Foreign fast food companies are lagging behind their own expansion plans in Vietnam due to the fierce competition with major rivals in the same segment and local competitors.
KFC entered the Vietnamese market in 1997, but McDonald’s late entry is showing how tough the competition is
Leaving Hanoi’s McDonald’s, Tamas Nguyen did not radiate the satisfied cheer that people have after finishing a delicious meal.
“I took my family to this restaurant because it is not far from where we live and my son was curious about the taste of a McDonald’s burger, but we were absolutely disappointed. It is an insult to real hamburgers,” he told VIR. “When I looked into my burger, I found a single teeny-weeny cucumber on the patty, and nothing else.”
For Nguyen, Vietnam has a wonderful culture of home cooking, with families taking the time to spend their dinners together. The local taste is also remarkably different in the amount of raw or cooked vegetables used, something very different from McDonald’s and other Western fast food franchises.
“If you open a banh mi at any street-side stall, the vegetables and toppings come falling out, whereas when you open your burger, you actually have to look for that one sad slice of gherkin hiding under the mayo,” he added.
As a foreigner living in Vietnam for several years now, he almost always opts to eat at Vietnamese food stalls and only goes to Western fast food joints when he gets a serious craving – and even then he leaves disappointed most of the time.
Competition in fast food
According to London-based market research firm Euromonitor International, McDonald’s in Vietnam has been performing well, registering double-digit growth in 2018, which nevertheless flew below expectations.
What has worked well for McDonald’s was the expansion of its product portfolio with chicken dishes that are especially popular among younger consumers in Vietnam, instead of just the burgers that the franchise is known for.
Deepika Chandrasekar, research analyst at Euromonitor International, said, “To stay alive in the fiercely competitive fast food scene here, McDonald’s has made attempts to incorporate Vietnamese tastes into its products, such as the crispy fried chicken released in November 2018.”
According to the researcher, McDonald’s has had a hard time differentiating its value from local outlets. The Vietnamese are spoilt for choice among numerous street stalls and local vendors who not only serve local delicacies like pho, but also serve faster and at a fraction of the cost of franchises.
“It is also relatively harder for a chain like McDonald’s to plan and execute the opening of a store in second- and third-tier cities in Vietnam compared to the nimbleness of traditional food stalls,” said Chandrasekar.
“Going forward, McDonald’s in Vietnam needs to do more than just refresh its menu: it needs to offer a wider localised menu, expand aggressively, roll out digital innovations, and enhance the in-store experience to merely stay afloat if not outsmart street vendors.”
In contrast to the fall in the demand for Western fast food, Vietnamese fast food joints have developed into imposing opponents to foreign names. By learning from their rivals to standardise the business model and by understanding the local taste, many Vietnamese fast food businesses have been capturing increasing market shares and increasingly expanded chains.
“Foreign competitors are strong in all aspects, but we have our own advantages,” said Nguyen Xuan Vu, representative of snackfood producer Tan Viet Sin Foods JSC. He highlighted the company’s tactic of avoiding going head-to-head with the fast food giants. While McDonald’s and KFC chose the mid- to upper-range segment, Tan Viet Sin Foods operates at a more affordable price level.
Another advantage of local fast food businesses is that they know what customers like. “Food is a big part of success, but the scale of a restaurant chain does not fully depend on it,” a fast food professional told VIR, saying that Vietnamese businesses can compete on an equal footing with foreign ones if they have good corporate governance and unique products, or services that suit the culture and consumption habits of natives.
According to Hoang Tung, CEO of Pizza Home, the products of foreign giants like McDonald’s and Burger King are a “swing and a miss” when it comes to local customers’ taste. “Burgers are popular in the west, but not in Vietnam. If there is no demand for their products, these brands will certainly face difficulties,” said Tung.
Regardless of the size of the restaurant chain or the strength of the brand, food is seen as the soul of any restaurant, satisfying the taste and habits of local customers.
In Tung’s opinion, this is the most important factor for the success of a franchise brand, and it is why burger joints have stopped expanding, while Vietnamese banh my has been so far developing rapidly.
Taking it step by step
The Fast Food in Vietnam report by Euromonitor International revealed that many major fast food brands in Vietnam declined in 2017, including Burger King, Popeyes, Subway, Carl’s Jr., Lotteria, and KFC which, despite maintaining their leading positions that year, recorded very low sales growth.
Lotteria and KFC are still the leading fast food brands with hundreds of stores across the country. However, the financial statement of Lotteria showed that the fast food chain recorded after-tax losses of VND118 billion ($5.13 million) and VND135 billion ($5.87 million) in 2015 and 2016, respectively.
By the end of 2016, Lotteria’s accumulated losses were more than VND413 billion ($18 million), while its charter capital reached only VND433 billion ($18.83 million), as reported by local media.
In the meantime, Lotteria’s competitor KFC also reported losses, with a low 15 per cent profit margin in 2016. This was even lower than in the previous year. As a result, KFC lost VND25 billion ($1.1 million) in 2015 and made a profit of VND15 billion ($652,000) in 2016.
US fast food chain Burger King entered Vietnam in 2012, initially opening in Ho Chi Minh City’s Tan Son Nhat International Airport before progressively moving into suburban locations in the city.
At the time, the company set the target to open 60 stores within five years, but in reality the group has fallen well short, with only 14 being opened. Five of those were subsequently forced to close, giving rise to speculation that the brand may exit the market altogether.
Grace Chia, senior research analyst at Euromonitor International, told VIR, “As Vietnamese people prefer healthy food and are presented with many affordable options at local street stalls, the demand for fast food is low. Sales growth at leading fast food chains KFC and Lotteria has slowed down as the market reaches a point of saturation.”
“Full-service Asian restaurants are expected to be the fastest-growing food service category over the next five years, especially Japanese and South Korean cuisine,” added Chia. “While Japanese cuisine attracts customers with its freshness and healthy image, South Korean food is popular for its spicy and indulgent flavours.”
In 2014, McDonald’s made a lot of noise in announcing its plan to launch 100 shops within 10 years in Vietnam, but halfway to the deadline only one-fifth of the plan has been reached.
Nguyen Huy Thinh, general director of McDonald’s Vietnam, told VIR that it took the company 10 years to study the market before deciding to open the first store in Vietnam, and the company has built a long-term development plan with numerous different investment periods.
Accordingly, in the early years, the company would focus on investing in training staff team to meet the company’s international standards. In the next five years, McDonald’s will focus on studying dishes which both meet its standards and suit Vietnamese taste, in collaboration with expanding the store system.
However, according to Chia, the demand for McDonald’s has been low as it faces fierce competition from leading player KFC. As KFC has been in the market since 1997, the brand has enjoyed first-mover advantage and reports strong brand familiarity.
KFC’s chicken buckets and family-friendly dining experience resonate with the Vietnamese culture of sharing meals. On the other hand, the core menu burger offering of McDonald’s do not encapsulate the sharing element that Vietnamese customers are accustomed to.
“Since I’ve been living in Vietnam, I’ve only ever gone for fast food when I had the cravings for it,” concluded Nguyen as he stood in front of the McDonald’s restaurant.
“I suppose this is one market segment, expats looking for a binge of fast food once a month, but it looks like a tiny market to me.” VIR
KFC, Lotteria and McDonald’s are the three biggest players in the fast food market.
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