The opportunity cost of retailing

LNT & Partners

The foreign retailers are expanding in Vietnam

To implement Vietnam’s commitments when joining the World Trade Organization, the government must accept businesses with 100 per cent foreign investment to carry out retailing services in Vietnam.

The government is currently following a MoIT proposal and is drafting a decree detailing retailing activities in Vietnam. This decree is long awaited for foreign investors who seek to enter Vietnam’s booming retail market. This decree is expecting coming into effect in November this year. This article highlight certain requirements of foreign invested enterprises participating in retail market in Vietnam.

The draft decree on retailing activities applies to enterprises with the right to implement retailing activities in Vietnam. Enterprises are granted the rights to conduct retailing activities in Vietnam specified in business certificate or investment certificate. The forms of retail include wholesale, retail, distribution, direct sale, e-commerce or franchising activities.

Retailers have to implement business registration regulations regarding conducting a business, quality of goods, goods’ labels,consumer protection, competition, industrial ownership and safety, environment as stipulated (Article 9).

Chapter III details all provisions on retailing goods, goods subject to prohibition, goods subject to restriction, retailing goods subject to certain conditions and state monopoly goods (from Article 11 to 15). In Article 16, conditions about space, quality, safety, food hygiene, terms of origin, effects, features, and utilities of good, labels and stamps with import taxes or special consumption taxed are regulated.

This applies to goods such as those containing radioactive substances or equipment of radiation emission or radioactive sources or explosives, gas, flammable chemicals, and other dangerous chemicals. With direct selling methods, there are conditions on types of goods not allowed to trade by this method such as quality, safety, food hygiene, terms of origin, effects, features, and utilities of goods, labeled and stamped at Article 17. Prohibited and restricted goods or goods subject to certain conditions shall not be allowed to trade via Internet or electronic devices (Article 18).

Chapter IV deals with the most important part of the draft decree - retail unit. Section 1 provides that to establish a retail unit, such unit must comply with the retail masterplan. The types of retail units include grocery store (including also automatic selling machine), factory outlet, department store, convenience store, supermarket, hypermarket, boutique shop, shopping mall. The MoIT shall specify criteria for each type of retail unit.

The establishment of a retail unit must comply with the retail masterplan to be developed by the local authority where the retail unit is established, as well as statutory requirements, such as scale and the establishment and maintenance of the operation of retail shops are detailed carefully. As noted, local authority is responsible for developing retail masterplan of its location, and the MoIT is responsible for developing the national retail masterplan. The draft decree is unclear as to whether investors are allowed to establish a retail unit if a relevant masterplan has not been developed or approved.

Under Article 24, the masterplan must comply with the national economic plan, the traffic environment, the logistics conditions, the population and other paramaters of the location involved. Article 25 further specifies the content of retail masterplan, requiring to address issues such as projects, priority of retail projects, the infrastructure conditions as well as the national or local demand of the retail market, which should be implemented exactly.

These issues are rather unclear requirements that might risk to become technical barrier preventing foreign investors from participating in retail market. Understandably, Vietnam is suffering from trade deficit and foreign exchange deficit and therefore some policymakers believe the main culprit would be foreign trading companies. However, preventing retail market from developing in the end may backfire the good objectives of the policymakers, because it would then harm consumers who have limited choice, who then will pressure on the salary increase to the government, and later inflation.

Article 28 of the draft decree regulates the application of an economic needs test (ENT). It covers the establishment of retail establishments of all traders including foreign-invested enterprises which must follow procedures defined in this decree and be in accordance with the area’s masterplan.

Furthermore, the establishment of retail units other than the first retail units of foreign-invested enterprises is subject to criteria such as the number of existing retail establishments, the market stability and inhabitants’ density. The number of retail units means the number of all shops, the number of shops of the same level and the number of shops of the same field.

The market stability indicates the effect of a new shop opened on other shops of the same field on the same certain area. Inhabitants’ density is carefully applied with the main contents such as the number of retail units on habitants’ density in a geographical region.

It must not exceed [by five times] the rate of the number of retail units on habitants’ density in the province covering the concerned region (Item b, Clause 4, Article 28) and only retail units (not wholesale units) are allowed to be established in geographical regions of inhabitants’ density [by five times] higher than the average inhabitants’ density of that province (Item c, Clause 4, Article 28).

To non-shop retailing forms including direct sale (door to door, network and multi-level sales) and sales through the internet, there are specific provisions on conditions of registration, staff and goods, except mobile retail in forms of travelling sales, sales of small articles, sales from afar must obey the regulations on goods in this decree and Decree 39/2007/ND-CP dated March 16, 2007 on individuals practising trade independently, regularly without business registration (Article 42).

Besides, guaranteeing the information about goods, prices, transaction conditions, transportation and delivery, and payment methods on e-commerce website is also required with respect to the sale through the internet form (from Article 35 to 41).

Drafting such a retailing services decree is an important step in opening the market, which may bring investors, especially foreign ones, many chances to enter and invest in the Vietnamese market. Most of the requirements, however, are not really clear and difficult to meet.

As such, investors would face many technical barriers for access retail market, as WTO commitment gives them the rights, in particular with the ENT.

Despite all of this, this is the first time where ENT criteria is detailed, as well as the retail masterplan and tough law is still better than no law at all. If the draft decree is issued, it will become the basis for foreign investors while applying for making retailing service investment decisions in Vietnam.