GIM 2007 -
POSTED ON: 01 Apr 2007
RESEARCHERS: Matthew Dobson, Sweta Modi, Michelle Perez, and Bao Phan
You still cannot get a Starbucks venti latte in Vietnam. Despite rumors of the possibility, the coffee giant has not yet entered the South Asian country. That is good news for local Vietnamese coffee retailers including Trang Nguyen, Highlands Coffee, and S-Café.
But can these local Davids withstand the entry of a Goliath like Starbucks?
Here, that question is considered carefully in an analysis of the Vietnamese coffee market based on literature reviews, interviews with industry executives and experts, and on-site visits. This paper is a synopsis of research conducted as part of Kellogg’s Global Initiatives in Management program into the challenges of local coffee retailers in Vietnam. A framework is presented to compare the Vietnamese coffee-purveyors to standard-setting Starbucks on internal and external environment, to see how the local players’ practices stack up. The analysis suggests that to remain profitable in Vietnam’s growing and increasingly open economy, the locals have more than a little work to do.
Vietnam’s Coffee Industry
The French colonists brought coffee to Vietnam in the nineteenth century, but it remained a niche product until the late 1980s’ Doi Moi economic reform policy, which permitted privatization of land and gave farmers control over agricultural resources. Within a decade, Vietnam became the world’s second (to Brazil) largest coffee producer, exporting over 800,000 metric tons annually. But market forces, including the 1989 failure of the International Coffee Agreement to support export quotas, have eroded Vietnamese coffee-grower’s profits, prompting them to direct more of their output toward domestic consumption, which jumped from 3 percent in 1999 to 8 percent in 2005. This growth has been driven by the rise of urban incomes and the café culture in Vietnam, where roughly 50 percent of the population is under twenty-four, a segment increasingly attracted to international brands and the status accompanying these.
Despite these market conditions, cultural, political, and logistical barriers (e.g., high tariffs, lack of partners) have kept most foreign coffee brands out of Vietnam, with the exception of Illy Café, an Italian chain with limited retail distribution there. Local players will inevitably face competition from established international brands, but domestic rivalries are already heating up: Viet’s Top, a chain introduced by students in 2005, competes with stylish 8X (referring to people born after the 1980s) cafes; even hotels such as Saigon’s Sheraton have coffee shops. In this context it is crucial that local chains evaluate their positioning and brand equity, along with crafting thoughtful business strategies. Their sustainability depends on it.
A Sustainability Analysis Framework
To evaluate the sustainability potential of Vietnamese coffee retailers, a framework was developed based on SWOT analysis and internal/external factor evaluation models in the literature, allowing consideration of economic, social, cultural, political, and other factors related to long-term company health, along with firm strengths and weaknesses. Starbucks was analyzed as the benchmark brand.
The Framework. Analysis was conducted on two key dimensions: internal and external environments. Internal environment refers to the general conditions within a company that influence its ability to execute its strategy successfully; core internal elements of focus here were human and other resources, growth strategy (e.g., diversification portfolio), and brand management. There were also three external environmental factors of focus: competition (from which a company must differentiate itself), legal-political challenges and opportunities, and demographic-social issues (e.g., income and norm shifts). Each factor within the internal and external environment categories was assigned a weight from 1 (low) to 5 (high); sums (maximum of 15) for internal and external environment were used to compare players against each other and the benchmark: Starbucks.
Starbucks and Best Practices. Starbucks is the leading global coffee retailer, a firm that built a premium brand with what is effectively a commodity. The company is considered best-in-class and is appropriate to use as the benchmark in this analysis.
Within the framework here, Starbucks receives a total score of 14 for Internal Environment, just 1 point short of the maximum. The Resources score of 5 is predicated on Starbucks’s portfolio of over six thousand global outlets (in early 2006), its opportunistic and effective approach to real estate, its high staffing levels (fifteen to twenty employees per store), and its in-depth training for all employees. Starbucks’ Growth Strategy received a score of 4 for its foreign expansion plan through joint ventures and minimization of its franchise model to maintain brand image/consistency, though this comes with some sacrifice of flexibility. The Brand Management score of 5 is derived from the coffeemaker’s focus on the “Starbucks Experience” delivered by the cafes, along with operational efficiencies, strong PR (e.g., through community development), and product development.
Starbucks rates an External Environment score of 13. The Competitive Forces score of 4 is based on the firm’s strong lead in the United States despite significant competition. Because it faces few constraints in its major markets, Starbucks was given a Legal-Political score of 5. Finally, the firm’s ability to provide consistent quality and tailored offerings to customers (e.g., local baked goods) earns it a Demographic-Social score of 4.
Domestic Player 1: Trung Nguyen
Launched in 1996 by a medical student, Trung Nguyen became a household name in Vietnam in less than a decade, its now-ubiquitous red, yellow, and brown logo is a symbol of the new Vietnam. Like Starbucks, Trung Nguyen redefined the coffee “experience,” developing its brand cup by cup rather than through traditional advertising. Despite this parallel, Trung Nguyen, unlike Starbucks, has expanded haphazardly, sacrificing consistency for penetration in its franchise model. Each café, including overseas-based ones, sports its own style, typically reflective of local preferences, and the company has announced its intent to launch hypermarkets that may be part of a push to develop a broader brand portfolio.
