Downturn rains on retail parade
New rules allow foreign companies to establish wholly
owned retail outlets in Vietnam, but where's the rush?
By Eric Johnson
In different circumstances, Jan. 1, might have been a bigger deal than it was in Vietnam.
That was the date from which foreign retailers were allowed to set up wholly owned retail outlets in the fast-growing Southeast Asian nation.
But coming on the heels of a depressing second half of 2008, when survival, and not expansion, is on the minds of most retailers, it hasn't been that big a deal. Yet.
Retroactively, the date could prove hugely important. The policy change, one of the mandates set when Vietnam was admitted to the World Trade Organization, means foreign companies won't have to rely on partners to set up shop in the country.
Prior to Jan. 1, a handful of major international retailers had already hopped on the wagon – notably Germany's Metro, France's Big C, Malaysia's Parkson and South Korea's Lotte. But there wasn't any big rush to announce wide-scale plans as the ball dropped on 2008.
Hoang Thi Tuyet Hoa, deputy head of the planning department under Vietnam's Ministry of Industry and Trade, told a press conference in Hanoi on Dec. 30 that there had been almost no action since the previously mentioned firms announced intentions to set up wholly owned subsidiaries, Than Thien News reported.
No Wal-Mart, no Carrefour, no Tesco. Just a lot of pause for reflection. It's worth noting that of the four international retailers who are opening their own stores in Vietnam, two are from Asia and both are from Vietnam's neighbors. In other words, there hasn't exactly been a stampede from the West. Tesco is said to have been marketing itself in Vietnam for the last year without having an outlet in place. Wal-Mart has said it is considering Vietnam as a potential market, along with fellow ASEAN nations Indonesia and Thailand, but it seems to be focusing more on China, India and Japan.
It's indicative of the current economic climate. At a time when retrenchments are the norm, not many are willing to plant their flag in Vietnamese soil just yet. But they most likely will, because Vietnam is a huge, and growing, market, rife with as much potential for consumption as it is for production of goods.
Before the global economic crisis this fall, consultant A.T. Kearney released the 2008 version of its annual Global Retail Development Index. The report (www.atkearney.com/shared_res/pdf/GRDI_2008.pdf) named Vietnam as the most promising market in the world for foreign retailers.
Now Vietnam had been lurking in the top five for a couple years, even surpassing China in 2006. But this year, it passed India for the top spot, mainly because analysts at A.T. Kearney saw the perfect confluence of potential consumer spending and lack of government resistance.
'While Vietnam's $20 billion retail market pales in comparison to India or China, the absence of competition and 8 percent GDP growth (year-end GDP growth was actually closer to 6.5 percent) make it an attractive expansion opportunity for global retailers,' A.T. Kearney wrote in June at the release of the index.
The size of Vietnam's retail sector shouldn't be overestimated. India's retail sector, for instance, was pegged at $511 billion in the report. But Vietnam has many advantages, notably a young population and two big urban clusters.
'Vietnamese consumers are among the youngest in Asia, with 79 million below the age of 65, and increased their consumer spending by more than 75 percent between 2000 and 2007,' the report said. 'The country is growing increasingly urbanized and concentrated with more than one million people a year migrating into the two large cities of Ho Chi Minh and Hanoi.'
But perhaps the biggest advantage is a distinct lack of sophisticated competition.
'The Vietnamese consumer is seeing rapidly growing per capita income and regulations are drastically opening up the market for new entry,' said Mike Moriarty, a partner with A.T. Kearney and co-leader of the GRDI. 'Now is the perfect time to get involved. It won't be easy and you'll be a pioneer. But now is the moment. Currently the top five organized retailers in the country, including Saigon Co-op, G7 and Casino (which owns Big C), have less than 3 percent of the market.'
A large part of transitioning to more organized retail will be changing the buying habits of the Vietnamese people. The A.T. Kearney report said the cities have significant pockets of middle- and upper-class dwellers craving modern shopping experiences, be it for electronics, clothes or groceries.
A report in fall 2008 by the Vietnamese think tank Business Studies and Assistance Center found that Saigon residents age 20 to 45 have increased their spending on clothing from 11 to 18.5 percent of their total income just in the past year.
But growth in spending alone doesn't justify a foray into Vietnam. For one, per capita income in Vietnam is low – less than $1,000 per year. That's much lower than in China or India.
There are also consuming habits to consider. Do Vietnamese consumers prefer smaller outlets where they can get fresher food (or at least where they have the perception that they're getting fresher food)? Will they flock to gleaming box outlets and malls? The traditional shopping experience involves visiting open-air markets, and habits are hard to change.
'Traditional mom-and-pop stores and wet markets still dominate,' the A.T. Kearney report said. 'In Ho Chi Minh City alone, there are more than 6,000 mom-and-pop stores and more than 2,000 wet markets, the latter being a major source for grocery and personal care goods. Shoppers trust the freshness of the products they buy in wet markets, knowing they come directly from the field or wholesale market each morning. These markets also offer convenience, location, variable pricing and familiarity as consumers have developed relationships with the sellers. Convenience is especially important as the Vietnamese tend to buy their produce daily.'
