New Frontier

Date: March 21, 2013

New Frontier

While many economies around the world have been facing severe hardships and even social upheaval as result of the financial crash of 2008, Vietnam has managed to enjoy stable growth and prosperity. Today the country is one of the CIVETS group of emerging economies whose members include: Columbia, Indonesia, Egypt, Turkey and South Africa. The Asia Development Bank has Vietnam on course to reach GDP growth of 6.5 % for 2012, an enviable accomplishment even during good economic times.

The sound stewardship of Vietnam’s economy has caught the eye of many foreign investors in the retail sector, most of whom may have been reluctant to put their assets into the country in the past. But a closer look at the fundamentals makes Vietnam an obvious and attractive destination for overseas investors.

Stepping into the spotlight

While manufacturing has long been the focus for overseas investors looking to diversify away from China and other Asian countries, Vietnam’s domestic retail sector is now entering the economic spotlight in a big way.  

At $20 billion in turnover, Vietnam currently offers a relatively small retail market compared with giants like India and China. But because of a less competitive retail sector environment and projected 8% annual growth in future GDP, international retail chains would be wise to look at Vietnam now for expansion opportunities. 

The domestic retail sector in Vietnam accounts for 13.32% of GDP and is on track for continued growth, serving as a key driver for the overall economy. In addition, in terms of goods-and-services turnover, the retail sector was the overwhelming leader at 79% compared to hotels and F&B at 11%, and tourism at 10%.

Demographics are also playing a key role in boosting the Vietnamese retailing renaissance. The country boasts a consumer base that ranks among the youngest across all of Asia. Some 79 million people are aged below 65. And spurred on by government policies to put more money into consumers’ pockets, retail spending has jumped 75% between 2000 and 2007 and continues to grow. This is in line with Vietnam’s overall domestic migration patterns and urbanization; today nearly a million people move to the country’s two largest cities of Hanoi and Ho Chi Minh every year. 

Foreign retail-friendly policies

Since its epoch-making entry into the WTO in 2007, Vietnam has taken great strides in opening up its retail sector to foreign investors while at the same time easing regulations that had been a barrier to entry into the country for decades, so that today foreign operators can take a 100% share in a business venture. As a consequence, many overseas retailers in shopping centers, fresh produce, processed foods, fashion and other sectors are targeting Vietnam for investment.  

With retail sales across Vietnam growing by over 50% between 2005 and 2008 it’s no surprise that more and more overseas companies are eyeing a piece of the nation’s lucrative pie. To this end, over the past several years, foreign companies looking to invest in Vietnam have seen a great many entry hurdles disappear. This is the direct result of Vietnamese government officials taking decisive steps to liberalize procedures for setting up retail operations.

Indeed much of the growth in foreign-owned domestic retailing has been the direct result of Hanoi’s economic ‘opening-up’ strategy that has encouraged overseas operators to set up shop in the country. Experts expect that the Hanoi government will continue to relax regulations concerning 100% foreign ownership of retail outlets across the nation. In 2010, officials also set up new programs to develop wholesale and retail-related real estate.

All of this has catapulted the country into the top bracket of investment markets in Asia. In fact, the 2009 A.T. Kearney GRDI index placed Vietnam as the sixth most favorable investment destination worldwide.

Other experts on foreign retail investment in Vietnam say that per-capita income spending by consumers is growing fast, and more overseas investment-friendly regulations are dramatically priming the market for new players to come on line.  All of this is helping to create a synergy of positive sentiment that is prompting foreign retailers to open up operations in Vietnam.  The challenges are still there, but getting into any country at the pioneering stage, where Vietnam is at the moment, could reap big rewards later on. Currently the top five domestic retail groups in the country, including Saigon Co-op, G7 and Casino, comprise less than 3% of the market.

Over the past several years, a number of powerful incentives provided by the government to spur overseas investment in Vietnam have taken shape and are dramatically changing the country’s economic landscape. These include:

Preferential corporate income-tax rates
Exemption from, or reduction in, corporate income tax and import duties
Exemption from taxes on royalties
Exemption from, or reductions in, land-use or land-rental fees
Privileges awarded to build-operate-transfer (BOT), build-transfer-operate (BTO) and   build-transfer (BT) projects as well as projects in special economic zones
Investments in geographical areas of Vietnam that face difficult socio-economic conditions are more likely to qualify for the above investment incentives

In another attempt to stimulate foreign capital inflows, the Vietnamese government is providing investment guarantees. These include a commitment to any overseas investor that their assets will never be nationalized or confiscated. A further guarantee ensures that all intellectual-property rights will be duly protected. In addition, the government has made assurances that all capital and assets from a foreign investor may be remitted abroad and that there will be rock-solid protection for investors, even if changes in laws or policies occur.

Promising opportunities for big brands

International names like Metro Cash & Carry as well as French-owned Big C have already made their entry into the Vietnamese retail sector.

Top South Korean retail discount chain E-Mart, too, has made a big splash on the local market, forming a joint venture with the U&I Group headquartered in Binh Duong. Together they will expand nationwide through a US$1 billion investment. Their strategy is to build a chain of 52 supermarkets and shops centered in the largest urban locales. Full implementation is set for 2020. The chain will supply a wide range of fresh-food and seafood items for the Vietnamese consumer. 

Japan’s AEON Co Ltd. retail group, which operates the prestigious Jusco supermarket chain, is also looking to break into the Vietnamese market by 2013. Recording yearly gross revenues of nearly US$15 billion, AEON’s top management have their sights set on becoming one of the three leading retailers across Asia within the next decade and hope that Vietnam will emerge as its fourth largest foreign market after China, Thailand and Malaysia. 

Officials at Malaysian shopping-center operator Parkson Vietnam say their growth rate in Vietnam in 2010 was 30%, nearly double what they recorded in China or Malaysia. The retailer plans to develop even more outlets and renovate existing ones to meet expanding consumer demand.

Vietnamese consumers today are also much more fashion and style conscious and have the spending power to get what they want. That’s why, starting in 2007, Vietnam also welcomed a host of global fashion giants into the local market. Famous brand names, such as Gucci, CK and Mo&Co, Ungaro, Timberland, Guy Laroche, Levi, Burberry, LV, Lacoste and Dr. Martens, plus many others, are on sale at department stores in major cities across the country. Despite the fact that these prestigious branded products are fetching high prices, they are still very much in demand from consumers. Market watchers say the Vietnamese high-end fashion sector is enjoying double-digit annual-growth rates.

Consumer electronics are also contributing a great deal to Vietnam’s expanding retail sales sector, with demand rapidly rising to match growing consumer income levels, spending habits, and greater access to a wider range of brands. In fact the consumer electronics market in Vietnam could hit the US$ 6.8 billion mark by 2014.

Getting in on the ground floor

In today’s depressed global economic circumstances, now is the ideal time for overseas retailers who want to enter the Vietnamese market to conclude long-term property leasing contracts in Vietnam, as real-estate and construction costs are seen to be actually decreasing. For this reason, fresh opportunities for international investors to form joint ventures with local developers will continue as domestic land prices and project owners’ prices drop even further.

With positive demographics, rising consumption power and a government that is actively courting overseas investors with relaxed regulations, there has never been a better or more profitable time for global retail chains to make their move into Vietnam.  

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