What is a two-tier distributor? They buy from manufacturers and sell to resellers.
What are their competitive advantages? Two-tier distributors can expand the retail footprint in emerging markets. They normally sell a diverse range of brands and control a large percentage of the local distribution in the telecom and the computer industry. Two-tier distributors understand local conditions and can negotiate much better lease terms with proprietors. In some cases they might even own their own buildings.
How can they add value? Smaller distributors understand the needs of retailer and have well established practices and systems to deal with local customers. Because they are closer to the customer, they are also a valuable source for customer feedback.
Do they provide additional services? They normally provide credit terms to small retailers. In a current credit tight market, this can be a big advantage.
How will it affect lead times? By making use of two-tier distributors, manufacturers can reduce lead times by moving goods closer to retailers.
How can manufacturers support two-tier distributors? Manufacturers can assist them with route planning and help them identify the potential outlet base. Training workshops can go a long way in developing the business and building relationships.
How can they avoid channel conflict with their own sales force? Manufacturers can restrict salesmen activities to certain channel, and avoid conflict with distributors.
Personally, I am not very fond of the term, slums. I think it is loosely defined term for a type of informal market. However, with all their problems and challenges there is a lot to learn from slums from a business perspective.
Entrepreneurism – slum areas are highly entrepreneurial, with a high degree of business activity. Most houses also double as business premises. While this is often out of economic necessity, there are some interesting models coming out of these organic (and often unregulated) businesses. During my first visit to Lagos’ Makoko, I was impressed with the supply chain of Nollywood movies (Nigerian films). Nollywood hawkers were everywhere, with no shortage of supply (and demand). The lack of law enforcement also provides some advantages to entrepreneurs. Because the market is informal, most businesses trade without bothering to fill out any paper work, keeping start-up costs low and speeding up the notoriously slow process of starting a business in Nigeria.
Low cost distribution – slum area are normally densely populated. Because such areas often have poor infrastructure, a conventional route system is normally ineffective in these areas. However, with some ingenuity, high density can be converted into quick delivery and turnaround time. For example, in Dhaka’s Motijheel Thana there is a highly effective cold chain (ice) distribution system catering to fish mongers. Deliveries are made with pushcarts and completed before 11 am. In 1999, while working in the Coke system in Ethiopia, my team and I rolled out a low cost manual distribution system to cover our outlet base in an informal market area. The model was by no means unique to Ethiopia or Africa. However, what made it different was that it was a managed distribution system that required detailed planning and implementation. The distribution model also created a high number of jobs in this poor area, about which The Harvard Kennedy School wrote a case study. The distribution system has since been adopted by a number of companies operating in Africa.
Environmentalism – poverty inspires frugality as well as innovation. When walking around in slums, you notice the importance of waste recycling. From computers to packing material, nothing gets wasted. Soda cans are hammered and reshaped into toy airplanes to sell to tourists. Grain sacks become patches on frayed clothes. Individuals living in slums already understand fully the environmental call to “reduce – reuse – recycle”.
Community projects – the extreme social and economic challenges faced by those living in slums has inspired innovative social programs and partnerships. In Nairobi’s Kibera there are a number of NGO projects focusing on how to convert waste recycling into stable income generation, as a means to lift individuals out of poverty. A number of organizations are also evaluating the potential of distributing “social products” such as condoms and vitamins to such areas. Simon Berry and his highly visible Cocalife campaign, is a great example. Escaping the slum is an unlikely reality for most and companies and NGOs need a fresh approach to operate in these areas.
Managing supplier relationships used to be a zero sum game. Most companies focused on short terms goals where price was the main focus. Bullying suppliers were commonplace in some organizations. Employees took great pride in “facing down suppliers” and relationships were viewed on “how much money we will make”. However, with the increase in outsourcing and volatility in commodities, supplier relationship management (SRM) has moved to the forefront of organizational strategy. Companies are spending increased time on their selection criteria and determining clear best practices to manage partner relationships. However, few companies have mastered supplier management and SRM is in its infancy.
