McDonald's is the latest global brand to announce it will open stores in Vietnam, a communist country increasingly drawing the attention of American chain stores.
Vietnam’s business climate has a mediocre reputation, trailing China and Thailand on the World Bank’s Ease of Doing Business Index, but ahead of Indonesia and India.
The economic growth rate hit a 13-year low last year and a recent survey by the International Labor Organization
showed more than half of young workers are affected by poor quality employment.
But the bad economic news has not taken the sheen off the market for big U.S. brands. This year alone, Starbucks opened its first of two stores and McDonald’s recently announced it would open a store early next year.
“We see that in Vietnam now we have KFC, we have Starbucks, Pizza Hut, Subway, Lotteria and the other fast food chains and brands. I think the economy is growing quite healthy and the political is quite stable so that’s why I think it’s the right time for McDonald’s to come to Vietnam now,” said General manager Thinh Nguyen.
All of these brands have started off in the country’s biggest metropolis, Ho Chi Minh City. The city is Vietnam’s economic heart, and Ho Chi Minh’s population is generally more wealthy. In 2010, per capita GDP was $2,800, around twice the national average.
Starbucks said the price of a latte was affordable for ordinary Vietnamese. Its $3 coffees are on par with equivalent Vietnamese branded stores Highlands and Trung Nguyen.
Unlike many Western countries where processed fast food is considered an affordable, yet unhealthy convenience, in Vietnam foreign franchises have a different reputation. Here, most customers are young people and well-to-do families.
“More than 60 percent of Vietnamese people are under 30 so they are in love with big brands like McDonald’s, Starbucks, any sort of famous brands in the world,” said Nguyen.
McDonald’s announced entry to Vietnam sparked controversy because the local licensee is the son-in-law of Vietnam’s prime minister. Nepotism and crony capitalism have drawn widespread criticism among Vietnamese.
McDonald’s defended its choice of Henry Nguyen, saying he had an impressive business background and proven record with new businesses in the country.
While his political connections were obviously an asset, Adam Sitkoff from the American Chamber of Commerce said Nguyen had the market experience and knowledge that brands like McDonalds were searching for.
He pointed out that Nguyen worked in the food and beverage [F&B] industry before he met his well-connected spouse, helping establish brands like Pizza Hut, Coffee Bean and Tea Leaf, and Subway in the country.
“When we think about nepotism in Vietnam, we think of unqualified people getting jobs that they shouldn’t and this is not a case of this at all. This is somebody that would be hired for this anyway, I really believe that,” said Sitkoff.
For brands that are headed to Vietnam, Sitkoff cautioned that doing business well in Vietnam took time.
“Vietnam doesn’t have a very strong rule of law. It doesn’t have a fair and impartial court system. It doesn’t have certain types of investor protections that people in more developed countries are used to. It hurts the ability for a lot of businesses to come in and operate,” he said.
One of the biggest challenges for businesses is finding good landlords. Much of the land is state-run, owned by a state-run company or a ministry. Often, landlords demand extra money on top of official rent or terminate leases so they can copy the business model and open their own store.
Starbucks had a strategy it rolled out in many countries to tackle this issue, said General Manager of Starbucks Vietnam Viet Idea Food & Beverages Patricia Marques.
“We have dedicated a lot of time to educate landlords, to invite the landlords to visit our location in District 1 [Center of Ho Chi Minh City] for them to observe what the brand can do for their piece of real estate. For the amount of traffic that our stores bring I believe landlords want to have us. They don’t want to copy us, they want to have us,” said Marques.
Sitkoff said it took a long time for Starbucks to come to Vietnam because the company was not sure the local population could afford its products. However, as young people hunger for famous names, he expects more brands will follow suit.
Marques from Starbucks is similarly optimistic. She said competition only brought more interest from the customers, so that can only be good for business.