By Tim O’Shannassy and Stephen Jasper 

Acknowledgement

In late 2018 Group Chief Executive James Riley, a long-term Jardine Matheson employee, is grazing the breakfast buffet and enjoying the company of colleagues at the Mandarin Oriental Hotel Group’s (Mandarin Oriental) flagship hotel in Hong Kong, and cannot stop thinking of the opportunity and the challenges of opening a five-star luxury hotel in Ho Chi Minh City Vietnam, formerly known as Saigon. Has Mandarin Oriental chosen the right country and the right location within that country for this investment? Will the Ho Chi Minh City property be able to achieve and sustain the required room rate and ancillary revenues to deliver return on investment? How will Mandarin Oriental deliver their signature customer service and service quality in Ho Chi Minh City? There was much to reflect on with a tension between Jardine Matheson corporate objectives and Mandarin Oriental business-level concerns.

Ho Chi Minh City is a logical choice for a Mandarin Oriental property with the growing Vietnam economy, low labour costs and comparably low property ownership or lease costs compared with other major Asia-Pacific cities such as Hong Kong, Sydney and Melbourne. Ho Chi Minh City is the centre of economic activity in Vietnam and the major hub of the southern region of the country.

In relation to ownership structure Mandarin Oriental International Limited is the parent company of Mandarin Oriental and a subsidiary of Jardine Matheson Group. Jardine Matheson Group own a 66% shareholding in Mandarin Oriental International Limited. Mandarin Oriental International Limited is incorporated in Bermuda and listed on the London Stock Exchange with secondary listings in Bermuda and Singapore (Jardine Matheson, 2018).

Mandarin Oriental is famous world-wide an award-winning owner and operator of 31 hotels and eight residences across 21 countries and territories operating more than 7500 rooms globally (Mandarin Oriental International Limited, 2018). These are some of the most luxurious hotels, resorts and residences in the world. Each hotel, resort and residence reflect the brand’s oriental heritage, strong emphasis on customer service, and sense of space.

The Company

Mandarin Oriental is a small part of the much larger Jardine Matheson Group. Mandarin Oriental is responsible for 3% of the Jardine Matheson Group’s total underlying profit (Jardine Matheson, 2018), bringing in US $44 million in 2018.

The Jardine Matheson Group has its headquarters in Hong Kong, and its activities are heavily focused in Asia, with 56% of its assets in China, 40% in South East Asia, and only 4% in the rest of the world (Jardine Matheson, 2018). As a result, the Jardine Matheson Group is heavily dependent on Asian economies, particularly China.

As with the much larger Jardine Matheson Group, Mandarin Oriental also has an Asian background. It was founded in 1963 with the opening of ‘The Mandarin’ in Hong Kong, and in 1974, Mandarin Oriental acquired 49% of Bangkok’s famous historic hotel, ‘The Oriental’, forming the ‘Mandarin Oriental’. Mandarin Oriental has grown to a global brand with a total of 12,500 employees and total capital investment US $125 million (Jardine Matheson, 2018). The company is incorporated in Bermuda and listed on the stock exchange in London, Singapore and Bermuda (Mandarin Oriental International Limited, 2019).

The current group chief executive of the Mandarin Oriental Hotel Group, James Riley, has had a long career within Jardine Matheson, having been there since 1993. His previous roles include Finance Director of Jardine Cycle & Carriage and Jardine Pacific, and Managing Director of Jardine Pacific before being appointed Jardine Matheson’s Group Finance Director in 2005. From 2012 to 2016, Mr Riley was a non-executive Director of the Hong Kong and Shanghai Banking Corporation and Chairman of its Audit Committee. Before joining Jardine Matheson he qualified as a Chartered Accountant with Price Waterhouse in London and then spent seven years as an investment banker with Kleinwort Benson (Bloomberg, 2016).

Given the diversity of divisions within the Jardine Matheson Group, it would seem that there is a great deal of autonomy in Mandarin Oriental in terms of operations, as it is a very distinct identity within the portfolio of the Jardine Matheson Group’s assets. However, the leadership team of the Mandarin Oriental is paid somewhat below the industry average (Bloomberg, 2019), although this may reflect the Mandarin Oriental being part of a much larger group of companies.

