McDonalds Late Entry Into Vietnam

Abstract

The aim of this report is to analyse the strategy of McDonald to the
Vietnam fast food market. This study also evaluates the reason of
the late entry into Vietnam. In the last section, there will be the
details of the challenges and recommendations for McDonalds.

Keywords: late entry, strategy, fast food


1. Introduction

McDonalds Corporation is the biggest American hamburger fast
food chains all over the world, serving nearly 70 million customers
everyday. While the informal eating-out trend was decreasing, their
profit continued to grow. The compelling reasons that make
customers to visit McDonalds in 2012 are the new products like
the Big Mac or McWraps. According to McDonalds 2012 annual
report, earnings per share growth was 5%, global comparable
sales growth was 3.1% and average number of customers served
everyday was 69 million. The Asia/Pacific, Middle East and Africa
(APMEA) segments accounted for 23% of total revenues, in which
China, Japan and Australia contributed to 56% of APMEAs
revenues. In fact, Asia is the potential market for the company that
contributed substantially to its profit in recent years.

1971 became the turning point of McDonalds in Asia when it
opened the first restaurant in Tokyo, Japan. After that, their
restaurants began to spread out over Japan and other Asian
countries. At the moment, China has become one of the most
important market which have nearly 2000 restaurants scattered.
Including the China expansion, McDonalds plans to open 750 new
restaurants and remodel about 475 existing restaurants in its Asia
Pacific, Middle East and Africa market by the end of 2013.

McDonalds is making a late entrance into Vietnam, where has
been the dominant market of many strong rivals like Lotteria, KFC
or Jollibee. Definitely it will bring a new taste of fast food services
to local customers.

1.1. Background note

The early stages of McDonalds date back to 1940, when Dick and
Mac McDonald opened a BBQ restaurant on 14E Street in San
Bernardino, California. It is a distinctive drive-in which had
diversified menu (up to 25) and car hop service. They continued to
run the restaurant for eight years until they closed it for a few
months for alterations. In December 1948, the restaurant reopened
with the reduction in the menu. The big revolution in this year was
the introduction of self-service that helped serve more customers,
enhance speed and cut down hamburgers price.

In 1953, a decision of going into franchising had been made by
Mac and Dick because they thought it was the requirement to
expand the business. The first McDonalds franchise was Neil Fox.
The franchise business then developed stedily from year to year.

In 1954, Ray Kroc a multimixer salesman visited McDonalds in
San Bernardino to persuade Mac and Dick to put his multimixers in
the menu of every restaurants. Fascinating by the McDonalds
operation, Kroc applied for a franchise and determined that his
future would be in hamburgers. Under Ray Krocs supervision,
McDonalds had an incredible improvement. In 1958, 100 million
hamburgers had been sold. In 1959, McDonald celebrated the
100
th
restaurant in Fond Du Lac, Wisconsin. As the result,
McDonalds became the largest fast food chains in the United
States.

1.2. Global Strategy

After obtaining big success in America, McDonalds decided to go
international. In 1967, the first international McDonalds
restaurants opened in Canada and Puerto. England, France,
Germany became their next destinations a few years later. In
1971, McDonalds broke into Asia market by opening the first
restaurant in Tokyo, Japan.

1990s witnessed the magic growth of McDonalds in increasing
outlets and subsidiaries. In 1992, it opened the first African
restaurant in Morocco. By 1998, McDonalds had over 11,000
outlets in 114 countries with global revenues of US$3.21 billion.

In 2002, the McDonald's Corporation recorded the first quarterly
loss of nearly US$345 million in its history. This forced the
company to decide to alter its strategy by closing poor performing
restaurants, changing consumer tastes. As the result, McDonalds
earned profit again. In 2012, McDonalds had totally over 33,000
outlets of which roughly 80% were franchised.

It is clear to see that the secret that leads McDonalds to success
is franchising to local people. This facilitates the operation in
international countries. In addition, the company conducted the
same strategy that had been successful in America for foreign
markets, but with a few alterations in the menu fitting the local
tastes. The additions did not change the core menu of McDonalds
including burger, sandwich, Soda drinks and the most globally
popular product the fries.

