Analysis of McDonald's difficulties

in entering the Vietnam market

Student ID 31221021667

Abstract:
This project undertakes a comprehensive examination of McDonald's
strategic approach to entering the Vietnamese market. In February 2014,
McDonald's opened its inaugural restaurant in Ho Chi Minh City, marking its
initial foray into the Vietnamese market. By 2017, the chain had expanded to 16
outlets in the second city. However, the company failed to meet its initial growth
projections due to challenges in sourcing ingredients locally at competitive prices
and offering menu items that appealed to Vietnamese consumers. This project
critically analyzes the reasons for McDonald's struggles in the early years after
launching in Vietnam in 2014. Furthermore, it evaluates the company's evolving
localization strategy to better tailor its operations, marketing, and menu offerings
to the local market. The insights gained from McDonald's experience may prove
invaluable to other foreign firms seeking to expand successfully in Vietnam.
 1. Introduction

The activities of Transnational Corporations (TNCs), these days, have become more
popular thanks to the development of technology, science, and globalization, impacting all
areas of Socioeconomic life on a global scale. Studying International Business, hence, has
helped deepen learners' understanding of globalization, economic development, and political
economy among countries, trade-related theories, cultures among countries, and the
restructuring of the global economy. McDonald's, a fast food chain from the United States, is
ubiquitous all over the world, and Vietnam is also one of the markets where McDonald's set
its foot. Having realized this, we have decided to analyze the very first challenges that
McDonald's faced when emerging in Vietnam's market based on the knowledge of the
International Business Management course, to point out the difficulties of McDonald’s and
provide feasible solutions for other companies in the future.

2. Case presentation
2.1. Company and Case Introduction
McDonald’s Corporation (McDonald’s) is one of the world’s largest and most well-
known fast-food chains, which was founded in 1940 by brothers Richard and Maurice
McDonald. With the first overseas branch in Canada in 1967, McDonald’s is now the leading
global foodservice retailer with over 38,000 restaurants in over 118 countries, serving a
staggering 69 million customers daily, known for its hamburgers, french fries, and signature
sandwiches such as the Big Mac, Quarter Pounder, and Egg McMuffin.
With rapid growth, McDonald's has had success when it has expanded into Asian
nations like China and Japan. However, things were different in Vietnam. McDonald's has a
staggering 45,000 locations in America. However, when it first entered the Vietnamese
market in 2014, it only had plans to open 100 locations there in ten years. As of right now, it
has only launched 28, due to several key problems.
Some key problems, such as Cultural differences in the taste (the initial menu lacked
local adaptations and customization options failed to cater to Vietnamese preferences);
Strong local competition and international competition (KFC, Lotteria, and Jollibee); and
differences in the affordability of the two types of markets can be a burden, making
McDonald’s slow to adapt to the Vietnam fast-food market.
 2.2. International Business Management and its relations to the
case analysis
The case of McDonald's in Vietnam is a perfect illustration of how international
business management principles play out in the real world, regarding cultural differences,
economic development, and competition. Based on some key IBM theories surrounding
economic systems, legal systems, managerial implications, determinants of culture; and terms
such as mode of entry, GNI, the Rate per capita, and taxes, we can analyze the initial failure
of McDonald’s in the Vietnam market. The subject then helps us understand the global
business environment, the strategic management in a foreign market, evaluate performance,
and make adjustments for specific cases when tapping into a new market.

3. Case analysis
3.1. Problems that challenged McDonald's at the beginning when
setting foot in Vietnam's market
McDonald's first took off in Vietnam in August 2014 with the entry mode called
“Franchising". It has nearly been a century since 2014, and McDonald's is considered a
“latecomer" compared to other international brands entering Vietnam. Though McDonald's
came late in Vietnam, it still faced challenges at the beginning, which was difficulty-related
culture, or cultural differences.

In the beginning, McDonald’s didn't research thoroughly Vietnamese culture.

Vietnam has been, for a long time, famous for its street food such as Xôi, Phở, Hủ Tiếu, and
Bánh Mì sold by street vendors or food stalls while McDonald's only offers food that is rich
in fat such as french fries, fried chicken, or even Western food like Hamburger. There is the
fact that Vietnamese people in their daily meals in the past, Vietnamese needed to consume
much carbohydrates such as rice, and fibre from vegetables and take in less fat. Besides its
limited choice of McDonald's for customers, Vietnamese people can buy food at the street
stalls or from the street vendors, which is both time-saving and cost-saving while if one wants
to buy at McDonald’s, he has to park his vehicle, queue in line for a long time and go through
many order procedures to have a meal which is much more expensive than meal afforded
outside.

