Rising land leasing prices burden Phuc Long

Phuc Long announced closing two stores in golden locations in Ho Chi Min City

Phuc Long Coffee & Tea on August 5 officially announced to halt the operation of two stores, one at the shopping mall SC VivoCity (District 7, Ho Chi Minh City) and the roundabout at 6 Phu Dong (District 1, Ho Chi Minh City) – two top spots in the eyes of many brands.

SC Vivo City is always crowded with customers, especially during the evenings and weekends. The roundabout at 6 Phu Dong is the intersection of the streets Cach Mang Thang 8, Ly Tu Trong, Nguyen Trai, Le Thi Rieng, and Le Lai, which are home to many coffee and tea brands like Starbucks, The Coffee House, and The Coffee Bean & Tea Leaf. Even Starbucks selected the spot six years ago to enter Vietnam.

Phuc Long leaving these coveted positions has raised concerns about the increasing land leasing prices in dynamic cities like Ho Chi Minh City and the capital, Hanoi.

Skyrocketing leasing prices

According to Zing.vn, Phuc Long in 2014 paid $14,000 a month in leasing fee for its store on the roundabout at 6 Phu Dong. However, as soon as the leasing contract expired in June 2019, the position was replaced by a new store of the soy-bean milk brand Soya Garden after the leasing price nearly doubled to $25,000.

According to global real estate services provider Savills, land rent at bubble tea streets like Nguyen Hue, Ngo Duc Ke, or Phan Xich Long in Ho Chi Minh City has grown by 50-100 per cent in just a few years.

Some real estate agencies said that a company offering such a high price is nothing extraordinary as hundreds of brands are fiercely competing to gain space.

Regarding the issue, the representative of Phuc Long said, “We keep expanding the number of our stores across the country. In addition, we are always very careful to select the most favourable positions to best serve our customers.”

Despite not revealing the reason behind the closure, it could be seen that finding a favourable spot to open stores has been a point of particular difficulty for many coffee and tea brands, especially as the land leasing price keeps skyrocketing.

Low profit despite huge attraction

In 2018, Phuc Long earned VND473 billion ($20.57 million) in revenue, up 39 per cent on-year. Phuc Long currently rankes at the fourth coffee chain on the market in terms of revenue. Leading the market is Highlands with VND1.628 trillion ($70.78 million), followed by The Coffee House and Starbucks with about VND678.3 billion ($29.49 million) and VND603 billion ($26.22 million), respectively.

Notably, Phuc Long’s revenue growth rate is 17 per cent, but its gross margin remains at 35 per cent, lower than other brands. Accordingly, Phuc Long’s after-tax profit in 2018 was VND4.5 billion ($195,650) while Highlands and Starbucks gained VND129.2 billion ($5.62 million) and VND31.9 billion ($1.39 million), respectively.

The exorbitant land lease rates have been putting pressure on the coffee and tea brand, eating into its profit. However, Phuc Long stayed on course with its expansion plan by opening three stores in Hanoi in 2019’s first half. However, mounting rent is a definite risk factor in this expansion, especially as good spots for business are growing scarce in dynamic cities with high population.