Why Investors Should Care About Vietnam

Nathaniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

While emerging markets have tumbled greatly over the last month, some of our largest and most recognized brands are preparing themselves for the long-term potential of these developing nations. Year to date the iShares MSCI Emerging Markets ETF has performed significantly weaker than its broader market counterparts with a decline of nearly 13%. Fitting with the theme of some of my more recent articles, I would like to highlight a few companies looking to assert themselves in one country in particular.

Vietnam, officially the Socialist Republic of Vietnam, has caught the eye of some huge companies, including McDonald's (NYSE: MCD), Burger King Worldwide (NYSE: BKW), and Starbucks (NASDAQ: SBUX) to name just a few. Just a decade ago Vietnam received zero foreign investment, however the country has become a manufacturing hub over the last five years. Companies, including Samsung, have begun to shift out of China and into Vietnam to take advantage of its open economic policies, geographical position, political and economic stability, and, most importantly, dense and inexpensive labor resources. In an International Business Times article, analysts predicted employers could literally cut their labor costs in half by shifting their manufacturing from the traditional locations in Asia. While the labor may remain inexpensive, the population is growing increasingly educated, thus creating great potential in the decades to come.

Arching over Asia

While it may feel McDonald's has expanded to virtually every corner of the global, Vietnam remains an opportunity for the country. Late Monday it was announced the company had approved a Vietnamese businessman to start the expansion in the region, sooner than originally predicted. The company plans to open its first restaurant in the population-dense Ho Chi Minh City by early 2014.

While Vietnam is small in comparison to its developing counterparts, Ho Chi Minh City is home to a growing 6.65 million people, which I'm sure can't wait to get their hands on yet another western brand name. Up to this point, fast food competition has done fairly well within the region. Going forward I see Vietnam becoming a small but profitable venture that will need to be explored further. The promise of rising incomes and increasing educational importance bodes well for discretionary spending and therefore the company over the longer term.

Adding a jewel to the crown

Burger King has bounced back and forth between the public and private markets a few times before making its way back to the public spotlight in 2012. The company avoided an initial public offering altogether through a series of complex financial moves such as a merger and relisiting through a London-based company. As a result of the constant turning of private equity, the company is leaner, and charbroiled to perfection. While the company may have abandoned its iconic King to improve its reputation, everyone still likes the burgers.

The company has established itself on a smaller scale through a franchising partnership but believes the market remains far from saturated. President of Burger King's Asia Pacific market, Elias Diaz Sese, was recently interviewed by the Saigon Times where he discussed the potential in the years ahead. Sese stated the company would be working closely with its current partners IPP group and Blue Kite Vietnam (BKV) to make the franchised locations more accessible for the average middle class consumer. Management went on to say the market represents one of the most important Asia Pacific markets for the company's future. According to Sese, rising middle class incomes amid a young population is exactly what the company is looking for. 

Bold like the coffee

Vietnam is the next major market for Starbucks, which has already asserted itself throughout the majority of the Asia Pacific market. The potential within China has been highly publicized, however Vietnam has yet to receive similar coverage. The company opened its flagship store in Ho Chi Minh City earlier this year, and wow, it's not your average Starbucks either.

The two-story coffee house has been welcomed with open arms, and the shop offers consumers the typical Starbucks staples in addition to market specific favorites such as the Parisian Baguette and Roast Duck Wrap. The company leveraged its current partnership with Hong Kong Maxim's Group to help with a full scale roll-out. The demographic of Vietnam fits well with the image and customer base Starbucks like to target. The country is made up of young, well educated individuals, exactly the customer base Starbucks pulls here in the United States. Moreover, I would expect the company's free Internet access a huge plus for the majority of patrons as its has been in its other international markets, such as India. 

Wrap-Up

While Vietnam may be small in geographic terms, the county may offer huge potential for established brands looking to diversify their growth even further. McDonald's is set to open its first location within the country by early 2014, and I would expect the company to find similar success seen by the already established Burger King. Starbucks has taken baby steps within the region in preparation for a full scale release in the years ahead. While we cannot say today the magnitude of Vietnam in terms of revenues, I fully expect Vietnam will positively impact these companies over the coming years. 

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Nathaniel Matherson has long position in Starbucks. The Motley Fool recommends Burger King Worldwide, McDonald's, and Starbucks. The Motley Fool owns shares of McDonald's and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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