Macao, Malaysia and the mainland. Lai said the company plans to own most of the new stores in the mainland.
“China Resources would like to diversify along food and retail, and now they want to take an established Hong Kong brand to explore the mainland market,” said Keith Li, an analyst at CIMB-GK Securities (HK) Ltd.
“It’s too early to say whether the company could successfully maximize the interest to shareholders, as Pacific Coffee may not be as profitable as Starbucks.”
Still, Starbucks has a head start of more than a decade on the mainland. The company opened its first coffeehouse in Beijing in 1999 and entered Shanghai a year later, in a venture with Taiwan’s Uni-President Enterprises Corp.
Starbucks won’t comment on the Pacific Coffee deal, spokeswoman Caren Li said, confirming that the company is the biggest specialty coffee company in China.
Chevalier Pacific, 54 percent held by Chevalier International Holdings Ltd, said it will keep 20 percent of Pacific Coffee. The chain will gain greater consumer recognition in the mainland and “seize a bigger market share in a more efficient manner”, Chevalier said.
Pacific Coffee had an after-tax profit of HK$17.6 million in the year through March 31, 2010, against a year-earlier net loss of HK$20.3 million, Chevalier said.
“Profit contribution from this acquisition will be limited in the short run; still, it’s a good buy for strategic development,” Redford’s Tang said. This “will help to raise the company’s image, as it’s shifting focus to the more high-end market”.
Sophie Leung and Marco Lui Bloomberg News
