Did the Year of the Goat goad consumers to spend in 2015?
The Year of the Goat, 2015, was to be an auspicious year and was to herald in a year of promise and prosperity and, as far as consumerism is concerned, it did just that.
2015 was a promising year in terms of consumption trends in Vietnam. Clearly Vietnam is heading out of the recession that has plagued the country since 2010-11. For the first time in years most consumer indices increased, buoying the outlook for 2016. However, there are some underlying and very real concerns that may cloud the picture and create a backlash in the Year of the Monkey.
For many years now I have run a Consumer Confidence Index (CCI) and have forecast consumers’ spending preferences for the year ahead. For 2016, Infocus Mekong Research is continuing this tradition. The 2016 Infocus CCI has witnessed the highest ever increase in confidence, scoring an index of 86 out of a 100 index, putting 2016 as a year of even higher consumer confidence than 2008 and representing a four-point climb from 2015.
Key drivers for this increase in confidence include an optimistic outlook on foreign direct investment, employment, and Vietnam’s overall economic picture, and the belief that the average consumer’s living standards will continue to increase and optimism in overall spending among 12 consumer sectors in the Year of the Monkey.
The Big Picture
A review of Vietnam’s 2015 macro-economic picture paints a positive canvas of colors. Foreign direct investment is expected to have reached $22-$23 billion by year’s end, an increase of 5 per cent versus 2014. GDP growth should come in at 6.8 per cent versus 2014’s 6.4 per cent, while the consumer price index fell to 0.65 per cent; the lowest inflation rate in decades, largely fueled by lower global oil prices.
Vietnamese exports reached in excess of $154 billion, somewhat stagnating towards the end of the year, highlighting the overall weaker demand globally, while the trade deficit increased from 2014, to $3.5 billion. Overall the economy has surged forwards in 2015, though at a conservative pace.
Key consumption drivers
At the onset of 2015, consumer confidence was high (with an index of 82) and over the course of the year consumers have followed their new-found spending mojo with their wallets. One of the most striking trends is the growth of all things digital, from iPads to Smart TVs and, the biggest growth driver, smartphones. Over the past 24 months all of these items have experienced growth between 50 per cent and 150 per cent, with smartphones leading the way in urban Vietnam, now reaching 80 per cent of the population. The IDC Vietnam 2016 forecast estimates 34 per cent growth in smartphones, many of which will find their way to rural Vietnam, generating an entire new opportunity and connectivity in Vietnam never seen before.
Another major consumer growth area has been in the automotive sector, with car sales expected to reach an all-time high in 2015 of approximately 215,000 units (being at 193,000 at the end of November). Much of the growth is fueled by the emerging middle to high income groups, whom can now afford cars, as witnessed by the ever-increasing traffic congestion caused largely by all these new vehicles and their “new drivers”!
The banking and insurance sectors also had cause to celebrate in 2015. Based on the Infocus CCI survey, 30 per cent of all respondents took out a loan in 2015, most of which went to paying for real estate / property (35 per cent) and business investment (25 per cent). However, well over one-third went to purchasing products and services that increase one’s living standards or sense of well-being, such as cars, education, digital devices, and other non-essentials. This huge level of loans also indicates that banks have had a very festive year. Insurance companies have witnessed a bonanza in 2015. Back in 2013 less than 8 per cent of consumers had life insurance, whereas today this number has tripled.
Other sectors that had good years in terms of increased sales include healthcare and education, which have grown astronomically over the last five years.
Stalled consumer spending growth
One area of consumerism that is still suffering is the fast-moving consumer goods (FMCG) market. Consumers are just not spending at the rate and the amount they used to in the halcyon days of 2008-2009. 2015 marked the third year running that both the value and volume of FMCG sales experienced decline in growth levels. According to Kantar Worldpanel, value growth for 2015 was only 3.2 per cent in urban areas and 8 per cent in rural areas, while volume growth came in at 2 per cent in urban and 6.4 per cent in rural Vietnam. Much of this reduced growth is largely due to a reduction in the consumer price index but may also be caused by a saturation in urban Vietnam and the fact that priorities are changing and consumers may be pinching pennies on smaller daily and weekly purchases to buy bigger ticket items such as smartphones, cars, etc.
On a more positive note, Infocus CCI results indicate more positive growth for household care and personal care as well as food and beverage categories in 2016.
Upswing in purchasing behavior
The Year of the Goat marked a slight increase in the growth of modern trade retailing, from 2 per cent growth in 2014 to 4 per cent in 2015, according to Kantar Worldpanel. At the same time the overall growth of traditional trade continued its downward slope, reaching its lowest growth rate in decades, at 3.1 per cent against 2014. Though negative at first look, the upswing in modern trade growth may well be a symbol of consumers beginning to be less cost-conscious and showing a willingness to spend more for the convenience and the all-in-one shopping experience afforded by modern retail formats.
Shift from TV to smartphones
According to Kantar Media, advertising spend in 2015 grew by 10 per cent in all measured ad mediums in Vietnam, to over $1.8 billion, of which 90 per cent was spent on TV advertising. In contrast, the Number 1 activity consumers engage in the most, when not working, is using their smartphones, which was mentioned by 57 per cent of all consumers surveyed by Infocus in December, followed by using computers for online activities (29 per cent), while a distant third was watching TV (5 per cent).
The question must be asked, why are marketers spending so much of their advertising dollar on TV when viewership is in decline and the mobile evolution has absolutely engulfed urban Vietnam? As they say, old habits die hard and when in doubt stay with what is tried and trusted. A major trend moving forward is going to be advertising on mobile, as it has undeniably become the main media used in urban Vietnam, with almost half of all smartphone user spending three plus hours a day on their beloved smartphone. Look for more mobile content, consumer promotions, and viral TV-focused mobile advertising in 2016 and beyond.
Key to consumer growth in 2016
Economic indicators for 2015 show a marked improvement across almost all areas of the economy. Consumer as well as business confidence are at all-time highs, boding well for 2016. The potential windfall that the TPP will usher in, the fact that China is slowing down, making Vietnam more appealing, and the impact of major legal changes such as the new enterprise law, investment law, real estate regulations on foreign ownership, and new advertising legislation, all point to the potential for strong growth in 2016. Add to this the massive growth in all things technology driven and aiding connectivity and Vietnam is set for a new phase in its development. Call it “Doi Moi 2.0”.
Barriers to Growth
As far as barriers to growth are concerned, as mentioned before, consumers are beginning to leverage lower interest rates and take out loans for many of the goods they are purchasing. Thirty per cent of those surveyed had taken out a loan in 2015, for items such as property, cars, education, personal items (mobile phones, TVs, etc) and for business investments, turning Vietnam into a credit / debt culture. For a country that did not have a credit system until 2007, this new found access to wealth could wreak havoc if further global trends in economic downturns rear their ugly heads, such as continued declines in commodity prices, including oil and gas and agricultural commodities, on which Vietnam is so reliant.
When Vietnam joined the WTO in 2007 its economy went into overdrive, largely fueled by speculation in real estate, hyper-inflation (23 per cent), and high levels of promised foreign direct investment. With Vietnam’s new found economic confidence and the negative potential impact of the new laws mentioned earlier, inflation could again surface to dampen gains made as speculation may drive it to new heights.
The Year of the Monkey should be a very positive one, as consumers continue to spend in an effort to “Keep up with the Nguyens”, so long as debt levels are contained, inflation is kept in check, and the VND devaluation is curtailed. If, however, debt continues to climb and speculation drives up the cost of living, all of these positives may be stifled.