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THE MARKET OF COFFEE IN VIETNAM: STRUCTURE AND DEVELOPMENT

Bachelor Thesis

Vietnamese – German University Le Lai Street, Binh Duong New City, Binh Duong Province, Vietnam

The market of coffee in Vietnam: Structure and Development

Submitted to

Professor Dr. Roland Eisen

Vietnamese – German University

Faculty of Finance and Accouting

Pham Ngoc Tan

FA 2012 B-24

[email protected]

Vietnamese – German University major in Finance and Accouting

Table of Contents

I. Introduction ...... 1 1. Background of Vietnam’s Coffee ...... 1 2. Research problem ...... 4 II. The market of coffee in Vietnam: Structure and Development ...... 5 1. Vietnam’s Coffee market ...... 5 2. Structure of Vietnam’s Coffee...... 9 a. State of Demand ...... 9 b. State of Supply ...... 12 3. Development of Vietnam’s Coffee...... 17 a. State of Coffee’s production in recent years ...... 17 b. Competitive advantage and potential development ...... 20 III. Case study ...... 27 1. Trung Nguyen Coffee ...... 28 2. Highlands Coffee ...... 30 3. Vinacafe ...... 32 IV. Conclusion ...... 35 V. References ...... 36

List of Tables

Table 1: Coffee shops/ specialized coffee shops categorized in groups for period 2009 - 2014 .. 11

Table 2: Supplies and Demands of Vietnam Coffee production ...... 13

Table 3: Coffee planted area and coffee production (2005 - 2014) ...... 19

Table 4: Total coffee production from 2013 -2016 ...... 20

I. Introduction

1. Background of Vietnam’s Coffee

Over past 20 years, Vietnam Coffee history has been changed speedily and remarkably.

Being from a non-well-known industry, it becomes one of the most important industries which are bringing huge revenues to the whole nation since the Government changed and amended policies and market structure. Since the 1990s, Vietnam has moved from a closed economy to a more open minded economy in which international investors/companies, as well as private companies are more welcome. As the consequence of changes and amendment in government policies, Vietnam became and still has been a quickest growing country and standing at the 2nd position of producing and exporting coffee in the globe.

The remarkable development of Vietnam Coffee Industry could be explained by three vital reasons in the last two decades: the stimulation from changes and amendment in government policies following with liberalization in agriculture and finally thank for favorable developments in the global coffee market. Surprisingly, Vietnam is a country which has the fastest growth rate in producing and exporting coffee in comparison with other countries; such as a strong competitor – Colombia spent about 75 years to achieve the volumes that Vietnam already achieved in last decade, started from 2004. Particularly in Vietnam Coffee industry, producing and exporting segments take majority parts while coffee consumptions of Vietnamese contribute a small amount in total of revenue made from Coffee industry. In term of coffee production segment, Vietnam largely produces Robusta coffee which has highly contributed to and assisted Vietnam Coffee to become a strong country in the global coffee industry.

Refer to a period of the 1990s on which Vietnam had been through an open-minded circumstance, Vietnam’s coffee sector experienced explosive growth by following main reasons.

A first important reason is the looseness of governmental policies, especially for agricultural segments. Export crops including coffee were favorably mandated and stimulated by the government in different forms; prioritizing for favorable credits, supplying inputs, supporting with low-cost of land rent. The looseness of policies consequently led to an increase in cultivated area as well as a remarkable amount of outputs. A short-term after this looseness, Vietnam had soon earned the highest input production – average in more of two tons or 34 bags (60 kilograms) per hectare by the year 2000.

At that time, the success and fastest growth of Vietnam Coffee industry had additionally driven by two external factors: weather problems and willingness of using Robusta coffee. In

1994 and respectively in 1997, climate changes significantly affect Brazil’s coffee growing; therefore it created substantial hikes in global coffee price. Also with that, the global roasters changed their coffee preferences when they use more Robusta coffees in their blends since there were technological improvements in the coffee processing in which Robusta’s harsher flavor characteristics were softened.

Vietnam government in the last two decades had unique and consistent development policies for the national economy. Industrialization had to be prioritized; however, it must be implemented in parallel with agricultural developments. Developments of Vietnam economy in the last ten years had recorded that agriculture still plays a substantial role where it highly contributed a quarter of whole nation’s GDP – a part of that is contributed by growing and producing coffee. The first position in the national agriculture is growing and producing rice and the next after position is growing and producing coffee. This agricultural segment directly

2 employs huge amount of workers, especially during at the harvest seasons and might occupy about 3% of agricultural labor force.

Despite the advantages of changes in governmental policies and external factors, Vietnam

Coffee industry had confronted a plenty of challenges in the global trade arena. The success of

Vietnam Coffee industry is remained consistently since now is due to well-understanding of coffee trade dynamics in new environment in which transparency and agility. Comprehensive understanding of the global coffee market allowed Vietnam Coffee Industry to reach new opportunities; such as gaining market share over the competitors in Africa and Asia.

Nevertheless, it at the same time created more strict competition for Vietnam Coffee since it not only had to compete with the existing ones but also had to seek new market and market channels.

Understanding and exploiting the comparative production advantages, Vietnam had been very competitive in its core business – producing and deliver basic coffees. One of the advantages is the lowest cost of providing of bulk coffee with little add values. However, Vietnam Coffee

Industry still had several significant challenges and difficulties to enhance Vietnam Coffee’s reputation over the global market; for example promoting consistent and high quality. Vietnam’s competitors did not face these obstacles; such as the number one coffee producer – Brazil which had the longest history in growing and producing coffee. Therefore, to adapt and enter in the high-quality market with severe standards, Vietnam fostered an environment where these standards had to be applied by private and state-owned producers. One of key success in the global coffee industry is to reach the highest level of coffee quality which is being concentrated by lots of coffee producing nations. According to a research of International Coffee Organization

(ICO) and other high credit organization within the global coffee industry, low quality coffee is less appealing to consumers than high quality coffee and consequently negatively affect to the

3 national coffee industry. In few countries where they do not enjoy the low-cost advantage; such as Brazil, coffee quality and other forms of coffee differentiation are realized as one of the most critical keys to their success. Refer to Vietnam; it probably says that Vietnam coffee industry both reaches high quality coffee and low production cost.

2. Research problem

The above section has provided a brief summary regarding Vietnam Coffee industry over past two decades on which Vietnam had amended the government policies for agricultural products as well as external factors that favorably supports for development of Vietnam coffee industry. Mostly started from nothing, Vietnam Coffee industry has become the most competitive coffee producer in the global coffee market where nations in Asia, Africa and South

America, particularly Brazil were most well-known before. Vietnam coffee industry shall be categorized into the domestic and international segment. Considering domestic segment, it might be classified into sub-segments; such as instant coffee and roasted coffee. Similarly, two sub- segments are classified within the international segment. Each segment or sub-segment has its advantages as well as difficulties since both domestic and international coffee market become more competitive in recent years.

