09:14 (GMT +7) - Thursday 19/10/2017

Vietnam Today

Platform laid

Released at: 23:01, 05/01/2015

Platform laid

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 foreign ownership of property as an investment, not just as a residence, which should create an influx of foreign investment. 

If the government can implement and monitor these significant changes, money will start to flow back into the economy at a significant rate, which will obviously be the good news consumers have been anxiously waiting for since 2009. 

2015: Year of the Goat diagnosis

Considering that most of these changes will only be implemented by July 1 and have a typical lag effect in terms of good news trickling slowly to consumers, 2015 will start off rather sluggishly. 

If properly implemented, a noticeable impact should be felt by the end of Quarter 3 or 4. In addition, if the ASEAN Free Trade Agreement is actually ratified and in place, Vietnam stands to gain greatly in many sectors. 

Thus, the Year of the Goat will start slowly but pick up towards Quarter 3, if (i) savings from advertising legislation are passed on to consumers and the CPI remains below 4.5 per cent; (ii) interest rates and the value of the VND remain stable; (iii) all decrees are implemented and protected; and (iv) the rebound of the real estate market continues.
On the down side, many of these new laws could actually breed mass speculation and generate another bubble, as experienced between 2006 and 2009.

Uneven contest

Mr. Nguyen Ngoc Hoa, Chairman of Saigon Co.op, tells VET that Vietnamese retailers are at a distinct disadvantage compared to foreign retailers.

Many analysts believe that local retailers are gradually losing their competitiveness and there is a risk that the market will be taken over by their foreign counterparts. What are your thoughts?

According to a recent report from the Ministry of Industry and Trade (MoIT) there are about 70 foreign retail establishments out of the more than 800 operating in Vietnam. These foreign retail establishments, however, are four to five times the size of local retailers. It is necessary, moreover, to distinguish between types of retailers within the retail market. It would be a very large number when including all types of retailers, such as material retail sales for agriculture, etc. The market share of foreign retailers only accounts for 3.4 per cent, according to the MoIT. Nonetheless, the most important issue is the competition in modern distribution channels, including food, foodstuffs, cosmetics and daily consumption goods, etc., and the market share of foreign retailers for these products is huge. 

Foreign retail corporations have invested quite strongly in Vietnam. In terms of investment forms, there is an important difference now compared to previously. Five to ten years ago foreign investors usually invested in building retail establishments from the ground up. Now, however, many invest via mergers and acquisitions (M&A), and in this way it doesn’t take much time for them to build a retail system in Vietnam (five to seven months for negotiations). So their penetration into Vietnam will be faster and their ability to do so is substantial thanks to their experience and strong financial resources.

Some are concerned that with large numbers of foreign retailers in Vietnam, the goods sold at their supermarkets will be mainly imported from overseas and Vietnamese goods will gradually lose their position. Do you think such fears are justified?

Vietnam should not look at the market just as it is now; there needs to be foresight and forecasts for the next several years to come. In my opinion, there are two things to consider. Firstly, when the market share of foreign retailers is not big they can’t sell what they want; they must sell what the market needs. However, when their market share is large, the situation is reversed and distributors will play the role in leading producers and the market in what is available for sale. 

Secondly, Vietnam has been accelerating the implementation of free trade agreements. Tariffs will come down to zero per cent and then foreign goods are certain to enter Vietnam in massive numbers. Foreign retailers especially will import many more goods. Only some domestic goods will be sold in Vietnam and producers must then find ways to export the remainder. Retailers around the world are familiar with the principle that bulk buying results in better prices. When tariffs come down to zero per cent over the next couple of years the battle among retailers in Vietnam will be about price and purchasing power. So, with advantages in purchasing power and having staked out a market share, foreign retailers will become the leader and will direct consumption and production. These will be problems for local retailers and producers.

In order to ease competitive pressure, several localities have advocated promoting the development of trade centers, supermarket chains, and modern markets instead of traditional markets and Hanoi is typical of this. However, many trade centers were left vacant upon completion because they attracted too few customers.

Do you think Vietnamese retailers should expand their market share through network expansion in the context of tariffs coming down, in order to increase their competitiveness?

Building supermarkets should be set in the context of fair competition. Not only local enterprises but also foreign ones build supermarkets. Foreign enterprises are entering the Vietnamese market by building new supermarkets and through M&A, while local ones still face limitations in finance and other capacities. This doesn’t mean, however, that there should be protection for the local retail system, but the system has been directed to develop own its own and the State needs to issue policies that support the development of local enterprises.

In the retail market, those who have extensive networks, large market share, and long-term strategies will have an advantage when it comes to competition. Obviously, Vietnamese retailers are facing disadvantages. An example is that Metro accepted that it would earn no profit for ten years, while the leader of a local enterprise would be dismissed if no profits came for even two consecutive years.

User comment (0)

Send comment