Franchising: New Form and New Difficulties

With the Vietnamese economy integrating more deeply into the global economy, in particular with the country’s accession to the World Trade Organisation (WTO), franchising is expected to boom in Vietnam. Many famous and some local brands are planning for a new business model. It is expected that the number of franchising contracts will increase sharply, over 30 per cent per annum.

 

Baker & McKenzie, a world leading company in terms of economic impact evaluation, states with stable politics and young market of 84 million people, many of whom are aged under 30, Vietnam will see franchising as a new business tendency in the future.

The advantage of the business model is low cost. More importantly, Vietnamese enterprises can maintain their market shares before the ‘evasion’ of famous foreign retailers and supermarket chains. At the same time, the model will help local enterprises, which are planning to expand their business to potential markets, such as the US, the EU and Japan. This is also a business model giant groups in the world, in particular in processed food industry, such as KFC, McDonald’s, Loterria and Jollibee have applied.

 

According to the Ministry of Trade, Vietnam has around 70 franchising contracts. KFC has been considered to be a foreign firm which has been most successful with fast-food products in Ho Chi Minh City. Leading US retail group, WalMart, is planning to co-operate with local enterprises in major cities in Vietnam. At the same time, many Singaporean companies are seeking Vietnamese partners for franchising.

 

Over the past years, some strong Vietnamese brands such as Trung Nguyen, Vinashoe, and Kinh Do, have joined and become successful with the business model. Some traditional products of Vietnam, such as handicrafts, textiles and garments, and food can apply the model.

 

The XQ Silk Company has successfully franchised its brand in the US at a price of US$100,000. Pho 24 (Chinese soup 24) has developed 19 restaurants in the north, Central Vietnam and the south, let alone a restaurant in Indonesia. Of the figure, eight restaurants have been franchised. Total investment costs of Pho 24 restaurants in Vietnam is between US$ 50,000 and US$ 60,000, including franchising, restaurant upgrading and decoration costs.

 

Trung Nguyen has become a pioneer in the business model with more than ten years of experience. Apart from an agent in Tokyo, coffee under the brand of Trung Nguyen has been available in Singapore, Bangkok (Thailand) and Cambodia. The enterprise is targeting Shanghai and other coastal cities in China, Australia, Canada, France and the US. In 2001, Trung Nguyen paid US$3 million for a consultancy firm in New Zealand to get assistance from it to become more professional in franchising.

The Kinh Do Company has become the first food company to franchise retail shops with a network of 150 distributors and over 30,000 retail shops nationwide. Representatives from the Kinh Do Company said its franchising aimed to open 100 bakery establishments in the next three years, which would become a foundation for Kinh Do to develop further strongly. 

 

Franchising is a business model which is easy to cause disputes, especially in keeping know-how and profit distribution. The first negative side of the model is a risk of losing prestige of brands, enterprise control and other threats from potential rivals. The more enterprises are involved in the model, the higher a risk of violating intellectual property becomes. Therefore, Trung Nguyen, Kinh Do and Pho 24 are always ready for copyright violation court cases.

 

Observing franchise principles, all Pho 24 restaurants have to observe general regulations on decoration, facilities and cooking procedures. However, recently Nam An has uncovered a franchisee had violated regulations, cutting operation costs by reducing the volume of beef or turning off air-conditioners. As a result, customers have complained about the restaurant’s services.

 

Another risk is brand piracy. Nguyen Tran Quang, brand advisor for Trung Nguyen coffee, said that the company had had 1,000 franchisees in Vietnam and foreign countries but there had been hundreds of pirated Trung Nguyen cafes.

 

Risks in franchise are not very high. As a result, the Ho Chi Minh City-based Hoang Quan Real Estate has been very cautious before offers on franchising the Hoang Quan trademark and real estate business technology transfer.

 

On the other hand, the business model has not been secured by legal documents, which often overlap each other. The Decree 11/2005/ND-CP by the Government has regulations on technology and brand transfer from foreign countries into Vietnam. Accordingly, the Ministry of Science and Technology and departments of science and technology of provinces and cities shall be responsible for certifying technology and brand transfer, according to value and size of contracts. However, the (amended) Trade Law, approved in June 2005, stipulates that the Ministry of Trade is the agency to certify franchising registration. So far, no enterprises have faced disputes due to the regulations of the two documents, but they have worried enterprises which are planning for franchising.

 

As this is a new business model in Vietnam, experts say, it not easy to develop a suitable legal corridor for it. In fact, the draft Trade Law has only one item about franchising with cursory regulations.

 

Lawyer Fred Burke from Baker & McKenzie said that franchisors should be careful with transfer contracts to avoid future disputes. Fred Burke said that franchise contracts should be distinguished with commercial, service supply and technology transfer contracts.