McKinsey examines a Vietnamese supermarket sector set to explode

19 April 2018 5 min. read

As the Vietnamese economy continues its upward momentum, punctuated by a growing middle class and increasing urbanisation, the strategy and management firm McKinsey & Company has asked the question: what is the recipe for profitable growth in Vietnam’s grocery market?

While the Asian region bounds toward global economic dominance as a whole, there remain distinct differences in the nature of the its varying economies, even within Southeast Asia alone. The emerging ASEAN economies are growing at a rate of up to three times faster than their comparatively advanced regional neighbours, with Vietnam, currently tracking at above 6 percent annual growth in real GDP (compared to Singapore’s ~2%), among them.

A common feature of these emerging economies is the combination of a growing middle-class with greater discretionary income and more discerning tastes, increasing urbanisation, shrinking households, and a relatively time-poor citizenry with less flexible schedules and a need for convenience. Vietnam is no different, and while traditional grocers still dominate locally, the shifting lifestyles and consumer demographics indicate that the country’s immature supermarket sector is primed for explosion.Grocery spending in Asia per capitaFurther fuelling the prospect for rapid growth is the country’s relatively low modern-trade grocery-spend per capita, just a little above Laos and Bhutan and currently lagging Indonesia and the Philippines. Yet, according to a recent McKinsey & Company analysis on the state of Vietnam’s grocery sector, once certain GPD per capita levels are reached, the average spend on modern groceries typically sky-rockets – such that advanced economies like those of Japan and Hong Kong record vastly greater rates of modern grocery shopping with only the small incremental gains in GDP per capita past the tipping point.

With such conditions in place, the consulting firm predicts that the modern trade market in the country will grow at a rate faster than its per capita GDP, noting that the overall grocery market has already been growing at 15 percent annually since 2012 – with the expectation that the double-digit growth figures are due to continue. As it stands, the supermarket segment still commands the lion’s share of the modern sector, but the hypermarket and convenience segments are growing at a rapid clip, recording a CAGR of 22% and 49% respectively in the five years to 2017.Supermarket and hypermarket growth in VietnamBut while the demand for modern groceries may well be about to boom, the question remains – how can the big retailers capitalise, especially in a crowded market and with further respect to the unique market challenges of Vietnam, such as rising real estate costs, a still persisting culture of open street-markets, and a fragmented and shifting supplier base. Additionally, the report argues, the rise in disposable incomes will likely be fastest among young urbanites who eschew car ownership, such that the old US and European growth models will not readily apply.

To date, the report points to a crowded local supermarket landscape marked by low productivity and thus overall profitability. The average industry sales per square metre generated in Vietnam stands at roughly $2,500. As a contrast, the sector in Singapore generates over $8,500 according to the same metric, while in the more economically comparable Philippines the sales-rate is pushing close to $4,000 per square metre.Sales productivity of Asian supermarketsThe present focus on expansion in Vietnam along with the scramble for market-share has contributed to this relative lack of profitability. The report notes that, “Both outside-in interviews and in-market observations point to low gross margins, driven by the necessity to compete against wet markets, intense competition between players on promotions, and supply challenges for fresh items.” The big players have already ceded 15% of the total market share in just the past five years, and the competition doesn’t look to be slowing, with aggressive new challengers recently joining the fray.

So what’s the remedy – or, rather, recipe – for profitable market growth? McKinsey cites three prevalent strategies to date – the dominant low-price model, the focus on upmarket premium space, and a recent ‘winner take all’ expansion approach – and offers its own take on the keys to success and need for distinctive performance in six specific spheres;

A clear value proposition that works economically – i.e. not attempting to excel in every dimension such as price, assortment, and service; rigorous productivity management to maintain profitable gross margins – which will require consistent pricing and value proposition and ongoing discipline; championing quality where it matters most, as a point of difference to wet markets; the careful management of footprint and expansion to avoid a downward spiral and an investment in data analytics to gain a competitive edge, and, finally; to prepare for the more intense competition and market disruption still to come.