Experts give insight into Vietnam's retail sector

April 16, 2024 | 09:00
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Vietnam's specialised retail sector is witnessing transformative change driven by a burgeoning and increasingly digitalised middle class, along with the growing appetite of overseas investors with new sources and ways of financing. Christophe Péron, partner of Index Partners, and James Miles-Lambert, executive chairman of Maison Retail Management International (Maison RMI) outline how this sector is developing.

Inorganic growth has been instrumental for key players to consolidate the market as well as for foreign companies to enter Vietnam.

Experts give insight into Vietnam's retail sector
Christophe Péron

Central Retail from Thailand has made several acquisitions to enter and consolidate its position in the Vietnamese retail landscape, such as electronics retailer Nguyen Kim in 2020 and supermarket chain Big C in 2016.

In consumer retail, Masan Group has acquired a 70 per cent stake in The CrownX, which owns WinCommerce, the largest chain of supermarkets in Vietnam, for approximately $3 billion in 2021.

GS25, a major convenience store chain backed by Korean conglomerate GS Group, entered a joint venture with Son Kim in 2021 and now has over 200 stores in Vietnam.

In addition, Masan Group Corporation received an investment of at least $200 million, in an equity funding round of up to $500 million, from Bain Capital, marking its first-ever investment in Vietnam.

Vietnam’s strong market fundamentals, coupled with the need for major Asia-Pacific companies to continue to provide growth for their shareholders, make the specialised retail sector ripe for continued foreign direct investment (FDI) and mergers and acquisitions (M&A).

Private equity players have also heavily invested in the country to take advantage of the burgeoning middle class in the political and commercial capital cities of Hanoi and Ho Chi Minh City as well as in smaller cities, such as Can Tho, Danang, Nha Trang, and Haiphong.

Private equity rounds are being increasingly seen as an efficient step on the journey towards an initial public offering (IPO) or full divestment since private equity funds provide their portfolio companies with their reputation and best practices on governance, compliance, and operational excellence, on top of funding.

However, it is to be noted that the current difficult macroeconomic conditions, such as the drop in exports, inflation woes, and a real estate freeze, will make private equity funds more cautious in their investment strategy in the next one to two years, and they may wait until the dust settles until clear champions have emerged before making any moves.

With the increasing yield of private credit globally, we have seen this asset class take market share from other financing sources, and we expect this trend to remain strong in 2024.

In Vietnam and Southeast Asia, private credit is a strong option for profitable companies to obtain less dilutive sources of capital to fuel their growth, both organic and external, given the historic reluctance of local banks towards non-collateralised loans coupled with the current slowdown in the IPO and private markets.

We believe this instrument to be compelling for the retail market players that clearly understand their unit economics and growth plans.

Experts give insight into Vietnam's retail sector
James Miles-Lambert

The rising middle class in Vietnam is set to catapult the specialised retail sector. Vietnamese consumers’ increasing purchasing power and evolving preferences are crucial in shaping any successful retail strategy, from investment focus to market selection. New and sizeable opportunities are arising from the development of new cities and provinces, the willingness of new brands to enter the market, and the development of new sales channels.

The ongoing development of market infrastructure, the rise in private equity and M&As, and an evolving financing sector give today's retail operators more reason to be bullish than ever before.

We are likely to see an up-tick in M&As, particularly in fashion retail, which, due to increased competition, increasingly requires operating at scale to balance the need to serve an ever-discerning customer and still make a profit. These market forces are laying the groundwork for increased market consolidation. We see inorganic growth via acquiring other retailers in Vietnam and the region as a key component of Maison RMI's strategy, alongside growing the presence and variety of our existing brand portfolio.

Investment trends are heavily leaning towards technology integration – seamlessly connecting specialised software via API connections, rather than custom-building systems from the ground-up. Investors are particularly attracted to companies that harness tech to enhance customer experience, demand forecasting, and supply chain efficiency to better serve their customers with a complete and seamless omnichannel experience.

For the retailer, technology and e-commerce also tend to enable higher valuations, whereby it is common to see one dollar of revenue from e-commerce being valued twice as much as one dollar of revenue from an offline channel.

With Maison RMI’s North Star to be the first fashion retailer in Vietnam to IPO on the Ho Chi Minh City Stock Exchange, we have been relentlessly focussed on setting up the right practices for financial control, governance, reporting, and business intelligence, as well as making some initial progress on acquisitions. Partnering with private equity and large-scale foreign retailers who 'have been there and done that' has been useful in paving the way for our current and future success.

The specialised retail sector in Vietnam is experiencing rapid evolution, driven by strategic M&A activities, evolving financing methods, and a focus on technology-driven solutions. The growing and increasingly digital middle class significantly impacts this transformation opportunity, influencing market trends and investment directions.

This sector is at an exciting juncture, with the fast-growing discerning middle class and the diversification of financing opportunities. Understanding and adapting to these shifting market dynamics is essential for businesses aiming to succeed in this exciting market.

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By Christophe Péron

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