Rail and road woes stymie retail growth

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Poor infrastructure has hampered its meteoric rise as a market; but retailers are still biting

An employee at a Lotte supermarket in Ho Chi Minh City. The South Korean retailer last week inaugurated its VND1.9 trillion second supermarket in the southern metro and pledged to build 30 stores in the next ten years.

Mega Lifesciences has added 50 motorbikes to its sales team in Ho Chi Minh City and Hanoi. The Thai pharmaceutical firm's small truck fleet just wasn't cutting it on Vietnam's clogged urban roadways.

Ngo Thanh Loi, the firm's planning and logistics manager, said motorbikes were the only way around traffic jams, which can jack up distribution costs.

Loi said poor infrastructure has left the firm cautious about expanding and skeptical of any hard and fast logistical projections.

France-based healthy food firm Danone has also found it hard to calculate a retail expansion, given all the logistical variables. Danone has had to rely on the rails.

"We do not have many choices," said Danone's supply chain director Nguyen Minh Tri.

Tri said that relying on the national railway, the only link between the north and south, places limits on capacity and delivery times.

Gopal Ramasubramaniam, Asia Pacific Director of Transportation and Logistics for Frost & Sullivan told Thanh Nien Weekly that

Vietnam's critical infrastructure does not measure up to international standards.

He said the ports were plagued by aging loading equipment that is unfit for large freight volumes. Existing roads, he said, have failed to meet local demand in rural areas due to poor accessibility.

Ramasubramaniam attributed frequent delays in freight delivery to the single north-south track dedicated to freight and passenger services. He described warehousing and storage facilities as "basic" and generally lacking proper security or value added features.

Still potential

However, Ramasubramaniam told Thanh Nien Weekly poor infrastructure was not the main reason that foreign giants like Wal-Mart or Carrefour have yet to move in.

He said local demand is not growing fast enough to attract them.

Last week, after one year in the country, Korean retailer Lotte inaugurated its VND1.9 trillion (US$100 million) second supermarket and pledged to build 30 stores in the next ten years.

Vo Van Nam, head of Metro Cash & Carry's Supply Chain Management, said the German wholesaler was about to open its tenth store after over eight years of operating in Vietnam.

Tran Tinh Minh Triet, a local retail consultant, said convenience stores would develop faster than their larger counterparts.

Triet said the stores now account for 25 percent of the country's retail sales in its modern distribution system (i.e. modern stores). He expects 3,000 new convenience stores to open in the next five years. Triet added that a number of Asian franchisors are seeking opportunities in the Vietnamese market.

Jeffrey Bahar, managing director of Spire Research and Consulting, said the retail market in Vietnam has shown rapid expansion over the last few years, reaching nearly US$1.2 trillion in 2009 up from $200 billion ten years ago. Bahar attributes the growth to rising consumer expenditure and changing market dynamics.

With strong fundamentals like a high economic growth and a young population, Bahar expects retail sales to surpass $2.4 trillion in 2013.

The modern distribution system is projected to make up 30 to 40 percent of the country's retail sales this year (up from 18-20 percent last year) and reach 60 percent in 2020, according to Bahar.

Vietnam's retail and service revenues increased 26.7 percent to VND747.7 trillion ($39 billion) in the first half of this year, according to the General Statistics Office.

US-based management consulting firm A.T Kearney ranked Vietnam the sixth in the world's most attractive emerging retail markets last year compared to its top position a year earlier.

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