Another factor that contributed to the international success was the
think global, act local. For example, in India or Indonesia,
McDonalds did not serve pork. In Japan, the company used the
brand name Makudonaldo because it would be easier to
pronounce for local consumers.







2. McDonalds in Vietnam

2.1. PESTEL Analysis in Vietnam

Political
In 1986, Vietnam introduced Doi Moi (economic
renovation) with the aim to open Vietnam to foreign
investment.
In 2007, Vietnam became the member of WTO.
Many laws have been passed to define the
responsibilities of business firms.

Economic
Vietnam is a rapidly rising power ( Vierra,2010 )
Ranked 3
rd
in average annual GDP growth, just lower
than India and China.
Stable economic growth

Social
There is an increasing Western influences such as
consumerism and globalization to Vietnamese young
generation.
High-speed urbanization.
Vietnamese prefer to buy cheap products.
Vietnamese do not have loyalty to one product.

Technology
Upgrading the local transport network to meet the
criteria of rural industrialization and modernization.
The living standard is improving because of the variety
of services and products on demand.
Vietnamese are familiar with using high-tech
equipment.

Environmental
Vietnam is the country that can be seriously affected by
climate change.
According to World Bank, there is an increase in
exploiting natural resources that made bad effects on
the environment.
Lying in the tropical zone with four seasons and high
humidity.
Vietnam is facing the combination of environmental
problems including air, water and solid waste pollution.

Legal
Vietnam lacks of independent judiciary, it is controlled
by the ruling party (CPV).
The legal system is still weak, inadequate and unstable.
The laws is changing to make convenience for foreign
investors to do business.




2.2. McDonalds SWOT Analysis of Ho Chi Minh city

Strengths
The food sector in Vietnam contributes to a large
proportion of GDP, attracting substantial foreign
investment.
Ho Chi Minh is the largest metropolitan city in Vietnam
with the major population is the youth.
McDonalds has good quality of products and excellent
customer service.
Advantages of learning from competitors failures.
Strong brand name and reputation.
By the end of 2012, the citys GDP per capita was
estimated about US$3700, much more higher compared
to Countrys GDP per capita of US$1750.
Weaknesses
Late entry to Vietnam.
Unhealthy food image that contributes to obesity.
The main product is beef hamburger, not suitable for
Vietnamese peoples tastes, they prefer poultry.
Fees of franchising is still very high.

Opportunities
Ho Chi Minh is favorite destination of tourists.
Rising income levels and changing lifestyles.
Low labor costs in Vietnam.
Increase in demand for fast food in Vietnam.
Vietnamese consumers, especially the youth are lure for
Western products and brands.
Improve health trend among the customers.

Threats
A lot of intensity local and foreign competitors.
Inflation and deficit concerns.
Sector that focus on children have been dominated by
KFC.
Serious health issues.

2.3. McDonalds late entry to Vietnam
It is a fact that McDonalds is very interested in Vietnam market for
a long time ago. Despite of that, there are some reasons that
made the company breaking into Vietnam late:
Partner selection: It is a very challenging task for
McDonalds to figure out suitable and quality partners. The
basic criteria is that the partner must have ability to develop
the franchise competitively, and more importantly, the
financial potential. Moreover, the partner must have
trustworthy and brilliant track record. Finally, after 15 years,
McDonalds chose Henry Nguyen, a famous Vietnamese
businessman, to develop and grow the brand in Vietnam. It
was an excellent choice because Henry Nguyen is also the
son-in-law of Vietnams prime minister, Nguyen Tan Dung.
Supply chain: Another factor that leads to late entry is the
supply chain. Since the quality of local ingredients including
beef, chicken, potatoes do not pass the criteria of
McDonalds, they must import the raw from other countries.
Moreover, there were the extra costs of taxes, storage or
transportation. Therefore, the cost became higher and the
local customers could not afford it.
Real estate: There is a paradox in real estate of Vietnam.
Although the living standard of Vietnamese people is low,
the houses price is very high, especially in Hanoi and Ho
Chi Minh city. This is really a challenge for McDonalds
because when entering a new market, they often do it
quickly. Moreover, the supply of quality location in both cities
is limited. It is very hard for McDonalds to find the good real
estate in the city center where gathering a lot of young
people. In addition, the law of Vietnam does not allow the
foreign companies to buy real estate or land in Vietnam.
Financial: Indeed, there is only a few partners in Vietnam
can bear the franchise fees of McDonalds. Because of its
valuable brand, the original investment expenditure is often
about US$2 million for each restaurant. It is really a big
challenge for the partners of McDonalds.
Low GDP of Vietnam: About 10-15 years ago, the
economic growth of Vietnam was still very low. Not many
people willing to spend US$4-6 for a fast food meal. But at
the moment, it is no longer the obstacle because their
average salaries are increasing steadily and the local people
are familiar with Western fast food.