The question of quality
With the increase in outsourcing and the growth in world trade, product quality is increasingly an important factor. Many companies in the pet food, toy and dairy industry are still reeling from recent quality scandals in China and other parts of Asia. These scandals have put increased pressure on companies, as consumers are progressively more concerned about product quality. These quality scandals of late, as well of those in the apparel industry over the past decade, have highlighted the importance of managing relationships and the importance of supplier tracking and auditing. The days where companies could plead “we don’t have control over our suppliers” are gone. Environmental concerns and an increased scrutiny of labour practices also are demanding improved supplier relationships.
Outsourcing to the “unknown”
With outsourcing to Asian countries on the increase, companies need to understand culture issues. Many companies have been burned when outsourcing manufacturing to countries such as India and China. Management practices that worked in one country are not necessarily going to work in another country and companies need to change the way they think and work in other markets. Country values are also different. For example, cutting legal corners is seen as a survival technique and is much more tolerated in some countries. It is important to understand the value system of each country and it is important to assume nothing.
Outsourcing to emerging markets provides companies with unique challenges. Companies must develop contingency plans as delivery delays are normally more frequent. As one executive put it, “getting on time deliveries from our Asian suppliers, is one of our key challenges”. Working in the “unknown” also provides companies with unique legal challenges. Foreign companies trading in China and India have complained in the past about unfair legal practices. Companies must avoid disputes and ensure contracts are clear to all parties involved. Do not assume all parties will read the fine print and try to avoid legal terms. Always aim to simplify matters for suppliers. Consult lawyers that not only understand local laws but also cultural issues. The interpretation of the law can differ from country to country and cultural issues need to be taken into consideration.
Technology
In recent years, companies have seen technological advances in managing supplier relationships. The day of managing suppliers with spreadsheets are gone, and SRM is increasingly complex. Companies are demanding increased visibility. The need for real time information is on the increase. Companies are investing significant resources in managing suppliers and the use of supplier relationship software is becoming more common place. Supply chain managers are increasingly using the web to collaborate and to communicate with supply chain partners.
Find the right partners
Previously, partner selection only focused on price, with value sometimes taking a backseat. Today, companies are spending increased time and resources to develop and implement a comprehensive supplier qualification process. Companies need to establish a strategic road map and clear selection criteria. For example, the selection criteria may include important components such as strategic vision, capability, capacity and environmental issues. Companies need to evaluate if potential suppliers meet their required standards. Furthermore, supplier selection is not just limited to procurement departments, and companies are increasingly making use of cross functional teams. Employing external agencies to monitor and track supplier relationships is also on the increase.
Building relationships
Companies must always act with the relationship in mind. Companies must have a clear relationship development plan for each partner with clear goals. Building trust is key in any relationship, and trust must be built at all levels of the organization, and not just at senior management level. For example, companies can introduce department induction programs and in some cases even embed suppliers in the organization. The more partners understand each others businesses, the better for all parties involved. With clear communication channels, partners will have the confidence to address problems head on.
Advantages of relationships
One of the key advantages of long term relationships is cost reduction. Companies work together to solve supply chain problems and learn from one another. Better collaboration and communication will lead to increased sales. Improved collaboration can also lead to better demand planning and route scheduling. For example, when Kellogg evaluated Tesco’s inventory levels it realized that most out of the stocks occurred in the middle of the week. Kellogg worked with Tesco and changed its delivering schedule to accommodate the retailer. By changing the delivery scheduled, Kellogg reduced stock outs, increased sales and improved both customer and consumer satisfaction. As the Kellogg example demonstrates, working with suppliers can provide mutual benefits to all parties involved.
In today’s world, companies require suppliers that are results orientated and are demanding increased speed from suppliers. Not all suppliers are equal and all suppliers need to be segmented. Segmentation is critical, as it will determine the importance of the partnership and how much time companies need to spend on building supplier relationships. All members of the supply chain must have clear accountability and each member of the team must be aware of his or her duties. Companies need to monitor compliance and implement and communicate clear Key Performance Indicators (KPIs). In today’s high speed world, SRM is on the forefront of any successful company. SRM has changed significantly over the last couple of years, and suppliers are now seen as an extension of the business.
