Sink or swim for local retailers as market opens to foreigners

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A shopper selects fruits in a supermarket in Hanoi

Local retailers are facing stronger and stronger competition as Vietnam continues to open its retail market to foreigners, though optimists see big opportunities and potentials in the newly "integrated" market.

The country's retail market will be fully open to foreign investment by 2015.

Under its WTO commitments, Vietnam, will remove all barriers to foreign retailers over the next two years.

The country now allows wholly foreign-owned retail companies to operate here. However, they have to undergo the Economic Needs Test (ENT) when they want to expand their business in Vietnam.

Dinh Thi My Loan, general secretary of the Association of Vietnam Retailers (AVR), said local retailers will face more challenges in increasing their market shares as more foreign businesses infiltrate Vietnam after 2015 when the ENT is removed.

New game, less rules

Wholly-foreign invested enterprises in Vietnam must apply for a business license for their first retail outlet. The application process is said to be fairly straightforward, though that may only be relatively speaking compared to Vietnam's usually backlogged and tedious bureaucratic procedures. 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.

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But once this requirement is gone, foreign companies will no longer face their biggest hurdle and will thus be able to expand whenever and wherever they want to.

Still, some are confident in the resilience of Vietnamese companies.

"We should not be too worried that the market will be controlled by foreign retailers," said Loan. "Many local retailers have plans to expand their business. They are likely to get success amid the big potential market."

There should be one hypermarket and one trading center every 100,000 residents, one medium supermarket every 10,000 residents, and 1-3 convenient stores every 1,000 residents, said experts at recent meetings on Vietnam's retail market.

With population of 90 million and growing, Vietnam now houses only some 700 supermarkets, and 125 trading centers, of which foreign investors respectively own 40 percent, and 25 percent, according to the Domestic Market Department at the Ministry of Industry and Trade.

"The retail market is promising," she said, explaining that half of Vietnam's 90 million population are young people, who prefer shopping at modern stores rather than traditional markets.

Modern retail channels like supermarkets and convenience stores now make up only 20 percent of the market, much lower than that of 90 percent in Singapore, 53 percent in Malaysia, 46 percent in Thailand and 43 percent in Indonesia, said Do Vinh Phu, chairman of Vietnam Supermarket Association.  Vietnam hopes to double this number by 2020.

Vice head of the Domestic Market Department under the Ministry of Industry and Trade Nguyen Tran Nam said local retailers, with their deep understanding of local residents' consumption habits, could well compete with foreign rivals in the domestic market if they could get more state support in term of obtaining retail space, reasonable interest rates, and an improved human resource pool. 

Some local retailers have been very successful in the integrating market. Co.opmart is an example, as it is the largest domestic retailer with 61 supermarkets and 55 foodstuff stores nationwide. It hopes to take the total number to 100 over the next two years.

Vinatexmart, another major retailer, has 81 supermarkets and clothing stores. Opening outlets is one way of being competitive, but more needs to be done, said Vinatexmart deputy head Tran Thanh Nhan.

Foreign enterprises have advantages over their local rivals like management and logistics experience, he said.

But realizing this, local players like Vinatexmart, Co.opmart, and Citimart have been working on improving operations including customer service, he added.

"Different companies have different development strategies. We bring consumers products with reliable origins, quality and reasonable prices. We also pay attention to opening outlets at good locations. Thus, we believe that we can compete well in the market."

Minnows vs. big fish

Many major foreign retailers with famous brand names like Big C, Metro, Lotte have broken into Vietnam with a bang. Their turnovers are 20-30 times higher that of local firms, according to the Ministry and Industry and Trade.

Pham Quoc Manh, vice general director of retailer Phu Thai, said after Vietnam fully opens the retail market, local businesses will have to face off against even more foreign rivals with comparatively unlimited financial capacities.

"There are not any local retailers with a capital of $100 million upwards. Meanwhile, the profit of WalMart reaches more than $1 billion in a quarter," he said. "Local businesses will not be able to develop in such a competitive market unless they cooperate together, and have reasonable business strategies."

Loan from AVR said difficulties in renting retail spaces could make local business less competitive than foreign competitors.

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, she said.

High rent for retail space is also one of barriers to local companies with weak financial capacity. Spending on renting retail space often accounts for 30-40 percent of retailers' total investment.  

Co.opmart, one of the biggest local retailers, has failed to expand its outlets in northern region over the past three years because of high rents, said a representative from the company. It now has only one outlet in Hanoi.

"Local businesses could increase their competitiveness only when the state helps them solve difficulties in renting retail spaces," Loan said. "The government should offer incentives to local retailers, by handing them over land, or renting them land to develop outlets."

Agreeing with Loan, Nam of the Domestic Market Department said state support to local retailers in renting land and getting loans at reasonable interest rates would be quite necessary.

But the firms should also focus more on improving their services to increase their competitiveness, he added.

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

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