As a consequence, this report shall continue shed light on current Vietnam Coffee industry as well as examines several top coffee corporations which are heading top in their segments. A first research question is how the Vietnam Coffee market is being constructed and operated as well as its state of supplies and demands? A second question is about Vietnam

Coffee production in recent years and how it develops in the future – potential opportunities as well as probable threats? The final question is to examine a detailed circumstance of Vietnam coffee industry by studying several top coffee companies within Vietnam coffee industry. 4

II. The market of coffee in Vietnam: Structure and Development

1. Vietnam’s Coffee market

Vietnam is the second largest country in term of producing coffee (the largest coffee producing country is Brazil) with total amount of exporting coffee worth by 1.18 million tons of coffee – equivalent by USD1.73bn, according to 2009 statistics. Compared to other countries which export Arabica, Vietnam mostly is mostly exporting Robusta coffee type whose quality standard is lower than Arabica coffee. Vietnam has a long history with coffee products; nevertheless amount of coffee consumption per person is about 700 grams/ person/ year – much lower than other top coffee consuming countries; for example Poland (consumption rate is about

11 kilograms/ person/ year) and other countries within Asian, particularly Japan (consumption rate is about 3.3 kilograms/ person/ year)

Vietnam coffee industry is categorized into the domestic market and international market.

In contrast to the common perception that Vietnam shall have a very high coffee consumption rate since Vietnam is a leading country in the global coffee market, the coffee consumption rate in Vietnam domestic market is relatively low – only occupied 5% in total amount of coffee exports, equivalent to 61,000 tons of coffee. In that total coffee amount, instant coffee is accounted for 9,000 tons of coffee, brand name roasted coffee is accounted for 35,000 tons of coffee, and the remaining is non-brand name coffee. Vietnam domestic coffee’s annual growth rate is about 18% including annual growth rate of instant coffee is about 22% while annual growth rate of roasted coffee is lower by 13%. An interesting research regarding habits of using coffee shows that there are 65% of total coffee consumers shall take coffee seventh times in a week – majority found in male consumers (59%). Regarding habits of using instant coffee, there

5 are 21% of coffee consumer shall use instant coffee from third to fourth times in a week – probably found in female consumers (52%). Another coffee finding is that there are 50% of coffee consumers use coffee in house and 49% of coffee consumers use coffee out house – both ratios of two type coffee consumers are relatively equal. In Vietnam, coffee shops shall be easily found in every corner different cities in Vietnam; thus they create the comfortableness for coffee consumers.

Refer to a coffee research within 06 largest cities in Vietnam – only brand name coffee products were counted, instant coffee occupies 62% of domestic coffee market share and 65% of total market share in term of value; while brand-name roasted coffee occupies 38% of domestic coffee market share and 35% of total market share in term of value. Particularly in Ha Noi market and other four main cities (Hai Phong, Da Nang, Nha Trang and Can Tho), instant coffee and roasted coffee occupy 91% and 73% respectively. Regarding domestic instant coffee market, the total market share is composed by three largest contributors: Vinacafe (accounted for 38%),

Nescafe (occupied for 32%) and G7 (occupied for 23%). Amongst three competitors, Vinacafe is in emergency as its growth rate is the lowest (27%) compared to Nescafe reaches by 51% and G7 reaches by 88% in recent years.

In contrast to instant coffee market, the roasted coffee market is dominated by one biggest producer who is Trung Nguyen Corporation. The domination of Trung Nguyen

Corporation is probably explained by the lower consuming rate of roasted coffee compared to instant coffee; therefore, low demands of consuming roasted coffee lead to low competition in roasted coffee in the domestic coffee segment. The most updated research shows that Trung

Nguyen occupies the majority of total roasted coffee market share (80% compared to other brand

6 name or non-brand name roasted coffee in the market) compared to a severe competition amongst three competitors (Vinacafe, Nescafe and G7) in domestic instant coffee market.

The current domestic coffee market in Vietnam has not been clearly defined since there are two coffee markets: (i) common coffee and (ii) specialty coffee. Refer to common coffee;

Trung Nguyen in Vietnam similar to Taster’s choice of Nestle in the United States is included.

On the other hand, Highland Coffee in Vietnam similar to Starbucks in the United States is classified as specialty coffee. In Vietnam, specialty coffee market is relatively small; it therefore has no significant impact on the whole domestic market. Nevertheless, US’s coffee story is different to Vietnam’s since its specialty coffee occupies nearly 40% of total whole coffee market; it consequently has a Specialty Coffee Association of America (SCAA). A recent circumstance of Vietnam domestic market records few brand names of specialty coffee; such as

Starbucks has entered and been operating well in Vietnam domestic coffee market in recent years. As a result, the domestic coffee market has been re-allocated and formed in a clear way.

Considering to specialty coffee market, it is believed that Highland Coffee approaching Vietnam domestic market is relatively similar to the approaching methods of Starbucks in the United

States and other different neighborhood regions. The method to approach market is supplying coffee with special quality and excellent atmosphere/ coffee environment for customers to enjoy.

Although they have a similar market approach method, the differentiation amongst two brand names is the quality. Most of domestic customers who have tried both coffee types believe that

Highland coffee’s quality is not good as others; especially coffee products such as Cappuccino,

Espresso, Frappuchino’s flavors and quality have not reached to others’ coffee quality. Back to market approach method of Highland and others, domestic customers besides enjoying coffee at the coffee shop additionally can buy coffee and go (takeaway coffee) – Vietnamese coffee

7 customers buy and go at Highland Coffee and Gloria Jean Coffee shops. Refer to Starbucks brand name, it had been unveiled a new product type named Starbuck VIA (instant coffee) which can approach advanced level customers in a common coffee segment, as well as it entered into agreement with and cooperated with partners, manufacturers, companies and beverage distributors in the United States and other countries in which Starbucks coffee shops are operating (cooperating with PepsiCo to manufacture and distribute Ready-to-drink Double

Espresso and Ready-to-drink (RTD) Frappuccino in US market)

Highland Coffee recently unveiled new product type in the instant coffee segment named

Highland Ready-to-drink (RTD) to take new opportunities from RTD market. Nonetheless, this

RTD market is relatively new in Vietnam (consuming rate is about 600,000 liters per year), and it ultimately needs more marketing efforts to affect coffee customers’ perception. Interestingly, it is recorded several entries of domestic coffee companies; such as Tan Hiep Phat with VIP brand name, Ajinomoto Vietnam with Birdy brand name and Wonderfarm. New entries and investments of these domestic companies were not significantly effective and it explains why domestic coffee customers have not found any reasons to change their coffee using habits: instead of taking a cup of coffee in the coffee shop and or taking a cup of coffee at home and or taking a cup of instant coffee, they use RTD coffee. The ineffectiveness of these new entries and investments does not imply the failure of RTD coffee in Vietnam; it on the other hand, shows a more precise direction to approach and open new opportunities/potentials for current domestic coffee companies. The most feasible way to success is created the cooperation – supply & demand chain between coffee manufacturers and beverage distributors to robust the RTD coffee market since coffee manufacturers are a lack of experiences in coffee distributions while beverage distributors are unable to produce coffee with good flavors.

