Vietnam outbound expansion: Brands apart

When Vietnamese online English learning start-up Elsa begins operations in Japan, Indonesia, and India later this year, it will have accomplished a transition that is still relatively unknown in its home market. Vietnam can boast a number of thriving local brands focused on the surging consumer opportunity, but few have attempted to market their products to foreign audiences.

Elsa has characteristics that make the overseas expansion theme more obvious. Its business, focused on a mobile app that corrects the pronunciation of English learners, doesn’t require heavy infrastructure investment, and its backers include Gradient Ventures, a VC arm of global tech giant Google. But founder and CEO Vu Van considers these aspects secondary to a more fundamental strength: the fact that the company was intended from the beginning to appeal to an international user base, unlike its local peers that launched with an exclusively domestic focus.

“It’s not just about what product you build – it’s reflected in your strategy, the way you organize the company, and everything else,” says Van. “That’s a lot harder to change five years down the road, for instance, if you try to say, ‘Now the company has a good product in Vietnam, we can start thinking about different markets.’ Most of the people in the company, including investors, aren’t thinking that way yet, and it takes time to execute when speed and time to market is everything.”

Van’s assessment is echoed by members of Vietnam’s investor community, which see the country’s entrepreneurs as largely unprepared to tackle the challenges of overseas expansion. Outbound strategies are expected to become more accepted as Vietnamese companies build their experience and the domestic market grows more crowded, but for the time being home is where the opportunities lie.

Frustrated ambitions

Most investors have stories of companies that have tried to export their business models to foreign markets, only to struggle to gain ground against local rivals. A common factor is an excess of enthusiasm and a lack of experience with competitive markets after Vietnam’s relatively recent economic opening.

“Normally when they try to go overseas it either crashes or it ends up so small that it’s insignificant,” says Chris Freund, a partner at Mekong Capital. “They don’t know what they are getting themselves into, they don’t really have the management capacity to operate in another country, and they don’t know how to build their team.”

For example, electronics retailer Mobile World – a former portfolio company of Mekong – launched a Cambodia subsidiary under the Bigphone brand in 2017 that currently operates 10 stores in Phnom Penh, a small fraction of the brand’s 2,200-store footprint in Vietnam. The company’s overseas strategy is still in its early stage, but up-and-coming entrepreneurs can’t help but take such examples as a warning sign of the difficulties faced by even the most successful local brands.

An even stronger incentive to focus on home turf lies in Vietnam’s rapidly expanding consumer market. According to a report by Deloitte this year, the annual revenue of the country’s retailers grew from $85 billion in 2013 to $142 billion in 2018. It is projected to climb to $180 billion by the end of 2020, representing a faster growth rate than any other Southeast Asian market. GDP per capita has also grown more rapidly in Vietnam than in any other local market since 2010.

“The consumption story is broad, well-known, and deepening. A lot of the start-ups that we see in Vietnam are targeting the Vietnamese consumer, and that market can be quite big on its own,” says Bert Kwan, a managing director at Northstar Group. “At that stage entrepreneurs do best if they can deploy capital where the expected return is going to be highest, and it’s hard to find many markets where the return on capital is much higher than Vietnam.”

Indeed, Vietnam’s consumer story is so compelling that the conventional play in Southeast Asia is to target the country with brands from outside to access its nearly 100 million increasingly affluent consumers. Navis Capital acquired Nitipon Clinic, a cosmetic surgery chain based in Thailand, in 2015, and brought the company into Vietnam last year. It now operates 11 centers in the country, along with the 140 that it has in its home country.

“For us, the Vietnamese market is really attractive – it’s underpenetrated and growing very fast, and we have a brand where there’s credibility in beauty from Thailand and lots of experience with the products,” says David Ireland, a senior partner at Navis. “I can’t think of any brands in Vietnam that could go the other way.”

Exceptions to the rule

Navis’ investments in Vietnam reflect this view of the consumer opportunity as inwardly-focused – the firm has done deals in the country with an export-oriented theme, but these are for companies in more traditional industries, such as denim supplier Saitex and seafood processor Godaco. Targeting overseas customers with consumer plays is seen as an altogether different level of difficulty. 

As a Vietnam-based start-up that is actively pursuing an overseas strategy, Elsa aims to challenge this perception, but its expansion is still too recent to be deemed a success. The company is an outlier in several ways. Van originally conceived the business while studying in the US and was able to attract significant early backing from US-based investors with a pitch based on its global applications. Elsa was also created with flexibility in mind, so that it could be adapted to a variety of local payment gateways with a minimum of difficulty.

By contrast, founders focus on the local market first face pressure to tailor their systems to the tastes of Vietnamese consumers, making it time-consuming to retool the business for foreigners later on. Moreover, they must deal with the skepticism of the local investors, most of which actively discourage thoughts of foreign markets. In cases where entrepreneurs are determined to take their businesses overseas, investors try to keep their initial forays as focused – and limited – as possible.

“They might see commonalities between Saigon and greater Kuala Lumpur, for example, and they’ll export a business model that works in Vietnam and take advantage of less commercial assertiveness in that city,” says an executive at one Southeast Asia VC firm. “It’s not something we would encourage, but when we’re dealing with entrepreneurs that are this aggressive and have a track record of success, we’re very careful about pulling the reins back – you’d rather they try to do it and harness that aggression.”

There are local companies where investors see potential for overseas growth, but even these tend to stand out in ways that are difficult for local peers to imitate. For example, Mekong recently invested in Pizza 4P’s, a pizza chain with 11 locations and a farm-to-table advertising strategy that emphasizes fresh artisanal ingredients. In this case, the outbound potential has more to do with the elements of the business that are not local than with those that are.

“The founders aren’t Vietnamese, so they bring an international angle to it and they have a huge fan base among foreigners and tourists,” says Mekong’s Freund. “That company has the potential to expand overseas, but it’s the exception in our current portfolio, and for the time being all their growth will be in Vietnam.”

Local cachet

Most Vietnamese companies lack even this much investor support for the outbound expansion thesis. In order for cross-border plays to be seen as dependable avenues for value-add rather than isolated success stories, investors and entrepreneurs will need to find areas where an association with Vietnam can be a draw for consumers the way that electronics is for Japan, or fashion is for South Korea.

So far, such differentiation opportunities have been hard to identify. Food is one obvious area, drawing on Vietnam’s unique culinary culture and reputation for high-quality agricultural products. Technology could be another – Navis’ Ireland points to the surprising global success of Flappy Bird, a mobile game created by a Vietnamese development team, as proof of the country’s talent, though as products like this aim for an international audience identifying them with Vietnam could be challenging.

Until entrepreneurs can identify a cultural essence that is exportable, investors will continue to see Vietnamese companies as suited only for their home market. However, industry observers are confident that pressures of maintaining growth in Vietnam’s relatively small economy will push local entrepreneurs and investors to take the necessary steps for further development.

“Fifteen years ago, people in Thailand would have been equally lukewarm on the idea of outbound expansion,” says Jeff Olson, a partner at Hogan Lovells. “But we live in a global market and at some point these companies are going to have as big a share of the domestic consumer base as they can. They’ll have to capitalize on regional markets in order to keep growing.”   

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• Topics
• Southeast Asia
• Consumer
• Performance
• Vietnam
• Northstar Group
• Mekong Capital
• Navis Management
• Outbound investment