Vietnam: Ripe for Development

Despite remarkable development success over the last decade, Vietnam and its 78.5 million inhabitants are facing a number of difficult challenges. The economic renewal programme (doi moi) initiated in the late 1980s yielded rates of gross domestic product (CDP) growth of eight percent p year on average during 1990 and 1997, but in recent years a loss of momentum has hindered progress. For adventurous players, however, the food retail market holds untapped promise.
Elsevier Food International, Vol. 5, Number 1, February 2002
Oliver Vera

The retail picture in Vietnam has changed rapidly over the last five years. Total retail sales in current terms registered quick growth from 1996 to 2000, with double-digit increases in 1997 and 1998. In current value terms, total sales amounted to VND211 trillion in 2000, representing a rise of eight per cent over the previous year.
Retail sales growth of food outpaced that of non-food during the survey period. Total sales of food grew by 87 per cent in current prices over the five-year review period, compared with 49 per cent for non-food products.
Still, Vietnam's retail industry continues to be under-developed. Small, family-owned retail outlets dominate the retail infrastructure in the country. The number of retail outlets decreased by around 20 per cent between 1996 and 2000. The fall in 2000 was about four per cent. The establishment of large modern retail outlets (supermarkets, discounters, department stores and speciality stores) drove the smaller ones out of business.The modern outlets are centred on the commercial capital of Ho Chi Minh City in the south of Vietnam. Beyond the capital,
Hanoi, Da Nang and Hue have limited organised retailing. Among food retailers, independent grocers and wet markets playa key role as distribution channels, selling basic food items to meet daily needs. Several giant international retailers have been studying the market and are preparing themselves for entry.

Expanding and developing
The key issue facing the retail trade in Vietnam is one of expanding and developing the existing infrastructure from one based on wet markets and stand-alone independent retailers to one that includes local retailing chains and international retailers.
Foreign investment participation in retailing is still restricted. The only foreign retailer that has set up shop there is French retailer Cora, which operates three hypermarkets in Ho Chi Minh Town region. As a consequence, the development of modern organised retailing is expected to grow at a gradual pace.
Local retailers, however, are beginning to develop their own chains. These include the Co-op supermarket chain, and several bakery chains such as Kinh Do, Duc Phat and Hy Lam Mon. These outlets are of modern design and sell food suited to local tastes.
The US-Vietnam Trade agreements signed in 2000 and the Asian Free Trade Area (AFTA), which will be effective in Vietnam by 2005, are expected to boost the retail industry. The law governing retailing is not very clear at present, particularly in relation to franchising and foreign investment. This has impeded competition and growth of retailing in Vietnam. The recently introduced rules on packaging and labelling will enable consumers to identify the country of origin of goods sold. The government has been emphasising the need for better standards in food hygiene. This in turn will lead to an improvement in the quality of food retailing.
Food distribution is extremely basic in Vietnam, dominated mainly by high-street food outlets.
The restriction placed on foreign investment participation in retailing is a matter of concern. However, local food players in the bakery and fast food sub-sectors have capitalised on this opportunity to develop their own chains of stores. The government is planning to open the food distribution market to foreign investors, but this will take place only gradually. New concepts of retailing such as franchising, C-store and fast food will develop eventually, first in the wealthier areas such as Ho Chi Minh City and Hanoi. They will then expand to other city areas, but are unlikely to appear in the provinces for another ten years. International fast food players have been investigating the market and are waiting for the appropriate time to enter Vietnam.
As a result of restrictions on foreign investment, local players dominate the non-food distribution. Cora, the French discounter chain, is an exception. Co-operatives and individual family stores dominate the market, though supermarkets and department store have established in Ho Chi Minh City.
Several giant international retailers have been studying the market and are preparing themselves for market entry. The major retailers are local players. Co-op, a supermarket chain, was the leading retailer in 2000, followed by Cora. Total retail sales are projected to grow by 58 per cent between 2000 and 2005 in constant value terms, to VND333 trillion. The value of food sales is forecast to reach VND124 trillion, while non-food sales will rise to VND208 trillion by 2005.