The domestic coffee market in Vietnam is dominated by instant coffee consumers while roasted coffee is less preferred than. For a new opportunity in particular domestic market, several top domestic coffee markets plan to unveil new special coffee with high quality. The typical example is Trung Nguyen Coffee Company which is a leader in Roasted Coffee industry. In addition with consolidating Trung Nguyen’s position in roasted coffee segment, it also entered into Instant Coffee segment with G7 brand name and opened its product line with a special RTD

Coffee with high quality. Different to Trung Nguyen Coffee, Vinacafe – a leader in instant coffee segment consolidates its existing position as well as put more efforts in roasted coffee segment and RTD coffee segment. Refer to other international coffee companies; they shall have different strategic plans to invest in Vietnam coffee market more effectively. Gloria Jean Coffee may enter into RTD coffee market or instant coffee market; PepsiCo could bring RTD

Cappuccino and RTD Frappucino to Vietnam; Starbucks in addition with current coffee products could bring its instant coffee named Starbucks VIR Instant and construct new chains of coffee shops.

2. Structure of Vietnam’s Coffee

a. State of Demand

Recent years in Vietnam, hygiene and food safety issues have been increased substantially due to unethical manners and low awareness of healthiness of food producers.

Several agricultural products including coffee were made with very low quality for domestic consumers; for example producing roasted coffee by using roasted corn cob, roasted soybeans and other chemicals to produce fake roasted coffee. These roasted coffee products than were delivered through small coffee shops and other retail shops which are harmful to customers’ health. In order to solve this issue which significantly impacts to other large coffee brand names,

9 lots of coffee shops have changed their selling approach by showing milling & roasting progress in front of customers so that customers’ trustworthiness with large coffee brand names shall not be impacted by other low quality coffee brands. Although low quality coffee brands were stopped using by urban coffee consumers, they are still preferred by other low-income consumers in the suburbs. Demands of domestic consumers who come from a different level, different income level and different coffee tastes create different coffee price level. Coffee consumers easily find small to large coffee shops in every corner with different price level per coffee cup which is ranged from VND10,000 to VND70,000. In the domestic market, Vietnam coffee products are diverse in term of forms, product types and coffee services.

It is said that coffee shops chains in Vietnam domestic market develop with remarkable pace – sales revenues per annum increased by 32%. This quickest growth is driven by current coffee shop chains and new entries of new coffee brand names. Refer to current coffee shop chains, the most common brand name is Starbuck coffee which already has 16 coffee shops in

Vietnam since it newly entered into Vietnam coffee market. Another brand name such as

McCafe already opens 05 coffee shops since 2014 in which it joined Vietnam coffee market.

Plenty of international coffee brands; such as Coffee Bean, Gloria Jeans, Coffee Concepts as well as Highland coffee continue increasing amount of their coffee shops. The explosion of international coffee brand names in addition with traditional brand names such as Highland,

Trung Nguyen Coffee, Vinacafe create a high requirement for a quality of coffee as well as coffee services provided. Considering to other small coffee shops chains, they creatively serve customers with two types of coffee: traditional coffee for customers’ healthiness and other international coffee products (ice blended coffee, latte coffee and fruit blended) with competitive prices in comparison with foreign products. As stated above, coffee consuming rate is relatively

10 low in Vietnam domestic market comparing with total coffee production level per year. As a consequence, lots of domestic brands such as Trung Nguyen Coffee, Passio Coffee, Phuc Long,

Thuc, Napoli and Milano are enhancing coffee consuming rate in domestic market.

In addition with coffee shops chains – coffee selling type generates highest sales revenues, another type which generated significant sales revenues, is selling takeaway coffee.

This selling type becomes more common and is more suitable for lifestyles of coffee consumers who live in urban cities. It is objectively stated that takeaway coffee type is recently more popular than traditional coffee shops. In order to increase sales revenues and customers’ amount, lots of coffee brand names have been applying takeaway coffee type as well as delivering coffee depending on customers’ requirements.

According to research provided by United States Department of Agriculture, demanding coffee amount in Vietnam is increasing due to the fact that there is explosion in coffee shops chains and other small to medium coffee shops. It is recorded that total amount of roasted coffee only for domestic use increased from 1.83 million bags to 1,92 million bags.

Table 1: Coffee shops/ specialized coffee shops categorized in groups for period 2009 - 2014

Unit: number of coffee shop 2009 2010 2011 2012 2013 2014 Coffee shops 10,422 11,003 11,539 12,003 12,462 12,711 - Coffee shops chains 97 108 104 108 117 111 - Independent coffee shops 10,325 10,895 11,435 11,895 12,345 12,600 Specialized coffee shops 8,744 9,305 9,716 10,102 10,444 10,740 - Specialized coffee shops chains 125 136 147 178 190 230 - Specialized independent coffee shops 8,619 9,169 9,569 9,924 10,254 10,510

The above table shows a record of changes in number of coffee shops in domestic market started from 2009 to 2014. It is obviously seen that there was a significant increase in coffee

11 shops from 10,422 to 12,711 including from 97 shops to 111 shops of coffee shops chains and from 10,325 shops to 12,600 shops of independent coffee shops. In brief, there was a remarkable change in small to medium coffee shops compared to coffee shops chains. Considering to specialized coffee shops, majority change was driven by specialized independent coffee shops rather than specialized coffee shops chains.

Considering to instant coffee segment, domestic consumers are less preferred roasted coffee. According to Vietnam Coffee and Cocoa Association, Vietnam targeted to produce instant coffee with total of 2.67 million bags per year; however, a real coffee production might be reached 50% of target only. As domestic demands for instant coffee are relatively high,

Vietnam Coffee and Cocoa Association adjusted estimated figures for amount of coffee to be consumed, from 250,000 bags to increase to 300,000 bags in season 2014 – 2015 and adjusted from 260,000 bags to 350,000 bags in season 2015 – 2016. It is clearly seen that demands for instant coffee increased years over years. Domestic demands for coffee are predicted to continue increasing in the next years since the number of coffee shops chains, independent coffee shops, and restaurants with coffee services provided continues increasing remarkably. The explosions of these units shall contribute to a significant increase in total amount of coffee to be consumed in the near future.

b. State of Supply

High demands for domestic coffee consumption are supplied by majority production of

Robusta coffee, rather than Arabica coffee. Key figures regarding two main types of coffee production in Vietnam coffee market are shown in below table. Obviously, Robusta production occupies the majority of total coffee production with an average of 28,500 bags in a period 2013

– 2016 while there are only about 1,150 bags of Arabica production for the same period. In term 12 of statistics, there is 93% of Robusta coffee in total production while remaining 7% is for

Arabica coffee. Considering to coffee imports in and coffee exports from Vietnam, total coffee imports are relatively low as clearly Vietnam is regarded as one of the top coffee exports in the global coffee market; hence it is not necessarily to have coffee imports. In total amount of coffee imports, coffee bean imports contributed the highest proportion with average 300 bags (there is a significant drop of coffee import beans in 2015-2016), while two other coffee types including roasted coffee and roasted coffee occupy half of total coffee imports. Total coffee supplies for domestic coffee market increase over years (from 32,427 bags in the 2013-2014 period to 35,501 bags in the 2015-2016 period). An increase in coffee supplies is in accordance with remarkable growth rate of coffee shops chains and other independent coffee shops in Vietnam.

