China Consumer

Full of beans

Hong Kong brands strive to crack China market

Full of beans

Soon to have 2,900 outlets

You may not have heard of Pacific Coffee. But the Hong Kong-based chain is set to become China’s biggest coffee house, surpassing Starbucks.

Well, that’s according to state-owned firm China Resources. Last week, China Resources Enterprise, one of the country’s biggest supermarket operators, announced plans to pay $42 million for an 80% stake in Pacific Coffee, which was founded in Hong Kong in 1992 (eight years before Starbucks arrived in the city). Pacific Coffee now has 83 outlets in Hong Kong, but just three in China. That compares poorly with Starbucks, at 100 and 380 respectively.

China Resources, which is also the leading shareholder in China’s largest brewer by volume, CR Snow Breweries, wants to tap into the country’s growing coffee-drinking culture. According to research firm Euromonitor, the Chinese are on the brink of a coffee boom. It forecasts growth in sales of 34% by 2014 to 4,500 tonnes.

Starbucks, too, has stepped up its expansion on the mainland, a market it first entered in 1999. Howard Schultz, chief executive of the coffee giant, recently said that he expects to open as many as a thousand stores in China (see WiC60).

Initially, China Resources will roll out Pacific Coffee shops in its 200 hypermarkets. But it has plans for outlets at every one of its 2,900 retail stores in the longer term, Frank Lai, deputy managing director, told China Business Net. The goal, the company says, is to create a “a more sophisticated lifestyle experience for customers” when they shop at the conglomerate’s retail stores.

But others question the logic behind the Pacific Coffee acquisition. Does a Hong Kong brand have the same allure as Starbucks, for example?

Jing Daily, a website, points out that Pacific Coffee lacks both the track record and the equivalent “foreignness” of its larger rival. But the Hong Kong brand could still compete, it says, by setting its prices a little lower than those of the American coffee giant, and by offering a range of products that appeal to the wider (tea-drinking) culture.

Pacific Coffee’s dilemma is hardly unique insofar as the China market is concerned. Hong Kong brands find themselves in a tricky position – lacking the cachet of top Western labels, they also often lack the resources and marketing capabilities of the big multinationals.

They have also been slow at breaking into the mainland market, says the Hong Kong Economic Times, despite its proximity. Compared with foreign companies like Coca-Cola and Walmart, which have long ago established a presence in China, Hong Kong firms only started playing catch-up in the last 10 years.

Taiwanese firms, on the other hand, were among the first to see the potential of China’s consumer market. In last week’s issue we featured Tingyi, the Taiwanese company that owns the Master Kong brand, the country’s most popular instant noodle and ready-to-drink tea. Tingyi opened its first noodle factory in China back in 1992 and now looks well-placed to maintain its market leadership as it extends distribution to inland cities.

Nevertheless, several Hong Kong retailers have managed to strike a chord with mainland shoppers. A particular favourite: Watsons. The health and beauty product store, wholly-owned by Hong Kong-based conglomerate Hutchison Whampoa, is one of the largest retailers in China.

Industry observers say that Watsons, which boasts 600 outlets in 26 provinces, has done well in the mainland market by entering it early (in 1989). Chinese consumers also perceive Watsons to be more trustworthy than its domestic counterparts.

Similarly, Hong Kong jewellery store chains have done well in China because they have a reputation for not selling counterfeits. Hong Kong-based Chow Tai Fook is now one of the largest jewellery retailers in China. The company, which recorded revenues of Rmb20 billion ($2.95 billion) last year, now has over 950 retail outlets there and expects to surpass 1,000 by the end of this year.

Of all the Hong Kong firms on the mainland, Chow Tai Fook is clearly the closest to striking gold…

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