An Empire to Rival Starbucks amidst a Vietnamese Caffeine Affliction: Trung Nguyen

Vietnam is the second largest producer of coffee beans worldwide (after Brazil), yet domestically there is a coffee affliction with a mere 70,000 tonnes of coffee consumed annually by Vietnam’s 90 million strong population (out of 1.3 million tonnes produced). Whilst this caffeine affliction has been blamed on a traditional preference for tea and the lack of a substantial middle class, the upside is that there is plenty of room for coffee demand in Vietnam to grow. Growth will also be aided by the increased exposure to other cultures through the internet and social network websites leading to a change in tastes, the emergence of Vietnam’s middle-class, a younger and more trend-influenced population with 68% of the country’s 90 million people under the age of 40, savvier coffee advertising, and the emergence of stores from international coffee brands such as Starbucks in Vietnam.

Vietnamese Robusta Coffee Beans

Coffee is ingrained in Vietnam’s history with coffee shops a common sight on the streets of Vietnam’s cities. Asia accounts for 31% of global coffee beans production with Vietnam their major producer, with its production of 1.3 million tonnes of coffee beans each year worth around US$3 billion. Despite being the world’s second biggest producer of coffee beans, 90% of Vietnam’s produce is marked for export. Most of Vietnam’s coffee beans are the low-grade robusta utilized in instant coffee (of which Vietnam are the world’s biggest producer), yet there is a movement among farmers to grow higher quality Arabica beans which can fetch a higher price. Yet despite their long history, large production base, and myriad coffee shops, Vietnam still consumes much less coffee per capita than even its neighbours. For example, Thailand consumes four times the coffee per capita that Vietnam does. Currently the Vietnamese coffee market is dominated by two products: ground coffee which accounts for two-thirds of sales and instant coffee which makes up 30% of sales. Profitability could be boosted by a shift in Vietnam’s coffee consumption to drinking more ground coffee in cafes that would use higher quality Arabica beans rather than the traditional drink of choice – green tea – or the instant coffee derived from robusta beans. Developing higher domestic coffee consumption could be facilitated by emphasizing the health benefits of moderate coffee consumption and creating products moulded to local tastes. A mark of the potential profitability of Vietnam’s coffee market is seen in various multinational companies’ efforts to invest in the country. Not only have Starbucks opened their first store, but Nestle currently buy about a quarter of Vietnam’s total coffee beans produced annually and this year invested US$270 million to build new factories to produce soluble coffee for the local market and decaffeinated coffee for export. Currently the country has only processed about 12% of its total bean production – merely processing more of their own beans could generate a coffee industry worth US$30 billion annually and create around 6 million jobs. Strong branding of its coffee beans, more processing of its coffee beans, and stronger domestic consumption are all factors that could drive Vietnam’s coffee industry. Major coffee industry players include Nestle, Trung Nguyen, and Vinacafe Bien Hoa (owned by Masan Group). It is the second supplier – Trung Nguyen – that has captured the imagination and is set to be a good investment as the Vietnamese caffeine affliction is transformed into a caffeine addiction.

Trung Nguyen is Vietnam’s biggest coffee retailer and largest domestic coffee brand, a fully privately-owned business foundedin 1996 by a group of medical students. Its CEO Dang Le Nguyen Vu, regarded as Vietnam’s Coffee King, has stated his company’s intention of becoming a “global coffee empire” to rival Starbucks by 2020. Trung Nguyen is involved in the entire process of coffee from production to processing to distribution through retail stores. They also currently export its products to more than 60 countries, with a focus on major Asian markets such as Japan, China and ASEAN. Notable products include the Trung Nguyen coffee brand, Weasel kopi luwak and Legendee simulated kopi luwak coffee, Passiona low-caffeine coffee, and G7 instant coffee. Currently Trung Nguyen owns countless plantations all over Vietnam and five coffee bean processing facilities with a combined ability to process around 35,000 tons of coffee annually. In fact, its plantations have world-class technology, including an Israeli irrigation system and Finnish fertilizer, in order to increase the quantity and quality of its coffee beans. Trung Nguyen also possess nationwide distribution channels with over 1,000 coffee shops and 60 cafes – astounding growth if you consider the first coffee shop only opened in October 1998 in Ho Chi Minh City. In addition, Trung Nguyen has franchises in Japan, Thailand, Cambodia, Malaysia, China, and Germany. Trung Nguyen’s 2012 revenue was US$200 million, a 32% increase from the previous year. Trung Nguyen hopes to double their 2012 revenue in 2013 with their hopes hinging on higher demand from ASEAN and Chinese markets for their ground coffee and G7 instant coffee (Vietnam’s top selling instant coffee brand, better than Nestle’s Nescafe). Trung Nguyen’s G7 instant coffee currently has a 38% share of the national market, compared to 35% for Vinacafe Bien Hoa and 22% for Nestle. Furthermore, their instant coffee exports have been growing by 25% annually, driven in particular by demand from South Korean and China.

Trung Nguyen Store in Ho Chi Minh City

In order to become a ‘global coffee empire’ to rival Starbucks, Trung Nguyen have put in motion plans to buy bean roasters in the USA and to open coffee shops in Seattle, New York City and Boston by 2013. Trung Nguyen are marketing their competitive advantage as the quality and authenticity of their coffee. Their coffee indeed boasts high quality as they create a specialty roast that emulates the taste of kopi luwak, the expensive coffee brewed from beans recovered from civets’ feces. If Trung Nguyen are able to stick to their proven coffee formula and their traditionally authentic coffee taste they may be able to appeal to US consumers’ desire to try different taste profiles from other countries, which could lead to a successful coffee chain on Starbucks’ home turf of Seattle. Trung Nguyen’s future strategy emphasizes reversing their current proportion of sales of 70% domestically and 30% internationally with a focus on developing its presence in China, the USA and Europe. However the domestic Vietnamese market is still an important component of Trung Nguyen’s strategy as they seek to increase the number of cafes nationwide to 200 by 2015. All this, the company hopes, will propel their revenues to US$1 billion by 2016 as well as laying the foundations for taking the company public on an international stock exchange by 2015.

There looks to be a coffee market with strong potential to grow and the opportunity soon to invest in the leading Vietnamese coffee brewer with global ambitions. As major brewers coax the increasingly richer Vietnamese consumers to have three kilograms of coffee beans a year by 2017, up from one kilogram currently, Trung Nguyen are in an excellent position to provide exposure to the coffee industry, Vietnam, and a fast-growing multinational company.