Sri Lanka is currently waking up from years of civil war. There is a sense of optimism in the air and the country is most certainly open for business. In September I spent two weeks in the country and also had a chance to review a FMCG company’s distributor network. I jotted down a few distributor issues I spotted in the market.
Visual management- distributor staff can benefit enormously from Visual management. For example, a clear distribution process mapped out with required documents can be hugely beneficial to the distributor.
Focus – in most organizations in emerging markets, it is critical to focus on the absolute basics. In many cases, distributor management lack skills and knowledge. Don’t try to do too much. You are likely to lose focus and confuse distributor staff in the process.
What gets measured gets done- unfortunately this is not always the case. If you don’t follow-up and take action on what you are tracking it will not get done. Some companies are simply tracking too much information. Ask yourself the question, what is absolutely critical to our business right now?
Standardization makes simple – eliminate the guess work. Every time someone has to think about a process it takes time. Standardized processes will increase quality standards and ensure the same consistent service. Standardized processes will also make it easier to visualize processes with pictures and photos.
Complexity – if you keep adding SKUs to your business it will add to the complexity for the distributor. For example, an increase in the number of SKUs sold will increase the complexity of estimating sales and load forecasting. Can the distributor handle the level of complexity in their business? What do you need to do to assist them in the process?
Vietnam’s textile industry has increased significantly since normalizing relationships with the United States in the 1990’s. Vietnam was granted most favoured nation status (MFN) in December 2001, which led to a dramatic reduction in import tariffs in the US market. Vietnam’s induction to the World Trade Organization (WTO) in 2007 and the Vietnamese government’s strong support of the textile and garment sector, have provided strong incentives to attract foreign investors. The textile industry is now the second biggest exporter in Vietnam and is expected to become the biggest in 2009. However the financial crisis has had a severe affect on Vietnam’s textile industry, which has suffered from a slump in demand from key export markets in the US, Europe and Japan.
Labour cost advantage
In the textile industry, companies are increasingly looking for lower cost countries that can provide outsourcing opportunities. The rising cost of land and labour are diminishing China’s labour cost advantage and Vietnam is increasingly seen as a low cost sourcing alternative to China. Estimates are that wage levels in Vietnam are about one third of those in China’s coastal region. Companies that are chasing lower labour costs are increasingly moving production to Vietnam. In a 2008 Booz Allen Hamilton survey 88 percent of companies originally chose China for its lower labour costs. Of the companies surveyed, 55 percent believe China is losing its competitive edge to countries such as Vietnam. The survey also indicated that 63 percent named Vietnam as their top low cost sourcing alternative to China. However, costs may be rising. The Navigos Group, a leading recruitment solutions provider in Vietnam, announced early in the year that there had been a 16.47 percent increase in Vietnamese workers’ average gross salaries between April 2008 and March 2009.
Low cost location
However, low cost labour is hardly a competitive advantage in the long term. Labour cost keeps changing and today’s low cost location is not necessarily tomorrow’s viable outsourcing location. If it is not China or Vietnam, it could be Bangladesh or Cambodia. Ig Hortsmann, a professor of business economics at the University of Toronto’s Rotman School of Management notes that Nike originally off shored manufacturing to Japan. As labour costs increased, manufacturing was later moved to South Korea and Taiwan. When labour cost increased in South Korea and Taiwan, it was moved to China and later also to Vietnam. Justin Wood, a Director of the Economist Intelligence Unit Corporate Network in Singapore makes the point that in the last 15 years Vietnam has moved from a low to a middle income country. The move towards a middle income will likely put additional pressure on Vietnam’s low cost labour status.