Internal Environment (Overall Score: 9). Trung Nguyen earned a Resources score of 3 because its franchising strategy, while enabling rapid penetration inexpensively, constrains human resources. Increasing marketing expenditure in the context of growing competition threatens to further strain resources. The firm’s Growth Strategy also merited a score of 3 because its broad expansion plan, while ambitious, appears to lack focus and may further stretch resources. With regard to Brand Management (score of 3), while Trung Nguyen’s image of slowness and reflection is well-suited to Vietnam’s coffee culture and its visibility is high overall, it looks more like a consumer packaged goods player than a retailer today.
External Environment (Overall Score: 8.5). Having established itself as a mass market brand, Trung Nguyen still fares well against rivals, but its everyman product may have to be replaced eventually with a portfolio of brands targeting different segments, giving it a Competition score of 3. Intellectual property protection in Vietnam is poor at best, so Trung Nguyen’s Legal-Political (score of 3) edge may lie in its strong distribution network, which can help it protect coffee sales to franchisees (who may seek cheaper sources). The firm plans to expand its distribution network through a chain of hypermarkets with the name G7, but its mass-market brand is quickly falling out of favor as the class of young conspicuous spenders grows (Demographic-Social score of 2.5).
Domestic Player 2: Highlands Coffee
Founded by David Thai, who grew up in Seattle, Highlands Coffee targets Vietnam’s younger middle class, with premier-location-based Parisian style cafes offering coffee priced higher on average than that of Trung Nguyen. Like Trung Nguyen, Highlands puts baristas through extensive training.
|Outside seating at Highland Coffee in Vietnam|
Internal Environment (Overall Score: 7.5)
. Though not as prolific as Trung Nguyen, Highlands continues to grow, indicating steady access to capital. But its relatively low customer turns suggest that the company must improve operational efficiencies to lower costs (Resources score of 3). Due to its narrow focus on premier locations, Highlands’s growth may be limited without a modification in expansion plan, earning it a Growth Strategy score of 3. Despite consistent branding across products, Highlands has done little to update its logo/image, and limited work on product development or innovation, hampering its ability to stay fresh and compete with other upscale brands (Brand Management score of 2.5).
External Environment (Overall Score: 8). With few differentiating offerings, Highlands may need to enhance its core competencies of customer service and other aspects of the in-store experience, along with local market knowledge (Competition score of 3). Similarly, without trademark protection, the firm is quite vulnerable to imitation (Legal-Political score of 2). And though Demographic-Social (score of 3) trends such as rising income levels currently favor Highlands’s premium offerings, an economic downturn could be devastating, especially if the firm fails to develop a stronger differentiating factor such as customer service.
Domestic Player 3: S-Café
S-Café is part of the state-owned Tin Nghia Company-Timex (TNCT), which also holds production, granite mining, and import-export operations. All coffee is purchased domestically, with the beans roasted and blended in a TNCT-owned facility outside Ho Chi Minh City. In 2006 S-Café sold its four brands of coffee in the domestic rural market through stores and roadside stalls, but planned to open its first retail outlet in 2007.
|S-Café display at store in Vietnam|
Internal Environment (Overall Score: 4). Though S-Café has access to TNCT’s significant capital and resources, it must prove its profitability before being granted much of these (Resource score of 2). A clear expansion plan is needed to convince TNCT executives of the relatively new S-Café’s merit. Based on interviews with current management, S-Café’s expansion plan, however, seems more focused on short-term market factors (e.g., rising incomes and demand), and thus may prove profitable in that timeframe, but much less effective longer-term without a clearer focus on goals related to customer service, revenue, and store performance (Growth Strategy score of 1). According to management the “S” in the firm’s name stands for “share” but can also mean “special” and “smile” or represent Vietnam’s geographic shape; however, without a clear target market, S-Café’s Brand Management (score of 1) remains a true work in progress, and their current advertising efforts plan- rather than strategy-based.
External Environment (Overall Score: 7)
. Upon entry to the retail market, S-Café will face stiff competition from established players like Trang Nguyen and Highlands, especially with more brand-conscious consumers. Despite cost benefits associated with TNCT’s vertical integration in the coffee supply chain, this factor earns S-Café a Competition score of 2, especially without clearer differentiation, possibly based on understanding the needs of the everyday coffee-drinker. On the other hand, TNCT, as a state-owned enterprise, is more likely to gain special government consideration and less likely to face trademark infringement than competitors (Legal-Political score of 4). Nonetheless, S-Café’s brands carry little or no premium with increasingly status-conscious consumers, who are more likely to choose gourmet offerings (Demographic-Social score of 1).
Rising incomes, Western influences, and brand awareness dictate that Vietnamese incumbent coffee retailers must build strong brand equity or risk their survival. Winning firms will likely use market research to develop profitable, customer-focused business models. In this context, the three brands of focus here are at different stages strategically: Trang Nguyen has brand recognition, penetration, and distribution, but must invest in marketing and product development, along with developing stronger ties to and more consistency among franchisees; Highlands meets current market needs well enough, but must update its brand strategy (e.g., logo and store layout) to become better associated with status; S-Café can win with price-sensitive customers, but will have little cachet with the rising upper middle class.
As Vietnam’s demographic and social trends become clearer, it’s certain that competition in the coffee market will heat up, especially with the likely entrance of more foreign players, including Starbucks. What is not at all certain is how local players will fare in this brewing battle, and whose offerings will fill the cups of the most Vietnamese consumers in the coming years.