Franchise investments take hold in Vietnam

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A Burger King outlet inside Da Nang International Airport. The hamburger chain plans to open 12 stores in Vietnam this year.

The fast food invasion of Vietnam is gathering pace.

Last month, Burger King, the second largest fast food hamburger chain in the world, opened its first outlet in downtown Ho Chi Minh City, after launching stores at the Tan Son Nhat and Da Nang airports last November.

It is cooperating with local food and beverage firm Blue Kite Vietnam (BKV) via a franchising agreement to develop its business in the country.

Elias Diaz Sede, president of Burger King Asia-Pacific, said the company plans to open 12 stores in HCMC, Hanoi and Da Nang this year.

He said the investment environment in Vietnam is favorable right now for the firm, given the country's young population is eager to use new products. It aims to set up more outlets as rapidly as possible, he added.

A BKV representative said the company expects to invest some US$40 million in developing the Burger King trademark in Vietnam. It would increase the investment if it finds strategic locations to open more stores, he said.

In August, leading officials at American corporation McDonald's, the world's largest chain of hamburger fast food restaurants, held talks with the Ministry of Planning and Investment about investing in the country. The company revealed that it may open two outlets in HCMC through franchising in the next few years, and may expand to 100 stores nationwide in the future.

Another American restaurant chain, Johnny Rockets, has also decided to enter Vietnam and is seeking partners for the franchise after having conducted four years of market research, said Steve Devine, the company's international division president.

He said the firm plans to set up 10 restaurants in Vietnam in the next few years.

Global coffee company Starbucks plans to enter the Vietnamese market in 2013 after penetrating India and expanding its system in China.

Several foreign food and beverage companies like Pizza Hut, Domino's Pizza and Baskin-Robbins have opened their stores via franchisees in Vietnam.

"With a young population, Vietnam in general and HCMC in particular presents a big potential for brands like Domino's and we are targeting the younger crowd," said Di Nguyen, marketing manager for Domino's Pizza in Vietnam.

"Currently we have five shops in HCMC and anticipate rapid growth to over 25 nationwide in the next five years."   

"The young and dynamic consumers are the main reasons foreign firms are seeking franchises in the local market. We can expect that franchises in Vietnam will grow rapidly," confirmed an industry insider who did not want to be named.

Vietnam has a population of nearly 90 million people with 65 percent younger than 35 years old, a segment that is highly receptive to modern offerings, he said.

The franchising market will be very busy in the next two to three years, as companies from US, EU, Japan and South Korea jostle for space.

Beth Solomon, vice president of the US International Franchise Association, said it is the right time for US fast food companies to enter Vietnam's franchising market. Franchising can help companies cut costs and risks when expanding in foreign markets, he said.

Ho Huu Hoanh, director of the Vietnam Franchising News Center, said it will take foreign firms more time and money to research the market and build a distribution network if they directly invest in Vietnam. They would also have to apply for a new license to open their stores in the country.

Thus, foreign firms prefer to do business in the country by finding franchise partners. With an investment of $300,000-500,000, a local firm can become a franchisee for foreign companies, he said.

Franchisee worries

While local businesses are looking to take advantage of the prominence and popularity of international brands to make money, success does not come easily.

Location is a decisive factor, especially for retail, food and beverage businesses, so franchisees pay top dollar to get a good spot, said an industry insider.

He said given the high rents in Vietnam, rents can account for as much as 25-30 percent of the revenues of franchisees, and even increase some 20-30 percent each year. This would make it difficult for firms to earn profits.

Since choice locations are limited, many firms compete over them, raising the rents to as high as $20,000-30,000 each month in certain cases. When big companies enter the country, they will seek the best locations and pay hefty premiums for them, he said.

Some months ago, a Gloria Jean's Coffee outlet in HCMC's Dong Khoi Street had to close because it could no longer afford to pay the rent.

"The rent is over VND400 million ($19,180) a month. We could not earn profits even after a year of operations," the coffee chain's marketing director Nguyen Phi Van was quoted by a local newspaper as saying.

According to property consulting firm CBRE, the vacancy rate for department stores and shopping centers in HCMC in the third quarter of this year was 12.4 percent, compared to from 15.5 percent in the previous quarter.

Fashion and food and beverage accounted for a notable part of the new demand.

Baskin-Robbins, a global ice cream chain, has continued its expansion with two new outlets in Diamond Plaza and the Crescent Mall, and Trung Nguyen Coffee, a domestic brand, which has expanded notably in the quarter, has opened two new outlets on Dong Khoi Street. Net absorption was 2.4 times greater than that in the previous quarter.

Deputy Minister of Industry and Trade Tran Anh Tuan said the government is creating more favorable conditions, by creating a fair competitive environment, improving the legal framework and developing infrastructure to attract investment from foreign firms including the franchising business.

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