BMI Vietnam Food and Drink Report Q2 2014

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Q2 2014

www.businessmonitor.com

VIETNAM

FOOD & DRINK REPORT

INCLUDES 5-YEAR FORECASTS TO 2018

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Vietnam Food & Drink Report Q2

2014

INCLUDES 5-YEAR FORECASTS TO 2018

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: February 2014

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CONTENTS

BMI Industry View ... 7

SWOT ... 9

Food ... 9

Drink ... 11

Mass Grocery Retail ... 13

Industry Forecast ... 15

Consumer Outlook ... 15

Food ... 17

Food Consumption ... 17

Table: Food Consumption Indicators - Historical Data & Forecasts, 2011-2018 . . . 20

Canned Food ... 21

Table: Canned Food Volume/Value Sales - Historical Data & Forecasts, 2011-2018 . . . 21

Confectionery ... 22

Table: Confectionery Value/Volume Sales - Historical Data & Forecasts, 2011-2018 . . . 23

Pasta ... 25

Table: Pasta Volume Sales, Production & Trade - Historical Data & Forecasts, 2011-2018 . . . 25

Dairy ... 27

Table: Dairy Volume Sales, Production & Trade - Historical Data & Forecasts, 2011-2018 . . . 28

Drink ... 29

Alcoholic Drinks ... 29

Table: Alcoholic Drinks Volume/Value Sales - Historical Data & Forecasts, 2011-2018 . . . 31

Hot Drinks ... 34

Table: Hot Drinks Value Sales - Historical Data & Forecasts, 2011-2018 . . . 35

Soft Drinks ... 37

Table: Soft Drinks Value/Volume Sales - Historical Data & Forecasts, 2011-2018 . . . 38

Mass Grocery Retail ... 40

Table: Mass Grocery Retail Sales By Format - Historical Data & Forecasts, 2011-2018 . . . 42

Table: Grocery Retail Sales By Format (%) . . . 43

Trade ... 43

Table: Food and Drink Trade Indicators - Historical Data & Forecasts, 2011-2018 . . . 45

Macroeconomic Forecast ... 46

Table: Vietnam - Economic Activity . . . 49

Industry Risk Reward Ratings ... 50

Asia Pacific Risk/Reward Ratings ... 50

Table: Asia Pacific Food & Drink Risk/Reward Ratings Q214 . . . 51

Table: Asia Pacific Food & Drink Risk/Reward Sub-Factor Ratings Q214 (scores out of 10) . . . 54

Vietnam Risk/Reward Ratings ... 55

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Food ... 57 Agriculture ... 57 Food Processing ... 57 Food Consumption ... 58 Drink ... 58 Hot Drinks ... 58 Soft Drinks ... 59 Alcoholic Drinks ... 60

Mass Grocery Retail ... 61

Table: Structure Of Vietnam's Mass Grocery Retail Market By Estimated Number Of Outlets . . . 63

Industry Trends And Developments ... 64

Food ... 64

Key Industry Trends And Developments ... 64

Drink ... 70

Key Industry Trends And Developments ... 70

Mass Grocery Retail ... 79

Key Industry Trends And Developments ... 79

Competitive Landscape ... 86

Table: Key Players In Vietnam's Food Sector . . . 86

Table: Key Players In Vietnam's Drink Sector . . . 86

Table: Key Players In Vietnam's Mass Grocery Retail Sector . . . 87

Company Profile ... 89

Vietnam Dairy Products Joint Stock Company (Vinamilk) ... 89

Unilever Vietnam ... 93

Nestlé Vietnam ... 96

Masan Consumer ... 99

San Miguel Pure Foods Vietnam Co Ltd ... 102

Hanoi Beer Alcohol Beverage Corp (Habeco) ... 104

Saigon Beer Alcohol And Beverage Corporation (Sabeco) ... 107

Carlsberg ... 109

Metro Cash & Carry Vietnam ... 111

Saigon Co-op ... 114

Global Industry Overview ... 117

Table: Food And Drink Core Views . . . 126

Demographic Forecast ... 127

Table: Vietnam's Population By Age Group, 1990-2020 ('000) . . . 128

Table: Vietnam's Population By Age Group, 1990-2020 (% of total) . . . 129

Table: Vietnam's Key Population Ratios, 1990-2020 . . . 130

Table: Vietnam's Rural And Urban Population, 1990-2020 . . . 130

Glossary ... 131

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Mass Grocery Retail ... 131

Methodology ... 133

Industry Forecast Methodology ... 133

Sector-Specific Methodology ... 134

Sources ... 134

Risk/Reward Rating Methodology ... 135

Table: Food & Drink Risk/Reward Rating Indicators . . . 136

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BMI Industry View

BMI View: Despite slower than expected economic recovery in 2013, our outlook for Vietnam's economy in

2014 is positive. Recently released macroeconomic data shows a strong rebound in domestic consumption, which is felt across a wide spectrum of consumer industries. The consumer is expected to benefit from rising inflow of remittances and suppressed levels of inflation over the coming quarters. While we have

maintained our 2014 GDP growth forecast at 6.0%, we see potential for upside surprises. Food and drink consumption within the country will grow at a thoroughly impressive based, delivering double-digit annual growth through to our forecast period.

Headline Industry Data

■ 2014 total food consumption (local currency) growth: +19.2%; compound annual growth rate (CAGR)

2014 to 2018: +15.5%.

■ 2014 per capita food consumption (local currency) growth: +18.1%; CAGR to 2018: +14.7%.

■ 2014 alcoholic drinks value (local currency) sales growth: +12.0%; CAGR to 2018: +8.7%.

■ 2014 soft drinks value (local currency) sales growth: +10.5%; CAGR to 2018: +7.5%.

■ 2014 MGR sales (local currency) growth: +13.3%; compound annual growth rate (CAGR) 2014 to 2018:

+9.9%.

Key Industry Trends

McDonald's Opens First Ho Chi Minh Restaurant In February: US fast-food restaurant McDonald's, with its partner Vietnam-based company Good Day Hospitality, has forayed into the Vietnamese food market in a bid to compete with its rivals, such as KFC and Burger King Worldwide. The company launched its first outlet in the Vietnamese city of Ho Chi Minh on February 8 2014.

Sabeco Begins Construction On New Brewery: Vietnam-based brewer Saigon Beer Alcohol And Beverage Corporation (Sabeco) has started construction on a new brewery in Vietnam's Ninh Thuan region. The US $21mn facility will have an estimated annual capacity of 50mn litres of beer. The brewery will cover an area of 20 hectares and is expected to address the rising demand for Sabeco products in the south-central region. The brewery is scheduled to become operational in the next 12 months.

Vinamilk Opens US$110mn Milk Plant And Invests In Cambodia: Vietnam-based dairy group Vietnam Dairy Products Joint Stock Company (Vinamilk) has opened a new dairy plant in Vietnam's Binh Duong province, investing US$110mn. The plant will cover an area of 20 hectares and have an annual capacity of

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400mn litres of milk in the first stage. The plant will help the company to achieve its goals of raising its annual revenue to US$3bn by 2017 and becoming one of the 50 largest dairy companies in the world, according to Vinamilk's CEO, Mai Kieu Lien.

The company has also gained an overseas investment certificate from the Vietnamese government to build a milk factory in the Cambodian capital of Phnom Penh with an investment of US$23mn. The company will own a 51% stake in the unit, while Cambodia-based Angkor Dairy Products will hold the remaining 49% share.

Key Risks To Outlook

While we expect private consumption to grow at a relatively resilient pace of 5.0% in 2014, we note that the risk of further bankruptcies among SMEs could potentially lead to widespread job losses, especially in export-driven sectors. Uncertainties over the outlook for employment could, in turn, prompt households to cut back on spending.

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SWOT

Food

SWOT Analysis

Strengths ■ The food processing sector accounts for a sizeable proportion of industrial output and

GDP, with the sector attracting significant foreign investment in recent years from global industry majors such as Unilever, Nestlé and San Miguel.

■ Vietnamese consumers, particularly the young and affluent, are fairly brand aware by

regional standards. Accordingly, renowned Western products, backed by investment in marketing and promotions, tend to have highly successful launches.

■ The wealthy urban centres of Hanoi and Ho Chi Minh City now provide highly

receptive consumer audiences.

■ Large and diverse domestic agricultural output aids the stability of ingredient supplies

and prices for local producers - a vital strength during this period of global volatility.

■ Strong economic and private consumption growth will help fuel food consumption

growth.