2.4. Strategy in Vietnam
Expansion strategy
After Ho Chi Minh city, McDonalds will have a plan to expand
to other cities of Vietnam. These regions are often hectic
locations such as shopping center or entertainment places.
McDonalds strategy will also concentrate on the quality of
food, delivery services or the range of menus.

Localisation strategy
Vietnamese customers have loyalty with typical meal with
rice. Besides that, Vietnamese cuisine also has variety of
noodles and cakes. Therefore, McDonalds have to localize its
products such as providing more local food on the menu.

2.5. Competition and Challenges

McDonalds will have to rival fiercely with both local and
international competitors. It is undeniable that KFC (Yum Brands)
is the biggest competitor which has broken into Vietnam for over
15 years. KFC, which has about 80 outlets spreading almost cities
in Vietnam, has a good operation and distribution system.
Moreover, KFCs real estates are often located in the areas that
are the destinations of young people. Their marketing strategies
concentrate on the youth and especially the children.

Besides KFC, Lotteria is also one of the main rivals which have
over 70 restaurants in Vietnam. Their strategy is often contribute a
lot of promotions like discounting the price up to 20%. The
Vietnamese customers are always attracted by these promotions
because they like cheaper price. Furthermore, Lotteria also does a
lot of researches to modified their products suitable with
Vietnamese customers.

Jollibee has just had a closer approach to Vietnamese people
when it bought the brand Pho 24, the biggest Vietnamese noddle
restaurants chain. Combining with other 40 restaurants in Vietnam,
Jollibee saw Vietnam as the fundamental market to grow and earn
profit.

Subway, with 4 restaurants in Ho Chi Minh city by the end of June
2013, intends to expand their business with more restaurants in
the next few years. Its appearance in Vietnam makes the
customers have more options to choose.

With the low entry barriers in the fast food industry, there will also
have a small challenge for McDonalds to take part in the new
market.

Finally, Vietnamese people also have a long tradition of eating on
shops on the pavement because the price is cheap and they can
feel the real atmosphere of the city.

3.0. Recommendations

McDonalds should has a treatment that encourage their
Vietnamese employees to work efficient such as rewarding the
talented staff who boost the profit of the company. Moreover,
McDonalds should use excellent way to select potential
employees because the human resource is the most important
factor.
McDonalds must continue to improve their brand image in
Vietnam by focusing on environmental enhancements and
customers wellness.
Because the consumer taste is altering consecutively,
McDonalds should respond by distributing a range of menus
with appropriate price in order to have advantage on peer fast
food competitors.

4.0. Conclusion

With the first restaurant is going to open in June 2014, McDonalds
is hopeful to earn profit from Vietnam market in the future.
Although McDonalds could face some obstacles, it is believed that
the Vietnamese consumer will approach this brand excitedly. If the
result was successful, this could be the lever for McDonalds to
entry to other Asian countries where the outlook for steady growth
are greater.

















References

Vignali, C. (2001) McDonalds: think global, act local the
marketing mix, British Food Journal, Vol. 103, No. 2, pp.97111
Nguyen and Phan (2007). The food of Vietnam Vietnamese food.
Retrieved from : http://www.guidevietnam.com/travel/vietnamese-
food-cuisine.html