The Vietnam advantage
Elisabeth Rolskov, founder of ER-Couture in Vietnam, notes that manufacturing advantages in Vietnam go beyond labour cost and the country has some competitive advantages compared to China. “Vietnam has very good embroidery skills and needle work”, says Rolskov. “A lot of designers and manufacturers need embroidery skills and Vietnam has kept in touch with its traditional roots,” she adds.
However, for local designers, Vietnam has limitations as a sourcing location. “Sourcing material, buttons and zippers from Guangzhou is much better,” says Rolskov. In Guangzhou you can find everything in air-conditioned shopping areas and the shopping experience is less hectic.” This can have a negative impact on a designer’s creativity as the designer is restricted by what is on offer in the local market.
Rolskov thinks Vietnam is currently a great location for smaller manufacturers as the market is more flexible. “China is more volume focused”, adds Rolskov, a view supported by Rebecca Lebold, director of apparel product and technical development at Lilly Pulitzer. “Vietnam has higher production minimums than many other countries. Lower minimums would allow smaller companies to source their product in Vietnam”, Lebold notes.
Intellectual property threat
For many companies outsourcing to Vietnam, intellectual property (IP) remains a concern. Within the fashion industry, IP is not as enforced as it is within the film and music industries. Designers can “take inspiration” and it is seen as a major driver for setting trends in the industry. The World Intellectual Property Organization (WIPO) has called for stricter intellectual property enforcement within the fashion industry to better protect companies and promote competitiveness within the textile and clothing industries. “It is a hard thing to take care of and you just have to be faster than everybody else”, says Rolskov. For smaller designers and labels it is much easier to switch manufacturing. However to prevent the copying of designs is a challenging undertaking.
Infrastructure development
For Vietnam to advance as an outsourcing location, the textile industry supply chain needs to be considered. Local logistics are influenced by direct and indirect cost. In Vietnam’s textile industry raw materials are often imported, which increases cost compared with those countries able to source locally. Managing reverse logistics can also be a challenging undertaking in Vietnam. Procedures, processes and infrastructure are sometimes not in place to manage repairs, returns and warranties.
According to a new market research report from Transport Intelligence (Ti) entitled Vietnam Logistics 2009, the high cost of logistics remains one of the biggest stumbling blocks in Vietnam. According to TI analyst John Manners Bell, logistics costs are estimated at 25 percent of Vietnam’s GDP. Even with cheap labour cost, poor infrastructure remains a major barrier for entry. This is largely due to Vietnam being in the early stages of infrastructure development.
Many experts believe that China’s advanced infrastructure gives it a major competitive advantage. Electricity and transportation costs will likely come down even further and and this will have a significant impact on the total cost, even if their labour is more costly. The Vietnamese government is aware of this dynamic and has invested billions of dollars in the country’s infrastructure. The government is actively encouraging foreign direct investment in the country’s infrastructure. This is visible with projects such as the Cai Mep Container Port in the Mekong River Delta and the new Long Thanh airport that’s projected to be completed by 2015.
Through assessing the overall supply chain, rather than a singular focus on labour costs, it is easier to identify where Vietnam’s opportunities and challenges lie in the textile industry. While small scale designers and manufacturers take advantage of a flexible environment, infrastructure and logistics processes will need further investment to make Vietnam an outsourcing destination and source for tomorrow’s fashionista wardrobes.
On a recent trip to West Africa I had a chance to make a short stop in Gambia. As part of our company’s increased interest and research in the supply chain in social products, I made contact with Amy Hause, General Manager of Gambia is Good (GiG).
TN: Who is GiG?
GiG is a horticultural sales and marketing business conceived as a partnership between Haygrove (a private UK business) and Concern Universal (an international NGO)
TN: How does GiG tap into Gambia’s important tourist sector?
GiG supplies high quality locally grown produce to Gambia’s hotels and restaurants.
TN: How does it work?
GiG contracts local farmers to grow vegetables and enables farmers to move from subsistence to commercial farming. GiG has worked with over 1000 Gambian producers (indirectly benefiting 5000 people), 90 percent of whom are women. GiG also provides assistance to farmers to compete in the market place through increased marketing and business skills training and development.
