Tesco in Vietnam

Market Analysis – Advantages

Tesco is seeking expansion opportunities in Asia, and is looking closely at the Vietnamese market. Tesco currently operates in 13 markets around the world, including in the larger Southeast Asia economies of Thailand and Malaysia (Tesco, 2015). The company has been beset by challenges on the domestic front, especially from disocunters like Aldi and Asda, and only recently has begun to gain ground in that battle (Ruddick, 2015). But the message is clear — Tesco needs overseas expansion in order to deliver growth for shareholders, because the British market is mature at best, and hypercompetitive at worst.

The Vietnamese market is especially challenging. Thailand and Malaysia are much wealthier countries, and the hypermarket business model was of only moderate success in those places. The first mover into the Thai market was Carrefour, and the French giant announced in 2010 that it was exiting Southeast Asia altogether, having failed to gain a foothold in the region (The Economist, 2010). By contrast, Tesco entered the market late, and learned from some of the mistakes that Carrefour made. There are a number of different shopping formats in these countries. Carrefour had entered with the hypermarket format in major cities, while Tesco entered with smaller stores in smaller urban areas, along with hypermarkets in major suburban shopping zones. So while the two would compete side-by-side in, say, the outskirts of Bangkok or Kuala Lumpur, Tesco had a presence in the smaller areas as well, something that attracted shoppers and helped to build the brand (The Economist, 2010). As a result, Tesco has been more successful in Southeast Asia, and this is part of the reason why the company has designs on a Vietnam expansion.

The Vietnamese economy is at a relatively low level of development. The main draw to the country is that it has a lot of people (93 million), but the per capita income is quite low, at $4,000 (CIA World Factbook, 2015). This figure ranks 168th in the world. Among Southeast Asian nations, it ranks behind the Philippines, and Indonesia, let alone Malaysia, Thailand and Singapore. The growth rate of the Vietnamese economy is 5.3%, and has held at a relatively steady level for several years. Thus, there is some growth opportunity.

One of the other important characteristics of the Vietnamese market is that the country is densely-populated. There are two major cities — Hanoi and Saigon — that can support multiple hypermarkets. There are also many smaller cities that can support stores of different sizes. These are spread throughout the country. The small size of the country implies that it can be served via only two or three major warehouses (north, south and maybe central, around Da Nang). From a logistics point-of-view, Vietnam is relatively easy.

Further, Tesco is familiar with doing business in Southeast Asia. The shopping patterns are not dissimilar to small town and rural Thailand. Many people shop in local markets, but Tesco offers an entirely different shopping experience. It has been able to successfully convince Thai people that its offering is worthwhile, at least for some products. As a result, Tesco has become the largest supermarket in Thailand, and the second-largest operator of shopping centres. The strategy is simple. The Tesco hypermarket serves as an anchor for an entire shopping mall. The cities are growing rapidly, and the land is cheap, as it labour. This results in a low cost of market entry, and with the store as anchor, the shopping centre also attracts other tenants. Tesco’s Thailand strategy seems like it would be a good fit for the Vietnamese market as well, since many of the underlying conditions exist there as well (Ruddick, 2013).

Another advantage of the Vietnamese market is that the competitive landscape is not particularly daunting. There is one pre-existing hypermarket operator, Big C. This is a Thai company, so Tesco will be well familiar with its operations and competitive strategy. Big C. purchased Carrefour’s Thai stores when the French company exited Vietnam, and this has made Big C. A much more formidable competitor. Big C. operates in a number of different formats, ranging from premium hypermarket (Big C. Extra) to the regular Big C. Market. The company operates 27 stores in Vietnam presently (Big C.vn, 2015). However, other than Big C, there are no major competitors in Vietnam to this point. There are several local supermarket chains, a few department stores in big cities and otherwise retail in Vietnam is predominantly small scale and local (Vietnam Online, 2015). A market with only one major competitor is usually attractive.

