Home disadvantage in franchising

It seems difficult to build a franchise on traditional local dishes in Vietnam Photo: Le Toan

A day like everyday, from 7 to 9am, a long line of people wait in front of Pho Cham, a pho (a traditional Vietnamese soup) vendor on Hang Bun street in Hanoi in order to be able to enjoy the specialty.

The scene is completely contrary to the poor sales of the Pho Ong Hung high-end restaurant chain also in Hanoi, whose owner – Ho Chi Minh City-based Huy Vietnam received $15 million investment capital from Templeton Strategic Emerging Markets Fund IV in 2015. This restaurant only had a few customers drop by. The number of customers remains poor everyday and the restaurant at 179 Hue street stays mostly empty.

Pho Ong Hung is just among a number of franchise businesses in Vietnam with high-end pho chains that might be a spectacular swing and a miss.

Competition

In 2011, Pho 24, which once dominated the Vietnamese food chain business with 60 restaurants in the country and 20 restaurants overseas, finally agreed to the acquisition by Viet Thai Limited, the owner of the Highland Coffee chain.

In his first public appearance after the deal last January, Pho 24’s founder Ly Qui Trung, who comes from the south, stated that at the time, Pho 24 needed a lot of money to refresh its image, brand, and marketing strategy. He also affirmed that before the acquisition by Viet Thai, Pho 24 had not suffered losses and did not take up loans to maintain operations.

Trung may have foreseen a rather gloomy future where Pho 24 is constricted by fierce competition from international food giants with long experience in the franchising business and professional marketing skills like KFC, McDonald’s, Lotteria, and others. He decided to leave the sinking ship.

In fact, after the ownership change, the number of Pho 24 restaurants fell to 16 in Ho Chi Minh City and a single restaurant in Hanoi’s Noi Bai International Airport, according to its website. In addition to the competition with international food brands, regional differences also contributed to the failure of Pho 24 and Pho Ong Hung.

Discussing the issue with VIR, Sean Ngo, CEO of VF Franchise Consulting, said that one of the major challenges in the country is the cultural difference between northern and southern Vietnam.

“Some chains are seeking to dominate one part of the country before they seek to venture into the other parts of Vietnam. Perfecting their business model in one part of the country will help them when they wish to expand to other parts of Vietnam, since expansion to places farther away from your home base is incredibly difficult due to these challenges as well as issues with supply chain, people, real estate, and logistics,” Sean said.

Furthermore, the different local tastes also make it difficult for franchises – which thrive on offering uniform flavour and service quality – to develop. For instance, northern Vietnamese people prefer their pho more salty, while the southern people enjoy it sweet with a topping of bean sprouts.

These regional variances are a headache to franchises because if each restaurant under one brand have their own different flavour for the same product, then they are no longer a restaurant chain, according to Hoang Tung, CEO of Pizza Home.

Local dishes and franchises

The diversity of local dishes and delicacies are a point of pride in Vietnamese culture, which makes franchising seem like a good idea to broaden the appeal of Vietnamese cuisine and culture to the world.

In fact, franchising has led to the spectacular growth of many foreign businesses and local dishes in their home markets. McDonald’s and Burger King from the US are probably the first to come to mind, which have made hamburgers oh-so-popular around the globe. Similarly, Gong Cha and Yi Fang from Taiwan made bubble tea popular all across Asia and most of the world.

In addition, Vietnamese prospects in franchising are not bad at all. Vietnam ranked 9th among the top 12 markets identified by the members of the International Franchise Association as the most valuable markets for international expansion. Along with foreign brands, local Vietnamese brands such as Trung Nguyen Coffee, Highland’s Coffee, Golden Gate, and Red Sun-ITI Corporation have also started franchising with significant success.

Nguyen Phi Van, chairwoman of Retail & Franchise Asia, founder and manager of the World Franchise Association, said that local food franchises often account for 70-80 per cent of the total franchises in developed countries in North America, Western Europe, and North Asia. These countries have highly-developed markets and extensive knowledge and experience in local food business franchising.

On the contrary, about 80-99 per cent of franchises in Vietnam are international and regional brands.

“The difference lies in the fact that Vietnamese firms lack the capability and experience to build franchise brands and models. Thus, it is expected to take another 10 years for Vietnam to develop successful local franchises by applying the best practices of international franchise brands,” Van said.

Similarly, Ngo of VF Franchise Consulting also told VIR that in the short-term, the Vietnamese franchising sector remains challenging due to highly price-sensitive consumers, high rental costs, and limited supply of adequate modern retail space and fast-rising labour costs. The availability and quality of local suppliers, from raw materials to equipment, remains limited and thereby drive higher the costs of doing business in Vietnam. Infrastructure also requires significant improvement, including ports, roads, and utilities, according to Ngo.

In his view, the Vietnamese franchising sector is still quite young compared with other countries in the region, like the Philippines, Thailand, Indonesia, Malaysia, and Singapore. In all of these countries, there are already healthy and growing franchise associations, and their governments provide significant financial and other kinds of support to help grow their franchise industries. “Vietnam has a ways to go, and with further support from the industry and government, we will likely see more franchise success stories,” Ngo said.

In Vietnam, several businesses like Golden Gate and Redsun have been successful in franchising, with 277 and 50 restaurant franchises, respectively, all specialised in South Korean, Japanese, and Thai cuisine. This suggests that applying the franchise business model to things external in origin to the market is much easier than building a franchise on a dish that is part and parcel of the country’s culture and gastronomy. Thus, the lesson could be that Vietnamese dishes should be taken abroad where they are a novelty to broaden the appeal of local cuisine, according to experts.

Challenges

However, the majority of enterprises in Vietnam are of small and medium size. Hoang Tung from Pizza Home told VIR that many firms get used to running medium- and small-scale business, so extending their reach to other areas makes it difficult for them to manage the larger number of staff in multiple locations.

Regarding solutions to deal with the challenges, Van of Retail & Franchise Asia said that Vietnamese startups and small- and medium-sized enterprises (SMEs) still face countless difficulties in building successful franchise businesses. Thus, the government needs to provide training and professional development for startups and SMEs in the field.

Meanwhile, the market will develop better if mid- and large-scale companies can jump on the bandwagon. With their strong financial capability, the companies can invite top-notch experts to build the chains, thereby facilitating the development of Vietnamese franchise brands. On the other hand, strict adherence to product specifications such as taste and quality of ingredients at each restaurant in a chain is absolutely necessary when expanding to other markets.

“It is because the power of branding can help firms create sustainable business development and lure in suitable personnel,” Tung said.