Retail sales: overall trends
Total retail sales in current terms registered rapid growth during the 1996-2000 review period, with double-digit increases in 1997 and 1998. In current value terms, total sales amounted to VND211 trillion in 2000, representing a rise of eight per cent over the previous year.
Strong economic growth contributed to the robust expansion in retail sales in 1997 and 1998. These years also saw the introduction of the modern retailing concept in Vietnam. The establishment of supermarkets in the country generated impulse purchases among consumers, giving the impetus for retail spending. These modern retailers have laid the foundations for future development of the retail industry, particularly in terms of diversity and quality of goods and types of retail outlets. The quality of retailing has improved significantly, thus encouraging higher consumption of products that are in regular demand.
Another important factor that has helped to push up retail sales in Vietnam is the presence of fmcg companies, both local and international. These companies have stimulated consumption through their promotions and advertisements in the media. These activities have created an awareness among the Vietnamese for packaged and branded products, which offer convenience and hygiene.
In addition, the government's limited open market policy towards fmcg investors has led to fierce competition among manufacturers, much to the benefit of consumers and retailers. Despite these encouraging developments, the inability of retailers to adapt to local conditions, coupled with the slowdown in the domestic economy, resulted in the easing of growth in retail sales in 1999 and 2000.
The Asian Free Trade Area (AFTA) and the American- Vietnamese trade bilateral agreements will come into effect in the coming years. These developments are expected to contribute positively to the future growth of the retail industry in Vietnam. There will be a greater in-flow of products to the local market, thus enhancing competition.

The sales issue
Retail sales growth of food outpaced that of non-food during the survey period. Total sales of food grew by 87 per cent in current prices over the five-year review period, compared with 49 per cent for non-food products.
In 2000, there was a change in consumer attitude towards the purchase of food. The rising incidence of illness in 1999 due to the consumption of unhygienic food has led to the preference for packaged food sold in healthier environments. At the same time, the appearance of food chains selling fast food suited to the local tastes and at affordable prices has appealed to the young and busy consumer. As a consequence, growth in food sales at the retail level was constrained by competition. In contrast, the non-food retail sector has been developing at a slower tempo. However, it is envisaged that there will be a big improvement in the quality of products sold and prices of the goods. More branded and packaged products manufactured locally and internationally will be available in the future. This will enable consumers, particularly those in rural areas, to purchase better quality products.
Over the survey period, the share of retail sales to total GDP rose from 52.9 per cent in 1996, to 61.8 per cent in 2000. As Vietnam is a developing country, a higher proportion of income goes on consumption. Improvements in personal disposable income allowed the purchase of more consumer goods to satisfy basic needs.

