The franchising model, which allows people with limited access to capital to enter an established business, is well-suited to a developing economy like Vietnam. Meanwhile, rising incomes and an emerging middle class are generating growth in consumer-driven sectors such as retail, entertainment, food and beverage, and lifestyle-oriented businesses. As a result, the Vietnam franchising market has surged in the past few years, growing at approximately 30 percent last year.
Although far from saturated, the market is still relatively small and competition is heating up as more brands enter the market. However, growth prospects are bright as local investors become more familiar with franchising and are increasingly exposed to successful franchise concepts. In addition to interest among local companies and individuals, a number of foreign-invested retail and distribution groups have made investments in well-known foreign franchise brands with plans to expand throughout the country.
Franchising was legally recognized in Vietnam with the passing of the Commercial Law, which took effect on January 1, 2006 and includes eight articles dealing with franchising activities. The new law provides for a legal and regulatory climate conducive to the development of the sector. The issuance of the new Commercial Law, together with the Office of Government Decree No. 35/2006/ND-CP, dated 31 March 2006 (Decree 35) specifically legitimized franchising services, and therefore marked an important change in the Government’s perspective towards the development of the franchise sector in Vietnam.
One of the biggest challenges is identifying and conducting due diligence on partners to determine suitability and financial viability. Because franchising is relatively new to Vietnam, establishing good communication, setting clear expectations and achieving mutual understanding should not be taken for granted. Many local companies may not have a full understanding of brand value and/or legal regulations relating to franchising.
Franchising first took hold in Vietnam in the 1990’s with the appearance of famous foreign fast food chains like Kentucky Fried Chicken, Dilmah, Lotteria, and Jollibee. Franchising activities have become more widespread in Vietnam in recent years, with a number of well-known foreign and domestic franchise brands operating in the local market. Prior to the adoption of the 2006 Commercial Law the Vietnamese Government viewed franchising with skepticism and did not fully recognize it as a legitimate vehicle for promoting commercial activity and investment. This perspective has been changing as Vietnam witnesses the development of strong franchise sectors among its neighbors and begins to recognize the role this sector can play in creating jobs, as well as attracting investment, improved management practices and new technology. For example, a number of local restaurant chains have successfully franchised their winning formulas throughout the country and in overseas markets as well.
Consumer awareness of American food and beverage franchise brands is quite strong, but there is also strong potential in other sectors. Best prospects include: unique fast food concepts, health and nutrition, business services, education services, health care, childcare and children’s services, cleaning and sanitation, hospitality, beauty care, convenience stores.
There are several factors that will contribute to the growth of foreign franchises in Vietnam and that will attract foreign franchisors to participate in this market, including:
• Per capita GDP and per capita incomes are on the rise, and incomes in the urban areas (such as Ho Chi Minh City, Hanoi, Danang and Can Tho) have seen significant growth
• An emerging middle-class – with disposable income – is driving demand for high-quality food and beverages, entertainment and lifestyle oriented products and services.
• High-end, well-known “premium” brands are in demand, although recent research by Nielson suggests a slight shift toward value and increasing price sensitivity among urban consumers. Vietnamese consumers often associate Western brands with quality and reliability.
• Consumer patterns vary throughout the country: between urban and rural areas, and especially between the regions of Hanoi and the north, Danang and the Central Coast, and Ho Chi Minh City and the Mekong Delta region in the south.
The market is open for foreign franchisors in various sectors. U.S. brands are well perceived by local consumers, who reasonably associate them with superior quality, excellent customer service, and generally, a Western lifestyle. Currently, U.S. franchise brands represented in Vietnam include KFC, Pizza Hut, Dale Carnegie, New Horizons, Hard Rock Café, Circle K, Coffee Bean and Tea Leaf, Century 21, and ShoeBox New York. According to KFC, the first U.S. franchisor to enter the market (in 1997), business in Vietnam has never been better than in recent years. KFC now operates 55 outlets nationwide. A number of western F&B outlets plan to announce market entry plans in 2010.
As the legal and regulatory environment improves, franchises may also take advantage of the recent explosion in retail space development in Ho Chi Minh City and Hanoi, which has significantly increased the number of high-traffic sites that would be suitable for retail franchise outlets. In addition, landlords are increasingly interested in attracting (and also directly investing in) franchises to improve their tenant mix. Local restaurant groups have also expressed interest foreign franchise systems to leverage their industry know-how/customer bases to expand into new market segments.
To be successful in Vietnam, new-to-market franchisors should consider the following suggestions:
• U.S. franchisors should register their intellectual property rights and be prepared to take legal action against IP violators. Franchisors should exercise care in preparing franchising contracts to avoid problems down the line. Also register your URL’s and related websites in Vietnam.
• Understand cultural differences and adjust market access strategies accordingly. U.S. franchisors must consider adapting to local culture, habits, and tastes to guarantee success in the market.
• Optimize the price of the product and the franchising fee to achieve rapid expansion. Keep in mind that incomes are substantially lower than in the U.S. or even other countries in the region and Vietnamese consumers are very price-conscious. Local investors are only now becoming familiar with the franchising concept and may be reluctant to make too large an initial investment. Some franchisors opt to make direct investments in their first store in order to prove the concept and generate future franchise sales.
• U.S. franchisors may work with the U.S. Commercial Service in Vietnam to identify potential partners and to conduct basic due diligence. The U.S. Commercial Service frequently organizes Vietnamese delegations to visit the International Franchise Expo in the United States, and can facilitate matchmaking programs for U.S. companies in Vietnam.