McDonald’s Struggles with the Vietnamese Local Competitors

Executive Summary

In February 2014, the most famous fast food brand in the world, McDonald’s, officially entered the Vietnamese market. Starting its first location in the biggest city in Vietnam, Ho Chi Minh City, McDonald’s made a great start with thousands of visits by Vietnamese consumers on the grand opening day. However, the biggest chain restaurant leader of the world has struggled with the cross-cultural differences and the local competitors in Vietnam, since the country is strong in fast food. This paper evaluates the impact of cultural differences and consumer concerns on McDonald’s based on the external factors from the general environment and the industry forces. Overall review, the rivalry competition of existing fast food giants and local fast food chains are the most influential forces. The paper analyzes the company based on industry-based views looking at the cross culture and mainly competitors that bring the failure to McDonald’s. There are reccommendations that will be incuded for McDonald’s to increase their chances in the Vietnamese fast food market.

Introduction

McDonald’s, one of the most successful fast food chains not only in its original country and industry but also in the other international markets. The first McDonald’s restaurant was founded in 1940 by Richard and Maurice McDonald, in San Bernardino, California, United States. McDonald’s now has restaurants in more than 120 countries around the world, icluding many small island countries. The company mainly provides iconic burgers, chicken sandwiches, french fries, Chicken McNuggets, etc. ( McDonald’s Annual Report, 2017).

After 17 years of KFC entering the Vietnamese market, McDonald's brought its famous Big Macs to the Vietnamese people. In early 2014, the first McDonald’s restaurant in Vietnam made a great start with thousands of visits by excited and curious Vietnamese customers. The grand opening was impressive with more than 20,000 customers walking in within the first 24 hours. Vietnamese people put their effort to wait for hours in line to try the Big Macs of one of the most famous fast food brands in the world. Although being the latecomer in the Vietnamese fast food market after KFC, Lotteria, and Burger King, among others, McDonald’s takes advantage of the already-created growing market of fast food. Bringing the first drive-through service into Vietnam and providing 24/7 food service, McDonald’s has created its own differentiation. Furthermore, learning from other fast food competitors in Vietnam, McDonald’s provides playing corners for children in its restaurant. In early December 2017, McDonald’s expanded to Hanoi, located at a superior location with two street fronts and facing Hoan Kiem Lake, a famous place with a lot of Vietnamese and foreign tourists.

Vietnam is known for the diversity of fast food and street food in the street vendors and stalls, providing fast service and low price. There are over 7,000 fast-food outlets around Vietnam. These outlets are the traditional Vietnamese fast food such as Pho, banh mi, and bun bo hue, that are cheap, fast, and healthy (Hanoitimes, 2018). In September 2018, many American news sites, such as CBNC, and CNN talked about how McDonald's and other fast food giants like KFC, and Burger King are failing in the Vietnamese market. Specifically, it has been more than four years since McDonald's debut in Vietnam but they have only opened 17 stores nationwide, which is very low compared to the overwhelming numbers in other countries. The remaining fast food chains cannot avoid the same fate. McDonald’s, the name is still unfamiliar to the Vietnamese people, and the cross-cultural difference seems to be one of the reasons that Mc Donalds cannot do better business. The local Vietnamese people acknowledge foreign fast-food chains are places to meet friends and families, experience a treat, rather than to dine out. McDonald’s strategy is to target the middle class and the youth in Vietnam, seemed to be superior at its first start in the market. The company entered the market with a high price and high-quality food to create differentiation and keen perception. However, Vietnam is the country where the living standard is still low, and people enjoy the local fast food. Therefore, the pricing strategy and cross-cultural differences are significant issues that McDonald should pay attention to for long term development. This paper reviews the external factors that influence the company, briefly analyze main competitors in the Vietnamese market based on the resource-based view. The paper also evaluates the differences in the Vietnamese culture and includes some recommendations for the future development of McDonald's.

Five Forces

Threat of Barrier to Entry

The threats of potential entrants to the Vietnamese fast food industry is low due to the high barrier of entry to the industry. In Vietnam, there are already some incumbents such as McDonald’s, KFC, Burger King, and Lotteria. According to CNBC, the two giants McDonald’s and Burger King are now struggling with the Vietnamese local competitors. Therefore, it is difficult for the new entrants to enter the Vietnamese fast food industry since there is the availability of the largest fast food chains such as McDonald and a large number of local competitors. The new entrants would have to establish many outlets in Vietnam to become a strong competitor to McDonald’s and the local fast food stalls/kiosks. It will require a massive capital investment, time and should instantly create economies of scales to become profitable and successful.

Threat of Subtitutes

Recently, traditional Vietnamese fast food is also developing and favored by the taste, meeting the nutritional standards but the price is more reasonable than foreigner fast food. The more critical reason is Vietnamese food still has a particular foothold in the market because it is to the taste of Vietnamese people. With the characteristic 'delicious and healthy' taste that is utterly different from the fat of the dishes of foreign fast food, it remains a staple. There are substitutes of small meals from other fast food restaurants such as KFC, Pizza Hut, bakeries, and home-cooked meals. Vietnamese people’s eating habits are eating at home or going out to eat at the local traditional Vietnamese fast-food stalls/kiosks. There is a large number of regular Vietnamese fast food served in small restaurants and vendors on the street. Therefore, the threat of substitutes is a strong force against McDonald’s.

