A host of free trade agreements mean that the window for Vietnam's poorly-funded retailers to enter into joint-ventures with foreign retail giants is closing fast. Without those partnerships, they stand little chance of competing, according to experts speaking at a retail conference in Hanoi this month.
Saddled with thin credit, poor technology and limited experience, local retailers find it hard to compete with foreign retailers who are actively expanding their stake in the local market, said Pham Dinh Doan, chairman of local retailer Phu Thai.
Thai cited companies like Big C and Family Mart who appear to be gobbling up every prime corner and major box store location in the Vietnam's major cities
Local firms should consider entering joint-venture agreements with foreign firms to improve their competitiveness in the near future, particularly as Vietnam prepares to fully opens its retail market, he said at a retail conference, this month, in Hanoi.
To open a convenience store, firms need an investment of at least $100,000. However, to make a profit from the retail system, most need to open some 300 stores. Due to limited credit access, local enterprises can only afford to invest in a few shops, he explained.
“Most investors are suffering losses,” he said.
The poor economy hasn't hit deep pocketed multi-nationals nearly as hard. They only expect to begin making a profit in the next 5-10 years when their market presence expands, he said.
Vietnam’s largest retailer, Saigon Co-op Mart, reported annual profits of some $50 million, he noted, before adding that WalMart rakes in over $1 billion in a quarter.
If local businesses continue investing in retail markets without well-funded foreign partners, they will fail to develop, Doan said.
Without famous brand names, domestic retailers lack the advantages their foreign competitors enjoy. This becomes an issue not merely when wooing consumers but in negotiating prices with foreign suppliers.
"Local businesses will not be able to develop in such a competitive market unless they cooperate with foreign partners, and have reasonable business strategies,” Doan said.
The vanishing ENT
Now is the time local retailers must establish relationships with foreign partners, as the latter still need the cooperation to bypass the Economic Needs Test (ENT), he stressed.
The country currently allows wholly foreign-owned retail companies to operate here. Whenever they want to expand, however, they must first pass an ENT which has been criticized as opaque.
In theory, Vietnam's ENT consists of 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.
In practice, many foreign retailers complain that the ENT seems to invite interpretation by various state bodies.
Once the requirement is gone, foreign companies will no longer face their biggest hurdle and will be able to expand whenever and wherever they want to. At that time, they won't want to cooperate with local retailers, Doan said.
Vietnam's WTO commitments require it to lift all barriers to foreign retailers by 2015.
Echoing Doan, Dinh Thi My Loan, general secretary of the Association of Vietnam Retailers (AVR), said the cooperation should be seen as an active measure for the development of the local retail sector, instead of a surefire way to get taken over by a foreign partner.
Chairman of the Hanoi Supermarket Association Vu Vinh Phu said Vietnamese firms should maintain a majority stake in joint ventures and strictly manage input cost to avoid the risk of being taken over by their foreign partners.
Retail sales grew 11.1 percent between January and September to VND2.14 millions of billion ($101.9 billion), according to General Statistics Office.
With population of 90 million, Vietnam now houses only some 724 supermarkets, and 132 trading centers, according to the AVR.
Modern retail channels like supermarkets and convenience stores now make up only 25 percent of the market, much lower than that of 90 percent in Singapore, 60 percent in Malaysia, 51 percent in China, and 34 percent in Thailand.
Vietnam hopes to double this number by 2020.
Fair market rules
Loan of AVR said local authorities tend to favor foreign investors, offering them more help and fewer troubles than they do Vietnamese investors, particularly in terms of accession to land use and information on consumer trends.
Incentives offered to foreign companies have limited local retailers' ability to access prime retail locations, causing them great difficulties, she said.
“Vietnamese enterprises don't require government protection," she said. "They need fair and transparent policies.”
Many local firms have been beaten to prime retail locations by foreign competitors because they lack the financial capacity as well as experience to negotiate, she said.
High retail rents remains a major barrier to local companies with weak finances. Rent often accounts for 30-40 percent of retailers' total investment.