Diversity and convenience the way ahead in retail

Matthieu Francois, an associate partner of McKinsey & Company

How attractive is the Vietnamese retail market to overseas retailers, especially those from Japan, South Korea, and Thailand?

Among the major Southeast Asian economies, Vietnam performs favourably on key macroeconomic indicators that are attractive to foreign retailers. As of the first quarter of 2020, GDP growth has been forecast by the largest international agencies to reach 6.8-7 per cent in 2021.

Prior to COVID-19, our analysis showed that Vietnam’s retail sector was the fastest grower in the region, with the highest growth in total consumer spending (7.2 per cent annually between 2008 and 2018) and the second-highest private consumption rate (68 per cent of GDP) – and there is significant room for further growth.

The same analysis found that Vietnam is expected to have the fastest middle-class growth (forecast at 9.2 per cent compounded annual growth rate – or CAGR – up to 2023), second-fastest growth in disposable income per capita (9.9 per cent CAGR), and its low urbanisation rate represents an area of high potential.

While Vietnam remains an attractive market for foreign retailers, the pathways for these retailers’ expansion strategies will likely vary and depend on their unique value proposition and resonance to local taste.

In segments like groceries and consumer electronics, the market is dominated by home-grown retailers like VinMart, Saigon Co.op, and Mobile World. While there is a sentiment that international players would be able to expand their market share as the middleclass population grows, local shoppers are less receptive of the “foreign” retail concept.

Foreign players who have gained momentum offer unique value propositions. This concept, however, seems to have worked better in convenience stores, where the market is indeed more fragmented.

That said, even though Vietnamese retailers have led in terms of growth, most experts agree that the profitability of retail is low. This likely reflects a certain “land grab” mentality, where most players are conscious that establishing scale is a prerequisite to increasing profitability but could also in the longer term set a limit to their growth, which will likely open the door for overseas competition or capital.

How does Vietnam’s retail market measure up to other countries in the region like Thailand or Indonesia?

Vietnam may have a comparatively smaller retail market, but our 2019 analysis estimates that its growth (projected at 7.3 per cent CAGR to 2023) is comparable to Indonesia’s and slightly higher than Thailand’s. Segment-wise, Vietnam’s modern grocery market, which makes up 44 per cent of the retail segment, is expected to grow even more rapidly at a projected 25.8 per cent CAGR to 2023. This is more than double of any other country in the region.

How do you see the trend of greenfield investment and mergers and acquisitions (M&A) in the retail market going forward?

We have not yet seen large deals between foreign investors and local retailers, but a lot of elements seem to converge in this direction. Local players are typically taking the lion’s share of the market in most retail categories, and might at some point face increased need for funding.

In parallel, retail concepts from abroad do not easily resonate with Vietnamese buyers who are generally loyal to local brands. This might lead foreign players to consider investments in local ventures.

What are your recommendations for foreign investors looking to keep pace with the changing competitive landscape after the health crisis?

Vietnam’s post-pandemic outlook is unique for two reasons. Firstly, the country was under a much shorter lockdown than others, and secondly, its pre-pandemic retail landscape was singular, with under-penetration of both modern trade and e-commerce.

McKinsey conducted a mid-April consumer survey that observed a strong channel shift for grocery shopping during the lockdown, primarily driven by convenience. We saw a general shift away from large formats that require travel and a shift toward online channels, local grocery stores, and local convenience stores.

In addition, respondents who are grocery shopping online said they are spending more during COVID-19 than they did before, and they intend to continue to do so after the pandemic. Even within physical stores, this digital shift is apparent as respondents express a stronger preference for contactless payment options.

It is still early to make projections based on what consumers declare in a crisis. However, we observed two very important trends that were already here before the crisis and have large potential to accelerate.

Firstly, convenience is key to attract Vietnamese consumers. Vietnamese people shop in relatively small baskets, and in places close to home or to work. Secondly, omnichannel and online channels are emerging as very important.

In categories like consumer electronics, players like Tiki or Shopee are becoming increasingly common choices. In categories like groceries and fresh food, which were once thought to be relatively resistant to digital disruption, aggregators are rapidly creating online journeys.