DSpace at VNU: The franchising road to integration and sustainable development: the role of Vietnam''sfranchise law

THE FRANCHISING ROAD TO INTEGRATION
AND SUSTAINABLE DEVELOPMENT:
THE ROLE OF VIETNAM’S FRANCHISE LAW
Nguyen Ba Birth *
Andrew Terry *

1. Franchising and Sustainable Development
Franchising
Franchising is, in the words of the Australian House o f Representatives
Standing Committee on Industry, Science and Technology, "an increasingly popular
form o f economic organisation providing an alternative means o f expanding an
existing business or an alternative means o f entering an industry"1. It is a method o f
business operation, which has revolutionised the distribution o f goods and services
in virtually all industry sectors and has transformed the business landscape o f most
countries2.
Franchising has been explained as a form o f economic organisation in which:
...the franchisor, holding property rights over a marketing system, business
service or product (identified by a brand name or trademark) enters a contract or
agreement with the franchisee and grants, under certain conditions, the right to use a
business brand name or trademark and the right to produce or distribute the
franchisor’s product or service3.
It originated in the mid nineteenth century as a form o f exclusive branded
distributorship agreements - today known as product and trade name franchising characterised by an independent sales relationship between supplier and dealer in
which franchised dealers concentrate on one company’s product line and to some

!. ibid.
2. Andrew Terry and Nguyen Ba Binh, 'Vietnam's New Regulatory Regime for Franchising'
(2009) LawAsia Journal 82.
3. The I louse o f Representatives Standing Committee on industry, above n 1.
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extent identify their business with that o f the supplier1. This form o f franchising
includes product franchising in which the franchisee has the role as a distributor,
either wholesaler or retailer, for a specific product and processing or manufacturing
franchising in which the franchisor grants an essential ingredient or know-how to
the franchisee. However, the significant development and innovation in franchising
occurred a century later, in the 1950s, when the current iteration o f franchising business fo rm a t franchising - evolved. While product and trade nam e franchising is
a relatively unsophisticated form o f franchising essentially comprising branded
distribution arrangements, business format franchising - the major contemporary
form o f franchising - is a sophisticated business relationship. In a business format
franchise, the franchisor provides the franchisee with not only a branded product
and/or service but also an entire business model - an overall image and a method o f
doing business in accordance with a proven business system, and operational and
managerial systems supported by standards, training and ongoing assistance2.
Business format franchising is a "symbiotic relationship in which the needs o f
the franchisor and the franchisee blend in a commercial marriage o f convenience"3
which merges "the seemingly conflicting interests o f existing businesses with those
o f aspiring entrepreneurs in a single process that promotes business expansion,
entrepreneurial opportunity and shared cost and risk"4. The franchisor benefits from
rapid expansion o f its system without having to directly invest in and manage to
outlets, which are financed and managed by the franchisee, and from ongoing
franchise fees and, in many systems, income from product sales and service
supplies. The franchisee benefits from the goodwill in the brand, and from the
provision o f a complete business system including initial and ongoing training and
support, marketing, and economies o f scale5 - factors which can deliver higher
profit margins, lower failure rates, easier entry into the market place, and lower
capital requirements.

1. Andrew Terry and Des Giugni, 'Franchising' in A ndrew Terry and Des Giugni (eds),
Business and the Law (Cengage Learning, 5 ed, 2 0 0 9 ) , p. 401 .
2. Andrew Terry, 'Business Format Franchising: The Cloning o f A ustralian Business' in
Business Format Franchising in Australia (Robert Burton Printer Pty. Ltd., 1991), p. 3.
3. Terry and Giugni, above n 5, p. 398.
4. US House o f Representatives Committee on Small Business, 'Franchising in the u s
Economy: Prospects and Problems' (1990), p. 13.
5. Andrew Terry, 'Small Business, Service Exports and the Role o f Business Format
Franchising' (Paper presented at the Asia Pacific International Business: Regional
Integration and Global Competitiveness, Perth, Western Australia, June 20-23,1995).
40 4


THE FRANCHISING ROAD TO INTEGRATION.

F ranchising in Developing Countries
Franchising has proved to be "a viable method o f distributing goods and
services which can have a positive influence on economic developm ent"1. The 1997
Consultative Survey on Franchising in the APEC Member Economies stated that:
By supporting and encouraging the development o f business format
franchising, APEC governments can help the growth o f small and medium
enterprise. The franchising track record is full o f examples o f small businesses that
grow and in turn foster other small businesses .
Franchising is a particularly effective tool for economic development and
international integration in developing countries3 and is a proven strategy for SME
development. It may be the most effective method for developing countries to build
a services oriented economy4. Through the international expansion o f foreign
franchise systems, developing countries are introduced not only to new products,
services and technologies but also to training, business advice and operational and
managerial experience in relation to those systems. Foreign franchisors provide

franchisees not only with system know-how but also with a range o f management
skills. The most enduring legacy of the expansion of international franchise systems

to developing countries is nevertheless the development o f domestic franchise
sectors. The international systems stimulate entrepreneurial activity and are the
catalyst for the development of domestic franchise systems not only for the benefit
o f local entrepreneurs and their franchisees but also for consumers and society
generally5. For these reasons, franchising is a particularly attractive business
strategy in developing countries.
While franchising faces increasing saturation in developed countries o f North
America (the u s and Canada) and Western Europe (particularly Germany and the

1. Martin M endelsohn, The Guide to Franchising (Cassell, 5th cd, 1992).
2. Asia Pacific Econom ic Cooperation, 'Consultative Survey on Franchising in APEC Member

Economies' (1997).
3. IIan Alon, 'Global Franchising and Development in Emerging and Transitioning Markets'
(2 0 0 4 ) 24

Journal o f Macromarketing 156.