Weaknesses ■ There are wide income disparities between urban and rural areas, and local

consumption patterns vary significantly according to income.

■ The food processing industry remains largely fragmented, except for a few key

sectors such as dairy and confectionery.

■ The country's agricultural sector has been criticised for being too slow to adapt to

new technologies to be globally competitive in the long term, although the government is working hard to address this.

■ Vietnam's infrastructure is still weak. Roads, railways and ports are inadequate to

cope with the country's economic growth and links with the outside world.

■ The lack of white goods among large sections of the consumer base slows down the

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SWOT Analysis - Continued

Opportunities ■ Accession to the WTO, in January 2007, will continue to benefit Vietnamese

exporters, with the gradual removal of market barriers and trade restrictions set to increase competition.

■ Vietnam's upcoming ASEAN AEC membership in 2015 should provide greater access

to both foreign markets and capital, while making Vietnamese enterprises stronger through increased competition.

■ Rising income levels and changing lifestyles, particularly in urban areas, are

increasing consumer demand for snacks, convenience and luxury food items.

■ Vietnam's large domestic market, growing export opportunities and low labour costs,

as well as the prospect of acquiring newly privatised food companies, offer further investment opportunities.

■ The country's agricultural sector is in need of significant investment, and willing

investors can expect assisted entry.

■ A growing tourism sector fuels interest in convenience categories.

Threats ■ Vietnam's WTO membership may result in smaller companies who are unable to cope

with the increased competition being forced out of business.

■ Elevated agricultural commodity costs will remain a risk for the profitability of

processed-food manufacturers; farmers themselves also view this as a threat.

■ Rising unemployment levels are taking their toll on consumer confidence.

■ If there is a prolonged slowdown in emerging markets, this will hurt Vietnam's

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Drink

SWOT Analysis

Strengths ■ Vietnamese consumers, particularly the young and affluent, are fiarly brand aware by

regional standards. Accordingly, renowned Western products, backed by investment in marketing and promotions, tend to have highly successful launches.

■ The wealthy urban centres of Hanoi and Ho Chi Minh City now provide highly

receptive consumer audiences.

■ Alcoholic drinks are widely consumed and have gained popularity in recent years.

■ Vietnam has been one of the fastest growing economies in Asia in recent years, with

GDP growth averaging 7.1% annually between 2000 and 2011.

■ Competitive pressure is quickly intensifying in the drinks sectors, which is likely to

drive greater sector dynamism and fuel growth.

Weaknesses ■ There are wide income disparities between urban and rural areas, and local

consumption patterns vary significantly according to income.

■ The drinks industry remains largely fragmented, except for a few key sectors, such as

alcohol and soft drinks.

■ Despite the growing presence of multinationals, local firms continue to dominate the

beer market.

■ Vietnam's infrastructure is still weak. Roads, railways and ports are inadequate to

cope with the country's economic growth and links with the outside world.

■ Establishing separate breweries in different regions is costly but remains one of the

best strategies to overcome the lack of infrastructure.

Opportunities ■ Accession to the WTO, in January 2007, will benefit Vietnamese exporters, with the

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SWOT Analysis - Continued

■ Vietnam's upcoming ASEAN AEC membership in 2015 should provide greater access

to both foreign markets and capital, while making Vietnamese enterprises stronger through increased competition.

■ Vietnam's large domestic market, growing export opportunities and low labour costs,

as well as the prospect of acquiring newly privatised drink companies, offer further investment opportunities.

■ A growing tourism sector is fuelling interest in convenience categories, in addition to

sub-sectors such as soft and alcoholic drinks.

■ In line with consumers' rising disposable incomes, there are opportunities for

premium-branded products in the soft and alcoholic drinks sub-sectors.

■ The global trend towards health consciousness provides an opportunity for drinks

manufacturers to diversify into perceived healthier options.

Threats ■ Vietnam's WTO membership may result in smaller companies who are unable to cope

with the increased competition being forced out of business.

■ Rising unemployment levels are taking their toll on consumer confidence.

■ If there is a prolonged slowdown in emerging markets, this will hurt Vietnam's

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Mass Grocery Retail

SWOT Analysis

Strengths ■ The potential size of the mass grocery retail market makes it an attractive target for

foreign retailers once improved market terms are granted. Further growth is expected, especially in the supermarket format.

■ Hypermarkets, supermarkets and convenience stores have all proved popular in

Vietnam, catering for different types of consumers and different shopping occasions.

■ A growing multinational presence in the retail sector has aided the acceptance of

modern retail best practices in Vietnam, particularly things such as added-value in-store services.

■ Vietnamese economic growth averaged 7.1% annually between 2000 and 2012,

fuelling a steady middle-class emergence and growing consumerism. The economic boom has lifted many Vietnamese out of poverty, generating a greater demand for the higher-value modern retail concepts.

■ The formation of buying groups has proved an effective means of facilitating quicker

expansion among smaller industry players.

Weaknesses ■ Vietnam's retail distribution networks remain underdeveloped, and

expansion-oriented firms must invest in infrastructural development as well as new store openings.

■ Regulations governing international participation in modern retail in Vietnam have

resulted in slow rates of expansion, and aspects of government policy continue to make life challenging for foreign firms in spite of WTO accession.

■ Poverty levels among the country's vast rural population hugely inhibit the potential

audience size for modern retail in Vietnam.

■ Vietnam's infrastructure is still weak. Roads, railways and ports are inadequate to

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SWOT Analysis - Continued

Opportunities ■ The hypermarket concept is still in its infancy and, as familiarity with modern retailing

grows, this format will represent an immense growth opportunity.

■ Modern retail is currently focused on the major urban centres of the north and south,

which still boast space for new entrants. Central Vietnam and the provinces provide further opportunities still.

■ Modern retail concepts, such as discounting and private labelling, are likely to prove

popular with price-conscious Vietnamese consumers as familiarity with modern retailing builds.

■ Rapid urbanisation and the development of new housing complexes provide ideal

locations for modern retail outlets.

Threats ■ Were industry majors Tesco, Carrefour and Walmart all to enter Vietnam, the window

of opportunity for other entrants would rapidly close.

■ Rising operating costs will threaten retailer profit margins; price increases have to

date been passed on to shoppers, but this cannot continue indefinitely in the price-conscious market.

■ Rising unemployment levels are taking their toll on consumer confidence.

■ If there is a prolonged slowdown in emerging markets, this will hurt Vietnam's

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Industry Forecast

Consumer Outlook

Although we expect the Vietnamese economy to have recorded yet another quarter of sub-par growth in Q413, we are beginning to see potential for upside surprises to domestic demand over the coming quarters. Recent data on foreign direct investment inflows, remittances, passenger car sales, and property market launches, suggests that domestic demand is on a nascent recovery, setting the stage for stronger 2014 growth. We expect private consumption to grow at a relatively resilient pace of 5.0% in 2014. However, we note that the risk of further bankruptcies among SMEs could potentially lead to widespread job losses and uncertainties in the employment outlook could prompt households to cut back on spending.

We continue to see evidence that foreign direct investment (FDI) inflows into the country have remained resilient despite the lack of progress on banking reforms and the weak economic data. According to figures published by the Ministry of Planning and Investment (MPI), FDI inflows into Vietnam grew by 19.5% year-on-year (y-o-y) over the first eight months of 2013. The results are in line with our view that Vietnam's long-term prospects remain bright.

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Robust Remittances Could Also Boost Domestic Demand

Vietnam - Unrequited Transfers, US$mn

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Vietnam's growth story over the past decade has been marked by tumultuous periods of high inflation, multiple currency devaluations and widespread economic wastage as a result of inefficient state-owned enterprises that continue to have a dominating presence in key economic sectors. From our perspective, however, we believe that 2013 marked a major turning point for the economy. While structural factors underpinning Vietnam's potential for long-term growth (including favourable demographics, proximity to China, and the low cost of labour relative to the region) remain largely unchanged, we highlight recent developments that reinforce our bullish outlook on the economy over the next decade.

Certainly, the long-term potential of the consumer-facing sectors in Vietnam is undeniable. Rapid economic growth in Vietnam over the coming years is likely to translate into higher income, in turn benefiting consumerism. Most exciting is the country's favourable demographic profile: 51.9% of the population is estimated to be younger than 30. This implies potentially dynamic opportunities for consumer goods players targeting the mass-market segment in particular. Rapid urbanisation provides additional opportunities for modern retail outlets.

