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 persification 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 perse 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.