Into the game

At 8am on a wintery December 2, music blasted out as a crowd of hundreds queued up outside the first McDonald’s restaurant to open in Hanoi. “I’m very happy McDonald’s has finally opened a restaurant in Hanoi, and my kids were so excited they woke up at 6.30,” said Ms. Lana Shipley, a-34-year-old American. Three years after opening its first restaurant in the country, in Ho Chi Minh City, McDonald’s is now ready to offer northern customers its delicious menu of signature items.

The Hanoi outlet is at 2 Hang Bai Street, Hoan Kiem district, overlooking the fabled Hoan Kiem Lake. Covering an area of more than 400 sq m, its décor features images of the capital’s rich culture. More than 100 staff are on hand and there is seating for nearly 200 customers. The area with a full view of Hoan Kiem Lake is a great spot to enjoy McDonald’s while watching the world go by down below.

McDonald’s has an annual lease on the location, which also houses the headquarters of the Hanoi Pharmaceutical and Medical Equipment Import – Export Joint Stock Company (Hapharco). The space McDonald’s occupies was previously leased by Hapharco to a coffee shop. Mr. Nguyen Huy Thinh, Managing Director of McDonald’s Vietnam, told VET that preparations to open its first restaurant in Hanoi took than a year after the site was secured. “Finding a location was one of the key reasons McDonald’s arrived late in Hanoi,” he explained.

Location, location, location

McDonald’s opened its first outlet in Ho Chi Minh City in 2014 and earned around VND1.5 billion ($71,130) in revenue in its first two days. It also adopted an ambitious plan to have 100 outlets within a decade. Four years on, it has just 17 restaurants: 16 in Ho Chi Minh City and the new Hanoi opening. 

According to Mr. Thinh, it was difficult for McDonald’s to find a suitable location in the heart of Vietnam’s capital. “We spent a lot of time exploring the market in Hanoi, starting from when we first opened in Vietnam,” he said.

He added that the location determines the type of restaurant it can open. For example, a drive-thru service can require an area of 1,000 sq m, while an outlet in a shopping center, minus the drive-thru, can be smaller, at about 300 sq m. “Locations in Hanoi generally have a smaller area, with less parking, so finding a suitable location was much more difficult than in Ho Chi Minh City,” he said.

Figures from real estate consultants JLL Vietnam show that space for food and beverage (F&B) providers such as McDonald’s or Starbucks generally runs from 200 to 400 sq m, with 100 to 200 seats. “Therefore, international brands, when entering Hanoi, face the challenge of a lack of a diversified tenant mix in the market,” said Mr. Stephen Wyatt, General Director of JLL Vietnam. “They will choose a prime location in CBD for their first flagship store and will always have certain standards in terms of size and location for their first few stores.”

Rentals are also a key matter when seeking a location. According to a latest report from Cushman & Wakefield Vietnam, rentals in the CBDs of Hanoi and Ho Chi Minh City in the third quarter of the 2017 were almost double those in non-CBD areas. Average rentals in Hanoi’s CBD increased 3.4 per cent in the third quarter compared with the second quarter, and were 8.9 per cent higher than in the third quarter of 2016, standing at VND928,000 ($40) per sq m per month on average. Rising and costly rentals are primarily due to the limited space in the capital’s CBD, which also push up rentals in non-CBD areas.

McDonald’s Vietnam declined to reveal the rental at the new Hanoi restaurant, but industry insiders estimate it’s about $110 per sq m per month. 

Its location on what become vehicle-free streets on the weekend is a definite plus. The fast-food competition is also somewhat limited in the city center, to the advantage of the US giant. 

Hanoi retail attractive

Hanoi also witnessed a number of world-leading brands opening stores in November and December, including Zara and H&M. This confirms the attractiveness of the capital in the eyes of international brands, given it’s the second-largest consumer market in Vietnam. Competition between brands, in turn, makes Hanoi even more attractive. 

The latest report from JLL shows that in the third quarter of 2017, overall occupancy in Hanoi’s retail market continued to increase, from 80.3 per cent in the second quarter to 82 per cent. Meanwhile, occupancy was slightly down in Ho Chi Minh City’s retail market, by around 35 basis points quarter-on-quarter. A Cushman & Wakefield Vietnam report, meanwhile, noted that over the next ten years, the number of high-income earners in major cities will also increase. According to the Ministry of Foreign Affairs, these individuals represent only 1 per cent of the population today, but by 2020 it will be least 10 per cent, and they will play a leading role in the development of the high-end retail sector.

The development of tourism also bolsters Hanoi’s attractiveness among retailers. According to figures from the Hanoi Department of Tourism, total arrivals to the capital in the first ten months of 2017 were 19.81 million, of which international arrivals were estimated at 3.99 million, an increase of 26 per cent over the same period of 2016. Domestic tourists totaled 15.82 million, up 7 per cent.

Generally speaking, Vietnam’s retail market has huge potential, according to research from Savills Vietnam. It is in the middle of a period of economic transition and consumer behavior is changing dramatically. Vietnamese people are therefore willing to pay for famous international brands. For McDonald’s, Mr. Thinh believes that having opened three restaurants in Ho Chi Minh City during its first year, it will do likewise in Hanoi.