What Vietnam offers investors is arguably one of the most attractive consumer bases in South East Asia after India. With a youthful population of 90mn, and GDP growth forecast at 6.0% in 2014, the country provides attractive demographic potential for retailers keen to capture the vast consumer base. A flurry of international investment interest in the country over recent years has given continued focus on the merits of the unravelling consumer story in Vietnam, particularly in its mass grocery retail sector. The latest

multinational reported to be entering the market is French retailer Auchan which, according to local sources, is set to inject US$500mn in the next decade. This highlights the attractive long-term potential of a country that has been largely devoid of international investment in the grocery sector. Overall, we believe that Vietnam remains one the most exciting mass grocery retail Asian growth stories. With the potential to outperform regionally in the coming years, the country continues to gradually prove its growing reputation as Asia's 'little India'.

Food

Food Consumption

■ 2014 total food consumption (local currency) growth: +19.2%; compound annual growth rate (CAGR)

2014 to 2018: +15.5%.

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Food Consumption

2011-2018

Food consumption VNDbn (LHS)

Food consumption, VND per capita (RHS) 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f 0 500,000 1,000,000 1,500,000 0M 5M 10M 15M

e/f = BMI estimate/forecast. Source: General Statistics Office, BMI

Improvements in Vietnam's macroeconomic fundamentals suggest that its food sector will remain one of the most attractive investment opportunities in the region over the forecast period. Between 2014 and 2018 food consumption is projected to expand at a thoroughly impressive compound annual growth rate of 15.5%, posting an impressive 105.1% overall increase in local currency terms. An attractive demographic profile, rapid urbanisation and rapid expansion of country's mass grocery retail sector will fuel this growth over the longer term.

Currently, income levels in Vietnam are a long way behind those enjoyed in developed economies, and consumer purchases remain largely centred on food staples and daily necessities. However, as incomes start to accelerate off a low base on the back of sturdy economic growth, consumer tastes and preferences are expected to calibrate towards the higher-value food and beverage segments, which will be very likely to guarantee a receptive and growing audience for branded food and beverage products in the medium term.

The massive potential provided by the burgeoning middle class in Vietnam is already attracting the sights of major consumer-facing players in the country. Private equity firm Kohlberg Kravis Roberts &

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Co (KKR), in early 2011, acquired a 10% stake in Masan Consumer, the largest producer of condiments

including fish, soy and chilli sauce and the second biggest producer of instant noodles in Vietnam. This underlines its confidence in the opportunities available in the mass-market segment. In early 2013, KKR doubled its investment in Masan.

In particular, we expect functional food products to garner stronger appeal among Vietnamese consumers over the coming years. Given the nutritional health benefits of functional foods, these products have witnessed strong demand in Vietnam over the past few years in line with a growing shift towards health awareness. In 2000, the functional food market comprised only a dozen imported functional food products. By 2005-2006, domestically produced functional foods accounted for 33% of the entire food market, and in 2008 this figure had doubled, underlining the burgeoning demand for functional food products.

The ongoing expansion of the mass grocery retail industry will also drive up per capita food consumption levels, provided goods sold through such outlets remain competitively priced. Ultimately, food consumption growth will be driven by the government's ability to harness rural spending power and by modern retailers' ability to find a model that stirs consumer interest, without forgetting that price will remain the major purchasing determinant.

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Table: Food Consumption Indicators - Historical Data & Forecasts, 2011-2018 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f Food consumption (VNDbn) 396,467.8 441,791.9 504,206.3 601,208.9 725,087.1 870,250.0 1,037,539.7 1,232,851.5 Food consumption, VND, % chg y-o-y 11.19 11.43 14.13 19.24 20.60 20.02 19.22 18.82 Food consumption per capita (VND) 4,409,413 4,865,776 5,499,648 6,496,188 7,764,357 9,239,203 10,925,877 12,882,920 Food consumption per capita, VND, % chg y-o-y 10.12 10.35 13.03 18.12 19.52 19.00 18.26 17.91 Food consumption (US$bn) 19.19 21.17 24.12 29.23 35.67 43.05 51.88 62.27 Food consumption, US$, % change y-o-y 2.92 10.28 13.98 21.18 22.00 20.70 20.50 20.02 Food consumption per capita (US

$) 213.46 233.11 263.14 315.89 381.92 457.05 546.29 650.65

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Canned Food

2014 canned food value sales (local currency) growth: +10.7%; CAGR to 2018: +7.4%.

Canned food sales are forecast to experience strong growth in Vietnam, in line with increasing urbanisation and growing affluence among consumers. Between 2014 and 2018 we forecast volume growth of 23.4%, and value growth of 42.8%. Indeed, demand for higher-value products such as canned foods is expected to pick up on the back of rising disposable incomes.

Vietnamese consumers are experiencing a growing awareness of hygiene concerns and food origin as their living standards improve and as numerous health scares lead to increased caution. This will further encourage consumers to purchase processed foods over fresh produce, and strong investment in this sector from both domestic and international operators will be very likely to help to fuel sales growth. Meanwhile, city workers are increasingly cutting back on restaurant meals and opting for canned and processed foods in order to save money, with major retailers such as Saigon Co-op reporting a recent spike in sales.

Table: Canned Food Volume/Value Sales - Historical Data & Forecasts, 2011-2018

2011 2012 2013e 2014f 2015f 2016f 2017f 2018f

Canned food sales,

tonnes 9,621.76 10,062.31 10,441.09 11,081.23 11,762.98 12,132.74 13,126.33 13,668.20 Canned food sales,

units, % change

y-o-y 3.83 4.58 3.76 6.13 6.15 3.14 8.19 4.13 Canned food sales,

kg per capita 0.11 0.11 0.11 0.12 0.13 0.13 0.14 0.14 Canned food sales,

VNDmn 415,096.74 452,677.81 488,939.89 540,989.81 601,715.86 646,811.32 725,333.81 772,535.30 Canned food sales,

VND, % change

y-o-y 12.49 9.05 8.01 10.65 11.22 7.49 12.14 6.51 Canned food sales,

VND per capita 4,616.60 4,985.67 5,333.13 5,845.51 6,443.28 6,867.02 7,638.17 8,072.76 Canned food sales,

US$mn 20.10 21.69 23.39 26.31 29.60 32.00 36.27 39.02 Canned food sales,

US$, % change

y-o-y 4.13 7.92 7.87 12.45 12.51 8.11 13.35 7.58 Canned food sales,

US$ per capita 0.22 0.24 0.26 0.28 0.32 0.34 0.38 0.41

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Confectionery

■ 2014 confectionary value (local currency) sales growth: +10.7%; CAGR to 2018: +7.9%.

■ 2014 chocolate value (local currency) sales growth: +11.9%; CAGR to 2018: +9.9%.

2014 sugar confectionary (local currency) sales growth: +9.6%; CAGR to 2018: +6.8%.

Confectionery Sales

2011-2018

Confectionery sales, VNDmn (LHS) Confectionery sales, tonnes (RHS) 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f 0M 25M 50M 200,000 150,000 175,000 225,000

e/f = BMI estimate/forecast. Source: General Statistics Office, company information, trade press, BMI

The longer-term outlook for the Vietnamese confectionery market is positive. Factors such as rising purchasing power, favourable demographics, growing health awareness and continued investments in the sector will support confectionery demand, especially with regard to chocolate.

Rising Disposable Incomes: Rapid wealth accrual is likely to translate into a greater discretionary

appetite for premium confectionery products. As an increasing number of domestic confectioners expand their upmarket product ranges, this is likely to bolster value sales growth over the coming years.

A Massive Youthful Population: 51.9% of the Vietnamese population is estimated to be younger than

30, and the maturation of this demographic group means that there are dynamic opportunities in the mass market. Moreover, this demographic group is generally more receptive to Western cultures, which will give an impetus to confectionery demand.

Growing Health Awareness: Health awareness is prompting shifts of consumption habits towards

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such as Tan Tan Food & Foodstuff and Vina Mit are expanding their functional product offerings. These products typically carry higher price tags, and their rising demand is likely to translate into higher value sales in the sector.

Continued Sector Investments: Sustained competition levels in the Vietnamese confectionery sector

ensure that dynamism in the market is unlikely to cool off any time soon. Nabati Indonesia, a leading Indonesian biscuit producer, recently announced plans to start distributing its biscuit products in Vietnam - a testament to the attractiveness of the sector. Meanwhile, domestic confectioners such as Kinh Do are expected to continue to invest in broadening their product ranges and expanding their distribution channels.