4. Nguyen Ba Binh and Andrew Terry, 'Franchising in Developing Countries' (Paper presented
at the 2012 SIBR Conference on Interdisciplinary Business & Fxonomics Research,
Bangkok, Thailand, 7-9 June 2012).
5. Andrew Terry, 'A Comparative Analysis o f Franchise Regulation in the Asia-Pacific Region'
(Paper presented at the LAWAS1A Conference, Christchurch, N ew Zealand, 4-8 October,
2 0 0 1 ).

405

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UK), it is still relatively untapped in developing countries'. With four fifths o f the
w orld’s population and three fifths o f the w orld’s natural resources2, the developing
countries are attractive destinations for foreign franchisors. The u s Department o f
Commerce has recently estimated that the developing countries will account for
over three quarters o f the w orld’s expected trade growth in the next two decades3.
While franchising is an invention o f western capitalism which increasingly
dominates the market places o f North America and W estern Europe, its most
exciting future is likely to be in the developing countries o f Asia where its business
development potential is already having great influence. China is a good example.
Franchising was introduced to China only in the late 1980s, yet China today is the
world’s most franchised country with respect to the num ber o f franchise systems
with over 4,000 systems4 by the end o f 20095.
Franchising in Vietnam
Franchising is a relatively new butsteadily developing strategy in Vietnam,
which is one o f the w orld’s newest franchise countries. At the time when
franchising was becoming popular in many developed countries, Vietnam was at
war. The Anti-French w ar started in 1945 only a few days after the establishment o f
the Democratic Republic o f Vietnam (today the Socialist Republic o f Vietnam) and
ended in 1954. The Anti-American war started in 1954 and ended in 1975 when the
Socialist Republic o f Vietnam was reunited. Franchising could not develop in this

l.I la n Alon and D ianne H .B . W elsh, 'G lobal Franchising in E m erging and T ransitioning

Economies' (2002) 2(1) International Journal o f Business and Economics 332; Dianne H.B.
W elsh, Ilan A lon and C ecilia M . Falbe, 'An E xam ination o f International Retail Franchising

in Emerging M arkets' (2006) 44(1) Journal o f Small Business Management 130; Olafemi

A yopo O lotu, 'R einventing B usiness G row th through Franchising in D eveloping E conom ies:

A Study of the Nigerian Fast Food Sector' (2011) 3(1) International Journal o f Marketing
Studies 162.
2. Man Alon, Dianne H.B. Welsh and Cecilia M. Falbe, 'Franchising in Emerging Markets' in

Ilan Alon (ed), Franchising Globally (Palgrave Macmillan, 2010) 11.
3. ibid.
4. This is the num ber o f systems recorded by the China Chain-Storc and Franchising
Association (CCFA), but the number of franchise systems officially registered with C hina’s
Ministry o f Commerce is significantly less.
5. Zhiqiong June Wang, The Impact o f China's Regulatory Regime on Foreign Franchisor's
Entry and Expansion Strategies (PhD Thesis, The University o f New South Wales, 2010), p.

4; Yun Zhang, The Information Imbalance in the Franchising Relationship: a Best Practice
Model fo r Prior Disclosure and an Evaluation o f China's Regulatory Regime (PhD Thesis,
the University o f New South Wales, 2011), p. 336,
406


THE FRANCHISING ROAD TO INTEGRATION.

environment, nor in the closed, subsidised, bureaucratic, and centrally planned
economy which existed following reunification and in which private enterprise had
no place. The introduction o f the Doi Moi policy in 1986, which moved Vietnam to
a socialist oriented market economy and opened the door to the outside world
including western countries, led to an economic environment in which franchising
could operate.
Franchising did not appear in Vietnam until the mid-1990s when the business
environment became more attractive to foreign investors because o f many economic

and legal reforms and its deeper international integration, particularly after the
lifting o f the u s commercial embargo in 1994. As in most countries, franchising
first appeared in Vietnam through the expansion o f foreign franchisors. The pioneer
franchisors, including Jollibee (from the Philippines), Lotteria (from South Korea)
and KFC (from the US), came to Vietnam in the period 1996-1997. However, in the
first 10 years following the introduction of franchising, there were only 23 franchise
systems which, with few exceptions, owned and operated their outlets rather than
franchised them. Franchising has nevertheless experienced steady development
since 2006 when Vietnam introduced dedicated franchise regulations which for the
first time recognised franchising as a discrete business method. In the five years
following the introduction o f Vietnam’s Franchise Law, the num ber o f franchise
systems increased over fourfold, from 23 to 96.
Although the size o f franchising sector in Vietnam is still limited, and most
system outlets are owned and operated by franchisors, Vietnam is a promising
franchise market. A high and stable GDP growth rate (at around eight percent in
recent years)1, a highly literate and young population, political stability, wide
international integration, and extensive legal reforms driven by WTO accession
commitments - in particular the introduction o f a dedicated franchise law - has made
Vietnam an attractive country for franchising. In the words o f the General Director
o f KFC Vietnam, "Vietnam is not only a promising market for fast food but also for
franchising in other areas"2.

