Foreign retailers arrive en masse
The retail market is seeing an invasion by foreign retailers, which has brought pressure on local businesses who lack financial capacity or experience.
Japan’s Aeon plans to open a shopping mall this month in Hanoi, its third in Vietnam and first in the capital. Aeon Mall Long Bien will be one of the largest commercial facilities in Hanoi, occupying 96,000 square meters of land.
Aeon considers Vietnam its second most important market in Southeast Asia after Malaysia. Its first mall in Vietnam, which opened in January 2014 in Ho Chi Minh City, attracted 13 million people last year.
It plans to open 200 stores across the country, according to The Japan Times.
South Korean retail giant Lotte has increased the number of its supermarkets in Vietnam to 10. It plans to have a total of 60 by 2020.
The chairman of the Hanoi Supermarket Association, Vu Vinh Phu, said Vietnam, with its surging consumer spending in recent years, is squarely in the sights of foreign retailers.
Retail and consumer services sales grew 6.3% last year to VND2,950 trillion ($138.2 billion) outpacing the 5.6% growth in 2013, according to official data.
Vietnam has a 90 million population, and the size of its middle class is expected to double by 2020 since its economy has been growing at over 5% a year since 2000.
Modern retail formats such as shopping malls, supermarkets and hypermarkets will play a crucial role in Vietnam’s future retail sector growth. The modern retail channel now accounts for around 20% of sales in Vietnam, representing a latent market opportunity for investors, he said.
The upcoming establishment of the ASEAN Economic Community, or AEC, and some free trade agreements, including with the EU and South Korea, which remove tariffs on many goods imported into Vietnam, have given foreign retailers more reason to expand their business in the country, Phu said.
Foreign retailers have also expanded via mergers and acquisitions. Early this year AEON announced the purchase of a 30% stake in Fivimart, and a 49% in Citimart, two major retail chains in Vietnam. Fivimart has 20 stores in Hanoi, while Citimart has 27, mainly in Ho Chi Minh City.
"Vietnam will be one of the next [consumer] giants, and alliances with local partners are important because we see almost no chance of winning if we [operate] independently," Aeon president Motoya Okada said when announcing the new partnerships with Fivimart and Citimart.
Thailand's Central Group recently bought a stake in Nguyen Kim, a major electronics retailer with 21 stores across Vietnam.
The purchase of the 49% stake was done through Power Buy, an arm of the Thai family-run conglomerate.
Last year, Central Group opened two Robins department stores in Hanoi and Ho Chi Minh City.
Central Group says it sees Vietnam as a particularly promising market for replicating the retail dominance it has achieved in Thailand. While Central Group's priority is bolstering its position in Thailand and Europe, it is also considering acquisitions in fast-growing markets such as Vietnam, Indonesia, and Malaysia. The company said acquisitions can boost its sales growth by between three and five percentage points annually.
“We are quite bullish on Vietnam,” Tos Chirathivat, the CEO of Central Group, was quoted as saying by Forbes. “We’re looking to invest quite a lot in Vietnam.”
Difficulties of local businesses
Phu of the Hanoi Supermarket Association said most local retailers, excluding big businesses like Co.opmart and Saigon Trading Company (Satra), have struggled to remain in business amid the increasing competition from foreign rivals who have the upper hand thanks to their financial strength, management experience and cheap global supply chains.
Fivimart has had to close all of its supermarkets in the south, while Intimex and Hapro have shut down some of their outlets in the north, he said.
Dinh My Loan, chairwoman of the Association of Retailers, said the biggest difficulty for local retailers is finding land.
Many local firms have been beaten to prime retail locations by foreign competitors because they lack the financial capacity and experience to negotiate, she said.
High retail rents remain a major barrier for local companies with weak finances. Rent often accounts for 30-40 percent of retailers' total investment. In Hanoi, rent for downtown real estate could rise to $100 per square meter.
Without famous brand names, domestic retailers are less competitive in wooing consumers and negotiating prices with foreign suppliers than their foreign competitors. Thus, they find it hard to offer competitive prices.
To compete in the market, local businesses should cooperate with foreign partners, Pham Dinh Doan, chairman of local retailer Phu Thai, said.
Foreign retailers now need the cooperation to pass the economic needs test (ENT), he pointed out.
The country wholly foreign-owned retail companies to operate, but when they want to expand outlets to more than 500 sq.m, they must first pass the ENT, which has however been criticized as opaque.
Under Vietnamese laws, ENT comprises an administrative review of the number of existing retail sales outlets in a particular geographic area, market stability, population density, and the relevant urban development scheme.
Loan said the cooperation should be seen as an active measure for the development of the local retail sector instead of a sure-fire way to get taken over by a foreign partner.
Vietnam had 724 supermarkets and 132 shopping malls as of late last year, according to the retailers association. The country hopes to double this number by 2020.