Starbucks Vietnam debut challenged by light coffee image

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Customers drink coffee at a coffee shop set up on a sidewalk in the ancient quarter of Hanoi on Jan. 3, 2013. Photo:AFP

Starbucks Corp. will have to convince architect Tran Cao Tho and his friends to switch from stronger and cheaper coffee at their neighborhood cafe when it enters Vietnam next month.

He is part of the sizeable under-35 generation the Seattle- based company will seek to convert when opening its first stores in the Southeast Asian nation, where coffee consumption spiked 65 percent between 2008 and 2011. The world's largest coffee chain will battle entrenched tastes, local brands, international rivals and the thousands of neighborhood coffee shops that dot Vietnam's streets.

 "I like my coffee black, dark and strong," said Tho, a 32-year-old architect in blue jeans, whose morning routine includes a cup of drip coffee at Hanoi's Cafe Hanh. "I'd go to Starbucks once in a while for the ambience, but not for the coffee. The flavor is too light."

On a Monday this month, Tho and three friends sipped their coffees from low, wooden stools on the sidewalk as motorbikes whizzed by and street singers dropped in. Starbucks, seeking to profit from surging consumer demand, will open its first store in Ho Chi Minh City, the country's financial hub, early next month.

It joins foreign food chains including Burger King Worldwide Inc. (BKW) and Yum! Brands Inc. (YUM)'s KFC in expanding in the Asian country, where the economy grew 5 percent last year. Vietnam has a population of about 90 million and three out of five Vietnamese are under the age of 35.

"˜Premium products'

Starbucks plans on "showing up in a way that doesn't currently exist in the market in terms of the premium products and the experience we offer," said John Culver, president for China and Asia Pacific, in a telephone interview. The chain will offer flavors "tailor-made" to Vietnamese tastes along with its trademark drinks, while expanding "aggressively" into Hanoi and other cities,'' he said. Starbucks declined to elaborate on the number of outlets it plans to open in Vietnam.

Starbucks shares closed 0.9 percent higher at $55.01 in New York trading on Jan. 11.

Coffee Concepts (Vietnam) Ltd., a Hong Kong Maxim's Group subsidiary, will operate Starbucks stores in Vietnam, according to a Jan. 3 press release from the US chain. Starbucks said its first store will be in the city's business district.

Local consumers will be drawn by the Starbucks name, said Ralf Matthaes, a regional managing director at market research and consultancy firm TNS.

"Young people desire that modern, hip culture," Matthaes said. "It's famous and people want to be seen at popular places. That's very, very Vietnamese."

Vietnam's coffee culture stretches back to the late-19th century after France colonized the country. It exported 1.73 million metric tons of coffee in 2012, according to the General Statistics Office and is the world's biggest exporter of bitter-tasting robusta. Consumption of the drink in Vietnam jumped 65 percent between 2008 and 2011, according to the International Coffee Organization.

"˜Western lifestyle'

The coffee chain will attract young Vietnamese "who like to be fashionable, live a Western lifestyle and enjoy brand names," said Tran Doan Kim, a business management professor at National University.

Vietnam reached what the World Bank calls lower middle-income status in 2009, with per-capita income having increased more than 10-fold since the ruling Communist Party started market-oriented reforms in 1986. Gross national income per capita was $1,270 in 2011, according to the World Bank website.

Besides neighborhood cafes, Starbucks will compete with established global chains, including California-based Coffee Bean & Tea Leaf and Australia's Gloria Jean's Coffees International.

Local chains such as Trung Nguyen Coffee and Highlands Coffee also have more experience catering to the Vietnamese love of strong coffee.

Trung Nguyen

Dang Le Nguyen Vu, founder and owner of Trung Nguyen, which operates about 60 cafes in the country, isn't threatened by his newest competitor.

"Starbucks is not worth worrying about," he said. "It doesn't sell coffee. The people who go into a Starbucks may want to show that they are modern and stylish. If you're a coffee gourmand, you come to us."

Trung Nguyen, which exports coffee to about 60 countries, will expand to at least 200 retail outlets in two years, Vu said. Highlands Coffee stores, with overhead music and Wi-Fi Internet, are in prime retail and landmark locations in Vietnam's largest cities.

Starbucks will price its products in a "premium position" that is competitive, Culver said. Prices may still be less than the US because of lower income and operating costs, according to Sara Senatore, a New York-based analyst at Sanford C. Bernstein & Co.

Starbucks prices

She expects local Starbucks prices to be closer to India than China. A short cappuccino costs 95 rupees ($1.74) in India, compared with about $4 in China. A cup of drip coffee at a corner shop in Hanoi's streets and neighborhoods can cost as little as 10,000 dong (48 cents). A cappuccino at Trung Nguyen costs 65,000 dong.

"Starbucks doesn't compete directly with the local coffee shops, just the same way that McDonald's or KFC doesn't compete directly with the local fast-food vendors," Senatore said. "There's a premium that people are willing to pay for a clean environment, for consistent products, good service."

Thuan Pham, a Vietnamese-American who now lives in Ho Chi Minh City, surfed the Internet on his iPad while sipping a 70,000 dong cappuccino at Coffee Bean & Tea Leaf in Hanoi. He expects to be a frequent Starbucks visitor and said he will be surprised if it doesn't succeed in Vietnam.

"The cool factor is crucial. It's important for those young people to be seen at those places," said Pham, a commercial airline pilot. "The coffee is not that great."

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