Foreign brands eyeing Vietnam due to growing young population and liberalising reforms

A stroll through the newest shopping mall in Ho Chi Minh City proves that there has recently been a sweeping transformation in the Vietnamese retail sector. Only some years ago shopping in large modern shopping malls was limited, and much of the demand for inexpensive, Asian-manufactured goods was focused around smaller, traditional retail centres. Now major foreign brands have been preparing to tap into a rapidly growing consumer base that has been driven by rising disposable income, rapid urbanisation and increased living standards. As shopping preferences continue to shift and develop, the growing number of modern supermarkets, hypermarkets and shopping malls in urban areas are exerting significant competitive pressure on smaller retail centres and family-run corner stores.

Asia is the world’s largest retail market, with China and Japan generating a significant share of that growth. But with the cooling off of China’s economy, players are now looking to change focus to smaller Asian markets, most notably Vietnam, which since joining the World Trade Organisation (WTO) in 2007 has been gradually liberalising its retail sector, leading to a new wave of foreign investment.

Retailers have also been drawn to the country’s relatively young consumer population. The 15-to-64 age bracket accounts for 70% of an overall population of around 90m and are a key demographic to spur further sales. As many young people are flocking to big cities where more jobs are available, Vietnam’s urban population is expected to grow by 2.6% annually from 2015 to 2020, the highest rate among its regional peers, according to the World Bank.

Changing Patterns

The inflow of foreign direct investment (FDI) has spawned a new class of consumers who hold managerial positions in banks, insurance firms and various types of manufacturing companies. This consists mostly of younger locals with monthly salaries of around $2000 and who are keen to snap up mid-range, fashionable – and foreign – products. As Vietnam has becomes party to a host of free trade agreements, it will have to cut import tariffs on a number of categories of goods, and this should pave the way for more products to enter the country. “Improved living standards have changed consumer trends and Vietnamese people have begun to embrace modern shopping habits over the past 10 years.” Duong Mai Hoa, general director and CEO of VinGroup, told OBG. “Recent surveys have shown remarkable improvement in consumer consciousness and awareness of health and quality, and the desire for original products and high-quality customer service”, she added.

Purchasing Power

For foreign retailers, however, pricing will be a crucial issue as Vietnamese consumers are known for their price consciousness and strong savings inclination. Also, as the major urban centres become more saturated, it could prove difficult for retailers to penetrate the more rural areas that are home to a large swathe of lower-income households. Because of the relatively modest level of purchasing power in the rural areas, traditional trade outlets, such as wet markets and grocery stores, still represent a vital part of everyday life for the Vietnamese customer, especially for fast-moving consumer goods (FMCG). According to Kantar Worldpanel Vietnam, which studies shopper behaviour, some 82% of FMCG sales in 2015 were done via general trade stores, while modern trade channels accounted for the remainder.

High rents in the city centre have also become a concern. Average gross rent for shopping centres located in central areas was $70.70 per sq metre in Ho Chi Minh City, which has a 91% occupancy rate for shopping centres, according to a third quarter 2016 Savillis property report. Central rents in Hanoi were even more expensive coming in at $100 per sq metre in the same period. Though this marked a 7.4% decline on the previous quarter as owners of several shopping centres lowered their asking rents to attract more new retailers to bolster lower occupancy rates, which stand at 75%.

Sales Figures

The retail market grew by 10.2% in 2016, up from 9.8% in 2015, with total sales of consumer goods and services reaching an estimated VND3527.4trn ($157.8m), according to the General Statistics Office. However, after inflation is factored in, the real growth rate in 2016 was closer to 7.8%, which was lower than the 8.5% expansion recorded in the previous year, thereby showing no significant change in purchasing power for consumers.

Heading into 2017, the retail sector is set for further growth, as Vietnam is expected to be less affected by the economic headwinds that have been causing turbulence in the region. The economy is set to continue to see growth in excess of 6%, while annual income per capita has increased to around $2110. The currency remained relatively stable, while inflation picked up slightly, but is expected to stay at around the 3-4% level – not too worrying in an economy that is growing as fast as Vietnam’s.

Open For Investment

The market has seen progressive deregulation under the government’s open-door policy, leading to a continuing wave of foreign investment. In early 2009 fully foreign-owned companies could establish operations and were allowed to work in the market independently. In addition, under the WTO agreement, since January 2015 the country has allowed foreign retailers to set up businesses with 100% foreign capital.

