Coffee a complex market to negotiate

Mr. Ashish Kanchan, Managing Director of TNS Vietnam, casts his eye over Vietnam's coffee market.

by Mr. Ashish Kanchan, Managing Director, TNS Vietnam

The recent closure of NYDC, one of the first premium coffee chains set up in Vietnam, has sparked debate about the competitiveness of international brands in the country’s booming premium coffee market. Although the reasons for NYDC’s departure are unclear, there is widespread speculation about the factors contributing to its exit.

Since NYDC’s launch in 2009 there has been a café revolution in Vietnam, with entrepreneurs setting up restaurants almost every 100 meters along popular streets. Global players like Starbucks and McCafé have jumped on the bandwagon together with niche players like Caffé Bene and Angel-in-Us. During this time local players like Trung Nguyen and Phuc Long have successfully identified their niche and aggressively scaled up across Vietnam. This has led to a blurred distinction between premium coffee and popular mass coffee players. In these circumstances, Vietnamese brands have been successful in leveraging their understanding of local knowledge and culture in ensuring success. This, combined with the increase in trust consumers place in Vietnamese brands, bodes well for local brands competing in the premium coffee segment in the future.

But the proliferation of local brands with similar business models will place new pressures on an already saturated market. Knowledge of local customs and culture alone will not ensure success, as factors such as retail costs, price wars, aggressive advertising and changing consumer preferences demand a 360-degree approach to the market.

Competitive pricing is one of the key factors shaping the coffee market. New, local brands have entered the market with mainstream offers that approach the quality and convenience of premium brands at a fraction of the price, luring premium consumers initially loyal to international brands. Lower pricing is also recruiting new consumers, thereby increasing the total size of the category.

Parity in premium coffee pricing has led some brands to launch aggressive price discounts on menu items through promotions such as couponing, thus navigating the fine line between higher turnover and lower margins. Even though these strategies have brought the premium brands closer to the pricing of cheaper, mainstream brands, they run the risk of reducing their premium brand image.

Retail location and rental pricing are two related factors that add further pressure on the margins of premium coffee brands. In their bid for premium status, international brands vie for the best downtown retail locations in an expensive real estate market.

According to Cushman and Wakefield’s “High Streets across the World” report, prime high street rentals in Ho Chi Minh City are the second most expensive in ASEAN, behind Singapore. It also puts the city on par with retail locations in cities such as Rio, Boston, Qatar, Dubai and Lisbon. Some local brands have opted to occupy more fringe locations, often converting smaller shops to suit their needs. Apart from saving on rentals, it keeps the brands close to Ho Chi Minh City’s vibrant street culture and provides reach in areas that are often difficult for premium brands to penetrate.

Local brands have also been successful in integrating Vietnam’s traditional coffee culture with the values and aspirations associated with premium coffee. By fusing premium items such as Lattes and Cappuccinos with local coffee variants, smoothies and juices, brands now offer a wide range of products to consumers. Many local players also infuse their interiors with a mix of modern elements and local character, creating a hip space that appeals to the modern sentiments of the youth without appearing to be copycats of international brands.

The popularity of coffee has grown exponentially in Asia as sophisticated consumers have started to demand more specialist and craft products. According to TNS Qualitative, values such as authenticity, quality and uniqueness have emerged as important drivers of identity for young, restless consumers seeking acceptance in new social contexts both online and offline. The same values that drive the popularity of coffee have also contributed to the rise of other beverages, such as premium tea, smoothies and juices.

The increase in beverage brands has both expanded the category and increased the competition for “share-of-throat”, thus diminishing the hold coffee had on the beverage category as a whole.

Such cut-throat market conditions demand up-to-date insights into customer preferences and a go-to-market flexibility that allows quick innovation and adaptation. This is especially true for the unique character and dynamism of the Vietnamese market. For international brands the learning curve is much steeper, although they maintain the advantage in concept ownership and brand equity.

Despite the complexity of the country, local and international brands have found their niche in a fragmented market in Vietnam. Although volumes will not be the same as during the take-off stage, the size of the market will ensure profitability for a considerable time to come.

Against this backdrop it is difficult to pinpoint the most salient reason for NYDC’s departure from the market. Other factors such as the global life cycle of the brand and international strategy could add other considerations. Whatever the case, all players will agree that Vietnam’s premium coffee market is as complex as it is interesting, and that it demands a holistic approach to marketing and strategy.