The Branding

Mandarin Oriental is branded as a prestige offering, with luxury five-star accommodation. Their stated mission is to ‘completely delight and satisfy our guests. We are committed to continual improvement, to making a difference every day and to being the best’ (Mandarin Oriental Hotel Group, 2019a). The hotel chain began in Hong Kong and Bangkok, with location being a significant factor in the decision to build a hotel. Mandarin Oriental hotels are located in prestigious neighbourhoods in cities such as the Passeig de Gràcia in Barcelona and Knightsbridge in London and clients include royalty and some of the richest industrialist families in the world.

There is also a strong marketing campaign for the Mandarin Oriental using high profile celebrities (Mandarin Oriental Hotel Group, 2019a) such as actors Morgan Freeman and Lucy Liu, singer-songwriter Zayn Malik and champion golfer Adam Scott (Mandarin Oriental Hotel Group, 2019b), to enhance the sense of prestige and luxury.

Information technology has also been a significant component building the Mandarin Oriental brand. Microsoft technologies were working with Mandarin Oriental to provide premium digital experiences for guests (Microsoft Corporation, 2014). However, digital experiences for guests has not always gone to plan. For example, Mandarin Oriental was hacked and credit card data was stolen in a hack attack on the company’s network (BBC News, 2015). Since then Mandarin Oriental has worked hard to restore faith in their digital technology (Delporte 2018), with an ongoing commitment to continue to make investments in technology to ensure a high quality customer experience as technology steadily advances (Mandarin Oriental New York, 2018). As evidence of this commitment Mandarin Oriental is the first hotel to offer “business and technology butlers” on-site who provide information technology support to guests 24 hours a day (Mandarin Oriental Hong Kong, 2018).

Mandarin Oriental was slow to initiate a loyalty program for its customers (Skift Inc., 2018), finding that their customers wanted different benefits for their stays (e.g., upgrades) rather than complementary nights at a hotel. However, the Mandarin Oriental has invested heavily in digital marketing, using websites with multiple languages that can be viewed easily on a mobile (Mandarin Oriental Hotel Group, 2019a).

Mandarin Oriental room prices in Asia can vary at the low end from US$135 to US$140 per night in Kuala Lumpur and Jakarta to very expensive in Hong Kong depending on the season. Ancillary sales with each room booking (e.g. food, alcohol) also influence profitability of room bookings overall for a property.

Mandarin Oriental Hotel Group Financial Performance

In 2018 earnings before interest, tax, depreciation and amortisation were higher at US$179 million (2017 US$158 million). Underlying profit was higher at US$65 million (2017 US$55 million) with earnings per share at US 5.16 cents (2017 US 4.37 cents). Mandarin Oriental net debt at year end 2018 was US$285 million (2017 US$327 million) with gearing as a percentage of adjusted shareholders’ funds 5% (2017 6%). Within the Mandarin Oriental portfolio of properties Hong Kong and Singapore were the best performers, with one-off fees for Las Vegas and Atlanta also assisting 2018 results positively. Jakarta is also showing noticeable improvement in 2018 (Mandarin Oriental International Limited Annual Report, 2018).

The Current Situation in Vietnam

Despite a change in leadership due to the sudden death of president Trần Đại Quang in 2018, Vietnam is relatively stable politically and economically, with gross domestic product forecast to expand 7% in 2019. Vietnam has a stable currency and inflation rate, and the central authorities are committed to sustainable growth (Central Intelligence Agency 2018; Nguyen, 2018). Vietnam has successfully made the transition from a centralised planned economy to a free market economy (Fforde, 2019). There is also a strong manufacturing sector in Vietnam, and a relatively young population (Central Intelligence Agency, 2018). Investors are also attracted to the Vietnamese economy and Vietnam has strong foreign direct investment inflows as Vietnam opens economically (Central Intelligence Agency, 2018). Consumer confidence is relatively high in Vietnam compared with Thailand, Malaysia or Singapore (Nguyen, 2018).

However, there are potential problems looming for the Vietnamese economy, with economists stating that ‘Vietnam needs to keep an eye on borrowing’, with credit card use increasing, the Vietnamese government being close to its debt ceiling, a high proportion of bad debts in the banking sector, a collapsing real estate sector, and the potential of economic downside from the effects of a trade war between the U.S. and China (Nguyen, 2018).