1. Although V ietnam ’s economy was also affected by the global financial crisis in 2007, the
country weathered the storm well with 5.32 percent growth in 2009, 6.78 percent growth in
2010, and 5.89 percent growth in 2 0 Ỉ 1 (Source: Vietnam’s General Statistics Office [Tong
cuc thong ke Viet Nam]). See generally McKinsey, 'Growing up Fast: Vietnam Discovers
the Consumer Society' (2010)
< up_fast_
Vietnam discovers the consumer societyJ>655>, last accessed 20 June 2012.

2. Bao Vietnamnet [Vietnamnet Newspaper), 'KFC Exec Speaks on the Growth o f Fried Chicken'
(2006) < last accessed 30 June 2010.
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2. The Need for a Franchise-Specific Law
Although the D oi M oi reforms led to a market environm ent in which
franchising could operate, the development o f the franchise sector was constrained
by the lack o f a clear legal framework. Until the introduction o f the new regulatory
regime, franchising was not recognised as a discrete business relationship and, in a
country where the general rule is that anything not being specifically permitted is
not allowed1, franchise development was not practicable. As explained by Vision
and Associates, a Vietnamese law firm specialising in franchising, "without a legal
frame o f reference Vietnamese authorities simply consider a franchise agreement as
a trademark licence, technology transfer contract, and/or service agreement. Such
agreements will therefore be subject to different regulations under current
Vietnamese law"2. Instead o f entering the sector through a franchise agreement, an
intending franchisor generally entered through one or several other contracts which
was like "hammering a square peg into a round hole"3 discouraging both potential
domestic and foreign franchisors. These problems drew attention to the urgent need
to enact a franchise-specific law for Vietnam as a necessary prerequisite for the
development o f a Vietnamese franchise sector.
Accompanying this pressure was the fact that Vietnam, as part o f its
preparatory steps for WTO accession, faced the urgent need to m odernise its laws to
provide a legal framework more consistent with international practice and more
favourable for business. These factors led to a dedicated franchise regulation being
introduced as a part o f the new 2005 Commercial Law, which replaced the 1997
Commercial Law. The necessity for the new 2005 Com m ercial Law was

acknowledged by the Government:
Many new commercial activities have just appeared or been favoured by
businesses, however, there has not yet specific regulations on them whereas general
regulations under the 1997 Commercial Law could not be applied to them (for
example, franchising and sale o f goods through good exchange)4.

1. ibid.
2. Vision & Associate, 'Laws For Franchising Scattered A m ongst Many Decrees', Vietnam
Investment Review 8 December 2003 < /com s2/gi_0199-615163/
Laws-for-franchising-scattered-amongst.html>, last accessed 20 A ugust 2010.
3. Giles Cooper, 'Chalk Needed to Outline Franchising Fields o f Play' (2007) vir.com. vn/news/features/chalk-needed-to-outline-franchising-fields-of-play.htm l>.
4. Chinh phu Viet Nam [Vietnam's Government], 'To trinh ve Du an Luat Thuong mai (Sua

doi) [The Report of the Project of Amending the Commercial Law]' (October 2004), p. 1.
408


THE FRANCHISING ROAD TO INTEGRATION...

The introduction of Vietnam’s Franchise Law - the first clement o f which was
the inclusion o f a Chapter in the 2005 Commercial Law - was a response to the
practical requirement for a d e ar legal framework for the development o f
franchising. This was acknowledged by the Government when submitting the eighth
draft o f the 2005 Commercial Law to the Parliament1. Although there is not any
statement o f purpose, in the proposal document2 for the 2005 Commercial Law, the
Government acknowledged that the introduction of dedicated franchise regulations
was to encourage the development of franchising and to ensure legal rights and
obligations o f parties in franchise relationships ’.
3. V ietn am ’s Franchise Law

V ietnam ’s Franchise Law provides a clear and dedicated legal framework for
franchising in Vietnam. It comprises four components - the 2005 Commercial Law
providing a framework for regulating the franchise relationship; the 2006 Decree
Making D etailed Provisions fo r the Implementation o f the Commercial Law with
Respect to Franchising Activities’, a Ministry of Industry and Trade Circular
Providing Guidelines on Procedures fo r Registration o f Franchising Activities; and
a Minister o f Finance Decision Providing the Regime fo r the Collection and
Payment, Management and Use o f Charges fo r Commercial Franchising
Registration addressing registration and prior disclosure which are key features o f
the regulatory regime. Recently, some articles in Decree 5.5 have been amended by
Decree 120 (in 2011) of the Government Amending and Supplementing
Administrative Procedures Stipulated in a number o f Decrees o f the Government
Detailing the Implementation o f the Commercial Law.
Vietnam is one o f over 30 countries which have introduced a franchisespecific law to supplement the underlying commercial laws. The Franchise Law
adopts an increasingly familiar regulatory model. It stipulates comprehensive
franchisor prior disclosure with moderate relationship obligations. A "light touch"
registration regime, which was included in the Franchise Law was virtually
removed by Decree 120 in 2012, being retained onlv for international franchisors
franchising into Vietnam4.

