Retailers take to M&A to get the upper hand

Convenience store chains have been spreading like wildfire, with all major developers putting the pedal to the metal to gain market share Photo: Le Toan

Vietnam has been one of the world’s most attractive markets for retail investment, ranking sixth in the Global Retail Development Index (GRDI) of A.T. Kearney, an American global management consulting firm. This has attracted M&A deals from both foreign and domestic businesses.

Looking back on 2018, there have been great retail deals and great upheavals in the market shares of players. The local retail market has seen fierce competition, and domestic companies have had to adopt new strategies to regain their market share and improve their reputation to compete with international competitors who have the advantage in capital, technology, experience, and personnel.

VinCommerce, the owner of the largest Vietnamese retail outlet chain VinMart, has bought out rival supermarket chain Fivimart. The movement is part of its plan to expand the number of Vingroup’s stores to 200 VinMart supermarkets and 4,000 VinMart+ convenience stores by 2020. Following the acquisition, all Fivimart supermarkets will be renamed to VinMart.

VinMart+ is racing ahead with store openings as it said that it will open more than 50 new stores every month across the nation. Vingroup currently has more than 1,000 stores nationwide.

These deals serve as perfect examples for the frenetic M&A activity characterising the Vietnamese retail and consumer goods space in 2018. Nguyen Huy Hoang, commercial director of market research firm Kantar Worldpanel Vietnam said that M&A arises as the forefront strategy for businesses to increase their market presence and buyer base as well as save costs.

“In particular, M&A with domestic businesses allows foreign giants to quickly and more effectively penetrate the market to approach target local consumers. These types of union are on the rise, with no sign of slowing down, especially among investors from Asian countries such as Thailand, Singapore, South Korea, and Japan,” he said.

The Vietnamese retail market has been on the radars of foreign investors and private equity funds in recent years. Fan Li, executive director of Warburg Pincus, said that the fund has been active in the Vietnamese M&A market, which provides sufficient information to evaluate target companies. The country has a golden opportunity with a large group of mid-income earners emerging recently, especially in the field of retail. Thus, Warburg Pincus has been co-operating with Vincom Retail to develop it into the largest retailer in Vietnam, with a record pace of development in the last three years.

At the same time, BRG Group teamed up with Sumitomo Corporation to launch the Fujimart Vietnam Retail chain last December in Hanoi. The supermarket chain would use its modern Japanese-style retail expertise to draw increasingly well-off middle-class consumers in a country still dominated by traditional markets. Two more are expected to open in the city in 2019.

VinCommerce’s Fivimart buyout and BRG Group’s tie-up with Sumitomo reflect the growing competitiveness of domestic retailers amid the aggressive expansion of foreign retailers.

The Ministry of Industry and Trade said that the retail market is not completely in the hands of foreign companies as local counterparts have been more active in M&A to regain market share.

Similarly, Jacob Won, founding partner at Locus Capital from South Korea, told VIR that most large-scale South Korean companies in the retail and consumer sector continued showing strong interest in Vietnam. The reasons for such strong interest include the country’s overall economic growth potential and geographic proximity to South Korea. Vietnamese consumers are partial to this nation and its products.

Despite the strong interest, he also pointed out that it has been difficult to find a suitable acquisition target as most of the available companies in the sector are too small for South Korean companies to consider. In addition, these companies generally look for opportunities to acquire a controlling stake from day one, while Vietnamese owners are reluctant to give up management control and only look for growth capital.

Speaking at the Vietnam M&A Forum 2018 held in August, Dominic Scriven, executive chairman of Dragon Capital Group, said that Vietnam is the market for M&A, however, one of the most important things is setting a price tag on a transaction. In many cases, sellers offer a very high price, while the buyers always want to go lower. These things make negotiations difficult, and that is why the two sides must make in-depth research and understand each other, otherwise they cannot agree on any issue.

“Many M&A deals in Vietnam take place in the fast moving consumer goods segment, despite the fact that the number of successful deals in this field has been getting lower. In general, I see that we will move from foreign direct investment and foreign indirect investment to strategic investment in the coming time,” he added.

Market outlook

The Vietnamese retail sector is forecast to remain stable, attracting investment from many foreign investors thanks to its large population, brighter economic outlook, and greater purchasing power in the coming years, but it will witness fiercer competition in the retail market.

Peter Christou, expert solutions director at Kantar Worldpanel Vietnam, noted that the consumer demand is expected to change significantly towards high-quality products with smarter spending, which will also pose difficulties for retailers. Retailers need to pay attention to product diversification to meet the needs of different customer groups. In fact, compared to other Southeast Asian countries, Vietnam has the most traditional retail landscape with modern trade still two to three times smaller than in other countries like the Philippines and Thailand, but this represents a huge opportunity for future growth.

According to Vietnam Report JSC’s online survey, the majority of consumers said it was the diverse goods on offer that attracted them to certain retailers. Retailers are changing the way they sell goods – from traditional to modern and online channels – to serve growing consumer needs. Targeting the customer and developing a compatible business strategy requires retailers to invest a lot of resources.

