Starbucks seeks to expand in cafe-clogged Vietnam

HANOI Wed Jul 23, 2014 7:29am EDT

Pedestrians walk past a Starbucks store in the Manhattan borough of New York January 24, 2014.  REUTERS/Lucas Jackson

Pedestrians walk past a Starbucks store in the Manhattan borough of New York January 24, 2014.

Credit: Reuters/Lucas Jackson

HANOI (Reuters) - With more coffee shops per square mile than probably anywhere on earth, opening a cafe in Vietnam's capital could be a bit of a gamble. This week, U.S. coffee chain Starbucks is opening three of them.

Vietnam's entrenched coffee culture means Starbucks is delving deeper into what could be one of its most challenging markets yet. The brew is sold cheaply in the simple cafes that line almost every city street, or in the more sophisticated outlets run by local chains Trung Nguyen and Highland Coffee, in which the Philippines' Jollibee Foods Corp has a stake.

Jeff Hansberry, president of Starbucks China and Asia-Pacific, said on Wednesday Starbucks was seeking growth in Vietnam by offering "meaningful service" with "passion and care".

He, however, side-stepped questions on the company's ambitions for Vietnam, and how exactly it intended to compete. The three Starbucks Hanoi cafes add to the eight that have been open since February 2013 in the economic hub, Ho Chi Minh City.

"We've been thoughtful and careful about our entry into this important market," Hansberry told reporters after a ribbon-cutting ceremony at a Starbucks cafe in downtown Hanoi.

"We intend to grow with this exciting and dynamic economy," he added.

Vietnam's economy, however, has lost some of its edge. Once seen as Asia's next emerging market daring, Vietnam is now mired in bad debt, inefficiency and weak retail spending that rose 12.6 percent in 2013, its slowest growth in four years.

A stream of bankruptcies since 2011 continues, with 18,000 closures and 50,000 businesses suspending trade in the first five months of this year, according to official data.

Many small firms are denied loans, squeezing credit growth at 3.5 percent in the first half of 2014, well short of the central bank's 12-14 percent target for the year.

And while the middle class is expanding, times are hard for most Vietnamese, adding to Starbucks' challenges.

CHEAP COFFEE

Starbucks prices range from 55,000 dong ($2.59) for a black coffee - about half the average daily wage - to 85,000 dong ($4) for an Asian Dolce Latte. These prices are slightly higher, or the same as, offerings from Highland Coffee and Trung Nguyen.

By comparison, the thousands of streetside cafes in Hanoi offer shoe-shines, free Wi-Fi and traditional drip-filtered iced coffee for just 10,000-15,000 dong (47-71 U.S. cents).

For some of these traditional cafes, Starbucks is no rival.

"I don't see this as competition in that way that big fish eat all the small fish," said Nguyen Van Tinh, 54, who runs a streetside coffee shop that grew from the mobile coffee stall his grandfather started in 1926.

Starbucks network - 11 outlets so far in two cities - is also dwarfed by Highland Coffee, which has 50 outlets in five cities, and Trung Nguyen, which claims 13 billion cups of its coffee have been consumed worldwide since its start-up in 1996.

Trung Nguyen, owned by a local businessman, also has outlets outside Vietnam and exports to 60 countries.

Vietnamese consume roughly two million bags of coffee a year and the Southeast Asian nation is the world's second-largest coffee exporter.

On opening day, queues extended out of the door of Hanoi's first Starbucks. Some Vietnamese, however, said they preferred to keep their coffee simple, and cheap.

"Newcomers like Starbucks make the coffee scene more interesting, but I prefer to sit by the street and drink Vietnamese coffee," said Nguyen Duc Minh, a recent university graduate. "These places are down to earth and they really suit my wallet."

(Additional reporting by Nguyen Ha Minh and Ho Binh Minh; Editing by Miral Fahmy)

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