When McDonald’s entered Vietnam, it applied the same pricing strategy as the ones
in Western countries. While a Big Mac costs around $3 in Vietnam, which seems reasonable
from a Western perspective, it is considered a premium price for local customers that they
would only spend occasionally. With the same amount of money, Vietnamese people have a
lot of options when it comes to food. Higher-income Vietnamese still saw McDonald's as an
occasional treat rather than an everyday option, limiting its potential customer base and
profitability. According to Numbeo's data, a meal at a typical Vietnamese restaurant costs
around $2.16, but a meal at McDonald's can be up to twice as expensive at $4.32. The idea of
paying double the price for a burger, soda, and fries did not appeal to most Vietnamese
customers. Even though McDonald's had localized menu items like chicken rice and grilled
pork rice, the vast majority of people could not afford to frequently dine at McDonald's given

the higher prices compared to other options.

 The GNI per capita of Vietnam is 20-23 times smaller than Americans, which means
Vietnamese people rarely purchase such products at the same price as American
people do.
The same goes for the average income per capita a month in the two countries
 In 2014, approximately 66.89% of the Vietnamese population lived in rural areas.
This means that around 33.11% resided in urban centers. Therefore, the amount of people
consuming fast food is still low.

McDonald’s found it difficult to find the supply of raw materials, ensuring that the
quality of a product is not too different from that of the United States, self-sufficiency in
Vietnam cannot meet McDonald's needs. When importing food from another country, the
excessively high import tariff on the products would harm business efficiency. J. Simplot, a
US agriculture expert, once stated that maintaining the typical characteristics of US potatoes
would be prohibitively expensive for US fast food chains. Domestic enterprises currently
supply solely veggies. The remaining ingredients, such as meat sourced from Australia, must
be imported from McDonald's supply chains abroad.

3.2. Approaches that McDonald's has taken to cope with its issues
in its infancy
Having realized that it was facing the very first issue related to the difference in
eating habits among countries, in 2016 McDonald's quickly adapted to Vietnamese culture.
They introduced some Vietnamese-inspired dishes to their menu to attract and retain local
customers, such as rice with grilled pork, rice with fried chicken, rice with grilled pork and
omelet, and so on. These dishes were designed to appeal to local tastes and to make
McDonald's more accessible to Vietnamese people, luckily McDonald’s got positive
feedback from the customers. What is more, McDonald's in 2022 localized its menu by
bringing a new dish into the market - Pho Burger, a combination of Phở - Vietnamese cuisine
and Burger - Western cuisine, which successfully gained a position in Vietnam's market.

To address price sensitivity in the Vietnamese market and encourage regular

patronage among various customer segments, McDonald's implemented a multipronged
value-focused approach. This included introducing a dollar/value menu in the early 2000s
with combo meals and popular a la carte items priced competitively between 25,000-50,000
VND, and expanding the selection over time. Furthermore, McDonald's utilized various
temporary discounting mechanisms such as buy-one-get-one coupons in print and digital
media, loyalty programs, student and senior citizen discounts at certain times, combo meal
subscriptions for offices and schools, as well as voucher promotions through corporate
partnerships such as Shoppee Food, Baemin,... Moreover, dine-in-only options saw
comparatively reduced pricing versus delivery orders.
 McDonald's pursued a strategic procurement initiative to establish local supply chain
partnerships within Vietnam. By developing domestic sourcing relationships with
Vietnamese agricultural producers and distributors, McDonald's was able to optimize its
regional input costs. Procuring key ingredients like produce, proteins, and staples from within
Vietnam allowed McDonald's to circumvent expensive import tariffs and transportation fees
associated with its traditional transnational supply chain model. For example, lettuce is grown
in Dalat, and fresh chicken eggs are produced by farms in Quang Ninh. By leveraging
indigenous supplier networks, McDonald's lowered its production costs and increased the
affordability of menu offerings for price-sensitive Vietnamese consumers.

3.3. Evaluation of McDonald's approaches in handling its business

issues
That McDonald's rapidly adapted to cultural disparities by introducing a new menu
for local customers was considered a sound, timely, and flexible approach. Their thorough
research, incorporation of traditional dishes, localization of ingredients and cooking methods,
catering to specific dietary needs, and cultural sensitivity have contributed to their market
share, brand reputation, and role as a model for other multinational companies. This strategy
highlights the benefits of cultural adaptation in achieving business success in a globalized
world.

