The Year of the Horse, 2014, was highlighted by many positive macro-economic achievements that unfortunately are yet to have much immediate impact on consumers.
Mr. Ralf Matthaes, Managing Partner of Infocus & Associates
A review of Vietnam’s 2014 macro-economic picture paints a positive canvass of colors. The Year of the Snake (2013) showed the first glimmers of recovery, while 2014, from a macro perspective, further solidified the idea that Vietnam is on the road to recovery.
Positively, Vietnamese exports again were a bright spot, reaching in excess of $137 billion at the end of November, a 13.7 per cent increase against November 2013. Other key macro-positives include the government’s December projections of exceeding GDP growth targets of 5.8 per cent and reaching 5.9 per cent.
The brightest news for Vietnam in 2014, however, has been the curbing of the CPI, largely thanks to recent global falls in fuel prices. Vietnam’s CPI at the end of November was 4.3 per cent, the lowest in over a decade. The lower CPI together with continual falls in lending rates and the stability of the Vietnam dong (VND) are all pivotal and welcome signs moving into 2015.
Conversely, foreign direct investment (FDI) experienced a decline compared to the significant increase recorded in 2013, when it reached $21 billion. In the first eleven months of 2014 FDI reached $17.3 billion, a 16.7 per cent all against November 2013.
Positively, though, FDI disbursement stood at $11.2 billion in the same period, a 2.7 per cent increase, of which the manufacturing industry garnered the lion’s share, with over 75 per cent, and indicating Vietnam’s continued reliance as a foreign industrial base for exports, especially non-added value and commodity products largely accredited to Vietnam’s ASEAN neighbors South Korea, Singapore, Hong Kong, Japan and Taiwan. These figures also put to rest any major impact created by the industrial riots earlier this year in southern Vietnam.
Other negatives in 2014 include the 60,000 plus bankruptcies, up 9.8 per cent from the previous year, and the decline in new capital from the 67,000 newly-registered enterprises, at -4.5 per cent. These numbers certainly point to a much more competitive market place, with less capital to go around. It also sends a strong message that the “build it and they will come” halcyon days of the 2000s are over.
Overall, from a big picture perspective 2014 was a positive year, which should have a slight trickle-down effect into 2015.
Vietnam’s micro consumer picture
In 2014 the TNS Urban Consumer Confidence Index dropped to 51 from 56 in 2013, the lowest level of confidence for the last ten years. Consumers by the end of the year followed up their sentiment with their wallets. The Year of the Horse only saw a paltry 2.4 per cent volume growth and 5.3 per cent value growth in urban Vietnam in the consumption of fast moving consumer goods (FMCG). Rural Vietnam was much more robust, recording a 9 per cent volume and 11.7 per cent value growth, but still a decline compared to 2013, according to Kantar Worldpanel. This clearly points to the opportunity that rural Vietnam still offers, while urban Vietnam appears to have reached a saturation point.
As volume and value growth decline, manufacturers are struggling to maintain previous growth and more importantly are seeing their profits plummet, which has a direct impact on overheads, staff salaries, and headcount, which further erodes consumer confidence and creates a vicious circle of less spend.
Shifting purchase behavior
2014 marks the second year in a row where traditional trade in urban Vietnam outgrew growth in spend compared to modern trade. Historically, modern trade has been growing over the years by between 18 to 20 per cent, while traditional trade has seen growth in the low teens.
This year modern trade value growth peaked at around 2.6 per cent while traditional trade was at 5.9 per cent. In terms of overall contribution to retail spend of $125.9 billion in the first eleven months of the year, which would suggest 5 per cent year-end growth against 2013, traditional trade now represents almost double the growth potential of modern trade, clearly showing a shift in purchase behavior to traditional trade fueled by perceived lower prices for shoppers at traditional trade outlets. Thus, manufacturers need to better understand and control their distribution channels in 2015 to take advantage of this trend.
During the Year of the Horse, only the beverage, dairy and personal care categories saw growth of over 5 per cent in value in urban Vietnam. Remember, the CPI is at 4.3 per cent, so this represents no value growth at all. Rural Vietnam, meanwhile, bucked the trend, with the beverage, dairy and personal care categories showing 10 per cent plus value growth. Volume growth was flat in urban Vietnam, while in rural Vietnam it achieved 9 per cent. Interestingly, the packaged food category suffered the smallest growth, even though the average cost of packaged food in the CPI fell by -0.4 per cent and -0.1 per cent in urban and rural Vietnam, respectively, further highlighting Vietnamese consumption and shopping habits embracing wet markets and fresh food.
Key legal changes in 2015
In my 2014 diagnosis for the Year of the Horse I stated that “Vietnam needs a genuine kick-start to the year to bring back lagging consumer confidence. The Year of the Horse is expected to have a slow start out of the gate as consumers await some good news in the form of a rebounding real estate market, easier to access capital, a stable currency, and limited inflation via government efforts.”
According to Mr. Marc Townsend Managing Director of CBRE, “2013 showed signs of recovery, especially the affordable housing market, but 2014 has seen a complete turnaround. Basically the residential market has gone on steroids, with large local developments coming on line across Ho Chi Minh City’s District 2, 4, 9 and Binh Thanh and developers being able to sell more mid-market units in the last four months than in the last two years.”
At the recent National Assembly in November 2014, several significant pieces of legislation were passed, which should jump-start consumer confidence in 2015. These include (i) the revised Law on Advertising, which will drop the 10 per cent cap on advertising spend versus revenue and make advertising spend a non-taxable business expense, which will definitely help reduce consumer product prices if manufacturers pass on the savings to consumers; (ii) the revised Law on Enterprises, allowing companies to operate in a vast multitude of activities beyond their current scope of activity, hopefully driving further internal investment but potentially creating a lack of focus on core functional and service offerings. If properly implemented, domestic investment could increase rapidly by year’s end; (iii) the revised Law on Investment, allowing for foreign investment into Vietnamese companies, utilizing a simple transfer system, and eliminating share and capital transfer. This again should help increase FDI in 2015; and (iv) the revised Law on Real Estate, allowing foreig