Table: Confectionery Value/Volume Sales - Historical Data & Forecasts, 2011-2018

2011 2012 2013e 2014f 2015f 2016f 2017f 2018f

Confectionery sales,

tonnes 164,815.74 167,979.82 173,192.25 181,310.47 190,617.32 199,339.80 210,528.96 220,143.75 Confectionery sales,

tonnes, % change

y-o-y 2.83 1.92 3.10 4.69 5.13 4.58 5.61 4.57 Confectionery sales, kg per capita 1.83 1.85 1.89 1.96 2.04 2.12 2.22 2.30 Confectionery sales VNDmn 20,109,914 22,411,420 24,641,932 27,266,415 30,150,945 33,014,226 36,491,849 39,884,680 Confectionery sales, VND, % change y-o-y 22.20 11.44 9.95 10.65 10.58 9.50 10.53 9.30 Confectionery sales, VND per capita 223,657.33 246,833.31 268,782.78 294,619.31 322,861.48 350,502.89 384,279.72 416,782.70 Confectionery sales, US$mn 973.53 1,073.70 1,179.04 1,325.87 1,483.08 1,633.15 1,824.59 2,014.38 Confectionery sales,

US$, % change y-o-y 13.11 10.29 9.81 12.45 11.86 10.12 11.72 10.40 Confectionary sales,

US$ per capita 10.83 11.83 12.86 14.33 15.88 17.34 19.21 21.05 Chocolate sales,

tonnes 46,763.90 47,448.65 48,722.86 51,541.38 54,879.33 58,612.36 63,326.46 67,948.24 Chocolate sales,

tonnes, % change

y-o-y 1.92 1.46 2.69 5.78 6.48 6.80 8.04 7.30 Chocolate sales, kg per capita 0.52 0.52 0.53 0.56 0.59 0.62 0.67 0.71 Chocolate sales, VNDmn 3,340,752 3,703,892 4,054,379 4,536,173 5,083,520 5,700,780 6,461,089 7,272,341 Chocolate sales VND, % change y-o-y 20.96 10.87 9.46 11.88 12.07 12.14 13.34 12.56 Chocolate sales VND per capita 37,155.00 40,793.67 44,223.30 49,014.30 54,435.21 60,523.61 68,038.91 75,993.74

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Confectionery Value/Volume Sales - Historical Data & Forecasts, 2011-2018 - Continued

2011 2012 2013e 2014f 2015f 2016f 2017f 2018f

Chocolate sales US

$mn 161.73 177.45 193.99 220.58 250.05 282.01 323.05 367.29 Chocolate sales, US$,

% change y-o-y 11.97 9.72 9.32 13.71 13.36 12.78 14.56 13.69 Chocolate sales, US$

per capita 1.80 1.95 2.12 2.38 2.68 2.99 3.40 3.84 Sugar confectionery sales, VNDmn 15,709,150 17,530,067 19,324,607 21,185,318 23,136,033 25,077,466 27,255,472 29,381,901 Sugar confectionary sales, VND, % change y-o-y 22.56 11.59 10.24 9.63 9.21 8.39 8.69 7.80 Sugar confectionary

sales, VND per capita 174,713.15 193,071.41 210,783.87 228,911.78 247,744.60 266,240.51 287,015.47 307,031.87 Sugar confectionery

sales US$mn 760.49 839.84 924.62 1,030.16 1,138.02 1,240.54 1,362.77 1,483.93 Sugar confectionary

sales, US$, % change

y-o-y 13.45 10.43 10.10 11.41 10.47 9.01 9.85 8.89 Sugar confectionary

sales, US$ per capita 8.46 9.25 10.09 11.13 12.19 13.17 14.35 15.51 Gum sales, tonnes 6,129.08 6,230.61 6,269.18 7,250.90 8,612.57 9,496.01 11,235.85 12,467.62 Gum sales, tonnes, %

change y-o-y 1.75 1.66 0.62 15.66 18.78 10.26 18.32 10.96 Gum sales, kg per

capita 0.07 0.07 0.07 0.08 0.09 0.10 0.12 0.13 Gum sales VNDmn 1,060,011 1,177,461 1,262,944 1,544,923 1,931,391 2,235,979 2,775,288 3,230,437 Gum sales, VNDmn, %

change y-o-y 20.75 11.08 7.26 22.33 25.02 15.77 24.12 16.40 Gum sales, VND per

capita 11,789.18 12,968.24 13,775.62 16,693.22 20,681.67 23,738.77 29,225.35 33,757.08 Gum sales US$mn 51.32 56.41 60.43 75.12 95.00 110.61 138.76 163.15 Gum sales US$, %

change y-o-y 11.77 9.93 7.12 24.32 26.46 16.43 25.45 17.58 Gum sales US$ per

capita 0.57 0.62 0.66 0.81 1.02 1.17 1.46 1.70

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Pasta

The Vietnamese pasta market is underdeveloped, although the product has become more recognisable in view of Westernisation of lifestyles, particularly in urban areas. Around half of the retail market is dominated by Barilla, with other prominent importers including Italpasta and Pasta Zara.

However, the market for instant noodles is well established, with the market supplied by a mixture of locally made (by companies such as Masan Consumer and Acecook Vietnam JSC) and imported products. Goods are receiving strong marketing and advertising support, especially as the more challenging economic times have prioritised non-discretionary spending. Instant noodles are expected to remain very popular, on account of their affordability, versatility as a cooking ingredient, wide-ranging availability and convenience.

Table: Pasta Volume Sales, Production & Trade - Historical Data & Forecasts, 2011-2018

2011 2012 2013e 2014f 2015f 2016f 2017f 2018f Uncooked pasta production, tonnes 25,401.54 28,189.69 31,220.68 34,739.13 38,752.37 38,752.37 42,808.98 42,808.98 Uncooked pasta production, tonnes, % change y-o-y 14.01 10.98 10.75 11.27 11.55 0.00 10.47 0.00 Uncooked pasta sales, tonnes 18,484.38 22,059.82 25,865.49 30,164.19 34,975.21 35,784.64 40,666.02 41,502.54 Uncooked pasta sales, tonnes, % change y-o-y 25.63 19.34 17.25 16.62 15.95 2.31 13.64 2.06 Uncooked pasta sales, kg per capita 0.21 0.24 0.28 0.33 0.37 0.38 0.43 0.43 Uncooked pasta exports, tonnes 8,334.24 7,787.87 7,241.50 6,695.13 6,148.76 5,602.39 5,056.03 4,509.66 Uncooked pasta exports, tonnes, % change y-o-y -6.15 -6.56 -7.02 -7.54 -8.16 -8.89 -9.75 -10.81 Uncooked pasta 1,417.07 1,658.00 1,886.31 2,120.19 2,371.60 2,634.67 2,913.07 3,203.22

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Pasta Volume Sales, Production & Trade - Historical Data & Forecasts, 2011-2018 - Continued 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f imports, tonnes Uncooked pasta imports, tonnes, % change y-o-y 7.94 17.00 13.77 12.40 11.86 11.09 10.57 9.96 Uncooked pasta balance, tonnes 6,917.17 6,129.87 5,355.19 4,574.94 3,777.16 2,967.73 2,142.96 1,306.44 Uncooked pasta balance, tonnes, % change y-o-y -8.60 -11.38 -12.64 -14.57 -17.44 -21.43 -27.79 -39.04 Prepared pasta production, tonnes 597,893.96 640,105.91 685,994.47 739,263.20 800,022.78 866,912.83 935,331.18 1,008,534.87 Prepared pasta production, tonnes, % change y-o-y 8.58 7.06 7.17 7.77 8.22 8.36 7.89 7.83 Prepared pasta sales, tonnes 542,121.95 579,415.25 623,223.13 674,439.49 732,951.00 797,282.32 862,793.46 932,792.23 Prepared pasta sales, tonnes, % change y-o-y 8.87 6.88 7.56 8.22 8.68 8.78 8.22 8.11 Prepared pasta sales, kg per capita 6.03 6.38 6.80 7.29 7.85 8.46 9.09 9.75 Prepared pasta exports, tonnes 58,214.34 63,317.05 65,572.16 67,803.22 70,243.35 73,003.07 76,122.96 79,549.56 Prepared pasta exports, tonnes, % change y-o-y 5.74 8.77 3.56 3.40 3.60 3.93 4.27 4.50 Prepared pasta imports, tonnes 2,442.33 2,626.40 2,800.82 2,979.50 3,171.57 3,372.55 3,585.24 3,806.91

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Pasta Volume Sales, Production & Trade - Historical Data & Forecasts, 2011-2018 - Continued 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f Prepared pasta imports, tonnes, % change y-o-y 3.37 7.54 6.64 6.38 6.45 6.34 6.31 6.18 Prepared pasta balance, tonnes 55,772.01 60,690.65 62,771.34 64,823.72 67,071.78 69,630.52 72,537.72 75,742.65 Prepared pasta balance, tonnes, % change y-o-y 5.85 8.82 3.43 3.27 3.47 3.81 4.18 4.42

e/f = BMI estimate/forecast. Source: United Nations, BMI

Dairy

The Vietnamese dairy sector has experienced very strong growth in recent years. Key drivers of this growth have been increasing urbanisation and rising incomes, supported by a shift in consumer eating habits. Huge multinational companies have, in particular, managed to sway consumer preferences with their considerable advertising and promotional power. At the same time, the government is pouring investment in to the dairy industry, with a view to producing 3.4bn litres of fresh milk by 2025, which would generate export revenues of some US$200mn.