The retail produce sector seems particularly apt for organization, given that Vietnam is a huge source of exported refrigerated goods, as well as food commodities like rice.
The supply chain implications of allowing in foreign retailers are not too hard to discern. In general, the pattern across Asia has been that when foreign retailers enter a market, that country's supply chains become more efficient. Foreign retailers bring with them trusted multinational logistics partners, who in turn force local logistics companies to adapt or get left behind.
In Vietnam's case, there's already a nexus of logistics activity given the country's rise in recent years as a sourcing destination for exported goods.
|'The Vietnamese consumer is seeing rapidly growing per capita income and regulations are drastically opening up the market for new entry.'|
There's a sense Vietnam has been waiting for foreign retailers to enter the market in order to drive supply chain efficiencies. Multinational logistics companies – many subsidiaries of major container lines – have been operating in Vietnam for years. But they've been mostly focused on the relatively simple process of routing raw materials to factory and then finished goods from factory to consolidation center to port.
The logistics scene grows more complicated when the web of domestic and international distribution becomes more intricate. The same sort of bump in expertise from the entry of foreign retailers is expected in a handful of burgeoning nations in Asia – from the Gulf countries to India to Indonesia.
In Vietnam, however, infrastructure clouds the picture. As documented in 'Caught in transition,' most of the country's containerized goods arrive via three river terminals near Ho Chi Minh City. And getting those goods into the heart of the city isn't so easy.
Domestic retailers seem to understand the stakes as far as logistics is concerned. In 2007, four of the biggest retailers, Hapro, Satra, Saigon Co.op and Phu Thai, jointly formed the Vietnam Distribution Association Network Development and Investment Joint Stock Co. (VDA). The goal was to strengthen their purchasing power, logistics and distribution networks to gird themselves against an expected onslaught of massive foreign retailers.
And in early January, the Business Studies and Assistance Center announced a sweeping plan to help domestic manufacturers get their products to rural areas. The plan would allow companies to have their goods consolidated and packaged and sold through rural outlets more effectively than they could do it on their own.
The response to the threat of foreign might, in other words, seems to be collaboration.
Another trend to ponder is that domestic manufacturers have focused so heavily on exports that they've exported their best products abroad while leaving the domestic market with the lower-value goods. That's created a perception among Vietnamese consumers that imported goods are better than domestic ones.
For domestic retailers to counter the notion that imported isn't necessarily better, domestic brands will have to do a better job of selling themselves to Vietnamese consumers, said Pham Hoang Ha, vice chairman of the Phu Thai Group, in a summer 2008 article in Than Thien News.
'That's why the Vietnamese have grown fond of imported goods,' he said.
Vietnamese government officials have played down the allowance of foreign retailers in the market, saying most will likely enter in franchise agreements, not wholly owned subsidiaries, allowing domestic producers and retailers to prosper alongside them.
'We shouldn't panic when further opening up the market to foreign investors, but we shouldn't be careless either,' said Nguyen Cam Tu, deputy minister of the Ministry of Trade and Industry, at the end of December.
'Vietnam's retail market is more suitable with small-sized retailers so domestic companies will be able to maintain their foothold,' said Hoang Tho Xuan, head of the ministry's domestic-market department, at the same press conference.
All of this may be moot for a few months, though, as Vietnam tries to rediscover its growth trajectory like every other emerging Asian nation.
The demand malaise has not just tempered the plans of foreign retailers, but domestic ones as well – companies who probably should be taking advantage of foreign retailers' reticence to charge unabated into Vietnam. Both domestic retailer Saigon Co-op and Vinatex (a venture by the Vietnam Textile and Garment Corp. to open retail outlets) have fallen behind in their planned expansions. Vinatex, for instance, is planning to open 100 outlets throughout the country by next year but currently has only around 40.
While the demand downturn seems to have temporarily halted expansion into Vietnam, a case can be made that now is as good a time as ever.
The western credit crunch 'makes the retail opportunity in emerging economies more compelling (less than 10 percent of these markets are well-organized),' the A.T. Kearney report said. 'For global retailers, the message is clear: Even when faced with tough economic conditions in their home markets, they can realize continued double-digit same-store sales growth and profits in their emerging markets. This kind of growth creates a powerful incentive for large retailers in developed countries. Pursuing expansion into new markets appears to be the best means to further diversify their customer and operations bases, and deliver continued growth and shareholder returns.'
The emphasis on Vietnam is particularly poignant now. The report suggests that companies who move in now will get the clearest advantage afforded by the loosening of restrictions on wholly owned foreign operations.
'The window of opportunity begins to close once regulatory barriers to entry become less onerous, and when many global competitors have already entered – having snapped up the best real estate and captured consumer mindshare,' the report said. 'There may be additional opportunities in organized retail after this point, but only for retailers with the most innovative approaches.'