How International Dining and Food Chains Can Control Their Businesses In Vietnam
Now is the time for international chains to position themselves. Beginning in January 2015, Vietnam’s restaurant business is open to 100 percent foreign ownership. Foreign-invested enterprises (“FIE”) may run their own production and internal logistics network free from limitations. The dreaded Economic Needs Test (“ENT”), still required for large retail stores, may not affect restaurant outlets. Like them or not, the legal conditions required for mass-produced fast food will soon be in place. A shakeup may also occur among already-established restaurants with apparently foreign management. Expect to see international chains, which have been waiting for “100 percent ownership” and full control, to flock to Vietnam.
- Vietnam’s WTO Commitments provide for foreign ownership of restaurants
Currently, non-Vietnamese have a right to open restaurants in their own name only “in parallel with investment in hotel construction, renovation, restoration or acquisition.” Sector 9.A., Viet Nam – Schedule of Specific Commitments, GATS/SC/142, WTO (2007) (“WTO Commitments”). The result is that the vast majority of restaurants without hotel-like services, even if they appear to have foreign management, are probably registered and legally in control of Vietnamese citizens or domestic companies.
Joint venturing with a Vietnamese partner is technically not an option to lift such restrictions, as the business may be considered “foreign-invested”. On the other hand, licensing authorities have broad discretion to allow or decline foreign-owned restaurants. For example, they could permit a restaurant “disguised” as a hotel with a few rooms for rent applies.
This limitation on market access for catering food (CPC 642) and drink services (CPC 643) will cease 8 years from Vietnam’s accession to the WTO, i.e. – January 2015.
- Central kitchens – unrestricted food production facilities
Restaurant chains have central food production facilities – also known as “central kitchens” – to reap the benefits from economies of scale and maintain consistent quality across their outlets.
Food production itself is unrestricted to FIE in Vietnam. As in other countries, restaurant employees handling food are required to regularly obtain food safety and hygiene certificates. The same regulations should apply to both Vietnamese businesses and foreign-owned restaurants.
- Unrestricted internal distribution and logistics
Restaurant chains usually require strong logistics to source food from a network of suppliers. The logistics sector has recently been further opened to FIE, and although some restrictions remain, they should be irrelevant for businesses that do not offer logistics services to external customers. A chain with food production centers that distributes its food items to its own restaurants should not be restricted to do so. (For more information on recent changes to market access in the logistics sector, click here.) Of course, buying from local food suppliers is not restricted.
- Economic Needs Test not applicable to restaurants
The ENT should not apply to restaurants, so long as they are not considered retail outlets. Many foreign investors have considered the ENT a non-tariff barrier to market access in the retail sector. However, retailing services (CPC 631 + 632, 61112, 6113, 6121) are part of the distribution services sector under the WTO commitments, while catering food and drink services fall into the tourism and travel related services sector. The important difference is that restaurants are technically not distributing but serving food and drinks.
Deterring foreign retail companies, the ENT has created a loophole for licensing authorities to exercise discretion in assessing the arbitrary “economic need” for any retail outlet beyond the first one and effectively delay expansion plans. Fortunately, the ENT has been abolished for outlets of 500 square meters and less in 2013 in designated zones. Even if a local licensing authority considered applying the ENT to foreign restaurant related services, the ENT should not apply to restaurants of 500 square meters (about 5,370 square feet) and below in designated zones.
- Rice and sugar distribution restrictions should not affect restaurants
FIE can as of right not distribute tobacco, rice, sugar and a few other products. However, restaurants serve food and drinks. As stated above, offering distribution services to external customers is different from supplying your own restaurants and serving food and drinks. In other words, restaurants that only serve food products (e.g., cooked rice, sweets and sugary drinks) are not distributors or retailers of raw rice and sugar. Either way, foreign-owned restaurants should be allowed to serve food and drinks that contain rice and sugar.
- Fast track to opening a 100% foreign-invested restaurant chain?
Considering the time it can take to kick off a larger food chain, it is advisable to decide to come to Vietnam quickly.
Especially trademark and patent applications should be prepared and filed long before opening shop to protect one’s valuable intellectual property (“IP”). This should be a no-brainer, as there is no downside in having a registered trademark in Vietnam, even if the business changed plans and didn’t come to Vietnam. The risk of not registering one’s IP is higher, as another company may register your trademark first and enjoy the exclusive IP rights that come with it.
A prudent investor will also prepare the application documents well in advance. The gathering all required information to apply for an investment certificate (serves as certificate of incorporation) can be time consuming (e.g., legalization of foreign documents). The applicant will have to find the right person to perform the role of the legal representative of the Vietnamese entity and a suitable location for its head office. Once the flood gates open in January 2015, there might be a backlog of other companies targeting pole position, which could delay processing times. So, it is advisable to have all paperwork ready and submit before others do.
- Transfer of ownership of already established restaurants
Established restaurants in Vietnam seeking to transfer ownership to their foreign managers should benefit from the opening of the Vietnamese restaurant market. However, it is advisable to think strategically and avoid igniting potential conflicts with current business partners, who may be the registered owner or hold a controlling stake in the restaurant on paper.
Now is the time!
100-percent ownership will soon be available to international restaurant chains that previously considered investing in a local company in Vietnam or franchising to local licensee. Managers of established local restaurants may convert the legal ownership of their restaurant businesses. This may be the best and most natural way for many: build and operate your own restaurants!