Steady growth
Vietnam's economy underwent a period of steady growth in the 1990s following the ruling Communist Party's decision to liberalise the national economy. However, in 1999, the economy encountered many difficult points. The recessive tendency of these has not been overcome, and deflation obstructed growth. The fast conversion of the economy between inflation and deflation influenced the recession. In 2000, Vietnam's economy showed good signs, while the exterior environment was becoming brighter, especially with regards to the recovery of Asian countries after the economic crisis of 1997. Vietnam's GDP grew by almost seven per cent, a rate that surpassed expectations and is seen as the foundation for economic growth in the forecast period.
Retail sales accounted for 73 per cent of total consumer expenditure in 2000, up from 64 per cent in 1996. As the level of income is low in Vietnam, spending is overwhelmingly devoted to essentials and basic services namely health, transport and education. Nonetheless, the rising share of retail spending reflects the growing aspirations among the Vietnamese to improve their standards of living. The number of retail outlets decreased by around 20 per cent between 1996 and 2000. The fall in 2000 was about four per cent. The establishment of large modern retail outlets such as supermarkets, discounters, department stores and speciality stores drove the smaller ones out of business. The larger outlets offer more products at competitive prices in a better shopping environment. Smaller retail outlets, by contrast, are family-owned and run from the home. The range of merchandise sold is very limited. Unable to withstand the competition, many have ceased to operate. For a market that is highly fragmented, the demise of these small outlets is a healthy development.
In 2000, food outlets comprised about 81 per cent of total retail outlets, with a large number of small food outlets located along the streets. The quality of food sold in these outlets is expected to improve in the future in view of the demand for better standards of hygiene by consumers.
Expenditure on food constitutes a large proportion of retail spending. The opportunity for tapping non-food market is still very much in its infancy. This explains why there are fewer non-food retail outlets in the country.
The total retail sales area amounted to 8.4 million square m in 2000, an increase of 25 per cent since 1996. Average space per retail outlet has also expanded from 7,300 square m in
1996, to 11 ,600 square m in 2000. The bigger average retail space area is attributed to the appearance of large modern retail outlets such as supermarkets and department stores. Also, the family-run retail outlets, faced with increasing competition, have increased the shop area in order to offer consumers a wider range of products and the convenience of shopping in a larger area. At the time of writing, there were no official development plans that clearly defined the type of retail infrastructure that will evolve in the future. Until a clear strategy on retailing emerges, the government is unlikely to take steps to change the law related to retailing. While the retail industry is expected to remain closed to foreign participation, the quality of retailing will improve gradually.
There is no legislation governing the size of the retail space area or opening hours. Free competition exists among local players. However, retailers are required by a recent ruling to indicate the country of origin of products. The number of retail businesses fell by 27 per cent over the five-year review period, to 454,543 in 2000. Many of the companies that closed their operations included independent retailers that were unable to withstand the increasing competitive pressure from the larger modern outlets.

Types of retail businesses
Most of the retail businesses in Vietnam continue to be family-owned and run. It is normal for each family to own more than one retail outlet. However, co-operatives play an important part in the provinces, particularly in northern part of Vietnam. Co-operatives are state-owned, and their network is organised at province, district and ward levels, along the same lines as the government administration network. New modern retail chains such Co-op, Kinh Do and Due Phat have just emerged, with the last two being privately-owned companies. Retail sales through food retailers grew by 83 per cent between 1996 and 2000, reaching VND101,125 billion. Growth was particularly strong in 1997 and 1998 due to inflation. Subsequently, Vietnam suffered a slowdown in economic growth, which led to the closure of a number of food outlets, especially the independent grocers. As they account for about 80 per cent of food retailer sales, the impact resulted in more moderate rises in sales in 1999 and 2000. Independent grocers dominate the retail infrastructure throughout the country, accounting for 70 per cent of food retailer sales in 2000. Supermarkets and traditional markets, both with almost 12 per cent, had the next largest sales. The fast growing supermarkets are a threat to independent grocers, which tend to be stand-alone family-run outlets, operating within limited space and stock keeping unit, while consumers are increasingly demanding better quality products and convenience.

Rate of growth
The rate of growth of supermarkets fluctuated during the survey period. The higher growth rates enjoyed during the 1994-1997 period could not be sustained in the latter part of the 1990s. The major impediment is the higher prices, which discourage purchases from these outlets. However with the recent improved bargaining power with manufacturers as supermarkets began to expand, these retailers have been able to pass the benefit of lower prices to consumers. The new pricing will help to strengthen future sales. Supermarkets did earn the highest average sales among the food retailers throughout the five-year review period, though. In 2000, average sales per outlet amounted to VND90 billion. The sum is expected to grow in the future because of the rising preference among Vietnamese to shop at supermarkets rather than general stores.
Most retail outlets in Vietnam are located along the street, with easy access. In this sense, they are viewed more as convenience stores in the local context. The Western concept of convenience stores, as per 7-Eleven, is not present in Vietnam.
Bakers recorded a 430 per cent rise in sales between 1996 and 2000. This spectacular growth reflects the changing tastes for convenience food among the Vietnamese. A large number of Vietnamese are engaged
in food trading as a form of livelihood. Setting up the 'wet market' form of trading requires little capital.