1 . ibid, p. 6.
2. This is the document explaining the rationale for the introduction o f the law and the main
issues addressed in it.
3. Chinh phu Viet Nam IVietnam's Government], above n 4, pp. 16-17.
4. However, the annual report o f franchisors is still required to support data collection.
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Prior disclosure - which addresses the information imbalance inherent in the
typical franchise relationship - is generally considered as the key to franchise
regulation. Consistent with international best practice, Vietnam also uses prior
disclosure as its central regulatory tool. The prior disclosure provisions are broadly
similar to the requirements o f those countries which adopt a comprehensive
disclosure regime including the u s , Australia, China, M alaysia, and also
UNIDROIT’s M odel Franchise Disclosure Law.
Relationship/conduct issues arising from the power imbalance are also
addressed in Vietnam ’s Franchise Law, particularly through imposing moderate
restrictions on the rights and obligations o f the parties in the franchise relationship.
Vietnam, like many regulated countries, provides restrictions on unilateral
termination by the franchisor and follows the common form ula o f allowing
termination only on prescribed termination events and the giving o f a default notice
and the opportunity for the franchisee to remedy its breach. Vietnam also mandates
several rights and obligations o f both franchisors and franchisees.
Vietnam’s Franchise Law generally subjects both foreign and domestic
franchisors to the same regulatory regim e1 which is consistent with, and indeed
required by2, international best practice. Previous restrictions as to business forms
and the extent o f foreign capital ownership in foreign invested enterprises involving
franchising have been lifted as consequence o f Vietnam ’s W TO accession
commitments.
Vietnam’s regulatory regime for franchising is broadly consistent with
international best practice. It is, in the words o f Baker and M cKenzie lawyer Giles
Cooper, "modem and well-drafted, and balances commercial freedom and
protection o f franchisees"3. Cooper further states that "new specific domestic
legislation and recent W TO commitments on franchising have laid the groundwork
for a likely explosion in activity in this dynamic sector"'1. However, the gaps in the
protection provided for franchisees, and the ambiguity o f several provisions, are
issues o f concern for both franchisors and franchisees. The lack o f unification and

1. However, under Decree 120 (in 2011) the registration obligation remains only for foreign
franchisors which raises a concern as to a unified regim e for both dom estic and foreign
franchisors and seems inconsistent with Vietnam’s WTO accession com mitment.
2. Vietnam ’s WTO accession commitments,
3. Vietnam Investment Review, ’Franchise Operations Face Serious Challenges'
vir.com.vn/Client/VIR/index.asp?url=content.asp& doc=12077>.
4. ibid.
4 10



THE FRANCHISING ROAD TO INTEGRATION.

synchronicity o f provisions between the Franchise Law and underlying commercial
regulations is a particular concern. The governing Commercial Law unfortunately
makes certain o f the franchisor’s obligations subject to the proviso "unless
otherwise agreed" (article 287) which contradicts the mandatory regime o f Decree
J5 and Circular 09. Although in practice implementing regulations are treated as
having higher validity than the source document, this approach is not consistent
with Vietnam’s transition to a law-based State.
4. The Development and Contribution of Franchising in Vietnam
Steady Increase o f Franchise Systems and Outlets
With the introduction o f a dedicated Franchise Law, a clear legal framework
for franchising has fostered the development o f franchising. In the seven years since
the introduction o f the Franchise Law, there has been a significant increase in the
number o f franchise systems in Vietnam, including many famous brands from abroad.
Research conducted by the authors suggests that Vietnam currently has around 116
franchise systems, comprising 96 foreign franchisors and 20 domestic franchisors. The
franchise systems which existed before 2006 including KFC, Jollibee, Lotteria, and

Pho 24, have experienced strong development over this period.
Although in comparison with other countries such as the u s , Australia, and
China the size o f franchise scctor in Vietnam is still small, it has been developing
steadily since 2006. In seven years after the introduction o f the Franchise Law,
from 2006 to 2012, the number of franchise systems has increased over fivefold
from 23 to 116 as illustrated in the following chart.
Figure 1: Number of Franchise Systems in Vietnam
140

115

120

91
'Ề

116

100
80
60

5

40

JO

I

20

32

II
23

Before

2006

2007

2008

2009

2010

2011

A u g -12

2006
Year

411


VIỆT NAM HỌC - KỶ YÉU HỘI THẢO QUỐC TẾ LẰN THỬ TƯ

The statistics in Figure 2 also show that there has been a significant expansion
o f foreign franchisors since the commencement o f the Franchise Law - from 13
foreign franchise systems in 2005 to 96 in August 2012. The annual rate o f system
growth has been around 50 percent until the last three years when the effect o f the
global financial crisis impacted on system growth.
Figure 2: Num ber o f Foreign Franchise System s in Vietnam

Before
2006

2006

2007

2008

2009

20 1 0

2011

Aug-12

Y ear

Although not increasing as rapidly as foreign franchisors, dom estic franchisors
have gradually increased from 10 franchise systems in 2005 to 20 franchise systems
in August 2012 (see Figure 3). While this is not a significant increase it must be

noted that 95 percent o f Vietnam’s businesses’ are SMEs with little business
experience and a lack o f franchising knowledge. These factors have impacted on the
development o f franchising in the SME sector. However, a num ber o f local
companies - including such well-known local brands as Vissan Lim ited Company
(Vissan), Agrex Saigon Foodstuffs Joint-Stock Company (Agrex), and Hanoi Trade
Corporation (Hapro) - are reportedly considering franchising as the best strategy to
expand their systems in Vietnam and abroad2. M oreover, several o f the current local

1. Ngoc Chau, '80% Doanh nghiep nho va vua dang kho khan [80 Percent o f Vietnam's Small
and Medium Businesses are M eeting with Serious Problem s]' (2008) < />GL/Kinh doanh/Kinh-nghiem/2008/10/3BA07504/>.
2. Phan Anh, 'Nhuong quyen thuong mai la CO hoi kinh doanh thoi khung hoang [Franchising
is the Opportunity in the Time o f Economic Crisis]' (2009)
com/index.php?M odule=Contcnt&Action:=view&id=279&Itemid=73>, last acccsscd 12 July
2012.