Emerging economies with robust economic growth remain a significant opportunity for companies eager to grow and expand their business. With growth opportunities limited in the U.S. and Europe, these countries will be the battleground for companies in the years to come. Asian companies have improved their skills and practices and are gaining in their ability to produce reliable products. Lean approaches have progressed globally and emerging markets are no exception. However with all the opportunity and cost advantages, emerging market economies such as China, India and Vietnam present some unique challenges for companies eager to run the same lean production and logistics that they run in the U.S. and Europe. Some companies question if the same lean practices can be successfully implemented in emerging markets. Other companies are discovering that lean manufacturing and logistics are not only a possibility, but increasingly essential for business success.
What is a lean?
Lean manufacturing is a management process derived mostly from the Toyota Production System (TPS). A lean process (or system) is designed with a focus on customer value and satisfaction. Its aim is to deliver a product to the end customer quickly and efficiently with minimum waste in the system while delivering superior financial returns to the business. Implementing a lean approach in emerging markets can be a challenging, but possible undertaking for companies. It is important to note that lean principles do not apply only to manufacturing, but also to areas such as logistics and retail. For most companies in emerging markets, this is still a relatively new area. However some companies are already applying a number of lean principles.
Cultural Challenges
In a lean organization, the supervisor fulfills the role of an active problem solver. Traditionally, in emerging cultures, that is the responsibility of the manager. Workers and supervisors are not called upon for advice. Instilling a culture of problem solving takes time, and requires a major shift in the organization. One of the most difficult challenges is to change the behavior and convince staff and managers of the value of lean approaches. Changing the mindset of employees is critical to success, and companies must ensure groups do not view each other as rivals, but rather as team players. Companies need to ensure that all communication channels are open. For example, when Schneider Electric SA in Peru identified communication challenges between managers and employees, the plant established a communications council to address topics such as customer-service issues and cross-functional communication. Today Schneider Electric SA is viewed as a model for lean implementation in emerging markets. Beyond opening communication channels, companies need to invest significant resources in training.
The “small” challenges
In many Asian economies, most products are sold primarily through small shops after being delivered by small third party distributors. Orders are normally much smaller and customers require more frequent delivery than developed markets. With limited technology and visibility in outlets, applying lean principles can be a challenging undertaking.
However, even in small retail shops and distribution centers, companies can assist distributors and retailers to apply lean principles. Companies can help partners to simplify processes and systems and importantly help to reduce lead times. Companies can work with local distribution partners to identify value adding and non-value adding activities. Even in operations with limited technology and manual processes, this is a possibility.
Companies can work closely with distributors to implement systems such as the five s’ (5s: sort, straighten, shining, standardize, and sustain) and to help create visual management tool. In emerging markets, where literacy is sometimes a problem, implementing visual processes and flows can be hugely beneficial to employees. Implementing systems such as the 5s will reduce or even remove the clutter and bottlenecks that so often plague local operations. Companies can work with partners to provide clear instructions and process flows and in the process realize significant supply chain cost savings. Such lean practices require limited investment and can go a long way in creating a leaner supply chain.
The importance of training
In emerging markets readily available lean skills in the market are limited and companies need to invest time and money in capability development. In countries with high staff turnover such as China and Vietnam, identifying employees that are dedicated to the job ahead, can also be challenging undertaking.
To implement lean principles, such as continuous improvement, requires discipline and companies need to invest in continual mentoring, coaching, and training. Companies are making use of a number of training options including training centers, universities and institutes, such as the Lean Enterprise Institute. Training centers can help companies to build the required capability in the organization and ensure employees understand key lean principles. They can further help the company to create a continuous improvement road map and track employees to ensure they are on the right path to lean success and personal career development.
For most companies, most lean roads lead back to Toyota. The same is true of emerging markets, where Toyota has played a key role. During the Asian financial crisis in the 1990s, Toyota implemented an aggressive emerging market strategy to take advantage of low cost labour and emerging market cost advantages. One of the key challenges was how to implement the same lean production principles they had in Japan, in emerging economies. Toyota was concerned with quality and whether local staff, with a lack of experience and tradition in manufacturing excellence, could implement the same lean principles. Toyota embarked on an ambitious program that invested heavily in training and skills development in these markets. Today, Toyota is reaping the rewards, and remains the exemplar for implementing lean production.