Table 2: Supplies and Demands of Vietnam Coffee production

2013/2014 2014/2015 2015/2016 Oct-13 Oct-14 Oct-15 Items Previous Adjusted Previous Adjusted Previous Adjusted numbers numbers numbers numbers numbers numbers Beginning season (thousand 1,946 1,946 2,130 2,130 2,407 5,831 bags) Arabica production 1,175 1,175 1,050 1,050 1,100 1,100 Robusta production 28,658 28,658 27,117 26,350 27,500 28,200 Other production ------Total production 29,833 29,833 28,167 27,400 28,600 29,300 Imported Coffee bean 476 476 450 450 200 200 Imported Roasted coffee 12 12 10 10 10 10 Imported Instant coffee 160 160 160 130 160 160 Total imports 648 648 620 590 370 370 Total supplies 32,427 32,427 30,917 30,120 31,377 35,501 Exported Coffee bean 27,269 27,269 25,000 20,333 25,500 26,667 Exported Roasted coffee 120 120 130 457 140 550 Exported Instant coffee 900 900 1,300 1,282 1,400 1,500 Total exports 28,289 28,289 26,430 22,072 27,040 28,717 Domestic roasted coffee 1,788 1,788 1,830 1,917 1,900 2,250 consumption

2013/2014 2014/2015 2015/2016 Oct-13 Oct-14 Oct-15 Items Previous Adjusted Previous Adjusted Previous Adjusted numbers numbers numbers numbers numbers numbers Domestic instant coffee 220 220 250 300 260 350 consumption Domestic consumption 2,008 2,008 2,080 2,217 2,160 2,600 Ending season 2,130 2,130 2,407 5,831 2,177 4,184 Total distributions 32,427 32,427 30,917 30,120 31,377 35,501

Above content is about coffee supplies for domestic coffee consumption. This report continues examining coffee supplies for international coffee exports. There are no significant changes in total coffee exports from a 2013-2014 period to a 2015-2016 period. Total coffee exports in the 2013-2014 period were 28,289 bags, then decreased to 22,072 bags in a 2014-2015 period and finally increased to 28,717 bags in a 2015-2016 period. A decrease in period 2014-

2015 may occur due to a remarkable drop in commodities prices including global coffee, rubber, etc. On average of total coffee exports, raw coffee bean production takes the highest proportion in total production while roasted coffee production is relatively small and remaining proportion belongs to Instant coffee.

It is reminded that coffee supplies for domestic consumption or international exports are from Robusta coffee sources. As stated in section 1, Vietnam coffee industry in the last two decades earned some advantages: new government policies and changes in coffee roaster preferences (changes from using Arabic to Robusta coffee bean). The majority of coffee businesses in Vietnam use Robusta coffee bean as raw material while there are a small amount of businesses use Arabica coffee bean. Due to limits and disadvantages with regard to coffee supply sources, manufacturing technology, marketing and promoting approaches, the coffee businesses which use Arabica coffee bean in Vietnam have set a low revenue target as well as market share

– only concentrate on domestic market. Despite reasonable financial target and modest marketing objectives, it seems that Arabica coffee is less preferential in Vietnam coffee market.

Difficulties in selling Arabica coffee in Vietnam market is probably reflected in this small story.

Vovo Company is a small specialized coffee shop in District 1, Ho Chi Minh City which is selling Arabica Cầu Đất (very high quality coffee) as well as Robusta coffee. Several customers have asked to take cups of Arabica coffee and interestingly they were asked whether they can bear a sour taste of Arabica coffee (Insert reference here). It implies that Arabica coffee is not preferred as much as Robusta coffee by majority of coffee consumers due to its strange flavor.

However, the story is different in foreign coffee markets where Arabica coffee is more commonly used. Arabica coffee has some highlights in its flavors, such as sour, soothing and wishy-washy which preferred by foreign consumers. On the other hand, Vietnamese consumers have different and unique coffee tastes, for example condensed, terracotta, and bitter and hot; it consequently explains why Robusta coffee bean or mixed robusta coffee are primarily used to manufacture coffee. Few managers of domestic coffee companies share their opinions regarding

Arabica coffee consumption in Vietnam. Vietnam coffee market has limited options for Arabica coffee unlike in other markets, such as South-East Asian market (Indonesia), Africa market

(Kenya) and America market (Colombia), said by Mr. Do Minh Tuan, Chief Executive Officer of Archcafé Joint-stock Company.

In Vietnam, Arabica coffee is primarily grown in Cau Dat, Da Lat City – each year it supplies 10,000 tons of Arabica coffee in total national Arabica coffee production which is about

40,000 tons to 50,000 tons per year. Considering to Lintong region, Indonesia which is the fourth largest coffee exporting country, total Arabica coffee production is about 15,000 tons to 18,000 tons per year (In 2014, 25% of total Indonesia’s coffee exports is Arabica coffee. To briefly

15 summarize, key issues of using Arabica coffee in Vietnam are low consumers’ demands for

Arabica coffee, low production rate, the high cost of investing in coffee roasted technology and machines. Therefore, few coffee companies invest their money in Arabica coffee for products diversification purpose only; instead majority of domestic companies concentrate on Robusta coffee. A typical example is the Espresso of ArchCafé Company (using Arabica coffee) which is only for diversification purpose – total coffee production per month is 1,000 kilograms.

In summary, coffee supplies and demands accordingly cooperate together in Vietnam coffee market. Raw coffee beans are grown in different provinces in Vietnam (discussed in next sections) and then are manufactured and processed to roasted coffee and instant coffee. The majority of raw coffee beans are Robusta coffee which are much preferred by Vietnamese consumers; on the other hand, minority of Arabica coffee beans are grown in particular regions due to weak demands from domestic consumers and high investments in technology and machines. In domestic market, instant coffee products were preferred in recent years; however, it does not mean roasted coffee are less preferential. In recent years, due to demands of roasted coffee are significantly increasing due to the fact that lots of coffee shops chains and independent coffee shops explode in numbers. More consumers change their coffee taste from using instant coffee to roasted coffee. In comparison between domestic market and export market, the total amount of coffee consumption in domestic market is much lower than total coffee exports.

Coffee exports – mostly Robusta coffee including raw Robusta coffee beans taking the highest proportion, roasted coffee and instant coffee are exported and delivered to Asian, European and

US market.

3. Development of Vietnam’s Coffee

a. State of Coffee’s production in recent years

This section shall give a brief summary regarding Vietnam Coffee’s production in recent years with two types: Arabica coffee and Robusta coffee. As stated above, the majority of coffee production and exports is Robusta coffee although Arabica coffee likely provides a higher profit.

