Vietnamese Grocery Market

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Tesco in Vietnam

Pros

There are a number of pros to entering the Vietnamese market. First, this is a market where there are few competitors. The main competitor, Big C, is a Thai company that entered Vietnam by buying Carrefour's stores as it exited Southeast Asia[footnoteRef:1]. While many other markets in the region have multiple competitors, Vietnam really only has one. With only one major competitor, and an underdeveloped market for modern grocery distribution, Vietnam represents an opportunity to gain early mover advantage in a promising market. The familiarity with Southeast Asia will help the company to work quickly to establish itself in the Vietnamese market. Furthermore, it is easier on the logistics than either of Indonesia or Philippines, the two other major opportunities in Southeast Asia. Those are archipelagos, whereas Vietnam presents an easy market logistically, close to suppliers, and can be served with only a couple of warehouses. So while there are some challenges to entering the Vietnamese market, there are a lot of good reasons to pursue this market above the other options. This will help make the market entry that much easier. There will be pushback from this established competitor, especially since it is a Vietnamese company, but ultimately any market should have room for multiple different competitors. Further, Tesco has a lot of experience at running hypermarkets, which should allow it to hit the ground running and be a strong competitor. [1: "Exit Carrefour." The Economist. The Economist Newspaper, 23 Sept. 2010.]

In terms of the market, the Vietnamese market is a promising Southeast Asian market. Vietnam is a large market, with 89.7 million people[footnoteRef:2], but market entry can be concentrated in the two largest cities of Hanoi and Saigon (Ho Chi Minh City) initially. With just these two bases, and maybe a third in Hue in the middle of the country, Tesco can serve most of the country's population. Moreover, Vietnamese shopping characteristics are similar to those in other Southeast Asian countries, and this will allow Tesco to enter the market with a lower degree of difficult, given how familiar it already is with operating in the region. The country's transportation infrastructure is reasonably good. The roads are in fairly good condition, though those around Ho Chi Minh City in particular are chronically choked with traffic. [2: CIA World Factbook (2015). Vietnam Central Intelligence Agency.]

Vietnam's government is encouraging foreign direct investment, which Tesco's arrival would be. In addition, the population structure of Vietnam is in the so-called "golden structure" of 60%+ working age. With that demographic structure, Vietnam is likely to experience strong economic growth for the foreseeable future, and there are signs of that already. With favorable government and demographic conditions, Vietnam is a good market to build a base, and has already become foreign direct investment success story[footnoteRef:3]. [3: Nguyen, T. (2014). Why foreign investment in Vietnam is booming. World Economic Forum.]

Cons

There are a number of challenges associated with entering the Vietnamese market. The first is that Vietnam is relatively poor compared with the other markets in which Tesco operates. It is much poorer than Thailand or Malaysia. The only other country with a GDP so low in which Tesco presently operates is India[footnoteRef:4], but India has a massive middle class while Vietnam does not. Even if the average Vietnamese wants to shop at a Tesco, they might not be able to afford to. Overcoming this challenge will be a matter of adjusting the product mix, and locating stores in those areas that can support them -- Ho Chi Minh City in particular has a concentration of wealth. [4: CIA World Factbook (2015). Vietnam Central Intelligence Agency.]

Another knock on Vietnam is that while Southeast Asia in general is an attractive region, Vietnam might not actually be the best market to enter in the region. The company is already the number one retailer in Southeast Asia, but the company's own data shows that Indonesia and the Philippines have larger populations, comparable economies, and much more significant modern grocery sales. Indonesia has ?36 billion in modern sales, Philippines ?11 billion, and Vietnam only ?4 billion[footnoteRef:5]. Those other two countries, of course, are archipelagos so serving those markets would come at a much higher cost than serving Vietnam, with its relatively good transportation infrastructure. [5: Mcllwee, Laurie. "Tesco in Asia -- Key Messages." (n.d.): n. pag. Web. 7 Apr. 2015. ]

Another potential disadvantage to Vietnam is that the people in Vietnam are less familiar with this type of retailing.

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This is still a fairly rural country, and lacks the density of Western-style shopping that many of its wealthier neighbours have. Thus, Vietnam represents a significant challenge for Tesco to operate in the country, and change the tastes of the people in respect to how they shop, and how they view the shopping experience. While Tesco has succeeded in other, richer, nations, there remains the concern that this will be too much of a challenge for too many Vietnamese, and that Tesco will have to adopt its strategies as a result. With little institutional knowledge about Vietnamese shoppers, Tesco will have to be a quick study.

Entrance Strategy

Tesco's business benefits from economies of scale, so it will want to open multiple stores at once. The initial focus should be on the wealthiest area of the country, Ho Chi Minh City, and adjacent urban centres like Can Tho or even Nha Trang. The country should target getting 5-6 stores open in the south initially, along with one warehouse, as a means of building the business. After a year, the company should seek to gradually add stores in the south, but make an entrance to the north with 5-6 stores in Hanoi and Hai Phong. By the third year, a third warehouse can be built in the middle of the country, in Da Nang, to serve Da Nang, Hue and the rest of central Vietnam. By this point, the southern and northern markets should be close to saturated.

Tesco will need to enter the Vietnamese market with a mixture of local and foreign managerial talent. Vietnam has a pretty steep learning curve -- just crossing the street without getting killed is an achievement for most foreigners, let alone running a major retailing business. The corruption rate is fairly high, so despite the support of the central government for foreign investment, local managers will be required to navigate the unique Vietnamese characteristics of the market.

The product mix will need adjusting, in particular to focus on Vietnamese suppliers. For one, Vietnam has relatively few trade agreements compared with many other countries, so its tariffs are higher. Local suppliers helps to minimize the cost of goods, and fortunately many products are manufactured domestically. But lower average tickets are to be expected, because of higher poverty rates and the fact that everybody will be attempting to get their shopping home on a motorcycle, so the product mix should reflect this. The product mix is an area where knowledge acquired from doing business is small Thai towns will help Tesco -- its nimble strategy in Thailand took it to places that have similar rural, poorer economies to what the company will face in the Vietnamese market.

The company will also need an exit strategy. While managers are often not encouraged to think of such things, there are many risks inherent in the Vietnamese market that would demand the company has a set point where it decides that the market is not working out, and some plan for how it would dispose of its assets at that point. This is not so much counterintuitive as it is pragmatic -- Carrefour had a failed market entry here and they are a pretty good company.

Risks

There are several risks that the company faces. In essence, Vietnam is a bet on the future. There are more attractive markets today, with Vietnam has a lot of size and a fast growth rate, and there is only one major competitor. Thus, Tesco wants to enter Vietnam early in order to develop market dominance. This strategy works well when the economy continues to grow, but economic growth is never assured, especially in the developing world. There is a huge risk that the move into the Vietnamese market will not pay off for Tesco because the market's growth stagnates, leaving it as a relatively poor, underdeveloped economy, while other markets Tesco could have entered outperform. The company has to remember that there is an opportunity cost to entering Vietnam, and that is that it could have deployed those resources elsewhere, such as Brazil, and the risk is that Vietnam does not grow as quickly as hoped.

A second risk that the company faces is that the market is tougher to break into than it anticipated. Vietnam's culture is distinct from others in South East Asia, and its history is, too. It is not a given than knowledge gained in Thailand will help the company perform well.....

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