The local demand for dairy products is met by a combination of locally produced goods, which accounts for 20% of consumption, according to the US Department of Agriculture, and imports from countries including New Zealand, the US and Australia. Vietnam Dairy Products Co (Vinamilk) is one of the key players in the sector. Indeed, reflecting the promise of the Vietnamese dairy sector, Vinamilk aims to become one of the largest 50 dairy firms in the world. The company is also expanding internationally, as Vietnam is in a geographically strong place to take advantage of the growing Asian dairy story. Other prominent dairy producers include Dutch Lady, Hanoimilk and Anco.

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Table: Dairy Volume Sales, Production & Trade - Historical Data & Forecasts, 2011-2018

2011 2012 2013e 2014f 2015f 2016f 2017f 2018f

Processed liquid milk

production, tonnes 355,519.3 389,246.2 425,910.8 468,472.0 517,018.3 570,462.8 625,128.4 683,617.4 Processed liquid milk

production, tonnes, %

change y-o-y 20.74 9.49 9.42 9.99 10.36 10.34 9.58 9.36 Processed liquid milk sales,

tonnes 190,395.0 201,348.0 210,765.4 226,680.7 243,630.6 261,404.5 280,020.4 299,495.0 Processed liquid milk sales,

tonnes, % change y-o-y 4.87 5.75 4.68 7.55 7.48 7.30 7.12 6.95 Processed liquid milk sales,

kg per capita 2.12 2.22 2.30 2.45 2.61 2.78 2.95 3.13 Butter sales, tonnes 12,385.38 13,200.10 13,900.60 15,084.45 16,345.25 17,667.34 19,052.07 20,500.67 Butter sales, tonnes, %

change y-o-y 5.60 6.58 5.31 8.52 8.36 8.09 7.84 7.60 Butter sales, kg per capita 0.14 0.15 0.15 0.16 0.18 0.19 0.20 0.21 Cheese sales, tonnes 4,615.81 4,931.55 5,203.03 5,661.82 6,150.44 6,662.82 7,199.46 7,760.86 Cheese sales, tonnes, %

change y-o-y 5.84 6.84 5.50 8.82 8.63 8.33 8.05 7.80 Cheese sales, kg per capita 0.05 0.05 0.06 0.06 0.07 0.07 0.08 0.08 Ice cream production,

tonnes 25,191.39 27,531.60 30,075.65 33,028.85 36,397.33 40,105.69 43,898.78 47,957.16 Ice cream production,

tonnes, % change y-o-y 11.61 9.29 9.24 9.82 10.20 10.19 9.46 9.24

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Drink

Alcoholic Drinks

■ 2014 alcoholic drinks volume sales growth: +5.9%; compound annual growth rate (CAGR) 2014 to 2018:

+4.5%.

■ 2014 alcoholic drinks value (local currency) sales growth: +12.0%; CAGR to 2018: +8.7%.

2014 beer value (local currency) sales growth: +12.0%; CAGR to 2018: +8.7%.

2014 spirits value (local currency) sales growth: +11.0%; CAGR to 2018: +8.8%.

Alcoholic Drinks Sales

2011-2018

Alcoholic Drinks Sales (mn litres) (LHS) Alcoholic drink sales, VNDmn (RHS) 2012e 2013e 2014f 2015f 2016f 2017f 2018f 0 1,000 2,000 3,000 4,000 100M 150M 200M 250M 300M

e/f = BMI estimate/forecast. Source: General Statistics Office, Company information, BMI

In line with improved economic prospects and increasing domestic demand we maintain a very strong outlook for Vietnam's drinks industry. As it benefits from foreign investments and rising tourist arrivals, beer will continue to dominate the alcoholic drinks segment, and demonstrate a compound annual growth rate of 12% in local currency terms between 2014 and 2018.

Generally speaking, favourable demographic shifts, rising affluence, strong economic growth and a fast-growing tourist industry imply massive scope for alcoholic drinks consumption, with beer, in particular, set

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to benefit. We expect premiumisation to pick up momentum in the Vietnamese alcoholic drinks sector, and for value sales growth to outpace that of volume sales over our forecast period to 2018. The emergence of a thriving tourist industry in Vietnam is also likely to bolster alcoholic drinks consumption given that tourists typically have a greater penchant for higher-value consumer products.

Beer will continue to dominate the alcoholic drinks sector, accounting for the vast majority of volume sales, and will thus also remain the main contributor to value sales. This is due to the strong interest the beer sector has been attracting from both local and international brewers, with volume sales expected to experience real growth of 24.9% to 2018. We also expect foreign brewers to take on a more prominent role in driving beer sales growth in Vietnam as they seek to enter emerging markets. As foreign brewers strengthen their competitive position, and as the local giants Habeco and Sabeco extend their presence beyond their regional strongholds, sector dynamism will intensify rapidly.

APB's recent investment in the Vietnamese beer industry is a strong testament to the sector's potential. APB

will invest SGD90mn in expanding production at its Ho Chi Minh brewing joint venture by 50%. The company will increase output at the facility, which is a 60:40 joint venture(JV) with Saigon Trading, to 2.8mn hectolitres a year; it will also add a second canning facility and expand its warehouse space.

Similarly, Japanese brewer Sapporo has announced that it intends to increase its beer production in

Vietnam fivefold in the period up to 2019. The company expects to produce 200,000 kilolitres of beer in the country by 2019, from its projected 40,000 kilolitres in 2014.

Additionally, Japanese brewer Asahi Group Holdings has announced that it intends to extend its operations across Asia through a series of acquisitions. Asahi President Naoki Izumiya said that the company had already identified viable targets in Indonesia, Malaysia, the Philippines, Thailand and Vietnam.

Volume sales growth in the wine and spirits industries are also expected to be robust over our forecast period to 2018, albeit developing from much lower bases. Both are fairly immature industries, having been held back by an absence of multinational investment and by their relatively higher price tags. However, prolific wealth accrual among Vietnamese consumers is fuelling shifts in consumption habits towards higher-value alcoholic drink products, and this trend is particularly evident in the urban centres such as Ho Chi Minh City, Hanoi and Danang.

Exposure to Western cultures is also driving the local demand for spirits and wines. The biggest consumers of wine and spirits in Vietnam used to be Western expatriates and tourists, but local consumers are

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organised retail in the country acts as another impetus behind spirits and wine sales, facilitating consumer reach to a greater variety of brands in supermarkets, hypermarkets and local wine stores.

Looking ahead, investments in the Vietnamese spirits and wine sub-sectors are expected to intensify as an increasing number of investors recognise the higher margin growth opportunities on offer in these sub-sectors, and this is likely to instil further dynamism to drive volume sales.