Still, to apply lean techniques in emerging markets, companies need to accept compromises or trade-offs as not all lean principles will be successful. Suppliers in emerging markets typically are not as reliable. Implementing just-in-time can be challenging. It is, however up, to companies to determine which lean practices are realistic and which are longer term goals. Companies that overlook the softer side of implementation will struggle. Change in emerging markets can sometimes take longer, and companies need to focus significant resources on creating the right organizational culture and building capability within the organization. However, with the right approach, leaner operations can be a reality.
Medina market, Conakry, Guinea
How do you create a cold chain in a city with constant power cuts and outages? This is one of the key questions that faced us on a recent project in Guinea, West Africa. Periodic power and water cuts are a daily burden for Conakry’s residents, not to mention the upcountry areas. For consumer goods companies that rely on a cold chain, such as beverage companies, cold availability is a critical component of their business. “Without refrigeration or ice, it is very difficult to activate new outlets”, said one distributor I spoke to. “Ice machines are not designed for power cuts” he explained.
The power entrepreneurs
At Conakry’s Madina market, one of West Africa’s largest markets, I met some entrepreneurs that have decided to create their own power company. “The government is not acting, so we will act”, said one ambitious Medina trader who asked not to be named. They have created a power company by setting up a power grid with a few generators. Each shop owner is provided with an electricity meter making the market one of the few areas with a constant electricity supply.
Some areas are more equal than others
Electricity supply is major barrier for every cold chain in Africa. However, careful evaluation of Conakry city revealed that it very much depends on where you find yourself. Areas with government buildings and commercial centers receive a more constant supply of electricity. The state owned telecom company Sotelqui S.A, as expected, also has a constant supply of electricity. In upcountry areas, mining areas also are benefiting from a good supply of electricity, such as the bauxite mine in Debele. Inequalities in electricity access are by no means unique to Guinea. However, this information will be very valuable when drafting your cooling placement strategy.
In Africa, companies are increasingly looking at ice machines and ice distribution. Advances in ice machine solar technology hold real potential and should not be overlooked. However, such technology is still some distance away from becoming mainstream. Setting up an ice route supported with ice boxes however takes time and effort. Identifying potential areas with electricity supply is just the first step. Companies also need to have a clear understanding of the current and potential outlet base. However for companies and entrepreneurs this can be a rewarding undertaking. Ice making and distribution can also be combined with entrepreneur development programs, generating a more inclusive supply chain model. In the words of one shop keeper I spoke to, “give me the tools, and I will show you what I can do”.
- Culture – understand culture issues and don’t assume anything. Change your thinking when working in other markets
- Relationships – build long term relationships with suppliers and always act with the relationship in mind
- Contracts – don’t assume all parties will read the fine print and try to avoid legal terms. Avoid disputes and ensure contracts are clear to all parties involved
- Qualification – implement a supplier qualification process and make use of external agencies. Obtain the right expertise for the job
- Training – arrange joined training sessions and focus on building supplier capability. Keep in mind there is a lot to learn from local suppliers
- Contingency plans – develop contingency plans as on time delivery can sometimes be challenging. Communicate problems to key stakeholders
The Vietnamese retail market has seen significant changes the last couple of years. Neighbourhoods in Ho Chi Minh City and Hanoi have been transformed as Vietnamese shoppers demand more from their retailers and retail experience. However, even when compared to other major Asia economies, the retail market remains in its infancy with a great potential for growth. Despite the current economic downturn, the retail market remains attractive. “Double digit growth is attractive in any market”, notes Eckart Dutz, Managing Director of Cartridge World. “I don’t see the current global economic downturn as a major barrier for sustained growth”, he says. “The retail sector will continue to grow just like any other market as the Vietnamese consumer searches for a more specialized shopping experience”, he continues. Beth Owen, General Manager of Indochina Research, mentions a recent retail interview her company conducted in Vietnam. “There is still a lot of optimism and many retailers expect an upturn within the next six months.”
