January 14, 2013

Starbucks faces local brands and tastes, expense in Vietnam debut

'The cool factor' and 'the ambience' – not the coffee – are expected to be the draw for Vietnam's upwardly mobile under-35 generation.

Bloomberg News

HANOI, Vietnam — Starbucks will have to convince architect Tran Cao Tho and his friends to switch from stronger and cheaper coffee at their neighborhood cafe when it enters Vietnam next month.

click image to enlarge

A sign outside a Starbucks hangs over the Riverwalk in San Antonio, Texas, in a 2010 file photo. Starbucks, which will make its debut in Vietnam next month, will join foreign food chains including Burger King Worldwide and Yum Brands KFC in the Southeast Asian country.

2010 File Photo/The Associated Press

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Coffee beans are stored in glass bins at a shop, one of thousands in Hanoi, Vietnam, in 2006. Starbucks will battle local brands, entrenched tastes, international rivals and thousands of neighborhood coffee shops in opening its first Vietnam locations.

Paul Haigh/Bloomberg News

Tho is part of the sizable under-35 generation the Seattle-based company will seek to convert when opening its first stores in the Southeast Asian nation, where coffee consumption spiked 65 percent between 2008 and 2011. The world's largest coffee chain will battle entrenched tastes, local brands, international rivals and the thousands of neighborhood coffee shops that dot Vietnam's streets.

"I like my coffee black, dark and strong," said Tho, 32, an architect in blue jeans, whose morning routine includes a cup of drip coffee at Hanoi's Cafe Hanh. "I'd go to Starbucks once in a while for the ambience, but not for the coffee. The flavor is too light."

Tho and three friends sipped coffee from low, wooden stools on the sidewalk as motorbikes whizzed by and street singers dropped in. Starbucks, seeking to profit from surging consumer demand, will open its first store in Ho Chi Minh City, the country's financial hub, early next month.

It joins foreign food chains including Burger King Worldwide and Yum! Brands's KFC in expanding in the Asian country, where the economy grew 5 percent last year. Of a population of 90 million, three out of five are younger than 35.

Starbucks plans on "showing up in a way that doesn't currently exist in the market in terms of the premium products and the experience we offer," said John Culver, president for China and Asia Pacific, in a telephone interview. The chain will offer flavors "tailor-made" to Vietnamese tastes along with its trademark drinks, while expanding "aggressively" into Hanoi and other cities,'' he said. Starbucks declined to elaborate on the number of outlets it plans to open in Vietnam.

Local consumers will be drawn by the Starbucks name, said Ralf Matthaes, a regional managing director at market research and consultancy firm TNS.

"Young people desire that modern, hip culture," Matthaes said. "It's famous and people want to be seen at popular places. That's very, very Vietnamese."

Vietnam's coffee culture stretches back to the late 19th century after France colonized the country. It exported 1.73 million metric tons of coffee in 2012, according to the General Statistics Office, and is the world's biggest exporter of bitter-tasting robusta. Consumption of the drink in Vietnam jumped 65 percent between 2008 and 2011, according to the International Coffee Organization.

The coffee chain will attract young Vietnamese "who like to be fashionable, live a Western lifestyle and enjoy brand names," said Tran Doan Kim, a business management professor at National University.

Vietnam reached what the World Bank calls lower middle-income status in 2009, with per capita income having increased more than 10-fold since the ruling Communist Party started market-oriented reforms in 1986. Gross national income per capita was $1,270 in 2011, according to the World Bank website.

Besides neighborhood cafes, Starbucks will compete with established global chains, including California-based Coffee Bean & Tea Leaf and Australia's Gloria Jean's Coffees International.

Local chains such as Trung Nguyen Coffee and Highlands Coffee also have more experience catering to the Vietnamese love of strong coffee.

Dang Le Nguyen Vu, founder and owner of Trung Nguyen, which operates about 60 cafes in the country, isn't threatened by his newest competitor.

"Starbucks is not worth worrying about," he said. "It doesn't sell coffee. The people who go into a Starbucks may want to show that they are modern and stylish. If you're a coffee gourmand, you come to us."

Trung Nguyen, which exports coffee to about 60 countries, will expand to at least 200 retail outlets in two years, Vu said. Highlands Coffee stores, with overhead music and Wi-Fi Internet, are in prime retail and landmark locations in Vietnam's largest cities.

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