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Foreign retailers entering joint ventures have plans to squeeze local partners out, insiders warn


 
A family buys produce at a supermarket in Hanoi

Foreign retail firms entering into joint ventures to avoid a technical entry barrier often deploy tricks to squeeze their local partners out once they set up shop in Vietnam, industry insiders say.

Vietnam allows wholly foreign-owned retail firms, but foreign firms mostly prefer to cooperate with Vietnamese firms to bypass the Economic Needs Test (ENT).

Wholly-foreign invested enterprises in Vietnam must apply for a business license for their first retail outlet. This application process is fairly straightforward. Each additional retail outlet of more than 500 square meters, however, requires a new license and as part of that application, must undergo the ENT.

The ENT, as currently constituted, comprises an administrative review of (i) the number of existing retail sales outlets in a particular geographic area, (ii) market stability, (iii) population density, and (iv) the relevant urban development scheme. Approval is then given by the relevant provincial People's Committee on a case-by-case basis.

Vu Vinh Phu, chairman of Vietnam Supermarket Association, said the ENT is seen as a big challenge to foreign investors. He said the ENT criteria are not sufficiently concrete and seem to invite interpretation by relevant state bodies. Therefore, foreign investors choose to cooperate with Vietnamese partners to avoid the test.

Up to 90 percent of foreign retailers have cooperated with Vietnamese partners to enter the country, while the rest have established 100-percent foreign-owned firms, he said.

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Singaporean supermarket chain NTUC FairPrice cooperated with the Saigon Union of Trading Co-operatives Limited (Saigon Co-op) to open their first store, Co.opXtra Plus, in Ho Chi Minh City last month. FairPrice has a 36 percent stake in the joint venture and the local partner holds the rest.

Following the opening of the first store, FairPrice and Saigon Co-op will be looking to introduce both Co.opXtra hypermarkets and Co.opXtra Plus hypercash stores to various areas in Vietnam, the Singaporean company said on its website.

Meanwhile, South Korea's top retailer E-Mart has cooperated with Vietnam's U&I in a US$80-million joint venture. They are buying products to prepare for the opening of their first supermarket in Vietnam later this year. They plan to open 52 convenient stores and supermarkets by 2020.

E-Mart, the second Korean retailer to invest in Vietnam after Lotte Mart, has contributed 80 percent of the project's capital, which is expected to gradually increase to more than $1 billion.

Cooperation with Vietnamese retailers will help foreign investors make use of the former's existing supermarket networks and learn about local consumers' habits, Phu said.

"It will help international retailers participate in the market with greater ease."

The leader of a joint venture supermarket in Hanoi, who declined to be named, said as a technical barrier imposed by Vietnam to protect local retailers, ENT makes it difficult for foreign investors to expand their operations.

"Establishment of a joint venture is the best way to help them avoid the barrier."

The cooperation with local firms could also make it easier for foreign investors to hire retail space and get to know the local market better. Hence the preference for joint ventures or mergers & acquisitions, he said.

However, the cooperation will also pose challenges to Vietnamese firms, which have smaller financial and business experience than foreign partners. They face the risk of being taken over by their foreign partners, even if Vietnamese firms initially hold the majority stake in the joint venture, Phu waned.

South Korea's Lotte Mart last year bought up the 20 percent stake held by a local company in its joint venture. The giant retailer now plans to double the number of outlets it had originally envisaged by 2020 to 60.

The most efficient method that a foreign investor can employ to weed out Vietnamese partners from the joint venture is to make the business unprofitable, he said.

Foreign partners in the joint venture could spend much money on importing goods at high prices and on advertisement campaigns to compete with their rivals, making the business run at a loss.

Consecutive losses would make it difficult for the Vietnamese partners to hold on, and they would have to quit the joint venture to escape the losses, he said. "We can see many foreign investors use this ways to take control from their Vietnamese partners in joint ventures. Coca Cola is one example."

Expansion plans

Despite the economic slowdown, Vietnam is still an attractive destination to international retailers, as half of its 90 million population are young people, who prefer shopping at modern stores rather than traditional markets, said Dinh Thi My Loan, general secretary of the Association of Vietnam Retailers.

Meanwhile, modern retailing channels like supermarkets and convenience stores now make up only 20 percent of the market. Vietnam hopes to double this number by 2020. "Thus, the sector continues to have great potential," she said.

The demand for consumer goods remains strong even when the economy is doing badly, she added.

French retailer Auchan plans to pour $500 million into Vietnam in the next 10 years, the Ministry of Planning and Investment says on its website.

A senior manager from the group recently visited Vietnam and worked with the ministry to learn about the country's policies regarding foreign investors in the domestic retail market, it said.

Auchan, which operates in 12 countries, distributes goods and also purchases products made in the local market to distribute them abroad.

If Auchan realizes its plan, it will be the second French retailer in Vietnam, the first one being the Casino Group, which has been present in the country since 1998 through its wholly-owned Big C supermarket chain.

The Big C network currently includes 24 hypermarkets associated with shopping centres across the country.

Japanese retailer Aeon has said it plans to build a 70,000-square-meter shopping mall in Hanoi later this year at a cost of $100 million. It already has two other properties under construction.

The increasing presence of foreign retailers is a big challenge to local firms. Phan Duc Binh, general director of local retail and asset management company ORC, expects Vietnamese retailers to face a lot of difficulties.

Many local firms have been beaten to prime sites for outlets by foreign competitors because they lack the financial capacity as well as experience in negotiating, he said.

Modern retail outlets only account for a fifth of the VND2,300 trillion (US$111.36 billion) market, according to the General Statistics Office.

Retail sales grew at just 16 percent in 2012 to VND2,319 trillion ($111.36 billion), compared to 20-25 percent in previous years.

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