HANOI — Mother-of-two Nguyen Thi Trang is an avid shopper at her local Lotte Mart in Hanoi’s Ba Dinh district. Not only is the recently opened South Korean supermarket more comfortable than the open-air market where she used to purchase groceries, it also gives her peace of mind. “People are suspicious of local shops,” Trang said. “I’ve heard many stories about unsafe food and fake products from China being sold in shops here, but if I buy from a foreign brand, then I know it’s safer.”
Vietnam, famed for its chaotic street markets and haggling retail culture, is attracting a slew of big-name international retailers such as Marks & Spencer of the U.K., South Korea’s Lotte and E-Mart, and France’s Auchan. All are keen to cash in on the growing retail sector, which in the first nine months of 2014 saw cash registers ring up sales of more than $76 billion, a year-on-year increase of nearly 11%.
Vietnam has two other demographic advantages that bode well for future shopping growth. First, 56% of consumers are under the age of 30, according to Nielsen, the consultancy. Second, the so-called middle class population — those with $714 a month to spend — will grow from 12 million to 33 million by 2020, according to the Boston Consulting Group.
Economic growth also appears robust, in spite of sluggish state-owned industries, a weak banking sector and a shock to business sentiment caused by widespread anti-Chinese riots in May. Four people were killed in the violence and hundreds of factories and business premises were seriously damaged.
Foreign direct investment pledges have dropped 18% so far this year, but FDI disbursements are up 3.2% year on year, to $8.9 billion.
The World Bank said in early October that Vietnam is growing below its potential, but forecast that gross domestic product would expand by 5.4% in 2014, the same rate as in the previous year. The institution foresees 5.5% growth in 2015, with falling inflation. The government forecasts that consumer spending will double by the end of the decade, when per capita income is expected to reach $3,000 from $1,900 now.
Sean Ngo, director of Vietnam Franchise, a franchising and licensing consultancy, said that a dramatic shift is occurring in consumer culture, as the new middle class gravitates toward modern shopping malls. “Retail consumption will continue to climb, and modern retail specifically has been growing at an average rate of 20% to 25% every year,” Ngo said.
There is also plenty more room for growth, with modern retailers making up only 20% of the market in Vietnam, compared with 90% in Singapore, 60% in Malaysia and 33% in the Philippines, according to Dezan Shira and Associates, an investment consultancy.
Interest in Vietnamese retail is tipped to expand further from 2015, when World Trade Organization obligations will force the government to fully open its retail market to foreign competitors. Trade with Vietnam’s nine partners in the Association of Southeast Asian Nations will also receive a boost next year, when tariffs on many goods are due to fall.
International retailers that have already established themselves in Vietnam are expanding aggressively, hoping to pre-empt the new competition. FamilyMart of Japan and Big C, a Thai chain, have opened new stores. Lotte recently opened a flagship 65-story outlet in Hanoi and plans a further 60 large stores by 2020.
Promises vs. reality
Nevertheless, foreign retailers face significant challenges, including Vietnam’s complex property market rules, stifling bureaucracy and limited retail infrastructure. Poor levels of transparency make it difficult for foreign entrants to assess the reliability of local partners. Vietnam also makes it tough for international groups to achieve economies of scale by forcing them to comply with an Economic Needs Test, which requires overseas chains to get permission from local authorities before opening additional stores.
Marc Townsend, Vietnam managing director of CBRE, the U.S. commercial real estate group, said a lack of clear ENT guidelines had created lengthy delays and a lack of transparency about decisions, impeding foreign retailers’ expansion. “No business can survive just on one, or even four stores,” Townsend said. “Some of our clients need to open up to 14 stores a year.”
The central government has eased operating restrictions by allowing retailers to avoid the ENT if additional stores cover less than 500 sq. meters. However, Townsend said the change has had little influence on the provincial governments that conduct the test. “The reality is it’s not getting any better,” he said. “Whether it’s customs procedures or opening more stores, what actually happens on the ground in the individual provinces is completely different to what the government is promising.”
In addition, it remains difficult to acquire prime real estate because of disproportionately high rents and a shortage of reliable property managers. There are also problems with poor logistics networks, and suppliers that fail to meet international standards. Vietnam Franchises’ Ngo said these hidden costs belied Vietnam’s reputation as a low-cost market. “This compounds problems in supply chain management, which is a key issue for a market like Vietnam, where the sourcing of raw materials, equipment and fixtures is key to managing costs and remaining competitive,” he said.
Some retailers, including FairPrice of Singapore, Aeon of Japan and Starbucks of the U.S., have turned to local and regional companies to help manage these issues. Others, such as U.S. brands McDonald’s and Dairy Queen, have entered the country by setting up franchised operations. Baker and McKenzie, a law firm, said that franchising allowed companies to dodge complications that arise in joint ventures or direct investments.
Some companies have used the tried and tested method of buying existing networks. Thailand’s Berli Jucker last month consolidated its presence in Vietnam by purchasing German retailer Metro’s 19 stores for an enterprise value of 655 million euros ($830 million).
Home-court disadvantage
Dinh Thi My Loan, chair of the Association of Vietnam Retailers, said traditional stores are struggling to compete with foreign rivals. She said the newcomers have access to government incentives, including land grants and tax concessions, that are unavailable to the domestic sector.
A survey by the association found that Vietnam still has 9,000 traditional markets, selling everything from edible snails to locally made cigarettes. This compares with about 750 supermarkets and 130 modern shopping centers. However, Loan said that if traditional merchants want to retain the lion’s share of grocery spending, they will have to adapt to modern retail trends by improving the appearance of their stores, developing better branding and providing a more enjoyable shopping experience. Many will also need to overcome lax quality standards and a stubborn service culture.
The big winners in Vietnam’s retail revolution may be consumers, who are increasingly placing their trust in brands that they associate with quality and a high standard of living. A U.S. Department of Commerce report published last year said rising Internet usage and contact with overseas-based Vietnamese had made local consumers familiar with goods from abroad. “Foreign products can and do compete in the local market, relying on marketing, branding and reputation for quality, safety and reliability,” the report said.
An assessment by Euromonitor International, the U.K. based market research group, said shoppers are increasingly concerned about health and food safety, with child health the top priority among households. A steady stream of food scares, often caused by lax monitoring and border control procedures, has fueled concerns about the quality, hygiene and safety of products sold by local retailers. Most notoriously, a 2007 food scandal drew national attention to a variety of contaminated foods, including rice noodles containing formaldehyde, banned pesticides in vegetables and fruit, and toxic soy sauce.
Back in Ba Dinh, Trang is far from the only shopper who is voting with her wallet. “Foreign stores are cleaner, the selection is bigger and the service is better,” said Nguyen Linh Thao, a 24-year-old student. “Why would I shop anywhere else?”
Source Nikkei Asian Review.