When initially entering Vietnam, McDonald's struggled due to applying Western

pricing that exceeded typical incomes. A Big Mac combo costing double local meals proved
impractical for most consumers. However, over decades McDonald's recalibrated through
extensive menu localization, targeted promotions, and franchising optimizations - all aimed at
decreasing prices to appropriately scale with purchasing power. This gradual transformation
allowed McDonald's to attract a broader population as regular customers and establish an
operationally sustainable model. McDonald's experience highlights the necessity of cultural
adaptation, especially regarding financial accessibility, for MNCs seeking widespread
success in emerging markets.

By transitioning key procurement relationships to domestic Vietnamese agricultural

producers and food processors, McDonald’s reduced its import costs. However, merely
pursuing lower-cost domestic alternatives risked compromising McDonald's renowned
standards for food quality, consistency, and safety. To circumvent this challenge, McDonald's
adopted a dual approach - intensive supplier vetting and collaborative process oversight.
Strict audits and continual performance evaluations aimed to verify local partners possessed
requisite safety management systems and production capabilities to replicate signature
McDonald's recipes and ingredient specifications with precision. This dual strategy allowed
McDonald's to capture material cost reductions from Vietnam's import substitution policy,
without sacrificing the brand's reputation for standardized menu quality.

3.4. Some feasible solutions for the future

Another better solution that McDonald's can adopt to cope with its preliminary
issues is that McDonald's can deepen its connection with the Vietnamese community by
engaging in local initiatives, sponsoring cultural events, and collaborating with community
organizations. This engagement will foster a sense of belonging and goodwill towards the
brand. Furthermore, McDonald’s would receive warm support from local customers by
developing regional menu variations to meet people's tastes coming from different parts of
the country. This regional adaptation will help show their profound understanding of local
differences and enhance their appeal to consumers across Vietnam.

An alternative pricing strategy is instead of long-term gradual price reductions,

McDonald's could have implemented tiered pricing geared toward different customer
segments from the start. Tiered pricing allows McDonald's to appeal to a wider customer base
simultaneously, not just over decades. Also, this will result in less long-term investment
needed than gradually lowering all prices over the years.

Another alternative is developing regional food production and processing hubs in

Southeast Asia. McDonald's could invest in commercial kitchens/manufacturing facilities
located in low-cost countries near its key Asian markets. For example, building facilities in
Vietnam, Thailand, or Indonesia that can produce ingredients and finished/semi-finished
goods for the wider region. Because transportation is more efficient for shipping goods
overland or short sea routes within the region, versus long-distance imports. This further
reduces import taxes and logistics fees. Over time, the hubs could help strengthen localized
food systems and enhance regional self-sufficiency vs. reliance on costly extra-regional
imports.

4. Implications for firms managers in a similar situation

The challenges faced by McDonald's when first entering the Vietnamese market
hold important lessons for other international firms looking to expand into Vietnam. Firms
will need to thoroughly research Vietnamese consumer preferences and dining habits to
develop a menu and customer experience that truly caters to local tastes. Sourcing high-
quality ingredients locally at competitive costs is also crucial given that Vietnamese
customers focus on fresh, affordable options. Firms must localize every aspect of their
operations rather than directly importing home-country models. A phased rollout strategy
starting in major cities could help test adaptations before wider expansion. Comprehensive
market research and a willingness to learn from early missteps are imperative for long-term
success. Without properly understanding the unique Vietnamese market context from the
outset, firms risk experiencing the same struggles McDonald's initially did.

Check out the benefits and drawbacks of several large corporations. To ensure a
cautious and prompt entry into the Vietnamese market, new businesses can benefit greatly
from studying the strategies and limitations of successful competitors. This will help them
make an informed decision about their path.

5. Conclusion
In conclusion, while McDonald's is successful in other countries, it is flopping in
Vietnam’s market. Through a thorough and detailed analysis, we have identified many first
challenges of McDonald’s particularly cultural differences, local competition, and pricing
strategy, all of which came from the lack of thorough research before entering. Furthermore,
Vietnam has a lot of street vendors that offer food much faster and much more affordable
than McDonald’s. Besides, the initial problems were not due to the lack of understanding of
Vietnamese food culture, they also came from the Western pricing strategy that McDonald’s
applied. Finally, This paper has shed light on the sound approaches that McDonald’s took to
cope with the problems and provided suggestions for other companies to address when they
are in McDonald’s shoes in the future.

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