However, growing and producing Arabica coffee requires severe requirement with regard to nutrition for coffee plants, growing environment, climate condition and soil requirements; for example Arabica plants cannot be grown in Northern areas of Vietnam since the climate is relatively cold. In the last years, coffee farmers afforded to grow Arabica plants in Nghe An province, nevertheless it was unsuccessful since this province’s climate has lots of hoarfrosts – caused coffee trees dead. In contrast to Northern areas, Southern areas have low altitude which is not a good condition for growing coffee plants. Most important factor determines high quality coffee plants is soil distribution. Mr. Nguyen Van An – a coffee specialist of Thai Hoa

Corporation, Arabica coffee plants are favorably grown at places in which altitude is about

1,500m to 1,600m. If the coffee seeds are qualified as well as grown at these places, the outputs quality shall be ensured with high standards. Due to strict and picky growing requirements, there are few regions in Vietnam where Arabica coffee plants might be effectively grown; for example

Cau Dat, Khe Sanh (Quang Tri province) and Dien Bien (Son La province). In comparison with

Indonesia, coffee plants are grown in very large regions especially islands such as Samutra,

Sulawesia, Java, etc. In Vietnam – Lam Dong province, several regions are chosen to grow

Arabica coffee plants, for instance Lang Biang, Lac Duong instead Cau Dat. The altitude of these regions is not as high as Xuan Truong, Xuan Tho (Cau Dat region). However, Lang Biang – Lac

Duong is well known in Lam Dong province, it is therefore easily to impress and attract more

17 investors. Two years ago, a Taiwan business entered in Vietnam coffee market and chose Lam

Ha (Lam Dong) province to grow Arabica coffee plants. It is recorded that this business already produced and sold coffee products at several coffee’s festivals; however, it is currently stopped operating and sold all its manufacturing machines. The failure of this foreign business, as well as other domestic businesses in growing Arabica coffee is that their coffee lands are lack of altitude which determines the coffee beans’ quality.

Due to difficulties regarding soil requirements, lots of large domestic coffee businesses implement their contingency plan which is growing coffee in other surrounding nations where soil requirements are met. This plan definitely enhances quality of coffee plants. The third largest domestic coffee producer – Tin Nghia Corporation exports about 100,000 tons of coffee on average per annum decided to use the contingency plan. Firstly, Tin Nghia Corporation continues developing its coffee lands in Vietnam, specifically in Lam Dong province; at the same time developing their business scope, enhance manufacturing, open and invest in coffee lands and coffee businesses in Lao since 2007. Recently, Tin Nghia Corporation is implementing growing projects and trading Arabica coffee projects at Parkson town in Champasak province which locates in Bolaven highland. This highland with 1,100 meters of altitude with favorable weather conditions, soil nutrition’s are suitable with coffee or tea plants (Bolaven highland in

Lao is a place where 99% of coffee plants are grown). More than 700 hectares of coffee of Tin

Nghia Corporation were harvested in Lao and the Corporation expects to grow about 3,000 hectares of coffee as well as construct coffee manufactory in Lao.

Table 3: Coffee planted area and coffee production (2005 - 2014)

Table 3: Coffee planted area and coffee production (2005 - Coffee planted area and coffee 2014) Provinces Percentage production (2005 - 2014) Percentage 2% 2% Quang Tri 1% 1% 2% 2% Quang Tri Kontum 2% 3% Kontum Son La 2% Son La 33% 12% Binh Phuoc 2% Binh Phuoc Dong Nai 3% Dong Nai 19% Gia Lai 12% Gia Lai Dak Nong 19% 24% Dak Nong Lam Dong 24% Lam Dong Dak Lak 33% Other provinces 2%

Table 3 shows percentage distribution of coffee planted area in addition to coffee production from 2005 to 2014 in Vietnam. The four largest percentage distributions belong to

Gia Lai, Dak Nong, Lam Dong, Dak Lak province. Dak Lak province has the largest coffee planted area and coffee production (33%), following with Lam Dong (24%), Dak Nong (19%) and Gia Lai (12%). It is believed that mid-land and high-land regions occupies the highest percentage of coffee planted area and consequently coffee production since weather conditions and soil nutrition of these regions are suitable for growing coffee compared with other regions. A small percentage is distributed to Kontum (2%), Son La (2%), Binh Phuoc (2%) and Dong Nai

(3%). The most well-known coffee brand names come from four largest provinces: Gia Lai, Dak

Nong, Lam Dong and Dak Lak.

The below table is the extract from table 2 in section State of Coffee Supply. Considering only adjusted numbers, total coffee production generally is increasing over three coffee periods:

2013-2014 (29,833 bags) then decreasing in 2014-2015 (27,400 bags) due to climate changes

19 and commodities crisis and finally increasing in 2015-2016 (29,300 bags). The common point for three periods is that Robusta production occupies majority of total production while the number of Arabica production bags is relatively small compared to Robusta production. Four provinces with largest coffee planted area majorly are grown with Robusta coffee plants excluding particular and small area within these regions are chosen to grow Arabica coffee plants due to their favorable weather conditions and qualified soil nutrition. Major production of both

Arabica and Robusta coffee is used for exports while there are small amounts used for domestic coffee consumption only.

Table 4: Total coffee production from 2013 -2016

b. Competitive advantage and potential development

Coffee overview

In 2014, Vietnam coffee industry experienced through a harsh period since the climate changes negatively affect to coffee plants, for example El Nino phenomenon in Brazil as well as

Vietnam caused a decrease in coffee production as coffee farmers went through seasons of drought. Due to unfavorable predictions regarding a decrease in coffee inventory or being unable to harvest coffee, coffee prices including spot price, future price, etc. fluctuated – however the average price is USD2,090 per ton of coffee, decreased by 2.6% compared to 2013’s price. It is

20 shown in historical records that coffee exports reached 788 thousand tons of coffee worth by

USD1.7bn in the first 07 months of 2015, decreased by 30.5% in quantity and decreased by 27% in value of money compared with last year.

Total coffee exports of Vietnam in 2014 were 1.73 million tons of coffee worth by

USD3.62bn. Total outputs were allocated as followings: 685 thousand tons of coffee to Europe worth by USD1.39bn and occupied for 42.5% of total coffee exports, 154 thousand tons of coffee to the United States worth by USD335 thousand and occupied for 10%; other markets are

Italy, Spain and Japan. Growing coffee is a primary revenue source of more than 500,000 households which are 1.6 millions of laborers – majority of them are ethnic minorities. More job opportunities created in the coffee industry for ethnic minorities contributed to development of

Highland’s societies and economy as well other provinces.

Competitive advantages and opportunities

Despite negative impacts of climate changes in recent years, the global coffee price is still remained consistent – about VND40million per ton of coffee; both coffee farmers and coffee businesses are able to generate profits. Considering to three months (April, May and June) of

Quarter 2 in 2014, it is recorded that purchase amount of coffee reached the highest level nearly by 500 thousand tons of coffee and with highest coffee selling price in that year (USD2,100 to

USD2,200 per ton). Stability in coffee price was driven by farmers holding coffee stocks during commodities prices crisis as they had experienced several times of price crises previously. For example, coffee farmers learned experiences from pepper farmers last years when pepper farmers temporarily hold pepper stocks in the warehouse and waited until pepper market price remained consistent and reached to reasonable selling point. That price strategy of pepper farmers helped them to stabilize pepper market as well as to retain their sales revenues at

21 reasonable level during price crisis instead they were driven by markets. Learning experiences from pepper farmers, coffee farmers were patient and waited to sell coffee at VND40,000 per kilogram instead of VND30,000 per kilogram. It is implied that coffee industry in Vietnam has a strong competitive advantage in price competition since farmers and businesses are already experienced through crises as well as are well-connected and supported each other in stabilizing coffee price.

