Vietnam's Distribution System: Lessons from South Korea

The retreat of foreign giant retailers from South Korea has provided opportunity for the Vietnamese distribution system to abate the market share loss worry. Experts said the sound application of South Korea’s lesson to Vietnam is an urgent matter.

After eight years in South Korea, the world-leading retail giant Wal-Mart announced its withdrawal from this market and sales of all of its facilities to a South Korean retailer at a price of nearly US$900 million. The world’s second largest retailer Carrefour of France also sold its system in South Korea at a price of nearly US$2 billion. The core reason for the withdrawal of these two giants is the failure to compete with domestic retailers, which have more flexible policies and know the tastes of consumers.

How has the experience in South Korea been applied by Vietnamese enterprises? The first lesson is domestic distributors should quickly build modern distribution centres in the best locations. Vietnamese enterprises said they will establish distribution centres in urban zones or residential zones before foreign retail giants land in Vietnam.

From now 2006, the Co-op Mart system will build an additional 4-5 supermarkets and open 100 retail shop chains in all residential and suburban zones.

Besides, the Vinatexmart supermarket system is preparing to open the 5-storey Can Tho Trading Centre covering nearly 9,000 square metres. Vinatexmart will invest VND1,500 billion (US$93.75 million) to open 37 fashion shops, 32 supermarkets, six trading centres, two fashion centres and general distribution base depots in northern, southern and western Vietnam in the next four years.

The Maho electronic shop network plans to open 40 instalment centres across Vietnam. 

The second lesson is competition in separate market segments. According to statistics from the Ministry of Trade, some 40 per cent and 44 per cent of goods reach consumers via markets and independent retail outlets, respectively. Before this situation, domestic distributors focused on selling goods via wholesales markets or farm produce centres as well as retail outlets. Saigon Trade Corp. (Satra) is a typical example of this model. Satra cooperated with many enterprises in other provinces to develop wholesales markets and set up distribution centres in rural areas. Its new facilities are also suppliers for supermarkets in urban zones. In trading centres in urban areas, Satra organises its typical utilities shops or cooperates with households to set up do-it-yourself shops to sell the products of its member companies.

Goods sold via modern distribution systems like supermarkets or convenience stores only accounted for some 10 per cent and the remaining 6 per cent is directly sold by producers. Hence, foreign retail groups, if entering Vietnam, can only compete in small markets and need a long time to take up the other market segments. 

Third, domestic enterprises strengthen their finances, logistics and professionalism. Financially, capital for huge projects of Vinatex from now until 2010 will be mobilised from domestic and foreign sources, according to Vinatex Chairman Le Quoc An. Meanwhile, Saigon Co-op is mobilising capital from its cooperative members and staff to expand production.

Domestic investors develop their logistic system by expanding warehouses, building production enterprises or joining hands with other companies to outsource specific products. Learning from world-leading retail groups since 2000, Co-opmart, Vinatexmart and Maximax have made swift changes in approaching management processes related to outputs, inputs, displaying techniques and negotiation skills.

Fourth, domestic enterprises unite to avoid dispersing strengths. One of the methods to gather scattered units is the G7 Mart system initiated by G7 Trade and Service Co. Ltd, which arranges groceries with the aim of equipping and upgrading facilities, changing management methods and service behaviours to turn these stores into modern convenience shop chains.

Another matter leading to the success of South Korean retailers in competition with foreign giants is a concrete connection between distributors and producers. The strongest point of retail giants is providing diversified products at low prices. However, to sell goods at such competitive prices, they coerced producers to supply at rock-bottom prices. The association with producers purchases cheaper, good quality products with delivery conditions good enough for distributors. For example, Phu Thai Co. buys renowned Thanh Ha litchis at farmers’ gardens in northern Hai Duong Province to supply for its shops.

In Vietnam, many people used to fear that international retailers might crush the domestic retail system. The above experience has helped domestic distribution enterprises set up their own way to not only avoid the market share loss but also attain a greater market share in the international integration process.