Since the country joined the WTO in 2007, it has been gradually liberalising the retail market and easing regulations and previous laws that had required specific planning permission for any foreign-owned outlet larger than 500 sq metres. As a result, there has been a raft of big names moving into the country offering more choices to the Vietnamese consumer. According to a report released by the Ministry of Industry and Trade (MIT) at the beginning of 2017, foreign retail enterprises now hold a 17% retail market share in shopping centres and supermarkets, 70% in convenience stores, 15% in minimarts, and around 50% in online, TV and phone sales.

Regional groups have been notably active. The Thailand-based Central Group of Companies established three Robins department stores and bought a 49% stake in electronics retailer Nguyen Kim and Big C Vietnam supermarkets. The Group is also responsible for bringing Marks & Spencer, Zara and H&M to the country. TCC Group, another Thai conglomerate, bought Metro Cash & Carry’s complete wholesale operations, including all 19 stores and related real estate portfolio for an enterprise value of $655m, according to a company release. Meanwhile, E-mart, a major South Korean retailer, has made a mark with its $60m shopping centre in north Ho Chi Minh City. Also from South Korea, Lotte Mart opened 11 supermarkets and is angling to increase this to 60 stores by 2020. Japanese investors; meanwhile, have been heartened by the success of Aeon, the largest retailer in Japan by sales revenue, which now has four malls in Vietnam and plans to build up to 20 by 2020. Also from Japan, Takashimaya entered the market in July 2016 as an anchor tenant in the Saigon Centre retail mall located in downtown Ho Chi Minh City. The new supply provided by the Saigon Centre expansion and Aeon’s recently completed fourth mall will bring more foreign brands to the market, creating competition between Vietnam and international retailers.

Domestic Scene

With the arrival of so many foreign investors, many have worried that domestic retailers will face an increasingly harsh struggle to survive as the competition heats up. MIT statistics show that the country is home to approximately 9000 traditional markets, 160 department stores and shopping malls, and more than 1m family-run retail shops. According to the MIT, foreign retailers own more than 100 supermarkets and shopping malls out of 800 nationwide; however, their activities only account for around 40% of revenue in the retail market. Vu Vinh Phu, chairman of the Hanoi Supermarket Association, said at a seminar in 2016 that foreign operators have a firm upper hand as they can offer an array of their own branded products, from cosmetics to essential goods such as foodstuffs, at attractive prices, while locally made products have a harder time getting on the shelves in these establishments. Meanwhile, products from countries such as Japan, Malaysia, South Korea and Thailand are becoming more and more popular.

The Vietnam Retailers Association (VRA) pointed out that while Vietnamese supermarkets and retail chains have seen upgrades, they still lack competitiveness in pricing, diversity of products and adequate quality control. Additionally, without good domestic production, it is hard to take advantage of opportunities and compete with foreign enterprises.

Convenience stores are becoming the fastest growing segment of the retail industry. By mid-2016 there were approximately 1500 convenience stores in the country, and more are on the way as Circle K and Shop & Go have started building more stores and will soon be joined by 7-Eleven Japan, which plans to open its first stores in 2017 with a total target of 1000 outlets within 10 years.

One local success story has been the conglomerate Vingroup, which flourished as a property developer and has since turned its sights to the retail sector. The group runs one of the largest convenience store chains across the country and has bought up retail chains, such as Ocean Mart, MaxiMark and Alphanam, as well as built its own supermarket and convenience store branding.

New Outlets

Despite the wave of newcomers entering the market, it does not appear to be all doom and gloom for local retailers, as many voiced confidence that they will continue to do well, especially in traditional retail channels. About one-third of local retailers have said the arrival of foreign companies will have a positive impact as it would help boost local consumption. According to a survey conducted by the VRA and the WTO, 50-70% of local retailers said they are confident in their ability to compete with foreign entrants, saying they have an advantage in locating better product supplies as well as understanding local preferences.

These advantages are expected to help local retailers expand into modern formats such as online retail, which has become increasingly popular with speculators. Furthermore, Vietnamese retailers are looking to expand regionally. “A number of leading Vietnamese FMCG producers are looking further afield for opportunities, with the country’s near neighbours seen as having strong potential,” Kajiwara Junichi, general director at Acecook Vietnam, told OBG.