412


THE FRANCHISING ROAD TO INTEGRATION.

franchisors have expanded overseas including Trung Nguyen Coffee, Pho 24, AQ
Silk, and Foci. With its first overseas outlet in Japan in 2001, Trung Nguyen Coffee
is n o w o p e ra tin g in m an y o th e r co u n tries in c lu d in g T h a ila n d , Cambodia, Singapore,
Malaysia, China, Ukraine, Poland, Germany, and the u s . Pho 24 currently has 10
outlets overseas in Cambodia, the Philippines, Indonesia, Singapore, South Korea,
and Australia.
Figure 3: N um ber of Domestic F ranchise Systems in V ietnam

8

JC

25

Before

2006

2007

2008

2009

2010

20 11 Aug-12

2005
Year

In addition to the increase in the number o f franchise systems, the rate o f
franchise outlet development is also steadily increasing. Franchise system outlet
numbers increased from 700 in 2007 to 890 in June 20081. This can be seen very
dearly in the outlet development of some franchisors. For example, in the decade to
2005, the num ber o f outlets o f Jollibee, Lotteria, and KFC increased to only four,
nine, and 14, respectively. However, by 2009, four years after the introduction o f
the Franchise Law, the numbers of outlets in these systems had increased to 10, 80,
and 80 respectively. Pho 24 and Trung Nguyen Coffee, two o f the most prominent
and successful domestic systems expanding through franchising, currently have

about 90 outlets and over 1000 outlets, respectively. Both have also expanded
overseas. After a decade o f franchising, Ninomaxx and Foci, two domestic fashion
brands, by 2010 had 50 and 33 outlets, respectively. A cake store chain, Kinh Do
Bakery, a tea restaurant, Hoa huong duong (Sunflowers); and a cane-juice restaurant,

L Thu I lien, 'Kinh doanh nhuong quyen thuong mai tai Viet Nam se tang 35% [The Sales
Growth o f Franchising in Vietnam will Increase to 35%]' (2009)
< />2009091007281011cat 119/kinh-doanh-nhiiong-quyen-thuong-mai-tai-viet-nam-se-tang35.htm>, last accessed 30 July 2012.
413


VIỆT NAM HỌC - KỶ YÉU HỘI THẢO QUỐC TÉ LẦN THỬ TƯ

Nuoc mia sieu sach, each commenced franchising in the year o f enactment o f the
Franchise Law and by 2010 had 32, 40, and 28 outlets, respectively. A survey o f 240
franchisees in fast food, beverage, confectionary, retail store, electronics, fashion,
medicine, and mobile phone sectors conducted in 2009, found that 75 percent o f the
franchisees had been operating since 20061.
Although most franchising system outlets in Vietnam are still owned and
operated by franchisors, there is a clear trend to system expansion through
franchising outlets since the introduction o f the Franchise Law. Since 2006, many
foreign franchisors have chosen master franchising or direct franchising to access
the Vietnam market including Cartridge World, Gloria J e a n ’s Coffees, Chocolate
Graphics (from Australia); Dream Cones (from France); Daiso, Hachi Hachi, and
Sarku (from Japan); Big c (from Thailand); Debenhams (from the UK); and
Sandler Systems Inc, H ard Rock Coffee, CBTL Franchising, Carl Karcher
Enterprises, Cold Stone Creamery, and B u d ’s Ice Cream (from the US).
Substantial Sales Growth and Spread o f Franchising over D ifferent Sectors
The sales growth o f the franchise sector has substantially increased over recent
years - from u s $ 1.5m (1996) to u s $ 9m (2005), and is estimated to reach u s $

36.68m in 2 0 102. According to Euromonitor, the revenue growth rate o f the fast
food sector in Vietnam - the most popular sector for franchising - was always over
13 percent annually during the period 2005-2010 (from VND 3,338 billion, about
u s$ 180 million, in 2005 to VND 7,126 billion, about u s $ 383 m illion in 2010)3.
In the fast food sector, the three franchisor pioneers KFC, Lotteria, and Jollibee
have more than 70 percent market share. The growth rate o f Loiteria was 38 percent
in 2009 and the average revenue o f each o f its outlet was VND 700m (US$ 40,000)
per month4. On 22 June 2006, consumers queued for the opening o f K F C ’s first
outlet in Hanoi (its 21th outlet in Vietnam) that seats 120 customers5. With the

1. Nguyen Dong Phong, Nhuong quyen thuong mai tai Viet Nam [Franchising in Vietnam]
(Nha xuat ban Dai hoc Kinh te quoc dan [The National Econom ics University's Publishing
House], 2009), p. 113.
2. Hien, above n 1, last accessed 18 June 2010.
3. Euromonitor, Market Sizes (2011) <. wwwproxyO.library.
unsw.edu.au/Portal/Pages/Search/SearchResultsList.aspx>, last accessed 3 August 2012.
4. Vinh Bao, 'Subway Da Den [Subway Aready Arrived]' (2010)
article.aspx?id=4202>, last accessed 24 August 2010.

< />
5. Thong tan xa Viet Nam [Vietnam News Agency], 'KFC Khai truong nha hang dau tien o
Hanoi [KFC Opened the First Outlet in Hanoi]’ (2006) < /tintuc/
nam e-News-file-article-sid-7000.htm >, last accessed 24 A ugust 2010.
414


THE FRANCHISING ROAD TO INTEGRATION.

success in Vietnam market, such prominent franchisors as KFC, Lotteria, and
Jollibee have been expanding their systems in Vietnam1.

