Local companies losing the retail battle with multinationals

Vietnam is considered an economic powerhouse of the Southeast Asian region, said Truong Van Cam, general secretary of the Vietnam Textile and Apparel Association, and is transforming into a major transport, financial and logistics hub of the region.

With relatively stable political, legal and economic structures, the country has, until recently, been widely regarded as one of the fastest growing economies in Asia. Many experts have also eyed the country as the next frontier of growth for the fast-moving consumer goods retail segment.

The prevailing logic of these experts, he noted, has long been that as the country’s economy grows, household disposable incomes will rise concomitantly resulting in more sophisticated consumer tastes for premium quality products.

This in turn will cause consumers to turn away from the more traditional poor-quality products produced by Vietnamese companies in favour of the higher quality goods produced by companies such as those in the US and EU.

A recent survey by Nielsen revealed that there are currently nearly 200 foreign brands in Vietnam and that 56% of all consumers in the country prefer these international brands over local brands in almost every retail segment.

According to the results of the survey, consumers across the board are willing to pay more for these international brands because they perceive them as better-quality products and distrust local brands.

Price quality conundrum

Price and value are key determinants of consumer behaviour in Vietnam only in the low income markets. In these markets, even a small differential can have an outsized impact on demand.

It’s only in these low-income markets that local companies have found themselves in any position to compete with their international counterparts. In the higher income markets, the international brands win the day hands down with little to no competition from them.

The survey showed no signs of this trend abating and forecasted that international companies would continue gaining ground in retail markets in consumer goods as disposable incomes continue to rise and Vietnam moves into the higher middle-income status.

The rising middle class of well-educated and aspiring consumers in Vietnam are willing to accept this trade-off to achieve the status and quality that international brands bring to the table, the survey showed.

Local brands have for the most part been passive in the face of competition of higher quality international brands and have failed to take heed and make the required effort to improve the perception of their own quality, because they are overly focused on keeping the sales prices of their products low.

Consistent with the low-sales price strategy they have been accustomed to producing low quality products.

Distribution

Some local brands, realizing they cannot compete with international brands making their foray into primarily the major metropolitan areas in Vietnam, have taken to moving their store locations to the smaller communities such as those in the countryside.

In an economy such as Vietnam, with poor infrastructure, the retail segments in these smaller markets provide local companies a comparative advantage over their international counterparts.

But this is only a temporary reprieve for local companies and as online marketing retail channels continue to evolve the multinationals are bound to make monumental inroads into the smaller communities throughout the country as well.

Local companies have largely ignored ecommerce in the past and will most likely continue to do so in the future.

Most smaller companies simply have neither the knowledge nor money to invest in developing this sales channel and would with little doubt leave Vietnam retail wide open to be dominated by the large international brands, concluded the experts.