Rising incomes, a relatively young population and a growing urbanisation have meant Vietnam has been held up as one of the next wave of emerging markets, beyond the BRICs.
Vietnam is one of the six favoured emerging markets dubbed the CIVETS. It is part of the so-called Next-11. Economists are fond of categorising markets, especially since the BRIC acronym was coined in 2011. However, there is little doubting the rise of Vietnam and analysts firmly believe in the country’s potential.
Cited by the World Bank as “development success story”, Vietnam has been transformed from one of world’s poorest to a market economy. Data from the World Bank shows per capita income was below US$100 when Vietnam launched its Doi Moi political and economic reforms in 1986; by 2010, income had risen to $1,130 per head. In 1993, 58% of Vietnam’s population was in poverty; by 2008, it was down to 14.5%.
From 1996 to 2005, Vietnam’s economy grew quickly, with annual GDP rising at an average of 7.1%, hitting a peak of 8.4% in 2005. In 2006 and 2007, Vietnam’s economy matched that average, growing by 7% and 7.1%.
However, Vietnam was not immune to the global slowdown of 2008. That year, its GDP grew by 5.7%, very strong by western standards, but a sharp drop from the previous decade. And since then Vietnam’s GDP has not hit 7% growth. Data from the IMF says the Vietnamese economy grew 5.4% in 2013. Inflation rose above 8%, far higher than neighbouring Thailand and the Philippines.
The IMF has forecast GDP growth to be 5.6% in 2014 and 5.7% in 2015, which would mean eight straight years below 7%. In the first three months of this year, Vietnam’s GDP slowed to just shy of 5%.
With Vietnam’s economy seemingly at a new normal of sub-7% growth, how should international food manufacturers, looking for new significant markets, view the country? How are trading conditions? How is consumer sentiment?
Bert Jan Post, MD of the Vietnamese arm of packaging giant Tetra Pak, says the GDP data for the first quarter of 2014 was “not too encouraging” and came with manufacturers, at least in the dairy sector, trying to entice more cautious consumers.
“It’s not as if people have no money but, if you listen to researchers, there is a bit more saving. People are a bit more cautious,” Jan Post says. “This is already what they call a promotional junkie country. My perception is that there are far more promotions today than three years ago.”
However, Jan Post does see consumer sentiment improving. “In recent weeks, it has turned from fear to hope. There are a little bit more positive signals coming in.”
Nevertheless, in recent weeks, there has been some concern among investors in Vietnam over the country’s row with China over an oil rig a Beijing-backed company had placed in the South China Sea near to the contested Paracel Islands. The dispute sparked anti-China protests and riots in Vietnam, with factories thought to be Chinese targeted.
Torsten Stocker, partner at consulting firm A.T. Kearney, believes recent events within Vietnam suggest underlying unhappiness among sections of the population but he argues the country’s prospects remain sound.
“I understand that while the dispute with China was the trigger, there are also longer-held grievances about working conditions, so there seem to be issues that need to be addressed to ensure ongoing stability,” Stocker says. “I think while these riots have shaken investor confidence, they won’t affect the country’s long-term prospects, as long as they don’t happen again.”
Analysts at EY agree consumer goods manufacturers should look at Vietnam positively. EY acknowledges an upturn in economic growth will be “slow this year” but believes Vietnam’s growth rate is set to “pick up to the 7% target by 2016” as the country’s government reduces the fiscal deficit and lowers inflation.
Andrew Cosgrove, consumer products lead analyst at EY, says: “Despite recent GDP growth slowing, Vietnam remains a compelling market of almost 90 million potential consumers.”
Cosgrove agrees the pace of promotions of picked up, pointing to growing competition, but points to the opportunities that are available to food manufacturers. “Similar to other emerging market economies, as the middle class population grows and the country becomes more westernised, consumer demand for convenience and easy meal solutions will present great opportunities for packaged food companies,” he tells just-food. “Snacking and categories that provide quick meals – dinner mixes, sauces ready meals etc – should experience strength, especially as consumers see this option as more affordable than a quick service restaurant.”
Vietnam is a nation in which the majority of the population lives in rural areas but the country has become more urbanised. Those living in cities, analysts argue, are, becoming more exposed to western trends and Stocker concurs convenience could be a trend food manufacturers looking for an opening could thrive.
“While the price of goods is still an important consideration, urban consumers in particular are very open to products that fit into an active and optimistic lifestyle, for example packaged snacks and ready-to-drink beverages,” Stocker says.
As with other emerging markets, distribution is a challenge, particularly outside the cities, although even in the major conurbations, the final stage of delivery sees goods moved around in small vans rather than trucks or lorries.
“Roads conditions are poor, reliable trucking companies remain hard to find, the cold chain is often and easily violated, and retail outlet merchandising skills are still nascent,” Cosgrove says.
Combine those challenges with the still-fledgling modern retail trade in Vietnam – modern outlets still account for less than 10% of sales – and it is clear operating in the market will take time, patience and investment.
“While retail has modernised significantly with a broad range of local, mostly regional, and global players – many from Asia – wet and fair market shopping is still significant and, given the country’s geography and rural areas, deep distribution requires a complex multi-layer model,” Stocker warns.
Distribution presents a stiff challenge. The retail trade is still overwhelmingly traditional. Competiton is already high, particularly from companies from Asia. And the economy is not growing at the pace seen a decade ago. However, in the round, Vietnam is a country continuing to enjoy solid growth, with consumers becoming wealthier and more open to western products, presenting opportunities to FMCG manufacturers.
“Despite the recent slowdown, which has been reflected in FMCG companies offering more value-focused products, there is a clear underlying growth story,” Stocker says.