Shopping Online

With an internet penetration rate of around 50%, e-commerce has been growing at a rapid rate. According to the Vietnam e-Commerce and IT Agency, revenue generated from the e-commerce retail market doubled between 2013 and 2015 to reach $4bn, and in 2016, 34% of companies were selling their products on social networks. Yet this growth is almost entirely concentrated in the two main cities of Ho Chi Minh City and Hanoi, which together account for 75% of the e-commerce market. A July 2016 survey by regional media agency Asia Plus showed that 67% of the residents of these cities purchase goods online, with 47% of them buying from the social media site Facebook.

Indeed, social networks appear to be the way forward for businesses, as the same survey showed shopping via forums or social networks jumped from 53% in 2014 to 68% in 2015. The number of Facebook users in Vietnam is increasing rapidly and reached 40m in mid-2016. This has prompted shop owners and retailers to shy away from e-commerce trading floors and instead sell on social networks.

For smaller traders, one option for widening distribution networks is to partner with large e-commerce companies that sell their products on their own platforms and marketplaces. This allows the traders to save money and avoid developing websites or applications. The biggest online shopping company in the country is Lazada, which attracted around 4000 businesses in 2016 and employed some 700 people. The Chinese giant Alibaba owns a 51% stake in the company, which gives it added expertise and know-how. Given that Vietnamese shoppers have shown to be price sensitive, company officials have based their strategy on competitive prices, which seems to have paid off for the time being.

The apparel industry is growing both on- and offline with about 200 foreign fashion retailers active in Vietnam, accounting for 60% of the clothing market. Fast fashion retail brands such as H&M, Gap and Zara have undertaken ambitious store opening plans. Yet, it is the country’s essential goods like food and drink that are propelling retail.

A Palatable Business

The food and beverage sector has seen a fair share of interest from both domestic and foreign investors owing to its large potential and steady yearly growth rate, as well as fast food demand driven by a young, increasingly urban population. Fast food revenue in Vietnam in 2015 stood at $747m, up 9% on the previous year, according to industry reports.

The growth of the food sector has also buoyed the operations of businesses that service this industry, such as bakery, poultry and dairy companies. Companies like Fonterra – a New Zealand-based multinational co-operative, and one of the biggest importers and distributors of dairy products in Vietnam – launched Anchor Food Professionals and has accumulated a 57% market share. The food service business is used in some 1500 bakeries, hotels and restaurants, according to the company.

The beverage sector, meanwhile, has seen yearly growth rates of 7-8%, according to the Vietnam Beer, Alcohol and Beverage Association (VBA). In 2015 the beverage industry alone contributed over $1.5bn to state coffers and sustaining more than 400,000 jobs. Among alcoholic drinks, beer continues to be the beverage of choice for Vietnam, with total consumption standing at about 3.8bn litres in 2016, according to the VBA. The industry expects annual growth of 4-5% over the next five years.

Chilean wine has the second largest market share accounting for around one-fifth of sales mostly due to the Vietnam-Chile Free Trade Agreement, which took effect in 2014 and slashed import taxes on Chilean wine from 56% to 20%, with further plans to drop to zero by 2030. Although, in wine, French brands are still the market leader with a 35% share.

Outlook

Overseas retailers are expected to continue pouring money into the country given the preference for foreign brands. For local products to survive, Vietnamese retailers will have to focus on investing in new product development and marketing campaigns. Though foreign brands enjoy broad popularity, overseas retailers will also need to stay on top of their game as increasing price consciousness could result in a decline in demand for costlier foreign goods. There is also an ingrained historical and cultural preference for small, family-run stores and traditional shopping formats.

The market is growing quickly, and PwC expects retail sales volumes to grow by an average of 7.5% over the next five years through to 2021 and more investment from foreign firms. A growing middle class will continue to buoy the sector, but there will also be more openings for big-name luxury brands. Indeed, the proportion of households earning more than $10,000 per year is set to rise from 2% in 2014 to approximately 20% in 2018, according to PwC, and the middle and affluent classes are expected to grow from 12m in 2014 to 33m by 2020 creating increased demand for mid-range, high-end and luxury goods.