Vietnam, one of Asia’s fastest growing markets, has been dubbed ‘little India’ and ranked the world’s third most attractive market for international retailers this year. But this makes business in the WTO’s newest member sound all too easy, Uwe Hoelzer, managing director of Metro Cash & Carry Vietnam, tells Dominique Patton in an exclusive interview.
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German retail group Metro was the first foreign distributor to enter Vietnam in 2002, and had to build up a modern supply chain from scratch. This week (on Thursday) it will open its seventh store, coming close to its initial target of eight in total.
Yet Hoelzer does not expect to see a significant increase in competition from international retailers in coming months, despite Vietnam’s formal accession to the WTO next month.
“It sounds so easy when A.T. Kearney ranks it number three but you have to work very hard to be successful here. It may be easy to buy cheap but it’s difficult to find quality, especially in fresh foods,” he says.
While Metro Cash & Carry’s key customers are international hotels, restaurants and the thousands of ‘mom-and-pop’ stores around the country (less than 10% of sales come from individuals) its pioneering experience is a valuable insight for retailers eyeing potential in this market.
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By GlobalDataDespite A.T. Kearney’s glowing recommendation, one of the most important lessons is that Vietnam is, and is likely to remain, a low-margin market.
“Prices for prawns, fish and fruit are unbelievably low,” says Hoelzer. “We have found that you have to sell at least three to four times the volume of a store in England to make the same turnover.”
He declined to reveal whether the group was making a profit in Vietnam, its second Asian market after China, or whether Metro plans to open any of its food retailing outlets.
“Our concept is to offer the highest quality for the lowest possible price. But whether other retail formats would work here remains to be seen.”
Yet Metro Cash & Carry is likely to expand beyond its initial target, underlining at the very least a growing demand for the convenience of modern distribution and higher quality products.
“Eight stores was the right number at the beginning but with such fast growth we see the potential for at least four more, and these will be in the provinces,” says Hoelzer.
Vietnam has emerged as one of the most attractive retail markets in the world thanks to strong growth in consumer spending. The retail market grew by 20% between 2004 and 2005, and is estimated to be worth US$20bn a year, according to A.T. Kearney.
Its ever-increasing population is a big draw: half of its 84 million people are under 30 and young people like to shop. Moreover GDP growth of 8.5% in 2005 is driving up household incomes. These young people with higher incomes are also learning fast about quality and hygiene standards.
“For the older Vietnamese, fresh meat has to be warm, showing that it is freshly slaughtered. But the young Vietnamese have already learnt that meat should be kept cool,” says Hoelzer.
Metro has invested heavily in its meat processing and seafood chain, opening its own slaughterhouses to ensure HACCP standards. Yet it still faces significant competition from the cheaper wet markets. Recent outbreaks of disease and a government drive to improve food safety and quality have helped its cause however.
“At the beginning it was mainly international hotels and restaurants that preferred to use Metro. But when bird flu and other diseases arrive, you see how fast the consumer changes to Saigon Co-op or Metro,” said Hoelzer.
Metro has also worked closely with the government to organise food safety seminars around the country.
For its fresh fruit and vegetable supply, the work is ongoing too. Hoelzer claims Metro has already trained more than 16,000 farmers to meet quality requirements for modern distribution but the fresh cold-chain is still a daily challenge.
“When you’re buying from thousands of farmers directly it is hard to guarantee a closed cold-chain,” he says, welcoming the idea that WTO accession may encourage more logistics firms to enter the market.
In other areas however the supply chain has significantly improved since the company’s launch in the market, suggesting that those retailers which follow Metro will have an easier time.
“We now have approximately 500 food suppliers and they’re definitely ready for WTO,” said Hoelzer. “They have the IT infrastructure, they know how to write an invoice and they know what level of quality is needed.”
It remains to be seen whether this is enough for international retailers. Currently they must set up a joint venture with a Vietnamese partner and foreign capital contribution cannot exceed 49%. But from 1 January 2008, the capital limitation will be abolished under WTO agreements and there will be no market access restrictions after January 2009.
France’s Groupe Bourbon already has a small presence in Vietnam with The Big C hypermarkets and South Korea’s Lotte recently announced plans to open new stores in 2008. But despite rumours about Tesco and Wal-Mart, the biggest retailers have not yet revealed their plans in this corner of Asia. They are sure to be watching the early movers however.
As Hoelzer says, Metro has been “an experiment” for the Vietnamese government.
“It has given them opportunities to see where they need to invest in their supply chain, and how to cope with modern distribution. When we started in 2001, pork meat was delivered on the back of a motorbike. Now, it is definitely a market worth investigating.”