Franchising as method of doing business has been used by both domestic and
foreign companies to access a variety o f industry sectors. In Vietnam, there are
currently at least 16 industry sectors which have utilised franchising with fast food
restaurants, retail store and education currently the three most popular sectors. The
distribution o f franchise systems in industry sectors in Vietnam is indicated by the
following chart:
Figure 4: D istribution of Franchise System s by In d u stry Sector
O th er

B eauty &
Fitn ess

4% r

Retail Store

c

Car S ervice

28%

2%
Ed u cation

9%

Real Estate

3%

Restaurant

45%

Source: Nguyen Ba Binh
5.
Vietnam

The Role o f the Franchise Law in the Development o f Franchising in

5.7. The Franchise Law is necessary fo r the development offranchising
The introduction o f Vietnam’s Franchise Law has paved the way for the
adoption o f a franchising strategy by local and international enterprises. It makes
franchising, as a discrete business model, practicable. The experience o f Lotteria,
Gloria J e a n ’s Coffees, Trung Nguyen Coffee, and Pho 24 - four prominent fast
food/coiTee systems operating in Vietnam - is instructive. Because o f the Franchise

I . Bao. above n 4, last acccssed 24 August 2010.
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VIỆT NAM HỌC - KỶ YÉU HỘI THẢO QUỐC TÉ LẰN THỨ TU'

Law, Gloria J e a n 's Coffees could enter Vietnam through its traditional entry mode master franchising - an impossible mission under the previous legal regim e and one
which it would not have attempted. After Vietnam introduced the Franchise Law.
Lotteria quickly registered its system with the Ministry o f Industry and Trade and
commenced preparations for franchising. Lotteria expressly acknowledges that
without the Franchise Law it could not franchise its system 1. Trung Nguyen Coffee
is currently standardising its operations in order to upgrade its system from product

and trade name franchising to business format franchising which is now possible
under the Franchise Law. As explained by M r Dang Le Nguyen Vu, its founder and
chairman, Trung Nguyen Coffee initially had to "franchise" its outlets through agent
contracts without system standard requirements because, in part, it could not rely on
laws for protection. The introduction o f the Franchise Law was a necessary
prerequisite for Trung Nguyen standardising its outlets to strengthen the development
o f its brand and to successfully expand overseas. Similarly, M r Ly Quy Trung, the
founder and chairman o f Pho 24, stated that:
The Franchise Law gives us more confidence to conduct franchising in
Vietnam. It paves a way to easily franchise today and in the fu tu re 2.
5.2.
franchising

The Franchise Law is not an exclusive fa c to r f o r the developm ent o f

Although the introduction o f the Franchise Law is recognised, acknowledged,
and welcomed as a necessary prerequisite for franchising it is apparent that socialcultural, commercial and economic factors influence the adoption o f a franchising
strategy. The experience o f the four prominent systems noted above is outlined below.
Lotteria
Unlike the traditional strategy o f Lotteria in its home country, South Korea,
where its expansion is mainly through franchising - 80 percent o f its outlets arc
franchiscd - Lotteria Vietnam cuưently owns and operates all o f its 92 outlets. This
is despite Vietnam having introduced the Franchise Law in 2006, which legalises
franchising expansion and despite Lotteria having registered its system with the
M inistry o f Industry and Trade o f Vietnam , which perm its it to conduct
franchising operations. The introduction o f the Franchise Law has crcatcd the legal
environment in which franchising is a legally available option for Lotteria, but
commercial and cultural factors have to date provided challenges which have

1. Mr Lee Jang Mook, interview 1 April 2011.

2. Mr Ly Quy Trung, interview 31 March 2011.
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THE FRANCHISING ROAD TO INTEGRATION.

prevented Lotteria from adopting a franchise strategy. Mr Lee, Director o f Lotteria
Vietnam, explained that:
Potential franchisees in Vietnam do not know the franchise concept. They do
not know why they have to buy material from Lotteria, be controlled by Lotteria and
pav royalties to Lotteria. These are the essence o f franchising. At the present time it
is easier to build a successful brand image and reputation fo r good service, and
food quality i f all outlets are owned by Latter ia .
However, Mr Lee acccptcd that conducting franchising in Vietnam was only a
matter o f time:
We have to franchise as it is an easy way to expand our system. For example,
in Ho Chi Minh City and H anoi‘s downtown the rental o f location is very high. We
cannot rent all locations we want, although we would like to open many stores in
these areas. Therefore, i f Vietnamese companies which had or can rent buildings in
good places, we can franchise to them. Even in other areas, i f the building owners
would like to get franchise from Lotteria, we are happy to do that1.
While continuing to expand its system through company owned and managed
outlets Lotteria is therefore preparing for franchising. When the local people’s
perception o f the franchise concept is better, and the comm ercial environment
improves, Loiteria will commcnce a franchising strategy.
Gloria J e a n ’s Coffee
Gloria Jea n ’s Coffees entered Vietnam after the introduction o f the Franchise
Law, in 2007, and immediately pursued a business format franchise strategy. To
date, Gloria Jean's Coffees has only six outlets in Vietnam - three o f which are
owned by Gloria J e a n ’s Coffees Vietnam and three o f which arc sub-franchised.

