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CHASING THE STARBUCKS DREAM

In 2003, a new player came to Roppongi, the pulsating,


neon-lit nightclub district in the heart of Tokyo, Japan.
The area still boasts its rough edges, with lap dancing
clubs for American military personnel. This is the
 
environment in which a café with humble origins in the
forested highlands of central Vietnam opened on a
prime piece of real estate in 2003. With bamboo posts at the door, rattan flooring and
conical hats for lamp shades, the café, Trung Nguyên (pronounced choom win),
looks like something out of a mythologized vision of colonial Indochina. That a
coffee franchise from a poor, developing country could sprout up in the world’s most
expensive city is testament to the forces of economic transition in Vietnam, to the
sudden, startling arrival of Vietnam on the international coffee scene and to
globalization in general.

Call it Starbucks, Vietnam-style!


In less than six years after it opened its first café in 1996, Trung Nguyên had
expanded to more than 400 franchises. That alone is a significant achievement, for
regulatory and financial barriers have restrained private enterprises in Vietnam.
There are no other franchises, with the exception of
the octopus-like businesses of the People’s Army.
Vietnam is one of the last countries where one still
cannot buy a Big Mac. It is remarkable, then, that a
small firm started by Dang Le Nguyên Vu (herinafter
known as Dang), a medical student, and three other
of his friends from downtrodden Daklak province
could grow so large so quickly. Trung Nguyên has
prospered in a Vietnam that is shifting from a socialist
command system to a hybrid market economy, a
transformation not unlike the evolution of Vietnam’s
giant neighbor to the north, China. Nowhere is it more
obvious than in Vietnam that globalization is not
exactly a new concept.

About Trung Nguyên


In 1996 Trung Nguyên was a small business processing coffee in Ban Me Thuoc city,
Vietnam. At that time, Vietnam had risen once again to be one of the leading coffee
producers in the world, but almost solely producing "green" coffee (unroasted beans)
that were sold on the commodity market. This resulted in no control over the final
coffee quality or prices. The Highland region of Vietnam is one of the world's "top 10'
best environments, combining the right altitudes, soils, natural drying conditions, and
temperatures for producing the finest of gourmet coffees. Yet the region was not
controlling its own destiny to produce these once sought-after coffees.
The owner of Trung Nguyên, Mr. Deng Le Nguyên Vu, then a young medical student
saw that the future for producing gourmet coffee and being reasonably independent
of the world commodity markets was to once again follow the best possible growing
and processing techniques to produce a world-class coffee, and carry it through all
the way to the packaged product. After the revival of this exotic coffee, the company
developed the first Vietnamese franchise of coffee houses and expanded throughout
Vietnam and then a number of other countries. Now the most established, respected
and successful producer of branded coffee in Vietnam, Trung Nguyên (TN) seeks to
bring its unique blends to the United States. The West Coast has TN coffees
available in Asian grocery stores, but most of the US has no source of TN coffees...
until now.

Look Out, Starbucks!


Trung Nguyên’s global ambition moves it from a closed, protected marketplace into a
more competitive environment where it is positioned up against a global brand,
Starbucks, as well as smaller, established coffee chains that operate primarily in
single countries. Starbucks, with all its know-how, marketing genius and vast capital,
had set up a beachhead in Japan in 1996. As of March
2010, the coffee market in Japan is crowded with 877
Starbucks outlets and about 100 outlets of a lesser-known
American competitor, Tully’s. In addition, there are several
established Japanese brand coffeehouses, and two
domestic coffee retailers have opened cafés that mimic the
look and appearance of Starbucks. The coffee retailer
Daitsu paid $50,000 for the franchising rights of Trung
  Nguyên in Japan and will be responsible for up-front
investments of retail space rental, equipment, decor and
employee salaries. This arrangement minimizes Trung Nguyên’s financial risk, but it
surrenders considerable control over brand image to the franchisee.
The company’s international marketing strategy is focused on selling the image of
Vietnam as much as selling Trung Nguyên coffee. Cafés will feature a romantic,
idealized vision of a neo-colonial Vietnam similar to the one foreigners might be
familiar with from such lush films as Indochina or The Quiet American. The coffee
itself differentiates the brand from Starbucks and other coffeehouses; it is a bitter-
tasting brew that can be flavored with the sweetened condensed milk and served
over ice.
Surprisingly, the Japan franchise has priced the coffee 50 percent higher, per cup,
than Starbucks and 25 percent higher than domestic coffeehouses.
Dang is nonchalant in his attitude toward Starbucks. “Starbucks and Trung Nguyên
share some similarities. But we are planning to make our Trung Nguyên coffee
shops with typical Vietnamese features, which reflect our culture, design and service
style”.
In addition to the franchise in Tokyo, Trung Nguyên has opened franchises in
Bangkok and in Singapore. It has targeted Shanghai and other cities along the
eastern seaboard of China, as well as Australia, Canada, France and the United
States. In the latter four countries, Trung Nguyên plans to target the large
Vietnamese émigré communities, a strategy employed by the Philippines’ Jollibee
hamburger chain when it moved to the United States.
Trung Nguyên is therefore serious about meeting Starbucks in the global market, at
least in the Asian region for a start.
In 2003, Trung Nguyên coffee company launched its first instant coffee product,
called G7, in an effort to diversify its production and increase market share at home
and abroad. “We hope to encourage the use of locally processed coffee products
instead of the imported market for a long time, “Đặng Lê Nguyên Vũ, Trung
Nguyên’s general director, said.
The company launch a major marketing campaingn on the new product that year.
“We also want to increase the competitivenness of Vietnamese coffee products on
the world market and promote G7 as a brand name that comes from Việt Nam, the
second largest coffee exporter in the world,” Vũ said.
The company will export its new product primarily to the US and EU and to Japan,
Singapore and Hong Kong, Vũ said.
In an effort to help companies build their brands, Trung Nguyên is offering financial
support to other coffee exporters and farm producers for promotion and marketing.
The company has developed a coffee – growing area in the High – lands province of
Daklak to ensure a stable supply of beans for its instant coffee production and its
new ground – coffee plant, expected to open in the second quarter of 2004.
The company now exports its coffee products in 16 countries, including the US,
Germany and Russia.

