Three years ago, when Starbucks began closing stores in Vietnam, I predicted it would exit the market. However, with mounting pressure in its second-largest market, China, and the rapid global expansion of Chinese coffee giants, maintaining a presence in Vietnam and across Asia has become strategically necessary. A withdrawal now would not only cede valuable market share to local competitors but also make any future return costlier and far more uncertain.
Starbucks Has Issues in Vietnam
Starbucks still faces many difficulties even though it hasn’t left Vietnam. After seven years of operation, Starbucks Vietnam closed its sole Starbucks Reserve location in Ho Chi Minh City in August 2024. The company confirmed plans to open a new Reserve location elsewhere in the nation, despite the fact that this move caused concern among devoted customers.
Starbucks has struggled to establish a strong foothold in Vietnam’s dynamic coffee market, despite the country’s sizeable population of 100 million and over eleven years of operation. It has been challenging for the American behemoth to prosper in the nation due to its strong coffee culture and consumers’ inclination for strong, traditional Vietnamese brews. Due to high rental costs, Starbucks has been unable to grow and now only has 108 locations nationwide, far less than its regional rivals.
The Booming Coffee Scene in Vietnam
Coffee is more than just a beverage in Vietnam; it’s a cultural mainstay, a way of life, and a social custom. There are more than 500,000 coffee shops in the nation, according to market research firm Mibrand Vietnam. Together, the five largest chains—Highlands Coffee, Trung Nguyen E-Coffee, The Coffee House, Phuc Long, and Katinat—control 42.5% of the market.
Despite the coffee chain model’s success from 2017 to 2019, the market environment has changed since the pandemic. Starbucks is under further pressure as new local competitors continue to step up their game and established brands like The Coffee House have been forced to close several locations.
China is Starbucks’ biggest opponent
If Vietnam is a difficult market, China is a more formidable battlefield. China is home to more than 7,000 Starbucks locations, making it the company’s largest market outside of the US. However, the business is struggling with dwindling sales and profitability in spite of this extensive reach.
Chinese consumers are just selecting domestic brands that are more affordable, not cutting back on their coffee consumption. One of the most prominent of these is Luckin Coffee, which has surpassed Starbucks in terms of the number of its locations and enthralled customers with its aggressive pricing, regional flavours, and digitally driven service model.
Since its founding in 2017, Luckin has grown quickly to become the biggest coffee chain in China, and it is currently entering new markets in places like Singapore and Malaysia. It is truly amazing that it has recovered from being on the verge of bankruptcy only five years ago.
The brand can provide the same amount of coffee at about one-third the cost of Starbucks thanks to its formula, which includes automated locations, inexpensive beverages, and creative drinks catered to regional tastes.
Manner Coffee, another rapidly expanding Chinese rival, has also opened over 1,000 locations, which is indicative of a larger trend in which Chinese companies are taking control of entire industries as well as the domestic market, partly due to rising consumer nationalism.
The Disruption Strategy of Luckin Coffee
China’s coffee market has been reshaped by Luckin’s success using a multifaceted strategy:
• Rapid Growth: Currently running over 11,000 locations, surpassing Starbucks in this regard.
• Value Pricing: Providing premium coffee at a significantly reduced price.
• Digital Integration: For tech-savvy customers, mobile ordering and delivery are made simpler.
• Localised Innovation: Speciality products like coconut milk coffee and cheese lattes.
• Operational Efficiency: After previous financial scandals, the company’s profitability and scalability have improved.
The Growth of Local Brands and Nationalism
A rise in nationalism is driving this change in consumer behaviour. Just 15% of Chinese consumers favoured domestic brands over foreign ones in 2011. That figure skyrocketed to 85% by 2020. Today, it’s probably even higher.
McKinsey explains that a number of important factors are causing this change:
• Increasing National Pride: It is believed that promoting homegrown brands demonstrates China’s economic tenacity and global clout.
• Better Product Quality: Chinese businesses are now on par with, and occasionally better than, international brands in terms of quality and innovation.
• Digital Ecosystem Advantage: Local e-commerce and social media platforms are better integrated with homegrown brands.
This trend has been further fuelled by geopolitical tensions, especially the economic pushback against China spearheaded by the United States. Due to past events, in particular the “century of humiliation,” many Chinese consumers now see choosing a brand as a sign of their sovereignty and a sign of resistance to the US-led containment strategy against their country.
Starbucks’ Counter-Strategy
Starbucks has changed in a number of ways to stay competitive:
• Cultural Localisation: Introducing drinks with a local flair, such as the Black Sesame Latte and Red Bean Frappuccino.
• Aspirational Branding: Presenting itself to China’s expanding middle class as a representation of status and modernity.
• Digital Partnership: Working together with Alibaba to enable delivery through Ele.me and integrate its loyalty program with Alipay.
• Aggressive Expansion: By 2025, the company plans to establish 9,000 stores across China, strategically targeting emerging markets and smaller cities to reinforce its long-term commitment—even amid the intensifying US-China rivalry.
Nevertheless, despite these efforts, tech-savvy and budget-conscious customers still gravitate towards affordable local brands like Luckin. Starbucks needs to improve its global positioning if it wants to stay ahead of these Chinese competitors as they expand internationally.
Continuing in Vietnam
For good reason, Starbucks is staying in Vietnam. As competition in Asia’s coffee market heats up, maintaining a foothold in key strategic markets like Vietnam is crucial. A withdrawal now would not only surrender valuable market share to local chains but also make a future return costly and significantly more difficult, especially as Chinese coffee giants continue their aggressive global expansion.