Bitter rivalry in Vietnam’s coffee shops

Foreign coffee shops and local peers are now in a fierce battle for customers Photo: Le Toan

Foreign chains like Starbucks and Coffee Bean & Tea Leaf have failed to convince construction engineer Le Ngoc Son and his friends to switch from the stronger and cheaper coffee at local cafés to their milder western products.

“I seldom go to foreign cafés. Their prices are too high compared to those of local cafés with western style,” said Son, a 32-year-old engineer in blue jeans, whose morning routine includes a cup of drip coffee at the Coffee House on Ba Trieu street in Hanoi.

Like Son and his friends, many Vietnamese people do not go to foreign cafés. Instead, they opt for local cafés like the Coffee House, which have comparable pristine and modern interiors, and offer their customers a considerable discount on the price of a Starbucks cappuccino.

Foreign café chains struggle in Vietnam

High spending on premium rental space and expensive imported coffee beans have posed challenges to international cafés in the country.

A quarterly survey conducted in 2015 by FT Confidential Research, an independent research service from the Financial Times, studied the coffee preferences of 1,000 consumers in each of the five biggest economies in ASEAN (excluding Singapore), and found that Vietnam was the only country where Starbucks was not ranked as the most frequently visited chain. Instead, Vietnamese respondents overwhelmingly turned to homegrown favourites like Trung Nguyen and Highlands Coffee.

Sean T Ngo, CEO of VF Franchise Consulting, said, “Since Vietnam is a net exporter of coffee beans globally, the country imposes very high duties for importing coffee beans into Vietnam. As foreign coffee chains tend to use imported arabica beans, and not the normal robusta beans that are produced in Vietnam, this drives up costs significantly for any foreign player.

“Higher costs mean higher coffee retail prices for consumers, which will drive many Vietnamese to local brands.”

A cappuccino at Starbucks costs VND80,000 ($3.60), while a cup of drip coffee at local café Urban Station can cost as little as VND14,000 ($0.64).

Another challenge to foreign café chains is high rental costs, which have raised the price of their products. Most foreign café outlets are located in the central business districts of Vietnam’s largest cities.

Ngo said it is difficult to find the right locations for café franchises, as there isn’t an adequate supply of attractive and modern retail locations which yield sufficient traffic.

Even when good locations are found in Vietnam, rental costs tend to be among the highest in Southeast Asia. This may make the selected location unfeasible for a profitable café, he added.

According to a report from property firm Cushman & Wakefield, the asking price for space in Vietnam’s central business districts now stands at $119 per square metre.

A representative from Coffee Bean & Tea Leaf said his firm is planning to leave some of its high-rent locations in the central business district of Ho Chi Minh City. The shops may move to other districts with lower rent, to be able to offer more competitive prices and attract more local customers.

Another challenge foreign brands face is in making their type of higher quality coffee acceptable to Vietnamese. Many foreign coffee chains cannot localise their food offerings as much as they may want due to system-wide franchise requirements. The key for the foreign brands is to differentiate themselves as much as possible from local and competing international coffee brands, he said.

Singapore-based café and restaurant chain NYDC recently closed its last outlet in Vietnam, ending a seven-year run in the country. NYDC said goodbye to customers on its Facebook page after closing its store on Ho Chi Minh City’s Dong Khoi street, its first and also highest-profile outlet. The chain’s branches in districts 1, 2, and 7 had previously closed in May. A statement from the chain cited recurring losses and high competition in the region.

After entering Vietnam in 2009, the café chain quickly became one of the most popular in the city. The

original plan was to open 20 outlets within five years, at a cost of around $6 million. But at its peak, the chain only had six outlets.

Other foreign coffee chains have struggled to grow in Vietnam. Both California-based Coffee Bean & Tea Leaf and Australia’s Gloria Jean’s Coffees International have had to close outlets over the past three years. Six years after entering Vietnam, Gloria Jeans had only six outlets in 2012 – a number now reduced to three. Coffee Bean & Tea Leaf now has 15 outlets in Vietnam after eight years operating in the market.

Local chains emerge

Analysts say that by offering lower prices, local café chains have found a way to compete with foreign name brands. They have westernised their services, while highlighting the Vietnamese characteristics of their drinks. They have upped their competitiveness, and taken advantage of the lackluster consumer response to global chains.

Local chains such as the Coffee House, Phuc Long, Urban Station, Trung Nguyen, and Highlands have entrenched their dominance by offering affordable prices.

After inaugurating its first outlets in 2002, Highlands Coffee has opened 130 outlets nationwide. The Coffee House has opened 30 outlets since its establishment two years ago.

Ngo of VF Franchise Consulting said local coffee giants such as Trung Nguyen, Highlands Coffee, Phuc Long, and others are successful due to their unique positioning – as higher-end coffee brands which cater to Vietnamese tastes. One of the keys to their success is in their food offerings. Traditional Vietnamese and western dishes are often served side-by-side.

Highlands Coffee led sales in 2015, accounting for 38 per cent of total value sales from café chains in Vietnam, according to the London-based market research company.

According to a 2015 company report, Vietnam is home to 111 chain cafés and 12,600 independent ones.

Ngo said since there are tens of thousands of coffee shops throughout Vietnam, the competition for Vietnamese consumers is intense. In certain parts of major cities such as Ho Chi Minh City or Hanoi, one can see several coffee shops within a few metres of each other.

Very few markets have this intense level of competition for coffee consumers. This is one of the biggest challenges for any foreign coffee chain that wishes to enter Vietnam, said Ngo.

Nguyen Hai Ninh, founder and CEO of the Coffee House, said it is not easy to develop chain cafés, as the businesses have to frequently update drinks and decor as customers’ tastes change. Competition among cafés is increasing because of growing numbers in the country, he said.

Nguyen Ngoc Ha, an administrator at a non-governmental organisation, surfed the Internet on her iPhone while awaiting her food and drink at the Highlands Coffee on Hanoi’s Ly Thuong Kiet street, a few hundred metres away from a Starbucks.

The Vietnamese chain has sought to attract other would-be Starbucks’ clients, opening in large office buildings and shopping centres across the city.

Ha is a frequent Highlands Coffee visitor, and said she knows why the café is always crowded from morning till night.

“While prices are reasonable, the café is luxurious enough to attract young Vietnamese who like to be fashionable, and live a western lifestyle,” she said.