Buying the rights to a major brand’s name comes with major paperwork and obstacles as our expert in the industry explains…
THERE CAN BE little doubt that Vietnam is the type of market where the franchising business model is growing and thriving. With a large consumer base, rapidly rising incomes, a very educated, young and growing professional population, and an entrepreneurial economy that is focused on wealth creation, it’s the perfect formula for success.
While franchising dates back to the mid 1800s and started in America, the influence and impact of franchising around the world continues to be immense, contributing USD1.2 trillion to the global economy. In the US alone, franchising has created over 9 million jobs and contributed USD500 billion to the economy. Although not the same in sheer numbers, other developed and developing countries have seen similar growth in the franchising market, including Australia, the UK, China, South Korea and Japan.
It’s easy to see when walking along the streets in Saigon that franchising has gained momentum in recent years, especially with Domino’s Pizza and Burger King sponsoring and adding their logos on the city’s Tet decorations this year. And while KFC, Lotteria and Jollibee have entered the country more than a decade ago, newer players into the game like Coffee Bean & Tea Leaf, Pizza Hut and Subway have ignited interest from abroad. And with Starbucks’ recent opening of its first flagship store in HCMC recently, this will only drive competition faster into Vietnam.
Though the opportunities are numerous, there are also many risks that a franchisor (a person or company that grants a franchise) must navigate effectively if they are to compete and succeed here. It starts with picking the right business partner, managing the supply chain, deciphering the legal requirements, and the all-important and all too real issue of the rising cost of retail space. Finding the right partner in Vietnam is often a lengthy process and can take up to five years if the brand you’re franchising has strict requirements. For example, Starbucks had eyed Vietnam for many years before its grand opening in February 2013.
As Matt Fujieki, Managing Partner of International Lifestyle JSC, Haagen-Dazs franchisee for Vietnam, says, “Like any global brand, the process of franchising may be lengthy and challenging, especially for a global brand’s first entry into a developing country like Vietnam. For an international brand like Haagen-Dazs, they must carefully strategize the entrance, their local partner, and development goals amongst other important aspects. For the local franchisee, a clear understanding of the market must be present and a correct business model must be put into an aligned game plan.”
Demand But No Supply
Another key focus area is the ability of the new partners to manage the necessary supply chain. To keep costs down, ideally franchisees should locally source their raw materials, equipment, furniture, and other necessary products and services. However, the reality is that many local suppliers and service providers in Vietnam lack the quality and scale that are required by international brands, thereby forcing the franchisees to buy overseas, raising supply cost. It’s a no-win situation that many franchisees face as local suppliers are unwilling to invest capital to meet international requirements if there is no guarantee of sale after they have made these investments. If you’re selling a Big Mac and you decide to use a plain bun because suppliers can’t produce the sesame seed bun, well, it’s no longer a Big Mac.
“As Haagen-Dazs is a super-premium global brand, with some of the highest international standards, supply chain and particulars such as sourcing are always a challenge in a developing market like Vietnam,” Fujieki confirms.
High real estate costs and location continue to be issues as well. Rental costs are higher than the average for the region and many locations do not drive the needed traffic to these businesses, including prime real estate in high-profile retail establishments like Vincom or The Crescent Mall. Expectations for leasing prices by local landlords can also be a problem as they are often much higher than what is appropriate for the franchises that seek those locations. To make matters worse, local landlords have also been known to break leasing contracts.
For any internationally recognized brand, failure in any market not only hurts them in terms of time and money but it may take them 5 to 10 years before they are able to re-enter that same market. This will also bring up questions from future potential franchisees about its viability, especially if they are located nearby in Southeast Asia.
While franchising is sure to feed hungry appetites here, traversing these critical issues is a must for the parties involved.
Sean T. Ngo is the Managing Director of Vietnam Franchises. The company has helped international brands enter Southeast Asia including KFC, Delifrance and Carl’s Jr.