Table: Alcoholic Drinks Volume/Value Sales - Historical Data & Forecasts, 2011-2018

2011 2012 2013e 2014f 2015f 2016f 2017f 2018f Alcoholic drinks sales, litres mn 2,270.67 2,381.68 2,471.72 2,617.80 2,768.31 2,925.33 3,091.37 3,265.46 Alcoholic drinks sales, litres, % change y-o-y 7.73 4.89 3.78 5.91 5.75 5.67 5.68 5.63 Alcoholic drinks sales, litres per capita 25.25 26.23 26.96 28.29 29.64 31.06 32.55 34.12 Alcoholic drinks sales, VNDmn 134,781,991 154,419,478 170,811,147 191,317,021 212,947,900 236,294,061 261,948,642 290,265,180 Alcoholic drinks sales, VND, % change y-o-y 27.72 14.57 10.62 12.00 11.31 10.96 10.86 10.81 Alcoholic drinks sales, VND per capita 1,499,010 1,700,734 1,863,128 2,067,220 2,280,282 2,508,668 2,758,466 3,033,182 Alcoholic drinks sales, US $mn 6,524.86 7,398.00 8,172.78 9,303.04 10,474.56 11,689.05 13,097.43 14,659.86 Alcoholic drinks sales, US $ % change y-o-y 18.23 13.38 10.47 13.83 12.59 11.59 12.05 11.93 Alcoholic drinks sales, US 72.57 81.48 89.14 100.52 112.16 124.10 137.92 153.19

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Alcoholic Drinks Volume/Value Sales - Historical Data & Forecasts, 2011-2018 - Continued 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f $ per capita Beer sales, litres mn 2,251.49 2,362.01 2,451.32 2,596.22 2,745.30 2,900.79 3,065.22 3,237.59 Beer sales, litres, % change y-o-y 7.79 4.91 3.78 5.91 5.74 5.66 5.67 5.62 Beer sales, litres per capita 25.04 26.01 26.74 28.05 29.40 30.80 32.28 33.83 Beer sales, VNDmn 131,710,794 150,984,783 167,035,324 187,108,141 208,239,672 231,035,226 256,093,902 283,750,064 Beer sales, VND, % change y-o-y 27.92 14.63 10.63 12.02 11.29 10.95 10.85 10.80 Beer sales, VND per capita 1,464,853 1,662,905 1,821,943 2,021,742 2,229,866 2,452,836 2,696,812 2,965,101 Beer sales US $mn 6,376.18 7,233.45 7,992.12 9,098.38 10,242.97 11,428.90 12,804.70 14,330.81 Beer sales, US $, % change y-o-y 18.41 13.44 10.49 13.84 12.58 11.58 12.04 11.92 Beer sales, US $ per capita 70.91 79.67 87.17 98.31 109.68 121.34 134.84 149.75 Wine sales, VNDmn 318,351.0 362,737.5 419,163.7 481,496.9 551,566.8 631,799.5 724,875.4 834,044.9 Wine sales, VND, % change y-o-y 28.22 13.94 15.56 14.87 14.55 14.55 14.73 15.06 Wine sales, VND per capita 3,540.62 3,995.09 4,572.04 5,202.67 5,906.27 6,707.64 7,633.35 8,715.51

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Alcoholic Drinks Volume/Value Sales - Historical Data & Forecasts, 2011-2018 - Continued 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f Wine sales, US $mn 15.41 17.38 20.06 23.41 27.13 31.25 36.24 42.12 Wine sales, US $, % change y-o-y 18.69 12.76 15.41 16.74 15.88 15.20 15.97 16.22 Wine sales, US $ per capita 0.17 0.19 0.22 0.25 0.29 0.33 0.38 0.44 Spirits sales, litres mn 15.30 15.62 16.01 16.81 17.81 18.88 19.96 21.07 Spirits sales, litres, % change y-o-y 0.06 2.13 2.50 4.99 5.95 6.02 5.69 5.57 Spirits sales, litres per capita 0.17 0.17 0.17 0.18 0.19 0.20 0.21 0.22 Spirits sales, VNDmn 2,752,846 3,071,958 3,356,659 3,727,382 4,156,660 4,627,035 5,129,864 5,681,070 Spirits sales, VND, % change y-o-y 18.75 11.59 9.27 11.04 11.52 11.32 10.87 10.75 Spirits sales, VND per capita 30,616.46 33,833.71 36,612.88 40,275.14 44,510.23 49,123.95 54,020.36 59,365.45 Spirits sales, US $mn 133.27 147.17 160.61 181.25 204.46 228.89 256.49 286.92 Spirits sales, US $, % change y-o-y 9.92 10.43 9.13 12.85 12.81 11.95 12.06 11.86 Spirits sales, US $ per capita 1.48 1.62 1.75 1.96 2.19 2.43 2.70 3.00

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Hot Drinks

2014 coffee value (local currency) sales growth: +13.0%; CAGR to 2018: +9.5%.

■ 2014 tea value (local currency) sales growth: +11.3%; CAGR to 2018: +8.8%.

Hot Drinks

2011-2018 Coffee sales, VNDmn (LHS) Tea sales, VNDmn (RHS) 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f 0M 25M 50M 20M 40M

e/f = BMI estimate/forecast. Source: UN Industrial Commodity Statistics Database, UN Comtrade, BMI

Vietnam's sturdy economic growth over the next few years will continue to fuel demand for higher value food and beverage products such as coffee. Vietnam's massive youth population, for whom visiting cafés and drinking coffee is a growing lifestyle choice, is another major positive factor. As this group of young, aspirant consumers enters the workforce, the accordant rise in incomes will serve to further buoy the demand for higher-value coffee products. The tea sector is also set to experience strong growth over our five-year forecast period, buoyed by rising incomes and increasing domestic demand.

These dynamics will continue to attract the sights of multinational coffee producers, in turn imbuing the sector with greater dynamism over our forecast period. As a case in point, Masan Consumer in 2011 acquired a 50.1% stake, valued at around VND1.07trn (US$51mn), in Vietnamese coffee producer

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was looking to put itself in a strong position to leverage on the exciting demand dynamics in the Vietnamese coffee sector.

Also looking to capitalise on Vietnam's coffee potential, Nestlé plans to increase its coffee sourcing from local farmers in Vietnam, and in 2011 committed to a new coffee factory in the country. The US$270mn factory was to be constructed in the south east province of Dong Nai and was to produce Nescafé-branded products for the domestic and international markets from 2013.

Philippine food major Jollibee Foods Corporation announced in early 2012 that it was to acquire a 50% interest in SuperFoods Group, which will give it a 49% stake in SF Vung Tau Joint Stock Company in Vietnam and a 60% share in Blue Sky Holdings in Hong Kong. The acquisition of a majority interest in the SuperFoods Group could expedite Jollibee's international push, given the former's reach across the coffee markets of Macau, Hong Kong and Vietnam.

In early 2013, US coffee chain Starbucks announced that it would debut in Vietnam's capital, Ho Chi Minh City, in February 2014 as it continues to develop its Asia Pacific business, where it has seen great success over the past few years.

Table: Hot Drinks Value Sales - Historical Data & Forecasts, 2011-2018

2011 2012 2013e 2014f 2015f 2016f 2017f 2018f Coffee sales, VNDmn 17,170,322 19,922,371 22,765,944 25,714,239 29,012,709 32,647,042 36,427,915 40,559,652 Coffee sales,VND, % change y-o-y 29.27 16.03 14.27 12.95 12.83 12.53 11.58 11.34 Coffee sales,VND per capita 190,963.93 219,419.59 248,320.38 277,847.71 310,673.05 346,604.59 383,606.46 423,835.95 Coffee sales, US $mn 831.22 954.45 1,089.28 1,250.39 1,427.09 1,614.99 1,821.40 2,048.47 Coffee sales, US$,

% change y-o-y 19.66 14.82 14.13 14.79 14.13 13.17 12.78 12.47 Coffee sales, US$

per capita 9.24 10.51 11.88 13.51 15.28 17.15 19.18 21.41 Tea sales, VNDmn 18,710,475 21,115,334 23,508,113 26,160,602 29,111,494 33,047,389 35,514,716 39,940,374 Tea sales, VND, %

change y-o-y 25.41 12.85 11.33 11.28 11.28 13.52 7.47 12.46 Tea sales, VND per

capita 208,093.12 232,558.57 256,415.61 282,670.76 311,730.86 350,854.97 373,989.96 417,364.68 Tea sales, US$mn 905.78 1,011.60 1,124.79 1,272.09 1,431.95 1,634.80 1,775.74 2,017.19

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Hot Drinks Value Sales - Historical Data & Forecasts, 2011-2018 - Continued

2011 2012 2013e 2014f 2015f 2016f 2017f 2018f

Tea sales US$ %

change y-o-y 16.09 11.68 11.19 13.10 12.57 14.17 8.62 13.60 Tea sales US$ per

capita 10.07 11.14 12.27 13.75 15.33 17.36 18.70 21.08

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Soft Drinks

2014 soft drinks value (local currency) sales growth: +10.5%; CAGR to 2018: +7.5%.

■ 2014 carbonated soft drinks value (local currency) sales growth: +12.7%; CAGR to 2018: +9.6%.

