beyondbrics

China may have a long history in drinking tea but the country is becoming the latest battleground for the world’s coffee chains.

This week, China Resources Enterprises, a Beijing-backed conglomerate, pledged to turn Pacific Coffee, a Hong Kong-based chain, into China’s biggest, surpassing Starbucks and all the other coffee houses on the mainland.

In Hong Kong, Pacific Coffee, founded in 1992 by a US businessman in search of a cup of good coffee, is neck-and-neck with Starbucks. They have similar numbers of stores (Pacific Coffee’s 83 versus Starbucks’ 111), often in similar locations (it is not uncommon to find a Pacific Coffee and a Starbucks in the same mall). Prices are comparable, while decors are not very different. If the armchairs at Pacific Coffee were not red, one could easily be mistaken for a Starbucks.

But in China, it is going to be a tough flight.

At the moment, Starbucks, which entered China 11 years ago, is the number one coffee house with 380 outlets across the country. Pacific Coffee is way behind with just five stores. Between them are many other serious players such as 85C Bakery Cafe, a Taiwanese chain that has about 130 shops, and Costa Coffee of the UK, which boosts more than 40 branches.

So how is Pacific Coffee going to compete with its bigger rivals? This is where China Resources comes in.

With 2,900 retail outlets in China, the country’s biggest supermarket operator is well suited to help Pacific Coffee roll out more shops and build a bigger presence. Initially, CRE plans to put a Pacific Coffee in every one of its 200 hypermarkets.

Shaun Rein, managing director of China Market Research which has studied the coffee industry, says this will be important to Pacific Coffee – as having prime locations in China is even more important than the quality of the drink. For Chinese people, most of who are not accustomed to drinking coffee, what’s inside the cup doesn’t really matter.

“In the US, most of Starbucks’ business is take-away. It is the opposite in China. People go to coffee shops as a destination and spend hours there. They like to be seen as chic and cosmopolitan,” he says.

But building more shops does not necessarily bring success. With almost zero brand recognition in China, a more pressing task for Pacific Coffee is perhaps to build its name.