Retail development still has potential in Vietnam

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A store employee helps a customer with a watch at a shopping mall in Hanoi. Photo: Bloomberg

Despite being downgraded by the US-based consulting firm A.T. Kearney for four straight years, Vietnam's retail sector still has a lot of potential as retail formats diversify and expand distribution networks into rural regions, Nguyen Tam, Marketing and Communications Manager at Nielsen Vietnam, tells Vietweek in an interview.

Vietweek: Vietnam has been removed from the list of top 30 attractive retail markets in a recent report from A. T. Kearney. How do you assess the downgrade?

Nguyen Tam: Vietnam fell for the fourth year in a row, resulting in a drop from the top 30 attractive retail markets. It has seen a steady fall in popularity since the country opened its doors to foreign retailers in early 2009, seeing the entrance of big names such as Metro Cash & Carry and Lotte Mart.

There is still potential for retail formats as they are growing more prominent in the country and are expanding their distribution networks to Vietnam's rural regions. However, in a country like Vietnam, traditional retail channels still dominate over 80 percent of the market.

The downgrade is understandable considering that when ranking globally we can see massive potential not only in Asia, but in other regions such as Latin America.

Similar issues have remained a problem around infrastructure development for the past few years. We believe the challenges that remain for Vietnam are the slowness in infrastructure development and distribution networks. These are big hindrances for retail growth in Vietnam.

Furthermore, issues are still raised about the challenges of the Economic Needs Test requirement, but the good news is we are seeing improvement, though not fast enough versus other markets, hence the drop off of A.T Kearney's global list.

The challenge is to get more foreign direct investment redirected back to Vietnam while other countries are becoming much more competitive.

Many foreign retailers have expanded their business in Vietnam although this is the fourth consecutive year the country was downgraded in rankings. Why?

 
Nguyen Tam, Marketing and Communications Manager at Nielsen Vietnam

Yes, they have expanded. But, challenges still remain since almost all foreign retailers are competing in the modern trade space and that still accounts for less than 20 percent of retail business, according to our latest Nielsen Shopper Trends Research report.

Also, with retail talent a critical differentiator in developing markets, finding and retaining talented workers is a core component to success. The Retail Talent Index, reintroduced this year by A.T Kearney, highlights Malaysia who is well ahead of Vietnam"¦ [Malaysia's] low-cost labor and favorable regulations, and a well-educated population, support the operations of international retailers that enter and expand in the market.

Consumer prices in Vietnam have dropped in recent months. Does this have a good or bad impact on the retail market?

Generally, price decreases are a good thing, especially for Vietnamese consumers. But for Vietnamese retailers this can be a challenge as they look to compete and lowering margins may make it tougher to navigate this dynamic economy.

How are the consumer trends in Vietnam this year? How do these trends affect the retail market?

Versus previous years, you could say it's been a quieter year, although some lasting consumer trends remain. Purchasing more on promotion, trading down to cheaper products and buying bigger packages to save money are still popular themes for Vietnamese consumers.

Industry leaders are still concerned about inflation and competitive pressures as they know further price transferring to consumers may very well hurt their business.

A large young population has been considered a powerful machine to boost Vietnam's consumer market. Is this no longer correct in the current situation?

A large young population is beneficial in many ways and it can be a powerful machine to boost the consumer market. But that is only one part, as you can imagine, for a healthy consumer market. Other factors such as inflation, job market, etc. will determine consumer confidence and willingness to spend.

What are the advantages of Vietnam's retail market compared with other Southeast Asian countries?

The biggest advantage for Vietnam is the relatively young workforce that remains and along with that a growing affluent customer base. Vietnam still has a lot of potential, as it did ten years ago. A good example is when we look at just modern trade outlets alone versus a market like Thailand's and we can see the advantages of Vietnam's retail market that remains strong with growth opportunities.

ECONOMIC NEEDS TEST

To operate retail activities in Vietnam, foreign-invested enterprises must apply for a business license for their first retail outlet. This application process is fairly straightforward. Each additional retail outlet, however, requires a new license and as part of that application must undergo what is called the Economic Needs Test.

The Economic Needs Test ("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. Approvals for satisfaction of ENT are made by the relevant provincial People's Committee on a case-by-case basis.

Putting the ENT criteria into practice, these criteria would not be sufficiently concrete, but seem to invite more interpretation by relevant state bodies. This might contravene to the country's commitments on enhancing transparency for its legal system, and eventually make lawyers in these areas work harder to pave the way for trading and distribution investors.

(Tran Bich Ngoc, Asian Legal Business)

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