Fashion Frenzy: Retailers in Vietnam

Working - Saigon/HCMC: March 28, 2017

Everywhere you look in HCMC’s District 1, there’s a new store opening. Remember when Zara, the Spanish fashion retailer, set up shop in Vincom Shopping Mall last September? If you dared to visit the store during its opening week, you probably spent more time in a queue than trying on clothes. Inside Retail Asia wrote that Zara “unofficially” made more than $246,000 in its first day, much more than anticipated.

zara crowded

It’s no wonder that many more mid-priced and mass-market retailers are following in Zara’s wake. It’s been reported that Mango, GAP, Topshop, H&M and Uniqlo are all getting ready to make their own marks on HCMC in 2017. While this is welcome news for Saigon’s legions of fashionistas, it also spells big changes for clothing retail.

The Land of Silk and Money

There are several reasons for this sudden popularity.

First of all, the middle class is growing, and it’s growing fast. Consulting firm PwC’s 2015-16 Outlook for the Retail and Consumer Products Sector in Asia found that the proportion of households earning more than $10,000 per year will rise from 2 percent in 2014 to around 20 percent in 2018. That’s a pretty big jump, and a significant one when you think about the demographics at play.

Vietnam has a young population, and it’s the young professionals who are the major target for these fast fashion brands. Deloitte Singapore’s Retail in Vietnam report stated that in 2014, 70 percent of consumers were between 15 and 64 years old. Meanwhile, almost 60 percent of Vietnam’s population is under 35 years old.

The sheer number of millennials is catching the eye of foreign retailers. And when you factor in where most of millennials are making money – namely Ho Chi Minh City and Hanoi – it’s no surprise that the vast majority of foreign retailers are playing it safe and catering exclusively to these urban areas.

family vietnam

Given these factors, a pyramid of consumers has emerged, as outlined in the Understanding Market Trends and Consumers in Vietnam report published by Singapore-based brand growth and communication company Louken Group.

At the top, you have the premium, niche market: people who buy products for social status and have a generous disposable income. Many of them do their shopping abroad, making it a difficult clientele to curate domestically.

The second tier is the mid-market: middle income consumers who want quality products with a pleasing design sold at an affordable price. This is the market Zara has tapped into with such success.

At the bottom are the mass market customers. They want fast fashion that is cheap and can be bought often. This is most of the Vietnamese population because, come on, who can resist a good deal?

And what company can resist demographics with so much potential? It doesn’t hurt that recent international agreements have made it easier for foreign companies to do business here, especially the World Trade Organisation (WTO) agreement Vietnam signed in 2007.

Before 2008, international companies were only allowed 49 percent of capital in joint ventures. But as of 2009, fully foreign-owned companies could operate in the Vietnamese market independently. And since January 2015, foreign retailers can set up businesses with 100 percent foreign capital. No more need to franchise or partner with a domestic company. Hence, the fashion flood.

Domestic Concerns

With the growing middle class and prime market conditions, it would seem to be a perfect time for Vietnamese retailers to get in on some of the action as well. Even better is the fact that most Vietnamese consumers want domestic products.

sales growth vietnam

In the Louken Group’s report, 71 percent of Vietnamese consumers surveyed believe that local products are of high quality, and 80 percent prefer domestically produced garments. Jackpot, right?

Not necessarily. As Carey Zesiger, manager of business development for the international fashion distribution company Havang told us, “Increasingly in recent years, we’ve had cases where our brands are producing in factories in Vietnam, and since the label says ‘Made in Vietnam’, you would think it would be easy [to acquire them], and it should be low-tax or no tax. That’s not always the case.

“Depending on the situation, depending on the paperwork, depending on the licensing of the factory and their tax status, there have been cases where we’ve had to export products that are made in Vietnam to Singapore, re-import them and pay full duty for a product that’s made in Vietnam.”

This complicated system seems to be a by-product of the country’s focus on developing its export economy, sometimes at the expense of its own businesses and consumers. And while there is a movement for the Vietnamese textile and garment sector to develop business in the domestic market, in particular for textile brands like Nha Be, Viet Tien, Hanosimex and Duc Giang, the export-heavy regulations and international free trade agreements are leaving the door wide open for foreign retailers.

The Future

Will we see Ho Chi Minh City reach the retail dimensions of powerhouse cities like Singapore or Hong Kong?

Zesiger has his doubts: “Singapore and Hong Kong are dependent to a large extent on tourism. They are hubs for tourists, travellers, people in transit, business, and so a lot of retail activity there is driven by inbound tourism.” Vietnam, and particularly Ho Chi Minh City, is quite different.

“Let’s face it,” Zesiger continues, “Vietnam is not going to be a destination for people to come and do their duty-free shopping, because the duties are high and the selection is not so broad.”

Instead, Zesinger sees retail growth to be long-term and based on developing the domestic market. That means supporting and helping the middle class to grow. Right now, with a GDP per capita of just $1,325, there’s a lot of room for growth.

Company to Watch: AEON Company Limited

With so many different companies emerging onto the market, it’s difficult to keep them all straight. Here’s one company that’s been working particularly hard to crack the Vietnamese demographic. Keep an eye on AEON; you might be seeing the name even more in the future.

eaon vietnam

Who?

AEON Company Limited is a retailing group from Japan. Reportedly founded in 1758, AEON has one of the longest histories in retail development in Asia. An international operation with 16,498 companies spread across Asia, AEON has turned an eye towards Vietnam.

What?

As the largest retail company in Japan, AEON deals in retail of all forms, with a special focus on mall supermarkets. So far, AEON has opened four shopping malls in Vietnam (two in Hanoi and two in the Ho Chi Minh City area) and 54 supermarkets throughout the country. AEON’s shoppers are middle class, and the company thrives on offering consumers solid brands at carefully controlled prices.

When?

AEON Vietnam first began in 2009 as a representative office and acquired a business licence from the People’s Committee of Ho Chi Minh City in 2011, when it began constructing the AEON Shopping Center in Tan Phu Celadon. By 2020, AEON hopes to own 20 outlets in Vietnam (10 near HCMC and 10 near Hanoi).

Why?

Vietnam’s rising middle class and younger population are attractive to foreign investors. This is especially true for Japanese companies, which have been struggling domestically due to increased international competition, a cost-conscious and ageing population, and a declining birth rate.

Where?

While most retailers have traditionally built in either Ho Chi Minh City or Hanoi, AEON is one of the first to build a major foreign-invested shopping mall in an outlying province – Binh Duong, about two hours north of Saigon. Though it has had offers to build in medium-sized cities like Danang, Nagahisa Oyama, the head of AEON’s Vietnam unit, has stated that it’s too soon for provincial developments.