However, Gloria J e a n ’s Coffees faced difficulties which arose from differences in
cultural and social norms. Gloria Jean's Coffees initially applied its system in
Vietnam as the same manner as in Australia which led to difficulties in the
Vietnamese market. Ms. Nguyen Phi Van - International M arketing Manager at
Gloria Jean's Coffees International and former Director o f Gloria J e a n ’s Coffees in
Vietnam - confirmed that:

1. Mr Lee Jang Mook, interview 1 April 2011.
2. Mr l ee Jang Mook. interview 1 April 2011.

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VIỆT NAM HỌC - KỶ YẾU HỘI THẢO QUỐC TẾ LẦN THỨ TƯ

Franchisees at that time fea red that they were applying the franchise system
incorrectly so they sim ply applied in totality the Gloria J e a n ’s Coffees ’ system as it
operated in Australia. We did the sam e1.
Since 2009, Gloria J e a n ’s Coffees has adjusted its system for the local market,
although the adjustments are not as substantial as those introduced by Lotteria.
Almost all aspects o f Gloria J e a n ’s Coffees Vietnam are the same as Gloria J e a n ’s
Coffees in Australia - the hom e country - from menu to serving style. It offers
Arabica coffees which are different to popular local coffees using Robusta beans.
Gloria J e a n ’s Coffees Vietnam also continues to use a self -service system as in
Australia which is not readily accepted by Vietnamese consumers. The only major
change is in its menu: "We did launch a local version o f hot and cold coffee to cater
to local needs"2, said M s Van.
Although Gloria J e a n ’s Coffees operates successfully in many countries the
closure o f several outlets, and the very small num ber o f current outlets, suggest that
its expansion in Vietnam through franchising is more problematic. After six years of

operation in Vietnam, Gloria J e a n ’s Coffees still has not yet recouped its
investment, and the point o f time for its breaking even and becoming profitable is
acknowledged by Ms Van to be "unknown"3. The full business format franchise
model relocated from A ustralia seems not to have operated well in Vietnam ’s
social-cultural, commercial, economic and legal environment.
Pho 24
Pho 24 embraced a full business format franchise model from the beginning
and is recognised as one o f Vietnam ’s most prom inent domestic franchisors. The
relationship between this company and its franchisees nevertheless resembles one o f
partners in a joint venture rather than a pure business format franchise relationship.
Pho 24 has invested in each o f its franchised outlets in Vietnam and is a part owner
o f each franchised outlet. The legal, social-cultural, commercial and economic
context o f Vietnam has influenced this choice o f model. Despite the introduction o f
the Franchise Law legal enforcement is still weak and M r Trung is firmly o f the
1. Le Dung, 'Gloria Jean's Nan giai voi cua ai Viet Nam [Gloria Jean's Coffees Meets with
Difficulties in Vietnam]' (14 May 2012) Nhip cau dan tu [Investment Bridge] nhipcaudautu.vn/article.aspx?id=12360-gloria-jean% E2% 80% 99s-nan-giai-voi-cua-ai-vietnam>, last accessed 2 August 2012.
2. Heneage Mitchell, 'Vietnam Embraces Western Coffee Shop Culture' (2010) teacofTeeasia.com/section-blog/57-features-q 1-10/224-vietnam-embraces-westem-cofTeeshop-culture.html>, last accessed 20 April 2012.
3. Dung, above n 1.
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THE FRANCHISING ROAD TO INTEGRATION.

opinion that he cannot rely on the law for protection o f his system and enforcement
o f his rights. Being a partner with his franchisees in their outlets is the compromise
that the owner o f Pho 24 has adopted to control his system.
In addition to regulatory issues, cultural, commercial and economic factors
have had a significant influence on the expansion strategy o f Pho 24. Unlike the

traditional model o f franchising for relatively small and unsophisticated concepts in
Australia - the so-called "mom and pop" model comprising a husband and wife
partnership - in Vietnam almost all franchisees o f Pho 24 are established and
successful businessmen. In Vietnam, there are many "mom and pop" restaurants but
they arc rarely franchised outlets. Pho 24 does not have any "mom and pop"
franchisees in Vietnam. When asked why he did not franchise to individuals
entering business for the first time Mr Trung said that it was not easy to find such
franchisees under the current cultural, commercial and economic context o f
Vietnam even among his own employees1.
Unlike the position in developed countries where franchisees in small systems
and unsophisticated concepts are often owner-operators who are usually required to
dedicate all their time to their franchiscd outlets, Pho 24 franchisees are ownerinvcstors. Running a franchised outlet is usually only a part o f the franchisee’s
multiple business lines and the franchisee can spend only a limited time in the
franchised outlets. The franchised outlets are operated by a manager who is
employed and directed by the franchisees. However, the franchisees and their
managers rarely have day-to-day contact. For example, a Korean franchisee o f Pho
24 with five outlets in Vietnam visits only two outlets to look around and talk with
the managers every w eek2. Moreover, Pho 24 franchisees tend to reduce costs3,
vvhich eventually results in lower quality o f products and service than that
demanded by system standards. Mr Trung has acknowledged that:
The negative thing about franchised stores is the quality o f the food. I am
concerned most o f the complaints from the customers are with the franchised stores .
The relationship between Pho 24 and its franchisees is also less personal and
quite different to the franchisor-franchiscc relationship in western countries where

1. Mr Ly Quy Trung, interview 31 March 2011.
2. Lorelle Frazer and Bill Merrilees, 'Pho24 in Vietnam: A Case Study o f a Newly Emerging
Asian Franchise' (Paper presented at the 2009 1CSB World Conference, Seoul, Korea, 21 24 June 2009).
3. ibid.
4. ibid.

