China Resources Enterprise Ltd, owner of Hong Kong's second-biggest coffee chain, plans to open as many as 1,000 Pacific Coffee shops in China, challenging Starbucks Corp in a market growing by 20 percent a year.

The Chinese partner of SABMiller Plc will open 50-100 stores next year in Shanghai, Shenzhen and other major cities where there's a "strong coffee culture," Chief Financial Officer Frank Lai said in an interview. Pacific Coffee now operates 90 stores in Asia.

Coffee consumption in China, which Starbucks expects to become its second-biggest market, is expanding by 20 percent annually, Japanese trading company Marubeni Corp said last year.

State-owned China Resources will open coffee shops at its high-end Ole hypermarkets, Lai said.

"Pacific Coffee may have the real-estate advantage because it's very hard to get the best locations for any companies at this stage," Shaun Rein, managing director of China Market Research Group, said in Shanghai. "The main target group is the younger consumers who are seeking different chatting environments as Starbucks are at all corners now."

China Resources, which is the nation's biggest beer brewer and operates wine cellars in Hong Kong, has climbed 13.6 percent this year in Hong Kong trading. That betters the 8 percent gain in the benchmark Hang Seng Index.

"Our challenge for Pacific Coffee is how to open 1,000 stores without compromising the quality," Lai said Wednesday.

"The first year we will be a bit slower. The second year we will accelerate once the training center, logistic and supply chain are all established." Having 1,000 stores in China is a long-term target, Lai said.

Starbucks has about 380 stores in China and plans to have "thousands" there eventually, Chief Executive Officer Howard Schultz said in April. The Chinese mainland, South Korea and Taiwan will lead coffee demand growth in Asia, and per-capita consumption may rise to match that in Japan, roaster Key Coffee Inc said in March.

Per-capita consumption is estimated at 3.3 kilograms (7.3 pounds) a year in Japan, compared with just 22 grams per person in China, Key Coffee said.

China Resources may open its first wine cellar in China, possibly in Shenzhen, within six months, Lai said. It's looking at boutique vineyard from different parts of the world, he said.

"Wine consumption is doing extremely well in China" as consumers move away from local white liquor known as baijiu, China Market's Rein said. Red wine sales are expected to increase by 20 percent in five years there, he said.

China's retail sales climbed 18.4 percent in August from a year earlier, after rising 17.9 percent in the previous month.

SABMiller and China Resources have said they will pursue acquisitions and increase capacity in the world's most-populous nation. The London-based maker of Miller Genuine Draft and Grolsch owns 49 percent of China Resources Snow, the nation's biggest beer brand by volume with 20 percent of the market.

"We've already bought a lot of small, Chinese local beer brands," Lai said. "The beer market still has more room for consolidation."

China Resources said in August it may spend as much as HK$5.5 billion ($709 million) on acquisitions in retail, beer, non-alcoholic beverages and food. Cash and bank balances as of June 30 were HK$14.3 billion.

Net income climbed to HK$4.24 billion in the first half from HK$1.16 billion a year earlier on surging growth at its retail division, which has about 2,950 stores selling food, jewelry and health products.

Bloomberg

(HK Edition 10/22/2010 page3)