Soft Drinks

2011-2018

Soft drink sales (mn litres) (LHS) Soft drink sales, VNDmn (RHS)

2011 2012 2013e 2014f 2015f 2016f 2017f 2018f 0 2,000 4,000 100M 50M 75M 125M

e/f = BMI estimate/forecast. Source: Company information, Trade press, BMI

We are witnessing a rapid emergence of competition in the Vietnamese soft drinks market. The

opportunities provided by an emerging middle class in Vietnam are firmly within the sights of domestic drinks producers such as PepsiCo Vietnam, Tan Hiep Phat and Coca-Cola Beverages Vietnam, and the companies' aggressive initiatives in terms of product innovation, portfolio expansion and advertising will only instil greater dynamism into the sector.

The maturation of a massive youth population and rising consumer affluence are translating into a burgeoning appetite for soft drinks. As consumers move up the income ladder over the coming years, an accelerating premiumisation momentum in the sector means that value sales are expected to increase more dynamically over our forecast period.

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An intensifying influx of sector investments will provide another major impetus to drive industry growth. In particular, we expect domestic soft drinks manufacturers to ramp up their initiatives in terms of product innovation, portfolio expansion and marketing. In terms of portfolio expansion, local soft drink

manufacturers are gradually calibrating their portfolio towards healthier and functional beverages such as fruit juices and ready-to-drink teas, as they look to tap into a growing health awareness trend in the country.

Reflecting a shift of consumer preferences towards healthier beverages, PepsiCo Vietnam and Coca-Cola Beverages Vietnam have been losing market share in recent years due to declining sales of carbonates, according to anecdotal reports. However, with the health awareness trend expected to remain well entrenched over the coming years, we expect more domestic soft drinks manufacturers such as PepsiCo Vietnam and Coca-Cola Beverages Vietnam to expand their non-carbonates offerings. As a case in point,

Big C recently introduced its private label fruit juice range Casino Bio to cater to the burgeoning domestic

demand for health and functional beverages.

As competition intensifies in the Vietnamese soft drinks market, domestic producers are also looking to differentiate themselves through branding and marketing initiatives. Coca-Cola Beverages Vietnam and Tan Hiep Phat have executed some of the biggest advertising campaigns in Vietnam through various formats such as print advertisements, television and the internet. These initiatives have not only bolstered consumer awareness of the different soft drinks brands but have also encouraged greater soft drinks consumption in the country.

Moreover, domestic soft drinks manufacturers will continue to engage in product innovation by offering different bottle formats and sizes in an attempt to cater to the varying consumer tastes and preferences. For instance, Coca-Cola Beverages Vietnam and PepsiCo Vietnam produce their soft drinks in varying sizes, and this has facilitated their reach to the end-consumer market. As more companies hop on the product innovation bandwagon, this will bring about greater dynamism in the sector and further fuel sales growth.

Table: Soft Drinks Value/Volume Sales - Historical Data & Forecasts, 2011-2018

2011 2012 2013e 2014f 2015f 2016f 2017f 2018f Soft drink sales, litres mn 1820.11 1937.14 2044.14 2208.74 2382.40 2569.98 2755.33 2969.08 Soft drink sales, litres, % change y-o-y 7.41 6.43 5.52 8.05 7.86 7.87 7.21 7.76

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Soft Drinks Value/Volume Sales - Historical Data & Forecasts, 2011-2018 - Continued 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f Soft drink sales, litres per capita 20.24 21.34 22.30 23.87 25.51 27.28 29.02 31.03 Soft drink sales VNDmn 58,936,203 68,557,713 75,572,321 83,484,322 91,207,122 99,566,244 109,131,706 119,924,341 Soft drink sales, VND, % change y-o-y 21.69 16.33 10.23 10.47 9.25 9.16 9.61 9.89 Soft drink sales, VND per capita 663,755.8 855,353.4 964,814.4 1,137,581.1 1,302,407.9 1,302,408.9 1,302,409.9 1,302,410.9 Soft drink sales, US $mn 2,853.13 3,284.50 3,615.90 4,059.53 4,486.33 4,925.36 5,456.59 6,056.78 Soft drink sales, US$, % change y-o-y 12.65 15.12 10.09 12.27 10.51 9.79 10.79 11.00 Soft drink sales, US$ per capita 31.73 36.17 39.44 43.86 48.04 52.29 57.46 63.29 Carbonated soft drink sales, VNDmn 8,959,932 10,240,965 11,567,863 13,041,047 14,690,702 16,522,106 18,461,358 20,603,242 Carbonated soft drink sales, VND, % change y-o-y 27.69 14.30 12.96 12.74 12.65 12.47 11.74 11.60 Carbonated soft drink sales, VND per capita 99,650.07 112,791.22 126,176.90 140,911.24 157,310.55 175,410.62 194,408.50 215,297.58 Carbonated soft drink sales, US $mn 433.75 490.63 553.49 634.14 722.61 817.32 923.07 1,040.57 Carbonated soft drink sales, US$, % change y-o-y 18.20 13.11 12.81 14.57 13.95 13.11 12.94 12.73

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Soft Drinks Value/Volume Sales - Historical Data & Forecasts, 2011-2018 - Continued 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f Carbonated soft drink sales, US$ per capita 4.82 5.40 6.04 6.85 7.74 8.68 9.72 10.87

e/f = BMI estimate/forecast. Source: Company information, trade press, BMI

Mass Grocery Retail

2014 MGR sales (local currency) growth: +13.3%; compound annual growth rate (CAGR) 2014 to 2018:

+9.9%.

2014 supermarket sales (local currency) growth: +13.9%; CAGR to 2018: +10.2%.

■ 2014 hypermarket sales (local currency) growth: +13.7%; CAGR to 2018: +10.1%.

■ 2014 convenience store sales (local currency) growth: +10.3%; CAGR to 2018: +8.3%.

Reflecting the long-term potential of the Vietnamese mass grocery retail (MGR) sector, we forecast real growth of 60.0% for overall MGR sales in local currency terms between 2014 and 2018. This growth forecast makes Vietnam one of the most attractive propositions in the Asia Pacific region. Owing to the higher profitability per store for supermarkets and hypermarkets, these formats will continue to garner the bulk of investment attention. Vietnamese consumers are most familiar with the standard supermarket format, and are increasingly showing a penchant for hypermarkets owing to their popular combination of food and non-food items.

We estimate Vietnam's MGR sales grew by 10.9% in 2013, slowing from growth in 2011 and 2012. The slowdown in 2013 can be attributed to the global headwinds of a potential hard landing in China, economic uncertainties in the US and sovereign debt concerns in the eurozone, which all weighed on consumer confidence that was already dented by rising unemployment in the manufacturing sector. However, we expect stronger growth to return this year, with us forecasting 13.3% in 2014.

Retail Fundamentals Remain Strong In Longer Term

Favourable demographics and robust economic growth largely underpin our optimism regarding the Vietnamese MGR growth story. According to our estimates, Vietnam's population is roughly 90mn and is forecast to grow over the forecast period to 2022. More importantly, Vietnam has a youthful demographic profile, implying attractive opportunities in the mass market.

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Vietnam's rapid economic development also is likely to assist the emergence of a new consumer class - in major urban centres at least - that has an interest, and can afford to participate, in modern consumption methods such as mass grocery retailing. GDP per capita in Vietnam is forecast to more than double over our 10-year forecast period. This rise in purchasing power will only trigger a swathe of consumer spending across the country's retail scene.

Vietnam Unlikely To Reach Full Retail Potential In Near Term

Although Vietnam is equipped with the aforementioned elements that are necessary to support strong growth in mass grocery retailing, the country is unlikely to reach the full potential of its retail growth story in the near future. Organised retail accounts for only 15% of overall grocery sales in Vietnam, highlighting the prevalence of mom-and-pop shops. The relative immaturity of the Vietnamese MGR sector can be partly attributed to the country's restrictive business climate. Vietnam remains a risky place to do business, with the lack of transparency of laws and regulations, as well as restrictions on foreign investment, deterring less-hardy retailers from setting up shop in the country. The lack of an established transport infrastructure further complicates distribution efforts for MGR operators.

Foreign Interest Picking Up

Despite the challenges, foreign interest in the Vietnamese MGR sector will very probably continue to grow steadily over the coming years given the sector's hugely untapped potential. We believe that the bulk of multinational investment in the near future is likely to come from bigger retail names such as Aeon and

Groupe Casino, which are eager to expand their emerging market footprint and have the financial capacity

to deploy the necessary distribution infrastructure in the sector. After receiving the regulatory permit from the Vietnamese government, Japanese retailer Aeon plans to develop around 20 retail and trade centres nationwide by 2020, which will house both local and foreign MGR operators.

