China Resources Acquires Hong Kong's Pacific Coffee, to Take on Starbucks

China Resources Enterprise Ltd., the state-backed company that’s China’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 today 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 China’s largest chain from five existing mainland outlets, in part by opening branches in its 200 hypermarkets, Deputy Managing Director Frank Lai said today. Starbucks now has about 380 stores in China, 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,” Kenny Tang, a Hong Kong- based analyst at Redford Assets Management Ltd., who rates China Resources a “buy,” said by phone today. “They could compete with Starbucks for market share.”

Pacific Coffee is “complimentary” to China Resources’ more than 2,800 retail stores in China as it may attract “more sophisticated consumers,” the company’s Lai told reporters in Hong Kong today.

Retail Focus

State-controlled China Resources is concentrating on consumer businesses to tap increasing spending in China. Monthly retail sales in China 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 China, Pacific Coffee has four shops in Singapore and five franchised outlets, in Macau, Malaysia and China. Lai said the company plans to own most of the new stores in China.

“China Resources would like to diversify along food and retail, and now they want to take an established Hong Kong brand to explore the Chinese market,” Keith Li, an analyst at CIMB-GK Securities (HK) Ltd., said in a phone interview today. “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.”

Head Start

Still, Starbucks has a head start of more than a decade on the mainland. The company opened its first coffeehouse in China 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 by phone from Shanghai today, 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 China and “seize a bigger market share in a more efficient manner,” Chevalier said.

Stock in Chevalier Pacific gained 1.6 percent to 62 Hong Kong cents at 3:47 p.m. in Hong Kong, as the benchmark Hang Seng Index fell 2.5 percent. China Resources dropped 3.7 percent to HK$27.70.

Pacific Coffee Earnings

Pacific Coffee had 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.”

To contact the reporters this story: Sophie Leung in Hong Kong at sleung59@bloomberg.net; Marco Lui in Hong Kong at mlui11@bloomberg.net

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