Chain stores
At the time of writing, there were no major retail chains in Vietnam as the retail market is still developing and is not completely open to free competition and foreign investors. But there are signs pointing towards local retailers starting to establish their own chains. Among them are Co-op Mart and Maximart supermarkets and Kinh Do bakery. In December 2001, meanwhile, Vietnamese retailer Masan announced plans to invest VND75 billion in a chain of 150 neighbourhood shops under the Masan Mart banner in Ho Chi Minh City and Hanoi during 2002, and 300 nationwide in the longer term. The outlets, which will be between 60 to 100 square metres in size, will stock more than 1,000 product lines and will open from 6am to Wpm. To compete with local markets, Masan intends to cut overheads completely. All the outlets will be linked online to a central office in terms of stock control, monitoring and supply. Away from the the home players, Cora was the only foreign retail chain and the only discounter - in Vietnam in 2000. Co-op, the supermarket chain owned by Saigon Co-op, was the leading retailer in 2000. Its total sales are estimated at VND500 billion. Co-op has five supermarket outlets. Cora, the discounter, a subsidiary of Bourbon Groupe, ranked second, while Fahasa, the book/stationery retailer was third.

Retail forecasts - trends to watch
Supermarkets will become important retail channels in urban cities, particularly Ho Chi Minh City and Hanoi, the two biggest cities in Vietnam. Modern retailing will be introduced gradually into the area. Department stores and shopping malls will feature, but they are not expected to grow rapidly in the near future due to government controls.
Local fast food chains, particularly bakeries, are expected to record fast growth.
In general, the quality of all retail outlets will improve and the degree of fragmentation will be reduced. The operations of the stores will be more structured.
Total retail sales are projected to grow by 58 per cent between 2000 and 2005 in constant value terms, to VND333 trillion. The value of food sales is forecast to reach to VND125 trillion, while non-food sales will rise to VND208 trillion by 2005.
Higher disposable incomes in future are expected to support the purchase of higher value food products, thus generating the significant rise in sales of food. Changing lifestyles in Vietnam and consumers' concerns over hygiene will prompt them to buy branded and packaged food sold at supermarkets and food specialist store rather than at the wet markets. The establishment of bigger and more modern retail outlets in the future will increase the supply of a larger quantity of non-food products to the Vietnamese. Despite the strong growth in food sales, its proportion to total retail sales is expected to decrease over the forecast period.
The majority of retail outlets in Vietnam will continue to be food retailers, with most stores expected to stock canned food, which meets consumers' preference for convenience and hygiene. However, the growth in the number of food retail outlets will slow towards the end of the forecast period. Fierce competition from bigger and modern food retailers will lead to the phasing out of small food outlets. Independent grocers will continue to account for the largest share of food retailers' sales during the forecast period due to their dominance in terms of number of outlets. Sales of independent grocers will amount to VND91 trillion in 2005, equivalent to 62 per cent of total food retailers' turnover.

Biggest revenue
Supermarkets will generate the second biggest revenue after independent grocers, but will be the most dynamic retailers, as they will enjoy growing popularity as a channel for buying food items. They will have a better level of penetration in urban Vietnam where there are a considerable number of middle-class consumers to support such large-scale stores. It is envisaged that higher levels of disposable income will provide the threshold for chains of supermarkets to develop in the future.
In contrast, traditional food retailers, namely, independent grocers and wet market stallholders, will see a decline in their share of food retailers sales. Growth in the sales of these retailers will lag behind that of supermarkets, reflecting the restructuring process traditional retailing will undergo to adapt to the changing retail environment.
Despite the advent of modern food retailers, independent grocers will continue to dominate the retail food sector not only in terms of sales but also in outlet number. The second largest group of outlets will be represented by traditional markets. Many families will continue to depend on small-scale retailing as a means of a livelihood.