Interest from less-hardy foreign investors will also pick up, in our view, although such investment will largely take the form of joint ventures as foreign retailers leverage on the local market expertise and

financial strength of their local counterparts. As a case in point, South Korean MGR player E-Mart recently reached an agreement with U&I Investment Corporation, to establish a joint venture (JV) in Vietnam with the aim of setting up retail stores in the country. Similarly, Singapore MGR operator NTUC FairPrice and Vietnam's Saigon Union of Trading Co-operatives are looking to establish a chain of hypermarkets in Vietnam through their local JV.

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The latest multinational reported to be entering the market, as of summer 2013, is French retailer Auchan which, according to local sources, is set to inject US$500mn in the next decade.

Supermarket And Hypermarket Sectors The Outperformers

While the supermarket and hypermarket sub-sectors will feature most prominently on investors' radars, the convenience retail sector can be expected to increasingly attract interest from retailers. Accordingly, the demand for convenience with the pay-off of higher prices is not yet on the agenda for most consumers. However, with purchasing power on the rise, this will bring the concept of convenience retailing more within reach of the average consumer.

If there can be a downside in the case of such an impressive retail growth forecast, it comes in the form of Vietnam's majority rural population, which drags down food consumption in the market to unattractive levels. The risk for retailers is that as soon as the country's major cities start to become saturated with business opportunities, few other communities exist that can currently support modern retail development. Even the low prices offered by discounters would be unlikely to attract buyers in rural communities, for whom self-sufficiency and wet markets remain the sole methods of consumption. However, this point is still a long way off. Retailers will invest in Vietnam in line with their own need to expand, confident of the country's economic development and growing consumer base.

Table: Mass Grocery Retail Sales By Format - Historical Data & Forecasts, 2011-2018

2011 2012 2013e 2014f 2015f 2016f 2017f 2018f Supermarkets (VNDbn) 65,373.55 73,643.31 82,028.05 93,457.02 106,475.86 120,406.89 135,536.54 151,791.74 Hypermarkets (VNDbn) 26,270.31 29,714.35 33,253.78 37,806.08 42,771.37 48,227.53 54,275.67 61,023.41 Convenience Stores (VNDbn) 19,828.26 21,664.35 23,301.52 25,705.44 28,409.65 31,389.82 34,673.20 38,289.61 Total mass grocery retail sector (VNDbn) 111,472.12 125,022.01 138,583.35 156,968.54 177,656.88 200,024.24 224,485.41 251,104.76 Total mass grocery retail sector growth, VND, (y-o-y) 13.9 12.16 10.85 13.27 13.18 12.59 12.23 11.86 Supermarkets (US $bn) 3.16 3.53 3.92 4.54 5.24 5.96 6.78 7.67 Hypermarkets (US$bn) 1.27 1.42 1.59 1.84 2.10 2.39 2.71 3.08 Convenience Stores (US$bn) 0.96 1.04 1.11 1.25 1.40 1.55 1.73 1.93

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Mass Grocery Retail Sales By Format - Historical Data & Forecasts, 2011-2018 - Continued

Total mass grocery retail

sector (US$bn) 5.40 5.99 6.63 7.63 8.74 9.89 11.22 12.68

e/f= BMI estimate/forecast. Source: Company information, Trade press, BMI

Table: Grocery Retail Sales By Format (%)

2012e 2022f

Organised/MGR 15 28 Non-organised/Independent 85 72

e/f= estimate/forecast. Source: BMI

Trade

2014 exports growth (US$ terms): +10.6%; compound annual growth rate (CAGR) 2014 to 2018: +8.6%.

2014 imports growth (US$ terms): +12.4%; CAGR to 2018: +9.3%.

We see growing downside risks to our outlook for Vietnam's food and drink exports. A sputtering economic recovery in the US, sovereign debt concerns in the eurozone and expectations for a second-half slowdown in China are placing increasing pressure on our export outlook for the Vietnamese food and drink sector. However, the Vietnamese consumer looks to be in stronger shape than its regional peers to shoulder the burden of slower economic growth.

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Trade

2011-2018

Exports of food and drink, US$mn (LHS) Imports of food and drink, US$mn (LHS) Food and drink trade balance US$mn (RHS) 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f 0 20,000 40,000 10,000 15,000 20,000 25,000

e/f = BMI estimate/forecast. Source: UNCTAD, Central Statistics Organisation, BMI

Over the five years to 2018, the outlook for Vietnam's food and drink trade balance is relatively strong, as the country is forecast to maintain a healthy and growing trade surplus. Off of a much higher base, exports are forecast to experience growth of 51.1% between 2014 and 2018, while imports are forecast to

experience growth of 55.7%.

A major driver behind the growth in exports is sustained government effort to improve local food

production and agricultural industries. This will boost output and make more produce available for export, and will also improve the quality competitiveness of local exports.

Over the long term, increasing urbanisation and continued exposure to Western influences are expected to generate growing import demand, and increasingly busy lifestyles and rising interest in branded produce will lead to growth in the processed-food industry. In order to meet this demand, local manufacturers will be forced to import the necessary raw ingredients. Beyond 2018, the government is likely to be hopeful that its investments and efforts to attract foreign investors will pay off, and that much of this new and specific type of demand will be able to be accommodated domestically.

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Table: Food and Drink Trade Indicators - Historical Data & Forecasts, 2011-2018

2011 2012 2013e 2014f 2015f 2016f 2017f 2018f

Exports of food and

drink, US$mn 15,707.15 16,721.83 18,676.83 20,663.54 22,819.16 25,252.43 28,039.63 31,211.69 Exports of food and

drink, US$, %

change y-o-y 29.08 6.46 11.69 10.64 10.43 10.66 11.04 11.31 Imports of food and

drink, US$mn 4,061.78 4,332.31 4,912.45 5,520.92 6,184.78 6,908.53 7,710.28 8,596.69 Imports of food and

drink, US$, %

change y-o-y 6.47 6.66 13.39 12.39 12.02 11.70 11.61 11.50 Balance of trade in

food and drink, US

$mn 11,645.37 12,389.52 13,764.38 15,142.61 16,634.38 18,343.89 20,329.35 22,615.00 Balance of trade in

food and drink, US$,

% change y-o-y 39.41 6.39 11.10 10.01 9.85 10.28 10.82 11.24

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Macroeconomic Forecast

BMI View: Although we expect the Vietnamese economy to record yet another quarter of sub-par growth in

Q413, we are beginning to see potential for upside surprises to domestic demand over the coming quarters. Recent data on foreign direct investment inflows, remittances, passenger car sales, and property market launches, suggests to us that domestic demand is on a nascent recovery, setting the stage for stronger 2014 growth.

The general consensus is expecting the Vietnamese economy to suffer yet another quarter of sub-par growth mainly due to subdued external demand and the lack of progress on banking sector reforms. This is closely in line with our view that real GDP growth will come in at just 5.3% in 2013, a slight improvement from 5.2% in 2012. Looking ahead to 2014, however, evidence of improving macroeconomic fundamentals in Vietnam (especially with regards to the outlook for domestic demand) suggests to us the balance of risks to our growth forecast of 6.0% is gradually tilting towards the upside.

Robust Remittances Could Boost Domestic Demand

Vietnam - Unrequited Transfers, US$mn

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Remittances: According to estimates published by the World Bank, the Vietnamese economy is on track to

record a bumper year for remittance inflows. The country is expected to receive US$10.6bn in remittances from Vietnamese citizens working abroad, a robust 6.5% increase from 2012. Crucially, we believe that remittance inflows will remain strong over the coming quarters as macroeconomic conditions in Vietnam continue to improve. Growing confidence in the stability of the Vietnamese dong should also help to encourage Vietnamese workers abroad, to a certain extent, to remit a larger share of their earnings back home. We believe that this will help to boost domestic demand while providing support for the currency.

Foreign Direct Investment: Total foreign direct investment (FDI) inflows are also set to surpass the

government's full-year target of US$13bn, after data released by the Ministry of Planning and Investment showed that inflows surged by 19.5% year-on-year (y-o-y) growth over the first eight months of the year. The strong reading chimes with our view that the country's solid long-term growth story should continue to attract foreign investors over the coming years.

Automobile Sales: We are witnessing signs of a robust recovery in automobile sales, a sign that pent-up

domestic demand is beginning to rebound. According to the Vietnam Automobile Manufacturers Association (VAMA), September vehicle sales of its members surged by 20.6% year-on-year (y-o-y), exceeding our already bullish forecast of 12.5% for the year (see 'Bullish On CV Sales In The Medium To Long Term', October 14 2013).

Figure

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