41 9


VIỆT NAM HỌC - KỶ YẾU HỘI THẢO QUỐC TẾ LÀN THỨ TƯ

franchising is often described as a "commercial m aưiage"1. Despite trying to
regularly keep personal contact with the franchisees, M r Trung com m ented that he
knew little about the families o f the franchisees as this could harm his business. He
has emphasised that:
In Vietnam it is quite sensitive. I f you go to too much into the relationship then
you cannot manage. You can 7 be good friends or they d o n ’t listen to you. Work
relationship but not friends; i f it becomes like friends then I cannot work*.
Pho 24 invests in its franchise units and becom es a part owner to be in a
position to better control system standard and uniformity am ong its franchised
outlets. Mr Trung has stated that:
I adjusted (the system) quite a lot to match the Vietnam context. For example,
when I started to franchise I didn 7 want to ju s t sell the franchise but (I -wanted) to
sell the franchise plus my shares as a shareholder. The concept was at least 30
percent o f investment fro m Pho 24 to any franchisee store.....that w ay I fe e l safer, I
fe e l I have better control o f the fra n ch isee3.
This strategy has been confirmed by Pho 24’s Human Resource Manager:
We need control and so that is why we have the voice o f the franchisee and the
voice o f the partner. That is why [Mr Ly Quy Tnrng] wants to control the company4.
Trung Nguyen Coffee
Trung Nguyen Coffee, unlike Gloria J e a n ’s Coffees and Pho 24, has chosen an
unsophisticated product and trade name franchise model to expand its system. Through
applying this strategy, Trưng Nguyen Coffee has successfully expanded its system
throughout Vietnam. The Trưng Nguyen Coffee model is a good fit with Vietnam’s
environmental conditions - social-cultural, commercial, economic, and legal.
For a long period - the decade 1998 to 2008 - Trung Nguyen Coffee conducted

a form o f product and trade name franchising to take advantage o f franchisees'
capital and human resources to popularise its brand name and to sell its coffee
products. Moreover, standardisation o f its system was neither necessary nor suitable
having regard to V ietnam ’s environment at that time. The D oi M oi economic
reforms - which moved Vietnam from a centrally planning economy to a socialist

1. Greg Nathan, Profitable Relationships (2008); Frazer and Merrilees, above n 52.
2. Frazer and M errilees, above n 52.
3. ibid.
4. ibid.
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THE FRANCHISING ROAD TO INTEGRATION.

oriented market economy - were then very new and intellectual property and
franchising were not well understood by the general public or by prospective
entrepreneurs. The legal framework did not consider franchising as a discrete
economic organisation and, under that legal framework, Trung Nguyen Coffee had
to expand its system through agent contracts rather than through franchise
agreements. Requiring standardisation of the system under that context was
impracticable. In Mr V u’s words:
It is impractical to require the system's standard when there was not any
standard concept in the mind o f people. Therefore, during that time, I only needed
the same signboard appearing in all outlets ofT rung Nguyen Coffee
In the first decade o f franchising, Trimg Nguyen Coffee therefore focused only
on expanding its outlets without standardising its system. It did not copy the
familiar western model but adapted it to fit Vietnam ’s context. Its outlets have been
developed in four levels, and franchising is conducted in a different way at each
level with different standards, different formats and different franchisee and

franchisor obligations. At the first two levels, Trung Nguyen Coffee utilises only
product and trade name franchising, and begins using business format franchising
with increasing system standardisation only at Level 3. The legal, cultural,
commercial and economic context of Vietnam has influenced this franchise strategy
adjustment: awareness o f intellectual property and franchising is still low and
franchising standards and compliance requirements are not yet highly recognised or
appreciated by local businesses. Since 2006, there has been a franchise-specific law,
but legal implementation is still weak and it is difficult to rely on the law for the
protection o f Trung Nguyen Coffee's franchise system. Although Vietnamese
consumers’ awareness o f brand names and franchising is much better than before,
the recruitment o f suitable potential franchisees remains a very significant
challenge. The flexibility o f Trung Nguyen Coffee's franchising strategy helps it to
overcome such difficulties.
Since 2008, Trung Nguven Coffee has introduced a new franchise model to
coexist with its original model. It has re-engineered its system to introduce
standards and uniformity on a business format franchise model. Trung Nguyen
Coffee has standardised all aspects o f its new coffee outlets from menu to outlet
design. This is a preparatory step to conducting business format franchising now
that the Franchise Law facilitates franchising. However, all o f the new domestic
outlets have been company owned and operated outlets rather than franchised.

1. Mr Dang Le Nguyen Vu, interview 2 April 2011.

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VIỆT NAM HỌC - KỶ YẾU HỘI THẢO QUỐC TÉ LÀN THỬ TƯ

Today, although the Franchise Law has paved a way for Trung Nguyen Coffee to
conduct franchising as a discrete business method, its new franchise strategy

requires a high level o f standardisation, which is currently easier to control if the
outlets are owned and managed by Trung Nguyen Coffee itself.
6. Conclusion
In a 2001 Report the OECD noted that:
Entrepreneurship and business activities are shaped not only by markets, but
also by regulatory and administrative environments established by governments.1
The Vietnamese experience in relation to franchising supports this
proposition: franchising was not possible until legal reform in the form o f the
Franchise Law introduced the appropriate environment for its operation. How ever
the Vietnamese experience also confirms that a range o f other environmental factors
- cultural, social, economic and commercial in addition to weak legal enforcement are highly infuential in the adoption o f a franchising strategy. Franchising can now
be practiced in Vietnam but a range o f extra-legal factors currently constrain its
development. The Franchise Law nevertheless puts in place the necessary
regulatory infrastructure for the future development o f the Vietnam franchise sector
for the ultimate benefit not only o f Vietnamese entrepreneurs and consumers but for
the wider society through facilitating international integration and supporting
sustainable SME development.

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