Surprisingly, the local government is an advantage. Though Vietnam is Communist, its government has made a point of encouraging foreign direct investment. The country has reduced barriers to FDI. Its population is 60% working age, considered a “golden” structure, and the government has improved internal controls to make investing in Vietnam more fair, and reduce the risk. As a result of these factors, Vietnam has become an FDI success story (Nguyen, 2014).

Market Analysis — Disadvantages

There are several challenges inherent in the Vietnamese market for Tesco. The first challenge is with the size of the Vietnamese economy. The only other country with a GDP per capita so low, in which Tesco operates, is India, and India has a massive middle class. Vietnam does not. The average Vietnamese may have an interest in shopping at a Tesco, but might not have the means to spend much. The company will need to be careful with its product mix, and the locations of its stores, to ensure that there is a large enough customer base that can actually afford to shop at Tesco.

Tesco has targeted Asia as a major opportunity for growth. The company is already the number 1 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. This means that Vietnam is not only smaller than those other markets, but it is less developed as well. The choice to go with Vietnam over either Indonesia or Philippines is dependent on other variables, such as ease of distribution and the relative lack of competition, two factors that will lower Tesco’s cost of doing business considerably. The company could also opt to plow more money into other Asian markets where the growth potential is higher. In essence, the appeal of Vietnam is that it is close to the other major markets in the region in which Tesco already operates, and the company can gain first-mover advantages.

A third disadvantage with Vietnam is that there is little history of this type of retailing in the country. While Big C. has enjoyed some success, many Vietnamese are unfamiliar with modern retailing, and simply buy their food at the local wet markets. The country is still largely agricultural — moreso than Thailand — and it 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.

Analysis & Conclusion

Tesco is looking for growth opportunities overseas in order to spur some growth for the company. It is the number one retailer in Southeast Asia already, and has a strong presence in several other Asian countries. The company is eyeing a new market, and Vietnam has been shortlisted. There are many positives to entering the Vietnamese market. However, on the surface, it should be noted that there are other opportunities that might be better. Some of the markets in which it is already active have strong growth potential. Moreover, there are other countries in Southeast Asia that have a more developed markets and perhaps even better potential.

However, Vietnam has a number of factors in its favour. First, there is only one major competitor, and this is a competitor, Big C, with which the company is already familiar from Thailand. 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.

Also standing in favour of the Vietnamese market is that 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. Certainly, compared with Latin America, a market in which Tesco has never operated, it is easier to expand further into Southeast Asia, where the company already has substantial operations and experience.

References

BigC.vn (2015). Your nearest store. Big C. Retrieved April 6, 2015 from http://www.bigc.vn/Default.aspx?tabid=198&language=en-UK

CIA World Factbook (2015). Vietnam Central Intelligence Agency. Retrieved April 6, 2015 from https://www.cia.gov/library/publications/the-world-factbook/geos/vm.html

Nguyen, T. (2014). Why foreign investment in Vietnam is booming. World Economic Forum. Retrieved April 6, 2015 from https://agenda.weforum.org/2014/05/foreign-investment-booming-vietnam/

Ruddick, G. (2013). Tesco goes head-to-head with Thailand’s wet markets. The Telegraph. Retrieved April 6, 2015 from http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/9963749/Tesco-goes-head-to-head-with-Thailands-wet-markets.html

Ruddick, G. (2015). Tesco leads way as supermarket sales turned on their head. The Telegraph. Retrieved April 6, 2015 from http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/11460945/Tesco-leads-the-way-as-supermarket-sales-turned-on-their-head.html

Tesco (2015). Tesco Worldwide. Tesco. Retrieved April 6, 2015 from http://www.tescopoly.org/worldwide

Vietnam Online. (2015). Supermarkets and retailers. Vietnam Online. Retrieved April 6, 2015 from http://www.vietnamonline.com/shopping/supermarkets-and-retailers.html

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