Phi Van Nguyen, Managing Director of the Future Sense Group who brought international brands such as Gloria Jeans Coffee and Yogen Fruz to Vietnam predicts that as the retail market continues to grow we will see more international brands coming to the market. She notes that a number of Asian franchises have entered the market. However she mentions for some big international brands it will take time to enter the market as they struggle with regulatory issues. Dutz also notes that there is a trend towards modern trade and convenience shopping. He however questions where retailers have yet found the right model for Vietnamese convenience shopping. “It is important that convenience marts get the assortment right and make people want to go there. Currently it is not that attractive for Vietnamese consumers”, Dutz explains. “For most Vietnamese consumers, convenience shopping already exists, it is just a traditional model.”
Trung Thu Luong, National Sales Manager for La Vie mineral water, notes that even though modern trade is growing for package goods companies, traditional trades will remain a dominant force. Beth Owen supports this view. “We are still seeing growth in traditional trade and the retail market remains highly fragmented”, she says. Owen mentions that there is still a perception in Vietnam that modern trade is the shopping place for the upper classes, with higher prices than traditional trade. She notes that some aspects of traditional trade have changed little and that consumers continue to shop at wet markets. “The structure of the city is not friendly to modern trade and research shows that people are not willing to travel far for products and services”, said Owen. “However, with time and planning, all of this can be overcome, just like any other markets in Asia”, she continues.
Focus on Tier One
In a number of growing emerging markets a lot has been made of the growth potential of tier two and three cities. However, compared to China and India, the focus for Vietnamese retailers remain tier one cities. Phi Van Nguyen notes that living standards outside of Ho Chi Minh City and Hanoi are still low. “Even in tier two cities the market is just not big enough for more than one big retail complex”, she explains. However, she mentions that her company has developed a clear growth plan for the six major cities in the country.
David France, Managing Director, Distribution Division of Highlands Coffee mentions that the focus for most retailers remains the two biggest cities. Highlands Coffee has an expanding retail base in the country and a growing package goods distribution arm to retailers. “Ho Chi Minh City and Hanoi continues to grow and the two cities hold significant growth potential for companies”, France notes. He mentions that the same level of development is just not visible outside of the two major cities and that some cities are stagnant because of the ongoing global crisis. Trung Thu Luong brings another perspective, noting that package goods companies with the right product category and price points are increasingly looking outside of the two major cities. “To sustain growth we have to go outside of the big cities.” However, most interviewed agreed that for most companies, the major urban areas will remain the playground.
Information is key
A growing retail sector will increasingly rely on information technology to make decisions. Companies also need a more sophisticated way of doing business. Few suppliers and distributors in Vietnam have information available at the retail level. Phi mentions that local companies are still far behind when it comes to information technology. “Many companies don’t see the benefits of information technology and some companies are still standing in the dark.” Dutz alludes to the fact that with relatively cheap labour, many companies are reluctant to invest in information technology. “For some businesses it is difficult to make the case for technology.” However he notes that information management is critical for success. “Without the information required, some companies just push things in the shop and then see what happens”, said Dutz. Owen notes that the retail market is starting to demand more and some high end retailers are putting pressure on companies to improve technology.
France notes that if distribution companies want to succeed at the retail level, they require technology to assist them in this task. “Above 25 sales people it becomes very difficult to manage employees and companies lose control of their sales people”, said France. “Many companies only cover about 60% of their retail base.”Even with the current economic climate, the Vietnam retail market will remain an exciting prospect for many investors. Retail space will continue to be challenge in the near future and it will take some time for consumers to change their behavior. Some might argue that the speed of change has been slower than projected. However, retail change does not happen over night. “It will take time for people to migrate from traditional trade, time to learn, like it and make it a habit”, said Phi.