However, with proper investment, retailers can take advantage of opportunities, as well as build and protect their reputation.

Accordingly, Big C, VinMart and Co.op Mart are the three most frequently mentioned retailers. Saigon Co.op has the largest supermarket chain in Vietnam, but concentrates heavily on developing in the south, while Big C is expanding its brand in all three regions and developing equally. VinMart, a new entrant, is developing impressively, opening hundreds of convenience stores and dozens of supermarkets in just over two years after entering the market.

The retail landscape is being re-terraformed with the rising omnichannel trend, prompting retailers to adapt so as to satisfy consumers’ shopping experience whenever and wherever. The fusion of offline and online shopping is gaining prominence. Thus, more foreign investors have been acquiring stakes in and formed joint ventures with Vietnam’s e-commerce companies to make in-roads into the market.

Christou said local players are proactively stretching their retail portfolio to meet omnishoppers. For example, the likes of Saigon Co.op stretching their retail portfolio to meet omnishoppers as they defend themselves against foreign-owned stores. They now have supermarkets, hypermarkets, online, convenience stores, and even the new Co.op Smile: a hybrid store format somewhere between medium-sized street shops and convenience stores looking to bridge the gap between traditional and modern trade – a step mirrored by Vingroup’s hyper-aggressive tactics in the market.

Foreign players are also continuously pouring money into developing multi-format shopping channels and are expected to bring new things to Vietnamese shoppers, and it remains to be seen how much the government can or is willing to protect local retailers.

Until now, one way for local players to succeed was to respond to demographic change – smaller households need smaller items, bringing convenience and community together and demonstrating values and social purpose by supporting high-quality local products from local manufacturers for a win-win relationship.

More convenience, more competition Tran Duy Dong The Vietnamese retail market witnessed impressive growth in 2018, with the mergers and acquisition scene remaining dominant. Tran Duy Dong, head of the Domestic Market Agency under the Ministry of Industry and Trade, talked with VIR’s Phuong Thu about his expectations for 2019 and the trends that are changing local consumers’ lifestyle and behaviour. What do you think were the main highlights of 2018 in the Vietnamese retail market? In 2018, the Vietnamese retail market witnessed impressive growth both in scale and speed. The total retail sales of goods and services revenue rose by 11.6 per cent on-year. The goods retail market was developing rapidly with the penetration of foreign retailers and the expansion of domestic players. Modern retail increased sharply, especially for mini-stores and convenience stores. The store opening speed has been accelerating in the past years. The retail, consumer goods, and industrial goods sectors continued to see mergers and acquisitions (M&A) deals, with domestic players becoming more active, regaining some of their lost market share. The Vietnamese retail sector is forecast to remain stable in the coming years, attracting investment from many foreign companies thanks to the large population, brighter economic outlook, and greater purchasing power. For example, Vingroup’s retail arm, VinCommerce, has completed the full acquisition of the Fivimart supermarket chain from its operator Nhat Nam JSC to own all 23 Fivimart supermarkets. This means that local businesses are trying to gain a bigger market slice. Convenience stores and minimarts have become more popular in Vietnam and are now the fastest growing segment of the retail industry. Could you elaborate on this trend? This is an inevitable trend in Vietnam’s retail development. Convenience stores in Vietnam have become popular destinations for young consumers to shop and hang out, as the stores provide them with an air-conditioned environment, well-organised shelves and seating areas, high-quality products, and in some stores, free Wi-fi. It is also easier to get licences for stores under 500 square metres, which is why retailers have been expanding to gain a bigger market share. Consumers are making their way from traditional markets into air-conditioned, brightly-lit convenience stores. With the growing spending power of middle-class consumers, the Vietnamese retail market is in need of new and modern outlets – and for many investors, the race has begun. Besides, not only foreign investors focus on developing convenience stores, domestic businesses are also active in the race. Foreign chains currently dominate the market with major brands like FamilyMart from Japan, Circle K from the US, and two other Asian brands, Shop&Go and B’s mart, making up 70 per cent of all convenience stores. Local companies have also entered the race to expand and compete with the international players. They include Vingroup and Saigon Co.op. Vingroup has nearly 1,300 convenience stores under the VinMart+ brand, and Saigon Co.op has more 250 Co.op Food stores and another 70 Co.op Smile stores. What do you foresee for 2019? The Vietnamese retail market is growing rapidly and is considered one of the most promising retail and distribution markets in Asia due to the young labour force, high-speed urbanisation, and the development of industrial production and services. However, it will witness tough competition. Previously, some foreign investors showed more ambition to take the market, such as Lotte and Parkson. There is no easy way to gain market share in the race between players. In my opinion, the Vietnamese retail market in 2019 is estimated to continue to grow and be highly contended, with the trend of convenience stores, e-commerce, and increasing healthy products persisting well into the years ahead.