Opportunities and challenges for retail businesses in Vietnam

Author:  Pranida Syamananda

Opportunities and challenges for retail businesses in Vietnam

Despite facing high inflation, trade deficit, and fluctuating exchange rates over the past few years, investors still view Vietnam as an attractive place for investment. However, the last two or three years have seen a shift in foreign investment from the manufacturing sector to the domestic demand related sectors. Retail trade sector is one of the most attractive investment areas.

Consumer spending in Vietnam is growing fast due to increased purchasing power and large market size. With a population of 90 million, 60% of the population is of working age with growing incomes. Even though most of the population is currently in the lower-middle income bracket, the upper-middle income proportion is expected to increase from less than 1% in 2011 to nearly 10% within 2030. This will lead to increased demand for various goods and services, especially in large cities like Ho Chi Minh, Hanoi, Haiphong, Dong Nai, and Can Tho.

The spending habits of Vietnamese consumers are moving more towards modern retail shops that answer changing demands with more diverse goods and services. For example, traditional demand for fresh food products is being replaced with more ready meal products, demanding from today's working population. This will lead to more consumers making weekly shopping trips to modern grocery stores, e.g. hypermarket, supermarket, convenient store instead of traditional market. The location is important, as most Vietnamese people still use motorcycles for transportation. Therefore, placing grocery stores near community areas, homes, and familiar locations will be important. However, in the case of top-up food shopping, some consumers may still prefer going to fresh markets or shops near their homes due to convenience. Aside from food and necessary consumer goods, Vietnamese consumers have also increased their consumption of fashion and IT goods, as well as furniture and home decoration products. Rapidly changing consumer behaviors will offer more opportunities for investors.

Vietnam's growing consumption capacity has made the country's retail sector a target for many foreign investors. Although it has allowed 100% foreign investment in retail businesses according to liberalization under the WTO since 2009, Vietnam does require businesses to seek permission to open new branches from the Economic Needs Test (ENT) Committee, which will assess their appropriateness and any impact on existing businesses nearby. However, it is not generally applied especially in a fast changing city such as Ho Chi Minh and Hanoi. Instead of applying ENT, it may set the specific requirement such as the size of additional branch that allow opening in a specific area. Despite some obstacles from government restrictions, the proportion of foreign investment in the retail sector continued to increase from 1% in 2005 to 3% in 2011. Many foreign investors have interested in grocery stores and plan to expand more branches in the next few years. South Korean investors have established the Lotte Mart supermarket chain, with 30 branches planned by 2018. Meanwhile, Japanese investors plan to add 300 branches to the Family Mart chain of convenience stores by 2015. Not only grocery store formats but also non-grocery store formats, such as shopping malls and other specialty stores are also gaining attention from foreign investors. Malaysian investors, in particular, have opened five Parkson shopping malls in Ho Chi Minh City, one in Hanoi, and one in Haiphong.

Although foreign investors are paying more attention to Vietnam's markets, the retail market is still not saturated; in particular non-grocery stores. Most of non-grocery store branches are still clustering in some large cities. The number of shopping malls and department stores is only seen in large cities like Ho Chi Minh and Hanoi, where the supply of retail areas for shopping centers from 2010 to 2012 grew by 28% and 54% respectively. In addition, closer examination in each city shows a great deal of clustering in some certain areas. For example, in Ho Chi Minh City, most shopping centers are located in the business center, District 1. There are not so many shopping centers in other areas, such as the area near Tan Son Nhat Airport, a middle class area, or other residential areas. These areas have high potential for growth.

Not only competing among foreign investors, but local investors also play a large role in the retail business. Data from commercial real estate firm CB Richard Ellis on retail areas in Ho Chi Minh City shows an increase in retail areas belonging to the Vietnamese private sector, which now owns more retail areas than joint ventures with foreign investors. As Vietnamese investors have less experience in managing retail businesses, they have adapted to competition from foreign investors by modifying their service strategies. This includes taking phone orders as well as using their insightful knowledge and understanding of local spending habits to retain their customers. At the very least, they can launch a new company logo to appear more modern as has already been done by the Co.opmart, one of the largest supermarket chains in Vietnam.

Given that local investors have an advantage in understanding local tastes and demands, it is important for foreign investors to study consumer spending habits in detail before making any investment decisions. The examples of spending habits include how Vietnamese people tend to find information through sources like websites before making expensive purchases, or the role of loyalty cards, which is important as Vietnamese consumers have high brand loyalty and like discounts and promotions. In addition, Vietnamese tend to spend more for decorating home, but they concern on the size of furniture as most of the houses in Vietnam are quite small and have limited space.

Despite Vietnam's high growth potential, there are still risks to be considered, including the stability of the Dong and high real estate prices. Vietnam's chronic trade deficit has forced the government to depreciate the Dong by 30% since 2008. Even though the current account has returned to surplus in 2011-2012, it is still worth keeping an eye on, as Vietnam relies heavily on imports, especially of raw materials and machinery. Furthermore, investor confidence in the Dong is further hampered by other factors, especially the budget deficit. Another worrying factor is the expensive land prices in large cities. Residential land prices in Ho Chi Minh City, despite a 10% drop in prices in a few years ago are still quite expensive comparing to a price in Bangkok, while land prices in Hanoi, which is a business zone, have increased by 200% in the last three years. It is also difficult to find appropriate locations for businesses.

Vietnam's retail market has high potential for growth, but investors may face fierce competition and complicated regulations. The new entrants, especially SMEs will face the challenges in competing against international giants. The entrepreneurs should find business alliances, improve quality and selection, and create a strong network with wholesale distributors and cooperate with large international business groups to effectively compete in this high-growth market.