In addition with coffee’s farmer experiences in stabilizing coffee price, Vietnam coffee industry is supported by changes in Government policies. Firstly, the Government accepted

Vietnam Coffee and Cocoa Association’s recommendation not to apply value added tax on agricultural industry, as well as coffee products which were not processed yet during the periods, when climate changes badly affected; therefore domestic coffee businesses were running smoothly, domestic coffee market was stabilized and coffee farmers enjoy better business environment. Besides not applying value added tax on coffee products, Vietnam Coffee and

Cocoa Association additionally recommended to the Government in order to seek financial sponsors from Credit Institutions – hence enhance capital flows into coffee market. Several opportunities are typically as follows: coffee businesses can be more easily to approach clean and transparent capital from Banks, capital borrows from banks are more accessible for coffee farmers with favorable interest rate to purchase coffee seeds, growing coffee plants, harvesting and manufacturing coffee products; coffee exporters are provided clear advantages to for international settlement. Additional policies are released to support for coffee industry, for instance, Ministry of Finance continues assigning Tax departments to handle value added taxes issues for coffee exporting business; researching to recommend the Government organizations to establish Fund for coffee developments in accordance with assignments of Prime Minister so that

Vietnam coffee industry has more capital to re-farm coffee plants, temporarily stock coffee, enhance coffee trades and build-up coffee brand names.

Although climate changes negatively impact to Vietnam coffee industry in recent years, they nevertheless probably create opportunities at the same time. As known that, El Nino phenomenon caused droughts in Vietnam and a decrease by 20% to 25% in total Vietnam’s coffee production; it is likely resulted in shortages of 11 million bags (60 kilograms per bag) of coffee supplies compared with total globe’s coffee demands; as a consequence Vietnam coffee industry could have more opportunities.

Challenges

 External challenges

Enjoying price competitive advantages and also favorable government policies applied on agricultural products, it is however believed that Vietnam coffee industry still has more challenges to overcome. Vietnam is entering into the global economy in which more opportunities are more opened for Vietnam coffee industry; however it could be a first challenge for Vietnam, said by Mr. Luong Van Tu – Chairman of Vietnam Coffee and Cocoa Association.

Lots of opportunities shall be opened for Vietnam coffee industry, typically Trans-Pacific

Strategic Economic Partnership Agreement (TPP agreement) even though US has not been a member of TPP agreement. Besides, there is a Vietnam – EU Free Trade Agreement (EVFTA) which is a new development of previous Free trade agreement between Vietnam and 28 members of Europe. This agreement has been unveiled in February 2016 and shall be effective on 2018.

Both TPP and EVFTA agreement are believed to enhance Vietnam’s industries (garments,

23 footwear, seafood as well as coffee); however it shall create more challenges; for instance high standards for products quality, strict competition between members in the agreement, etc.

 Internal challenges

In addition with external challenges, Vietnam’s coffee industry shall confront internal challenges also. Regarding government policies, it is assigned that authorized organizations concentrate on handling businesses which committed to non-performing loans and tax departments/offices must resolve all value added tax issues related to coffee businesses.

Authorized governmental organizations are assigned to solve several outstanding weaknesses that need to be executed immediately: hygiene and coffee safety, coffee plants re-farming, enhancements in coffee quality and safety for coffee farmers.

A first issue is not ensuring quality and hygiene in coffee products, especially domestic roasted coffee. Lots of roasted coffee products with no brand names are sold in the market and it therefore impacted significantly to other coffee products with brand names. There were several circumstances that authorized organizations intervened due to low quality of products might harm consumers’ health. As a consequence, it decreases total coffee production for exports of

Vietnam as well. To prohibit entries of non-brand names coffee, it is recommended that all businesses that manufacture coffee products must comply with standards in term of manufacturing roasted coffee as well as delivery systems. The most common quality standard is

VietGap in addition with other environmental policies, such as 4C, UTZ, etc. which purports to enhance domestic coffee quality in alignment with international quality standards.

Despite having a large coffee planted area, the second challenge for Vietnam coffee industry is re-farming more than 100,000 hectares of coffee plants area as well other areas in the most effective way. According to Directorate of Agriculture, Ministry of Agriculture and Rural

Development, there are 86,000 hectares in total of 635,000 hectares of coffee plants area in

Vietnam which have been used more than 20 years; 140, hectares area have been used from 15 years to 20 years. Total coffee plants area (old) needs to be replaced in the next 05 to 10 years is about 140,000 to 160,000 hectares. The province in which has the largest coffee plants area is

Dak Lak with more than 205,000 hectares. Coffee plants area in provinces of Highland region has to have significant re-farming. In total provinces’ area, there are 20% equivalent to 100,000 hectares area which is highly recommended to re-farm since it has been used for more than 20 years and 10% equivalent to 40,000 hectares area which becomes arid and provides low production level and low product quality. Re-farming planted area is a necessary work; however, it requires high technology and reasonable financial investments to implement. According to agriculture specialists, re-farming coffee plants mean taking out plants from soil; hence it shall deteriorate soil nutrition which has to re-grow for a long time. In June 2014, Ministry of

Agriculture and Rural Development approved the project to re-farm coffee plants area for the period from 2014 to 2020 in provinces of Highland region. As estimated in 2020, demand for re- farming coffee planted area of 05 provinces of Highland region including Dak Lak, Dak Nong,

Lam Dong, Gia Lai, Kon Tum and Binh Phuoc shall be about 200,000 hectares. At the current period, it is recorded that Lam Dong is the only province which is effectively implementing the re-farming and coffee manufacturing project with 26,000 hectares. Remaining provinces of

Highland region implement re-farming project with low pace and ineffective results. Slow implementation progress of re-farming project is likely driven by capital shortages and weak

25 cooperation between provinces’ authorized organizations and credit institutions. Despite there is an assignment of government which creates more accesses to bank capital for coffee businesses and farmers, the interest rate of borrowing loans for re-farming is relatively high and less attractive for coffee businesses and farmers who are implementing re-farming projects. Demands for ref-farming coffee plants areas are increasing whiles capital supplies for re-farming is in shortages. It is stated that there is only 4% of total capital package supported form re-farming project worth by VND12,000bn which were disbursed.