Intensity of Rivalry Among Competitors in an Industry

In the Vietnamese fast food industry, the intensity of rivalry among the competitors is high. Before the opening of McDonald’s in Vietnam, there was a competition between giants: KFC, Burger King, Lotteria, Jollibee, etc. These competitors compete not only in price, the quality of food and the variety of dishes in the menu but also in the delivery services and other promotional campaigns. Vietnamese customers choose KFC and Lotteria because of the old brand names. Vietnamese people are familiar with these names since these chains have appeared in the Vietnamese market for a long time before McDonald’s. Therefore, McDonald’s is still unfamiliar to the other two chains in Vietnam. Vietnam is known for a large number of fast-food outlets and food vendors/kiosks. There are over 540,000 outlets of the foodservice sector; over 430,000 are local food vendors and kiosks which serve a variety of traditional Vietnamese food such as Pho, banh mi, and bun bo hue and many more (Hanoitimes, 2018).

The Bargaining Power of Suppliers

In the fast food industry, having a continuous raw material is essential because there is a high demand for a large number of the consumers. The bargaining power of suppliers in Vietnam for McDonald’s is low, because the suppliers of raw materials for fastfood chains in Vietnam are mainly small suppliers and farmers. The number of these suppliers is large but they do not have connection in trading with the fastfood companies. Vietnam is an agricultural country, therfore, farming and animal husbandry are the two main sectors of development in Vietnam. This has created a huge advantage for McDonald's because it is possible to use indigenous raw materials and proactively while reducing costs. This is a great advantage for the development of fastfood industry in Vietnam.

The Bargaining Power of the Buyer

The buyer power in the Vietnamese market is high for McDonald’s. Customers are a significant competitive pressure that can greatly and directly affect the business operations of all industries, including the fast food industry. In the Vietnamese market, McDonald’s targets mainly the young, high-income customers. They are willing to pay a higher amount of money to have a good and quality meal. However, the level of quality requirements and food safety are increasing strictly. The Vietnamese people can be aware of the diseases caused by fast food such as dyslipidemia and obesity, and customers will choose other alternatives. Moreover, Vietnamese people have diversity and different tastes from the North to Central to the South, but the people do not like the taste of fat. Unfortunately, fat is the main flavor of fast food companies, including McDonald’s.

Another factor that increases the power of the buyer is the eating habit of Vietnamese people. In Vietnam, the eating habit of people is to cook and eat at home. They can buy ingredients and cook at home with an equal or lower amount of money to serve themselves at home. In general, the bargaining power of the buyer is a strong force to McDonald’s.

Culture Differences

There is an invisible war and competition between the modern fast food chains and hundreds of thousands of local fast food stall in Vietnam. The local fast food chains have one advantage that they can meet the strict requirement of local Vietnamese on traditional taste. Therefore, it is difficult for foreign fast food chains to adjust concepts and ideas to suit the culture of Vietnam, while the local brands can satisfy the local people’s habit of eating. ( Wang, Tran,& Nguyen, 2014)

After 1,000 years of Chinese domination, Vietnam adopted culinary concepts and techniques from the Chinese such as stir-frying, deep frying and the use of chopsticks. Vietnam’s food culture has been innovated since the Mongol invasion. The Vietnamese enhanced their taste with many culture dishes and specialties such as Pho (beef and noodle soup) and thit bo bay mon (“Seven Dishes Beef”) and adopted the technique of cooking meat on a “Mongolian hot pot,” or lau ( McLeod & Nguyen, 2001). Vietnamese people’s eating habit is eating three meals a day: light breakfast, lunch, and dinner. Differentiating from the West, where everyone has their own meals and are completely independent of each other. The Vietnamese people are the opposite, and they love to talk during meals, contrary to Westerners avoiding talking when eating. Talking while eating is an essential need of the Vietnamese because it is the opportunity for them to share about life, business experience and discuss their favorite topics with brothers, relatives, and friends. In the culinary culture of Americans, people are individualistic and have non-shared meals. For Vietnamese culinary culture, Vietnamese people usually want to share food, while McDonald's burger and dishes are not something to share.

In Vietnamese cuisine, rice is the staple and essential in every meal. Having rice with other dishes is the everyday meal in most Vietnamese family. Meanwhile, local Vietnamese fast food can be the substitute for the traditional meals. Foreign fast food is not suitable for the taste of most Vietnamese people. Vietnamese food is rich, varied and delicious. In Asia, Vietnam is known for the kingdom of fast food with noodles and banh mi stalls/kiosks. Saigon, the largest urban area in Vietnam, has thousands of places selling traditional breakfast dishes, sticky rice, banh mi, banh gio, etc. are the true local fast food. It can be said that food vendor/kiosks on the sidewalk and the street have created the Vietnamese fast food culture. Therefore, the differences in food culture has brought many problems to McDonald’s. Besides that, the local Vietnamese fast food market is extremely competitive for McDonald’s to develop in Vietnam.

Price Strategy

In Vietnam, banh mi, which is not much different and no less delicious than fast food products, while the price is extremely low compared to the price of McDonald’s burger. For e.g. a popular local street food in Vietnam is banh mi, which is bread and meat, cooked with spices and vegetables, and sold in roadside kiosks across the country for around 50 cents.

Obviously, why spend more than 40k for a 'industrial' burger while also having the same amount, can we eat a bowl of pho with meat at a regular stall? Compare between a dry burger and a home-made noodle bowl, not to say which option is more appealing. But there is one thing that any of us should appreciate: only in the territory of Vietnam can I eat the bowl of pho very 'authentic' at a reasonable price. As for international friends, who have to fall in love with this 'national spirit', they may have to pay a double price in exchange for a bowl of pho with only 50% being the same as orthodox pho. This is a privilege that only we can enjoy, so we must respect it!