Can Pacific Coffee Out-Brew Starbucks In China?

CRE, China’s Biggest Supermarket Chain Operator, Purchased 80% Stake In Pacific Coffee for $42 Million

The Chinese Starbucks killer?

The Chinese Starbucks killer?

China is still (rightly) known as a tea-drinking nation, but over the past couple of decades coffee has caught on in a big way among many middle-class professionals. Although instant coffee is more within the reach of students or lower-income individuals, mainland Chinese chains like Ming Tien Coffee Language, Taiwanese chains like UBC and 85c, and international chains like Starbucks have expanded throughout China, competing for the taste buds and cash of burgeoning coffee lovers with slightly higher budgets.

Out of these chains, Starbucks has emerged as the most committed to dominating the China coffee market, opening 376 stores there  since 1999 and planning to open “thousands” more in coming years, according to Chief Executive Howard Schultz. By keeping localization to a relative minimum and setting prices in the “affordable luxury” range, Starbucks has remained popular among fast-moving urbanites in big cities.

However, a (comparatively) new contender from Hong Kong, Pacific Coffee, looks set to give Starbucks a real run for its money.  Today, it was announced that CRE, China’s biggest supermarket chain operator and owner of brands like CR Snow Breweries (China’s largest beer brewery by volume) purchased an 80% stake in Pacific Coffee for HK$326.6 million (US$42 million) with the aim of rapid expansion throughout mainland China. And how will CRE do this? By putting a Pacific Coffee outlet in each of its “major malls.”

From the FT:

Pacific Coffee, founded in Hong Kong in 1992, has just five stores in China. Frank Lai, CRE deputy managing director, said among the company’s 2,900 retail outlets in China, about 200 are considered “major malls.”

Mr Lai said Pacific Coffee, which opened its first outlet in China five years ago, would be able to expand rapidly by capitalising on CRE’s retail presence and leveraging its customer base.

“Chinese consumers are getting ever more sophisticated,” he said. “They are very open to new things. They have developed a taste for the whole experience of going to a coffee shop to drink coffee.”

He said the ultimate goal for Pacific Coffee is to become the largest coffee chain in China in terms of size, but did not specify a time frame. He also played down the competition posed by [Starbucks].

“It took us 15 years to build China’s largest brewer. We built the biggest supermarket chain in just six years. It’s down to Pacific Coffee to break that record,” said Mr Lai. “Competition is always intense in China, no matter what sector you are in.”

While Mr. Lai’s optimism that Pacific Coffee — which lacks both the track record and equivalent “foreignness” of Starbucks — could quickly dominate the coffee retail marketplace might border on arrogance, the company’s potential success in smaller cities (where consumers are less internationalized and brand-savvy) shouldn’t be underestimated. If Pacific Coffee sets prices at a level perhaps on par with competitors like RBT (仙踪林) and offers drinks and products that appeal to a broader (e.g., tea-drinking) demographic, Starbucks could have its work cut out in the next few years.

Which could, ultimately, be a good thing for Chinese consumers.

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