International franchisors keen on Vietnam

The Republic of Korea’s largest convenient store chain, GS Retail, opened its first store, GS25 Vietnam, in Ho Chi Minh City in January this year, after shaking hands with SonKim, a leading retailer of lingerie and underwear in Vietnam, to launch a joint venture franchise in the country.

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Vietnam is GS Retail’s first overseas market, which has rapidly-rising consumer power compared to other emerging markets, and plans to have 2,500 outlets nationwide within a decade. “Convenience stores are not only for selling products but also drive food trends and promote cultural images,” said Mr. Yun Ju Young, COO of GS25 Vietnam. “Our products, with the private brand ‘You Us’, will be popular among young people like students and office workers.” GS Retail is one of many foreign brands that have come to Vietnam through franchising. 

New arrivals 

The headlines in 2017 were mostly about the launch of 7-Eleven and H&M in Vietnam, Ms. Nguyen Phi Van, Chairwoman of Retail & Franchise Asia and Founder/CEO of World Franchise Associates, told VET. Other regional brands from Taiwan, South Korea, and Singapore have arrived on the scene with much less fanfare but more efficiency in financial performance. “We have seen a few brands sign deals, with their first store or center opening in 2018,” said Mr. Sean T. Ngo CEO of VF Franchising Consulting. These included the US-based Rocky Mountain Chocolate Factory, the Taiwan-based Presotea, the Singapore-based Jumbo Seafood, the HK-based The Edge Learning Centre, and GS Retail. 

Vietnam has one of the highest GDP growth rates in the world, Mr. Ngo said. Franchisors have identified notable opportunities from consumer spending in the country, in particular food and beverages (F&B), as Goldman Sachs has estimated the country will move into the Top 10 leading economies by 2050. Online shopping has also boomed in recent years, which was one reason SonKim decided to expand to convenience stores and modernize its retail approach. 

Vietnam jumped five spots to sixth in the 2017 Global Retail Development Index (GRDI), released by the US management consulting firm A.T. Kearney. Convenience stores and mini-marts are the fastest-growing segment, the report found. With favorable government policies, urbanization, a growing middle class, and a relatively young population, foreign retailers have reasons to be positive about Vietnam. As such, the market has seen the presence of large overseas convenience store chains such as Circle K, Mini Stop, and Shop&Go over recent years via franchising. 

F&B remains the most common business in Vietnam for international franchisors, followed by education and retail. “This will remain the trend for the next three years before the country opens up to more service-based franchises,” said Ms. Van. Vietnam has been identified as one of 12 key target markets for US franchises by the US Commercial Service. The same can be seen through the business focus of franchises from Europe, Australia, and North Asia. Vietnam will therefore see a greater presence by international franchise systems over the next three years, she added, before Vietnamese enterprises realize its potential.

There were more than 195 foreign brands registered in Vietnam as at February, according to the Ministry of Industry and Trade. “We expect the market to increase another 15%-20% in 2018,” Mr. Ngo told VET.

Matters to address
Franchising remains quite new to Vietnam, Ms. Van pointed out, and began with iconic brands such as Circle K, Pizza Hut, and Domino’s, while McDonald’s and 7-Eleven have joined the market in recent times. “To put it all in perspective, Circle K arrived in Vietnam in 2009, but while McDonald’s entered Malaysia in the 1980s it only came to Vietnam in 2014,” she said. “As such, Vietnamese enterprises have little experience with the way the franchising industry works or its impact. It takes time for local enterprises to catch up with related knowledge before they can fully understand and apply franchising into their business development strategy and plans, starting with a change in mindsets.” 

A few Vietnamese enterprises still look at franchising as a way to make a quick buck by utilizing other people’s money. This is the entirely wrong approach and will create crises for franchise systems as they grow, according to Ms. Van. “The right mindset is the sharing of prosperity,” she said. “When franchisors do well, they share the opportunities with their franchise partners and grow together.”

Franchising is a method of developing a business, she explained. For it to work, good business and financial models are needed, which are weaknesses of Vietnamese enterprises. “My advice is for Vietnamese enterprises to restructure their business and business model prior to thinking about being a franchisor,” she said. “Vietnamese franchises have been in crisis over recent years due to weak modelling foundations.”

The 21st century has been described as the Asian century and Vietnam possesses potential in agriculture and F&B, which it can showcase to the world. Franchising would certainly be the easiest way for Vietnamese enterprises to go global.

Other sectors with potential, such as textiles and footwear, where Vietnam is strong as an original equipment manufacturer (OEM) for the world, can be explored to build brands and retail models for franchising. Last but not least, franchising and licensing is quite common in the technology sector, and this could benefit Vietnam, as a startup nation, to explore technology innovation that could be licensed worldwide. 

While not naming any specific brands, Mr. Ngo said that some have perfected a sustainable and profitable business model that consists of appealing to local Vietnamese tastes and preferences while at the same time being extremely cognizant of price sensitivity in the market. “However, there are also many weaker areas that require improvement, including standardizing franchise operations and procedures to ensure consistent experience and quality standards, staff training, effective supply chain management and marketing, and other key areas for successful franchise growth,” he said.

Significantly, brand protection, or brand integrity, is one of the most important aspects in franchising. Intellectual property (IP) laws and IP protection are significant for the industry to thrive, he believes. This can be an issue in Vietnam and its legal framework needs to be strengthened, which can affect the confidence of international brands about expanding in Vietnam.

A lack of knowledge among and preparation by Vietnamese enterprises about IP protection also creates problems for them in franchising both in Vietnam and overseas. “Improvements in IP would be welcomed by the franchise and business community,” Mr. Ngo said.

Future forecasts

Looking ahead, Mr. Ngo suspects that some of the weaker franchises will exit Vietnam, others will prosper, and many new franchises will arrive in 2018. “We expect to see growth in the franchise sector as a whole,” he said. The industry will continue to see fast growing demand in F&B, education, retail, and, to some extent, even services, which is similar in other emerging markets in Asia. Ms. Van, meanwhile, believes key sectors will remain F&B, retail, and education, with longer-term prospects available for corporate and personal services in the next three years.

For those seeking to franchise Vietnamese brands overseas, Mr. Ngo suggested their top priority be to franchise the brand successfully in Vietnam. Entering and managing an entry into foreign markets is ten times more difficult and Vietnamese franchisors often vastly underestimate the amount of effort and cost involved in making foreign expansions profitable for both the franchisor and franchisee. “We would highly recommend the use of experienced and proven franchise consultants to assist younger franchise brands grow inside and outside of Vietnam,” he said.

Meanwhile, Ms. Van recommended that Vietnamese enterprises view franchises as an investment for sustainable growth and not as a cheap way to get rich quick. They should consider three steps: restructuring their current operations and remodeling, building franchise support foundations, and piloting franchising projects and refining their approach.

As Mr. Ngo said, selecting a franchise or a franchisee is the most important step in ensuring the success of a franchise in any country. A poor franchisor or poor franchisee will ultimately make the franchise unsuccessful. “Franchisors and franchisees should utilize experienced franchise consultants who can assist in ensuring the match is optimal and hopefully profitable for both parties,” he said.

Vietnam Economic Times

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