Digiworld moving to make their mark on healthcare market

Digiworld is breaking into the pharmaceutical sector

Major obstacles blocking the way

Digiworld has expressed determination to be a pioneering newcomer in the pharmaceutical sector at any cost, as they became the first IT distributor in Vietnam.

Prior to this, chairman of Mobile World announced the launch of several M&A deals, including the acquisition of a pharmaceutical store chain which aims at expanding to hundreds of stores across the country by 2019. FPT Shop will also participate in this area in the coming time as mentioned in their development plan.

In addition, there are several leading names in the market who account for less than 5 per cent of the total market share, such as Phano, Pharmacity, Phuc An Khang, Sapharco, Vistar, and My Chau, none of whom have ever established a chain of over 100 stores.

This basically means that Digiworld is taking a deep plunge, despite being two months late by the predetermined plan.

Specifically, Digiworld announced that it would enter the sector of functional foods and over-the-counter (OTC) medicines with an investment of VND40 billion ($1.76 million) and expect to generate VND80 billion ($3.53 million) in revenue this year and VND1 trillion ($44 million) in the next two years.

Doan Hong Viet, chairman of Digiworld pointed out two main reasons for the corporation to join the functional foods industry through the foundation of market development services (MES) that have been formed for years.

First, it was the rapid aging of the population by 2030. The number of Vietnamese elderly can make up 18 per cent of the total population and reach 26 per cent by 2050.

Second, Digiworld clearly lays expectations on the middle class. This is the target group of customers of many products and services, including functional foods. Its growth is even forecast at 10 per cent per year at the least, covering about 33 million customers by 2020.

“Vietnamese middle class households tend to have at least one type of functional food at home. The market is still fragmented. This is why Digiworld wants to focus on this business opportunity—not because of the potentially high margins. We believe, as citizens are getting older and richer, the market will expand very quickly,” Viet said.

Of course, the pioneering newbie is seeing a couple of stumbling rocks on the road ahead.

A lot of customers still refer to functional foods as unreliable products because of their multi-level marketing business model. Digiworld needs to solve the problem of prejudice and regain customer’s trust first.

“Functional foods are not bad, but multi-level marketing channels made the products look bad and consumers lost trust in them,” Viet admitted.

According to the Vietnam Association of Functional Foods (VAFF), the functional foods market has seen strong growth. In 2000, there were only around 60 products imported to Vietnam through 15 agencies. Now there are 3,600 enterprises operating across the country with 6,800 products in circulation. More than 90 per cent of drugstores nationwide are selling functional foods.

Digiworld also revealed that in developed countries, functional food accounts for 60 per cent of the pharmaceutical sector, while they only occupy 20-25 per cent in Vietnam, meaning that the market still has room for growth. However, the fragmentation of the market is likely to pose lasting difficulties for newbies like Digiworld for a long time, possibly from 10 to 15 years.

What is Digiworld going to do?

Among various healthy food production enterprises, Digiworld chose Vinamedic Pharmaceutical JSC to cooperate by establishing a joint venture and applying MES to Kingsmen products.

In fact, Kingsmen already debuted in the healthcare industry two years ago. However, it was mainly sold through the original “word of mouth” channel in the northern market. According to Digiworld, they chose Kingsmen because they are good products with a lot of potential, which has not yet been fully exploited.

“A good product meets all the health needs of the users,” said Viet, explaining his concept of “healthy products.”

In fact, Digiworld and Vinamedic has jointly devised a cooperation plan in the fourth quarter of 2016 and conducted two tests at the National Institute for Food Safety and Hygiene. The first test was to ensure the food safety and hygiene standards of the products, as well as whether the ingredients had the right dosage and properly delivered the advertised medical functions. The second test included a clinical examination of the users and the results are due in November 2017.

To date, Kingsmen products, via Digiworld, have appeared on the shelves of about 1,000 large and small drugstores nationwide. The figure is expected to rise to 5,000 stores by the end of this year.

There are two types of supply chains in the market. The first is French-style specialty pharmacies, such as My Chau and Phuc An Khang which mainly sell medical drugs. The second is chains like Medicare and Guardian which mostly sell beauty and healthcare products.

Viet said that Vietnamese consumers still have a habit of buying drugs from French-style speciality pharmacies. However, Digiworld will distribute products through both channels. In addition, single drug outlets which are distributing about 60 per cent of medical drugs will also be included in the three main distribution channels—hospitals, pharmacies, and private health clinics.