A third challenge is that domestic coffee products’ quantity and quality is not remained consistent due to several factors, for example: nutrition for plants, short-life cycle coffee seeds, unexpected diseases, harvesting – preservation – processing cycle. Most significant factor impacted strongly on Vietnam coffee’s quality recent years is climate change. A consequence of climate change is drought and finally a water shortage in Highland region, Southern of Midland region and other regions. There is 60% of total coffee planted area in Vietnam which were fully received water supplies in 2014-2015 seasons. Considering to a 2013 – 2014 season, the climate changes caused rainy season early arrived whilst there were water shortages during the period of

El-nino phenomenon. At the same time, in addition with an increase in fertilizer selling price, there was an increase in labor cost as well. Another reason drove a decrease in coffee quantity and quality is the weak co-operation between coffee businesses and farmers and or farmers association. As a consequence, it resulted in a decrease in coffee production level and a decrease in coffee quality also. In total domestic coffee production, there is 90% of total production level used for exporting raw coffee material while a remaining 10% of total production level is used for exporting processed coffee products and domestic coffee consumption. In comparison with

Vietnam’s capability in coffee industry, exporting raw coffee materials likely brings fewer

26 profits compared with other processed coffee products which are more profitable. Another reason impacted on coffee quantity and quality is that 90% of total coffee farmers only have less than 01 hectare or under 02 hectares which is not complying with coffee standards. On the other hand, foreign investors/ coffee businesses which purchase Vietnam coffee have more strict regulations regarding standards and quality as well as pay more attention on coffee products with clear geographical origins and well-known brand name, such as Ban Me Thuot coffee.

The final challenge for Vietnam coffee industry is coffee thefts during harvesting season which become worse and unable to control. If coffee thefts issues are not handled completely, they shall remarkably affect to coffee quantity and quality in the most negative way. For instance, coffee farmers shall apply the solution which coffee beans are early harvested in order to prohibit coffee thefts; nevertheless, coffee quality shall not be assured in accordance with exporting and processing standards. It is highly recommended that local authorized organizations must have radical solutions and must co-operate with coffee farmers to resolve and prohibit this issue. Additionally, coffee farmers and farmers association must work together in order to prohibits coffee thefts in cooperation with local authorized organizations’ management policies, to supervise coffee transactions and report any violations in trading.

III. Case study

The above contents indicate general information about Vietnamese coffee industry and detailed information in relation with needs of coffee supplies as well as demands in both domestic and international market. This section continues researching on several highlighted case studies regarding largest domestic coffee companies which are dominating in roasted coffee

27 segment and instant coffee segment including: Trung Nguyen Coffee, Highlands Coffee and

Vinacafe Company.

1. Trung Nguyen Coffee

In a circumstance in which there is an intensive competition amongst coffee companies, Trung Nguyen Coffee is evaluated as the most well-known coffee brand name which shall be the first choice of domestic coffee consumers. Established in 1996 by a founder – Mr. Dang Le Nguyen Vu who decided to stop his medical education and pursued his start-up business which is enhancing coffee industry in Dak Lak province – his hometown. Trung Nguyen Coffee Company identifies its clear business targets and objectives: to be a top Robusta coffee producer in term of coffee quantity, to enhance coffee farmers’ passions, to increase awareness of domestic consumer to

Trung Nguyen’s products – that made Trung Nguyen brand name to be the first choice in

Vietnam coffee market. Trung Nguyen’s brand name was first known in Vietnam coffee market since 1996 and then a first coffee shop was opened in two years after. There are more than 80

Trung Nguyen coffee shops which are operating nationwide; additionally, Trung Nguyen coffee’s products are also sold in more than 1,000 other coffee shops in domestic market.

Being more well-known by domestic consumers and explosion in number of coffee shops show a significant development of Trung Nguyen coffee brand names. In addition, it started to enhance Trung Nguyen’s brand name in different international markets; for instance Japan,

Thailand, Singapore and China through transferring coffee franchises as well as the first Trung 28

Nguyen coffee shops were opened in Germany and United States in 2006. Considering to its instant coffee – G7 brand name, it is exported to more than 60 nations worldwide, and it is regarded as one of the most favorite instant coffee brand names which are consumed in China.

This explosive development is contributed by Trung Nguyen’s professional staffs as well as reasonable and accurate business strategies/targets/objectives set by Mr. Dang Le Nguyen Vu who was listed in the top wealthiest person in 2014 – Forbes magazine.

According to coffee market research in 2012, there are more than 17 millions of

Vietnamese people who bought Trung Nguyen Coffee products worth by more than

USD11million. At the end of 2013, Trung Nguyen Company was expected to have strong competition when Starbuck coffee entered into Vietnamese coffee market. Responded by Head of Trung Nguyen Company, he believed that Starbuck could not defeat Trung Nguyen brand name which was built consistently and operated effectively. It is proven that Trung Nguyen coffee still keeps its strong position in domestic market as well as desperately entered into the

US coffee market by purchasing roasted coffee factories and opening coffee shops in Seattle,

Boston and New York. Trung Nguyen’s objective in the US market is making Vietnam coffee more attractive to the US consumers and gradually persuading US consumers with highest quality roasted coffee products. Although Trung Nguyen brand name has not been successful in

US market due to local factors, a new entry to US market and consistent development in domestic market indicate that Trung Nguyen coffee is the largest coffee producer, coffee exporter and coffee shops chains in domestic as well as global market. Following the remarkable developments in recent years, it is expected that Trung Nguyen Company shall go to Initial

Public Offerings (IPOs) so that it has additional capital to reinvest into the company and to make

Trung Nguyen become the largest coffee company in Vietnam and especially global coffee market.

2. Highlands Coffee

Established in 15 years ago by Mr. David Thai who stopped his career in the United States and came back to Vietnam, Highlands Coffee has been experiencing lots of difficulties as well as successes in domestic market. Until now, Highlands Coffee is nationally known and established spread out of

Vietnam’s provinces with more than 100 coffee shops. The Company’s target is providing high quality coffee products to consumers and also reflecting traditional values and lifestyles of Vietnamese people through coffee cups.

Compared with Trung Coffee brand name, Highlands Coffee is lately opened as its first coffee shop was opened in 2002 at Ho Chi Minh City and Ha Noi City one week after that. Since then, it is recorded an explosion in coffee shops chains of Highlands Coffee which were opened in largest cities of Vietnam. Following with Trung Nguyen, Highlands Coffee becomes another preferential choice of Vietnamese consumers. Four years after 2002, there were more than 25 coffee shops in Vietnam and more than 50 coffee shops in 5 years after that time – 2011. Until

2015, the number of coffee shops was increased by 25 with 75 coffee shops and total number in

2016 was more than 100 coffee shops in Vietnam.

Coffee producing progress of Highland Coffee Company is controlled and supervised in accordance with high standard level. Raw coffee beans are harvested from high quality coffee plants, then transferred to coffee manufactories and categorized into different groups of coffee beans depending on different quality. All raw coffee beans with high quality are stored, daily roasted and or processed to finished products or packaged to export. To assure the highest quality of different coffee products, manufacturing chains and coffee producing technology are highly complied with international coffee standards so that coffee consumers could have coffee products with best quality. In addition with quality assurance in coffee manufacturing, coffee consumers shall have a unique experience when they enjoy cups of coffee at each Highlands

Coffee’s shop. Consumers are served in a place where they can realize Vietnamese modern lifestyles and traditional customs - the most attractive point of Highlands Coffee’s shops. The success of Highland Coffee in domestic market is driven by a clear and well-oriented objectives set by management level. Highland Coffee shall be the most well-known coffee brand name in term of coffee tastes and coffee lifestyles with reasonable price and ready services.

