International coffee brands quit Vietnam due to filtered down profits

By Ngan Anh   October 22, 2017 | 11:38 am GMT+7
International coffee brands quit Vietnam due to filtered down profits
High costs offered by foreign coffee chains have driven many customers to domestic brands. Photo by VnExpress

Some foreign coffee chains have been outmatched by local competition, forcing them to pull the plug on their Vietnamese ventures.

Le Quan is sitting at a table under a green parasol sipping a cappuccino, waiting for his friend to arrive. The sun is shining, and the seating area outside the western-style Highlands Coffee shop is full mostly of young and trendy people.

Only a few hundred meters away on the same street is a Starbucks store, but Quan and his friends rarely visit the American franchise, preferring to have their morning cups of coffee at Highlands.

Highlands' interior is comparably sophisticated and modern, but it offers a much cheaper cappuccino.

“The price offered by foreign coffee chains like Starbucks does not really suit my wallet,” Quan said.

The cost of a cappuccino at Starbucks is more than VND100,000 ($4.3), nearly double the price in local stores like Highlands and Trung Nguyen.

Quan, who is in his 30s, is among a growing number of Vietnamese consumers flocking to coffee shops and developing a taste for what’s viewed as a trendy Western beverage.

Many people now drink coffee as part of their daily routine, but foreign coffee chains have struggled to tap into this potentially lucrative market. Local coffee fans prefer domestic shops because of the affordable prices, so some international chains are pulling the plug and leaving the country due to losses.

Earlir this year, Australia’s Gloria Jean’s Coffee pulled out of Vietnam after 10 years of opening in Hanoi and Ho Chi Minh City.

Nguyen Phi Van, the first franchisee of Gloria Jean’s in Vietnam, blamed its demise on a business model that had been developed in Australia for the local and regional markets.

Even after the chain allowed its franchise in Vietnam to adapt to the local market, business remained tough because domestic rivals including The Coffee House, Phuc Long, Trung Nguyen and Highlands had already established their dominance by offering affordable prices.

Last year, Singapore-based café and restaurant chain NYDC closed its last shop, shutting down its seven-year business in Vietnam. A statement from the chain said it had suffered from losses and stiff competition.

Other foreign coffee chains have also struggled to expand. California-based Coffee Bean & Tea Leaf, as of late last year, had opened only 15 outlets in Vietnam after entering the market eight years before.

Coffee giant Starbucks has opened a modest 24 outlets in Vietnam in the past four years.

The international brands have been dwarfed by local firms such as Highlands, which has over 130 outlets, The Coffee House, which has opened 30 shops in just two years, and Trung Nguyen, which has opened more than a thousand shops in Vietnam since its start-up in 1996.

A Highlands coffee shop in Hanoi. Photo by VnExpress/Trang Bui

A Highlands coffee shop in Hanoi. Photo by VnExpress/Trang Bui

Factors behind the downfall

Talking about the reason for the failure of international brands in the domestic market, industry insiders said that high rents on premium land have raised the cost of retail prices, making their coffee less competitive than local ones.

According to a report by property firm CBRE Vietnam, the rents in Saigon's central business districts in the second quarter of 2017 rose 7 percent to nearly $140 per square meter.

The rate is one of the highest in Southeast Asia, which make the locations unfeasible for a profitable coffee outlet, Sean T Ngo, CEO of VF Franchise Consulting, said.

In addition, the high cost of importing coffee beans has made international brands less competitive.

He said Vietnam, a major exporter of Robusta coffee, imposes high import tariffs on coffee beans, and international coffee chains often use imported Arabica beans that raise costs significantly. Higher costs have driven many customers to domestic brands, he said.

The high density of coffee outlets in cities has also made the competition between foreign chains and local brands that have westernized their services, Ngo said.

“There are too many choices. I will remain loyal to local shops, which offer international products at reasonable prices”, Quan said.

 
 
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