Looking into more details, the method Digiworld is applying to functional foods is no different from what the brand has done with technological devices, which is clinging to MES services from market analysis, marketing, logistics to after-sale services. The investment of VND40 billion ($1.76 million) will be mainly spent on research activities, warehouses, and marketing programmes.

What will distribution stores get from their cooperation with Digiworld?

“Surely there will be fierce competition between Kingsmen and other functional food products available in pharmacies. It is Digiworld’s forte to address issues such as providing support for products close to expiry, setting up billboards, training marketing staffs at stores, and so on. We understand that retailers want reasonable profit and stable sales, not crazy discounts of 40 per cent, for example”, said Viet.

Digiworld estimates that it might take a product around 15 years to reach the average saturation threshold, while the functional foods market has just started to operate, which means it will take at least half the time to shape customers’ buying habits.

Digiworld's chairman also denied that the gross profit margin for the functional foods business was estimated at 65 per cent by the end of the year, ten times higher than that of the ICT sector. “It is not that high, because the price per unit is rather low,” Viet said.

Besides, since this year’s plan was launched later than expected, the target revenue of VND80 billion ($3.53 million) is still guaranteed, but the target profit for the functional foods business seems hard to achieve. These results will not be available until mid-2018.

On the other hand, the biggest competitor with a similar model to Digiworld could be DKSH. As stated by DKSH, in 2016, the company generated CHF10.5 billion ($11.1 billion) in revenue from four sectors, of which the healthcare industry accounted for half, equivalent to CHF5.5 billion ($5.8 billion).

Nevertheless, according to Viet, DKSH is not interested in Asian markets, although Bloomberg has mentioned DKSH’s desire to become the Amazon of the pharmaceutical sector in Asia within over the next 50 years by providing a host of services from drug registration, marketing, and distribution to drug selling.

DKSH’s representative declined to answer questions related to this matter due to some changes in its business.

“We are confident that we can fully understand the needs and feelings of Vietnamese customers, at least better than they do,” Viet said.

Digiworld will also participate in the OTC market, but the plan will not be executed until 2018 and they do not expect to make much of an impact on the market as there are already too many good agencies, like Phano, Phuc An Khang, and Pharmacity, operating in the industry.

A recent report by Roland Berger, a strategic consultant, said that the sales of OTC medicines in Asia are projected to grow at an average annual rate of 6.2 per cent between 2016 and 2021. Among the markets studied, Vietnam showed the highest growth rate with 9.3 per cent, followed by Malaysia (5.1 per cent) and Taiwan (3.6 per cent).

Additionally, Digiworld planned to spend nearly VND100 billion ($4.4 million) on acquiring 51-100 per cent of a company that distributes premium FMCG products.

Viet said that Unilever and P&G are holding about 60 per cent of the FMCG market in Vietnam. The remainder belongs to companies like Mesa, Phu Thai Group, and Tien Tien Distribution Co., Ltd, among others.

The company that Digiworld is targeting now owns a chain of retail outlets aiming at providing niche products to high-income households.

“They have the advantage in logistics, branding, and partners, while Digiworld’s strategy will focus on marketing and selling products to Co.opmart, Big C, and grocery stores, among others,” said Viet.

Digiworld has been listed on the stock market in 2015 with a listing price of VND28,300 per share ($1.25 per share) (after splitting dividends). However, it ended the trading session on September 8, 2017 at only VND16,000 per share ($0.71 per share).

This year, Digiworld's revenue target is expected to reach VND4 trillion ($176.2 million), up by 4.5 per cent year-on-year, while the net profit is estimated at only VND55 billion ($2.42 million), down 18 per cent year-on-year.

According to Viet, Digiworld's stock is on the downside, judging by its financial statements. Digiworld also does not have a strategic investor, because from their viewpoint, they do not need to acquire know-how from a partner. The know-how of the company is to build a brand which fully understands Vietnamese consumers, which also does not involve foreign enterprises.

“We have been using ERP for ten years, so the technology gap with foreign investors is not that wide,” Viet said. “Perhaps Digiworld might achieve something, like rearranging the multi-billion dollar functional foods market which has been fragmented and undesirably scandalous for years. However, it looks like we will have to wait for at least another decade to put the matters on the table again.”