The Starbucks Success Story


The results of Starbucks success has been nothing short of robust. Just 25 years
ago, Starbucks operated 17 coffee shops in Seattle. Today, it has nearly 16,700
outlets (as of December, 2009) in more than 50 countries (about 11,000 of them are
outside the United States) (www.starbuck.com, 2010). Its sales have grown 20
percent, on average, every year for the past 10 years, to $8.2 billion in the financial
year ending 2009. Like Trung Nguyên, it nearly has saturated its home market, and
future growth is expected to come from international sales. As Business Week
reported in September 2002: “Cup by cup, Starbucks really is caffeinating the world,
its green-and-white emblem beckoning to consumers on three continents.” Indeed,
Starbucks plans to double the number of its outlets, to more than 30,000, over the
next five years.
Trung Nguyên’s success at home in Vietnam parallels the Starbucks experience in
the United States (except it dominated its home country in just 4 years, while
Starbucks took 15).
The Global Challenge
While both companies face the hurdles of introducing a new
brand, and, in some cases, a new product category to
foreign markets, Starbucks has an established, global
identity, while Trung Nguyên is unknown outside of Vietnam.
This means the two face different levels of marketing needs.
Starbucks spends just $60 million annually on marketing and
advertising (about 1 percent of revenues), compared to the
$500 million spent every year by McDonald’s. Trung Nguyên doesn’t have the
resources to spend on a vast marketing campaign, yet it does not have the brand-
name recognition of Starbucks either. It will have to rely on a word-of-mouth
campaign among émigrés and hope that spreads to a wider audience. Brand
recognition can work both ways, however. Trung Nguyên’s reputation hasn’t suffered
the beating Starbucks has taken as a symbol of a negative side of globalization.
While Starbucks is criticized for profiting off of poor farmers in developing countries,
Trung Nguyên is itself from a developing country and has cultivated relationships
with growers by paying them higher prices than the government-owned exporters.
Both firms face the harsh reality that despite the proliferation of Starbucks around the
world, coffee consumption actually is declining. Also, the fresh, hip appeal of
Starbucks, and by extension, its imitators, has lost its luster among younger
Americans, who identify the coffeehouse with aging baby-boomers.
Even with all of Starbucks’s experience, capital resources and global image,
expansion has not been easy. Over the last two years, Starbucks in Japan had nine
straight months of falling same-store sales. In other markets, such as Great Britain,
where Starbucks operates 510 stores, it faces immediate threats from imitators and
a backlash from local consumers who bristle at consuming coffee from an American
company.

Challenges in Vietnam
Starbucks had long eyed on the Vietnamese market; after all, Vietnamese were well
known in the world to be coffee lovers. Besides, entry into the Vietnamese market
would mean Starbucks has access to one of the world’s finest coffee beans supply.
However, success in Vietnam will be difficult. Many have predicted that Starbucks
will lose out to Trung Nguyên in the home market even before it enters Vietnam.

Conclusion
For Dang, regional dominance is only the beginning. He is already casting his eye
about the whole world. His company is now negotiating with partners in 15 countries,
including the United States, Germany, Taiwan, Russia, Hong Kong, Australia and
Canada, to offer the franchise, he said.
For the time being, Dang plans to stop franchising within Vietnam
and concentrate instead on setting up 30 larger, luxury cafes in
Hanoi and Ho Chi Minh City which he believes would outshine
Starbucks if, as seems inevitable, the coffee giant arrives in his
country. "We see Starbucks as a potential competitor in Vietnam
and we are not afraid of competing with Starbucks," he said.
Love it or hate it, the trend toward globalization is here to stay.
What seems clear is that Vietnam's economy needs more
globalization. Things are booming here. Vietnam
grew 7 percent last year and similar growth is
expected this year. That means Vietnam is Asia's
fastest-growing economy after China. McDonald’s is
set to enter Vietnam by 2012. An identified source
has said that “It's sure that there will be at least one
McDonald's in Saigon by the end of 2012."
Starbucks will be next. The company seems set to
meet Trung Nguyên in Vietnam. But it seems Starbucks will be in for a tough fight if
it were to enter the Vietnam market.

References :
Tim Larimer, MBA ’04, Chasing Starbucks Dreams: Trung Nguyên and its Global
Expansion, Columbia Business School, Columbia University in the City of New York.
Tini Tran (June 24, 2003), Vietnam Peddles Coffee Chic With Trung Nguyên Cafes,
available at http://www.greenspun.com/bboard/q-and-a-fetch-
msg.tcl?msg_id=00AyR7
William Pesek Jr., (December 2, 2003 ), Starblacks, Not Starbucks, Booms in
Vietnam, Bloomberg.com