Due to the rapid development of the Vietnamese economy there are significant environmental challenges, with water pollution and solid waste treatment being substantial issues, and the environmental situation in Vietnam is deteriorating due to a lack of governmental resources (GlobalSecurity.org, 2019). Because of the poor environmental conditions in Vietnam there is a very high risk of infectious diseases, especially food or waterborne diseases for travellers to Vietnam (Central Intelligence Agency, 2018).

Another issue is a reluctance to use internet banking in Vietnam, with many retailers not online, including restaurants (Toan et al. 2018). While the banking system is highly regulated (similar to China and India), the Vietnamese banking sector is not as efficient as either China or India, but is relatively inefficient (Nguyen TPT, 2018). The Vietnamese banking sector faces a number of difficulties in terms of human resources, with a lack of employees with the skills to use banking information technology effectively and information technology professionals to support an online banking system (Toan et al., 2018).

There are also a number of legal restrictions in Vietnam. While Vietnam is politically and economically stable, legal avenues such as freedom of information legislation, while aligned with best practice, is in practice ‘mainly symbolic and might not facilitate practices of real transparency in the country’ (Dang Trung & Do, 2018).

Culturally, using Hofstede’s six dimensions of culture model, Vietnam has a relatively high power distance index (Hofstede, 2017). This high power distance index implies that Vietnamese people ‘accept a hierarchical order in which everybody has a place and which needs no further justification’ (Hofstede, 2017), implying that in the hospitality industry, particularly high-end operations catering to the top end of the market, staff attitudes are more likely to facilitate customer comfort.

Ho Chi Minh City as a Destination

Most of the major hotels in Ho Chi Minh City are clustered around Nguyen Hue Street which runs from the landmark Ho Chi Minh City Hall. These hotels include the Reverie Ho Chi Minh City, the Park Hyatt and the famous Rex Hotel which is owned by the state-owned enterprise Ho Chi Minh City Tourist, and this location is likely to be where the Mandarin Oriental locates its new hotel in Ho Chi Minh City.

In recent years the hospitality industry has had substantial changes to its landscape, with the rise of online booking systems rather than the use of travel agents to secure bookings. Additionally, the rise of hotel price comparison sites such as Trivago and Wotif have put more power in the hands of customers, although these sites are less frequently used for large hotel chains such as the Mandarin Oriental (Martin-Fuentes & Mellinas, 2018), as well as a number of hotel review sites such as Yelp and TripAdvisor (Bigné, William & Soria-Olivas, 2019; Duffy, 2015). Also, the rise of AirBnB has significantly altered the use of hotels, although again this product focuses on the low end of the market rather than five-star accommodation such as the Mandarin Oriental (Belarmino et al., 2019; Guttentag et al., 2018).

Because of the shift in technology in the hospitality industry, the Mandarin Oriental Hotel Group has sought to be a leader in this space, investing heavily in digital marketing (Mandarin Oriental Hotel Group, 2019a).

In terms of hotel operations, because of the high risk of food or waterborne infectious diseases (Central Intelligence Agency, 2018), extra care needs to be taken with the water supply, water purification and kitchen in the proposed hotel, as well as training hotel staff in safe food handling techniques to achieve Mandarin Oriental quality standards. Overseas suppliers, including suppliers from Australia, are keen to supply produce to the Vietnamese market, and with a strong French influence on Vietnamese cuisine, dairy products are particularly well received in the Vietnamese context (Australian Trade and Investment Commission, 2019).

The Future

The Vietnamese market clearly offers a number of opportunities to multinational corporations such as the Mandarin Oriental, with a strong, stable and growing economy, stable currency and political stability. However, there are also several significant challenges in operating a premium hotel in the Vietnamese market, and the Mandarin Oriental Hotel Group needs to balance the opportunities offered in Vietnam with the challenges of opening and operating a profitable hotel in Ho Chi Minh city. Should Mandarin Oriental open a luxury hotel in Ho Chi Minh city? If so, what precautions should it take to ensure that the brand is protected and enhanced by this operation? What price point per room night can Mandarin Oriental hope to achieve in Ho Chi Minh City? How will Mandarin Oriental achieve its signature level of customer service in Ho Chi Minh City? What value will the Ho Chi Minh City property add to the Mandarin Oriental in support of the overall expansion strategy?

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