In recent years, Highland Coffee Company contributes to a consistent development of coffee industry in Vietnam. By each year, there are more than 250 tons of raw coffee beans with high quality which were purchased by Highland Coffee so that coffee farmers could have a better life. Additionally, it significantly contributes to development of young human resources by joining local youth connection, career festival of universities, such as RMIT Vietnam, Ton Duc

Thang University, etc.

3. Vinacafe

Before studying on Vinacafe Corporate in details, it is worthy to have a general view about global instant coffee involving countries which are recognized as top coffee leaders. A first example is the United States where

Starbucks is most well-known coffee brand name. The number of Starbucks’ coffee shops is remarkably high with more than 17,000 shops around the world and certainly, they bring a huge profit for Starbucks as well as the United

States. The most interesting thing is that Starbuck – seemed to be a coffee leader in the world has no possession of coffee planted area. Another example is coffee products which are produced in

Germany. There are only 12.1% of Germany’s coffee exports in total of global coffee exports; there are however 18,7% of Germany’s coffee exports value in total of global coffee exports value compared with 12% of Brazil’s total exports value as well as quantity. It has proved that value of Germany’s coffee products is 1.55 times higher than Brazil’s. Considering to Vietnam coffee industry, despite Vietnam has large coffee planted areas compared with other countries, but coffee turnover value is relatively lowest amongst countries.

In recent years, there are new developments in coffee manufacturing industry and several coffee companies have been successful – a typical example is Vinacafe Biên Hòa Joint-stock

Company (Vinacafe) which is one of the top leaders in instant coffee. Having 30 years of experiences in making instant coffee, Vinacafe decided to put more efforts in roasted coffee segment in contrast to Starbucks’ strategy which was initially focusing on roasted coffee segment and recently has afforded in instant coffee segment.

Started in 1979, Vinacafe is one of the long-standing company in Vietnam coffee industry. In the beginning, majority of Company’s products are for exports; it nevertheless changed to serve for domestic coffee market after there are changes in government policies in

1980s. In recent years, Vinacafe is classified as the leader of instant coffee industry in terms of capability and manufacturing technology – occupies more than 50% of total domestic market share. Instant coffee products bring large turnover value to Vinacafe; for example, total coffee quantity of Vinacafe is 17,000 tons of coffee worth by USD65million (USD4,000 per ton).

Compared to nation’s exports quantity and value, there were 1.2 tons of coffees but worth by

USD1.85bn (about USD1,500 per ton). Despite bringing higher value to Vinacafe, instant coffee products are seemed not to be preferred by many consumers, and they are not the representative image for Vietnam coffee industry instead it is roasted coffee products. Considering to

Vinacafe’s revenue structure, roasted coffee products only contribute 0.6% for total sales revenues worth by VND8,443bn. Nevertheless, this revenue structure shall be significantly changed as Vinacafe determines to enter into roasted coffee segment additional. In order to manufacture roasted coffee, Vinacafe shall not take a high setup cost as the coffee machines and factory chains used to make instant coffee can be used to make roasted coffee. Therefore,

Vinacafe recently utilized the previous machines and factories which are used to make instant coffee to produce roasted coffee products.

There are three categories of Vinacafe’s roasted coffee products: Black, Heritage and

Mundo. Black brand name shall be concentrated on consumers who have low to average income while Heritage and Mundo brand name are led to other consumers who have higher income. A highlighted difference between Black and Heritage and or Mundo is the coffee taste. Amongst

Heritage and Mundo brand name, Heritage is seemed to concentrate on traditional coffee flavor,

33 on the other hand, Mundo brand name brings more international coffee styles and flavors to consumers. After a first coffee shop was introduced and officially operated in Hanoi, more than

10 coffee shops of Vinacafe were opened and operated nationwide in five different large cities.

Coffee consumers in addition with enjoying coffee shall have chances to know more about coffee history and its traditions. It shows that Vinacafe targets on building a solid and high quality coffee brand name instead of earning profit only.

As mentioned in above sections, Robusta coffee beans dominate total nation coffee production more than 95% while Arabica coffee beans occupy the remaining. Several coffee specialists believe that Arabica coffee shall deliver tastier flavor compared to Robusta and therefore lots of coffee companies have to mix between Robusta and Arabica coffee; however it may not be accurate in actual coffee market. It has been proved that Robusta coffee beans are used to make roasted coffee products with different attractive flavors by applying reasonable combination ratios amongst coffee beans. Additionally, in order to enhance and improve roasted coffee flavors, besides available Robusta coffee sources, Vinacafe continues investing in Arabica coffee plants in Lam Dong and Son La province to be more active in coffee market.

Domestic coffee market is seemed to be a key market to be concentrated; Vinacafe nevertheless does not stop at this market instead it continues entering into global market where there are new development opportunities as well as challenges. Domestic coffee market’s growth rate is 10% to 15% per year which may not be attractive enough for coffee businesses. As a consequence, investing in coffee exports market is determined as a key strategy of domestic coffee business including Vinacafe. It is recorded that there are 1,301 tons of instant coffee which were exported by Vinacafe in 2010 – occupied 7% of total sales revenue. However, this number shall be changed as Vinacafe’s target is to increase 60% to 70% of total production in

2020 and to concentrate on output markets, such as United States, China and South Korea. The remaining issue of Vinacafe and other domestic companies is that there is a big difference between countries with solely exporting raw coffee materials and countries with majorly producing high quality processed coffee products for exporting purpose. According to coffee specialist’s researches, exporting raw coffee materials brings USD16bn of sales revenues to the nation while exporting high quality processed coffee products generates approximately

USD90bn. Vietnam is most well-known country which exports cheap raw coffee materials not a country with famous coffee brand names.

IV. Conclusion

The above sections in this report have provided brief information with regard to Vietnam coffee industry in past two decades. There are lots of changes in term of government policies, climate changes, coffee roaster, etc that make Vietnam become a top coffee exporting country in globe. Followings with these changes, plenty of coffee companies were established and have been operating successfully until recent periods; such as Vinacafe, Trung Nguyen Coffee and

Highland Coffee. These domestic brand names become a leader in both instant coffee and roasted coffee segment in Vietnam coffee market and they already entered into the international coffee market; such as United States, China, South Korea and Europe. Developments of domestic companies are relatively prevented by new entries of famous international coffee brand names; such as Starbucks, Gloria Jean, Coffee House, etc. There are lots of new opportunities for Vietnam coffee companies; however the problem is how to apply coffee technology to produce finished coffee products which bring higher profit rather than solely exporting raw material with relatively lower value.

V. References

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2016.html

Statutory declaration

Full name: Pham Ngoc Tan

Matriculation number: FA 2012 B-24

Thesis title: The market of coffee in Vietnam: Structure and Development

Supervisor: Professor Dr. Roland Eisen

I herewith declare that I have completed the stated thesis independently, without making use of other than the specified literature and aids. Sentences or parts of sentences quoted literally are marked as quotations; identification of other references with regard to the statement and scope of the work is quoted. The thesis in this form or in any other form has not been submitted to an examination body and has not been published. This thesis has not been used, either in whole or part, for another examination achievement.

I affirm that the digital and hard copy versions of this work are identical. I am aware that the digital version of my thesis will be checked for plagiarism with the support of a speacialised software.

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