As anyone can see, franchising is no longer new in Vietnam. All one needs to do is look around. Starbucks here, Lotteria there, KFC nearly everywhere (in major cities), and Domino’s and Pizza Hut Express delivering every day. Local franchises also abound. Look no further to see franchise ads for Toco Toco, InXpress, Highlands Coffee, Trung Nguyen, Gong Cha, and countless more.
In fact, according to the Ministry of Industry and Trade, there were nearly 280 foreign brands registered in Vietnam at the beginning of 2022, and likely a handful of others in the queue. Indeed, Vietnam’s franchising market is catching up to its neighbors, where the number of foreign brands can be more than double or in some cases quintuple the number of brands here.
While the number of franchises entering the market continues to climb, it is not without its dangers. Many brands have come and gone. Look no further to brands such as Subway, Gloria Jean’s Coffee, NYDC, etc. Some international big box retailers such as Metro, Big C, E-Mart from Korea exchanged hands, so while not quite an exit, the original owners sold their businesses and have since exited from Vietnam. That said, some of these same brands have chosen to re-enter the market with different partners. Perhaps the second time is the charm!
Factors contributing to exits
The failure of international brands in the domestic market may include but is not limited to higher rental rates, lack of adequate modern retail locations, inefficient supply chain, pricing pressure, ineffective or insufficient marketing, management and operational expertise. Some factors such as a city’s public transportation also affects many businesses, but that is well beyond the control of any one business. A detailed analysis of each of these key areas is beyond the scope of this article, though it is clear that they have all in some ways contributed to the eventual failure of some of these aforementioned brands.
While some point to pricing as the main problem, it is not always so. Look no further than record sales of LV bags, Rolexes, Rolls Royces, Uniqlo and H&M apparel, Apple and Samsung products, and one can see that branded products can compete well.
What’s your strategy?
What it probably tells us more is that brands need clear differentiation. The famous Harvard professor, Michael Porter, introduced his Generic Strategies over three decades ago that outlined how companies can compete effectively in most markets. One strategy is based on cost leadership, and the other is based on differentiation. Now, any particular market can be segmented into many different sub-segments, and thus businesses can choose to compete in any of these sub-segments based on cost leadership or differentiation, and on the rare occasion it can straddle both areas precariously.
Source: MindTools
Choosing a cost leadership focus is a rather difficult strategy as it relies on your business being the cost leader, and in any given market, there can only be one cost leader. A good example of this cost leadership strategy is Walmart or Little Caesars Pizza – every day low prices. Both are considered value chains anywhere they are found around the globe. There is never a need to wait for products to be on sale and at value prices, because everyday is an opportunity to buy different products at sale like prices. This strategy helps wean consumers from waiting for sales, and allows them to buy products and services when the need arises. This is the reason why services like Groupon and similar services are not well liked by retailers and food and beverage establishments worldwide as they conditioned consumers to wait for these sales.
On the other hand, there are virtually unlimited ways for a company to differentiate itself from its competitors, thus they are not always being driven to cut costs at all cost (no pun intended) in order to offer the lowest priced products. In fact, it may be important to keep prices higher to help strengthen the brand’s perceived value and positioning in the market place.
Highly differentiated and branded products and services generally command high pricing and more importantly, higher margins. How is it that Starbucks can charge $5 for a drink when a local Vietnamese coffee shop can offer a similar product for a fraction of that price? The answer of course is that they are not selling the product by itself, but rather the Starbucks experience. Who wouldn’t want to be in a coffee shop where the venue and the products offer instagramable photos? The brand also offers an attractive and comfortable environment to relax with family and friends, and for those on the hunt, people watching! Other examples of highly differentiated brands include Texas Roadhouse, Slim Chickens, Habit Burger and Grill, Jaggers, Logiscool, International Canadian Academy, and countless others.
In short, being successful in Vietnam requires a clear focus on your strategy along with managing the challenges of the other key success factors. As Michael Porter probably said, “Differentiate and multiply.” Ok, he probably didn’t say that, but it does make business sense.
Author: Sean T. Ngo is the CEO and Co-Founder of one of Asia’s leading franchise consultancy, VF Franchise Consulting. He is Vietnamese American and has been happily based in Vietnam for over 17 years. You can reach him at sean@vffranchiseconsulting.com or info@vffranchiseconsulting.com.
