Is Now the Right Time to Enter Vietnam’s Retail Market?
Trang Do, the Head of Retail Services at Colliers Vietnam, told VnEconomy that this year is an opportune moment for retail brands to expand into the Vietnam market. In order to ensure success, however, there are a few things foreign retail brands should know.
The retail industry in Vietnam has experienced significant growth in recent years, with the rise of modern shopping centers and the increasing popularity of e-commerce.
As a result, several multinational retailers were eyeing Vietnam as a potential market for expansion prior to the COVID-19 pandemic, due to which many businesses had to put their plans on hold.
With the pandemic now mostly over, retail brands are looking at opening new stores in Vietnam. The sector is, however, still facing a number of challenges of which foreign firms need to be mindful.
As foreign retail brands devise their strategy to enter Vietnam’s retail market, we discuss some key points they should keep in mind.
Vietnam’s retail market overview
According to the General Statistics Office (GSO), the retail sales of consumer goods and services in Vietnam reached VND 5,679 trillion (equivalent to US$242 billion) in 2022, showing a surge of 19.8 percent compared to the same period in the previous year. This is also a 15 percent increase from the 2019 figures, prior to the Covid-19 pandemic, which caused economic disruptions worldwide.
Despite the pandemic’s impact, the retail industry in Vietnam has recovered fully and is expected to continue to grow.
One contributing factor to this growth is the integration of e-commerce into the business models of traditional retailers. For instance, the Masan Group, one of Vietnam’s top three privately-owned companies, has expanded its network of Winmart supermarkets by venturing into online grocery shopping through its website. This move is anticipated to increase revenue for retailers in Vietnam.
Mergers and acquisitions are increasing
Based on data provided by the Vietnam Retail Association, the retail market in Vietnam comprises over 800 supermarkets. There are also 150 shopping centers, roughly 9,000 traditional markets, thousands of convenience stores, and approximately 2.2 million active retailers.
As competition intensifies, mergers and acquisitions are becoming a favored strategy among major domestic retailers. In the second quarter of 2022, Nova Consumer, for example, concluded the acquisition of Sunrise Foods Co., Ltd. This is part of an expansion plan to have 450,000 retail outlets operational in the future.
Additionally, The Sherpa, which is a part of Masan Group, purchased an 85 percent stake in Phuc Long Heritage, a coffee and tea retailer. Masan Group has utilized this partnership by opening Phuc Long Heritage outlets in a number of supermarkets around the country.
On that note, Masan Group also purchased a controlling stake in VinCommerce, a subsidiary of Vietnam’s biggest conglomerate, Vingroup, in 2019 for US$233 million.
Under Masan, VinCommerce became WinCommerce with two key retail brands now in its fold: WinMart and WinMart+. Between them WinComerce has over 3,000 supermarkets in its network. It also plans to open over 700 new WinMart+ stores, 20 WinMart supermarkets and hypermarkets this year.
Foreign retail businesses are expanding
Foreign retailers are also expanding in Vietnam. For instance, Korean retail brand GS25 achieved a significant milestone in early November last year when it extended its operations to 200 stores in Vietnam.
Thai retail group Central Retail also plans to double its operations in the country by developing 70 supermarkets in 55 out of 63 provinces and cities over the next five years.
Japan’s Uniqlo also launched four new stores in Hanoi and Ho Chi Minh City in 2022, while Japan’s MUJI established its first store in Ho Chi Minh City in late 2020.
Also worthy of note, is that Vietnam has now replaced China as the third-largest foreign market for Korean retail group Lotte, which is also seeking to increase its market share.
Challenges facing retail investors
Since the start of 2022, the world has experienced dramatic developments that have spawned unprecedented shifts in policy priorities in several countries, beyond recovering from the pandemic. the global situation has undergone rapid and unprecedented changes.
Vietnam, as many other markets, has faced mounting inflationary pressure caused by global headwinds and the ongoing Russia-Ukraine conflict, with prices of gasoline and raw materials surging. Additionally, climate events like natural disasters, storms, and floods are becoming more frequent and unpredictable.
This could increase costs for retailers, and it may be difficult to pass these onto customers, who are looking for deep discounts and bargains.
Belt tightening among Vietnamese consumers
According to a survey conducted by VnExpress, 82 percent of participants had implemented measures to reduce their expenses over the last three months, whereas only three percent said they had increased their expenditure compared to the three months before.
This is as a result of growing global economic uncertainty as households hold back on buying big ticket items in favor of saving for a rainy day.
High-interest rates, a strengthening US dollar, escalating commodity prices, and decreasing consumer purchasing power have had a cumulatively negative impact on the retail industry. In addition, labor-intensive industries like textiles, footwear, and aquaculture are facing challenges due to decreased purchasing power in key export markets like the US, Japan, and the EU. This has led to large-scale job losses in Vietnam.
What foreign investors should know about retail in Vietnam
Vietnam has a unique culture and consumer behavior that may differ significantly from what foreign investors are familiar with in their home markets.
Vietnamese consumers have distinctive shopping habits and preferences compared to Western consumers. For instance, many Vietnamese consumers prefer to shop at traditional markets – often set up in any available space in communities, with vendors laying out their goods in makeshift stalls or on street pavements – which may be perceived as less convenient and more time consuming for outsiders.
Nevertheless, understanding the Vietnamese relationship with these outdoor markets, in particular, the practice of haggling over price, may be useful information for foreign retailers in developing their own marketing strategies and processes.
Regulations governing foreign investment in the Vietnam retail market
Foreign investment in retail operations in Vietnam is governed by Decree No. 09/2018/ND-CP.
Opening a retail establishment
A retail entity in Vietnam must meet the following criteria:
- It must have a financial plan for the retail establishment;
- In the event a foreign firm buys an existing business, it must have no overdue tax debt if it has been operating in Vietnam for at least one year; and
- The location of the retail establishment must comply with relevant planning laws in its target market.
Opening additional retail establishments
In the event a firm wishes to establish a second retail outlet, an economic needs test (ENT) may be required.
The ENT must usually be completed for the establishment of second and subsequent retail outlets as specified in Decree No. 09/2018/ND-CP.
The ENT does not apply to retail stores that are smaller than 500 m2, located in commercial centers, and that are not classified as mini-supermarkets or convenience stores.
Note that a first retail store in Vietnam only needs a store establishment license. It is exempt from the ENT requirement.
Understanding the retail market in Vietnam is key
Vietnam’s retail market is experiencing remarkable growth, providing substantial opportunities for international retail brands to expand.
Vietnam’s sizable population, expanding middle class, and swiftly developing economy create an ideal environment for retailers to expand their operations. Brands entering the market can establish themselves as prominent players and profit from the Vietnam’s highly optimistic growth potential.
Nonetheless, there are challenges on the ground that must not be overlooked. These include the penetration of e-commerce, macroeconomic obstacles, competition with domestic retailers, and cultural disparities.
Foreign retailers looking to expand in Vietnam are advised to consider these challenges and opportunity costs and should engage professional business advisory services to ensure their market entry is as seamless as possible.
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