PRINT THIS STORY:

CHANGE TEXT SIZE:

INVESTORS HEAR DISTANT ROAR OF ASIA’S NEXT TIGER: VIETNAM

By Curt Hazlett

The annual rankings of the world’s most expensive retail spaces are dominated by some familiar locations: New York City’s Fifth Avenue; the Champs élysées, in Paris; and Tokyo’s Ginza, to name a few. But it might be only a matter of time before the 147-year-old Ben Thanh Market wedges its way onto the list.

This main marketplace of Vietnam’s Ho Chi Minh City is decidedly unglitzy — a sprawling, low-rise building packed tight with tiny stalls stocking apparel, electronics, food and housewares. But though not a glamorous retail venue, it is a wildly expensive one. According to the Vietnamese tax office, space at the market rents annually for about $16,000 per square foot.

The high rents at Ben Thanh are just one sign of the economic vigor that has emerged in Vietnam 31 years after the end of what the Vietnamese call “the American War.” Aided by a decadelong effort by the government to move away from the stultifying effects of a planned economy, Vietnam has seen economic growth of 7 percent on average over the past five years, including an 8 percent jump last year.

For retailers Vietnam is a promising and untapped market. The country has a fast-growing population of 84 million, about half of whom are under 30, and a rising standard of living. Yet relatively few foreign retailers have been able to enter because of restrictions that require the involvement of local partners in most cases. “Vietnam is booming,” said Richard Leech, director of CB Richard Ellis (Vietnam) Co. “All the economic indicators are in Vietnam’s favor at the moment, and certainly the last five years have been particularly good. So there is optimism in the country, although from a development point of view that should be regarded as cautious optimism.”

Vietnam’s fundamentals are so impressive that this year consultant firm A.T. Kearney ranked it third among the world’s most-attractive emerging retail markets, just behind India and Russia. “In many ways Vietnam resembles a little India, particularly because of its fragmented retail market,” the Kearney report said, noting that 90 percent of the country’s retailers are in small shops and that consumer spending rose 16 percent from 2004 to 2005.

The biggest changes in retail are taking place in the city centers of Hanoi, the capital; and Ho Chi Minh City, formerly known as Saigon. Modern retail space has been in short supply in both cities, which together account for about 30 percent of Vietnam’s retail sales, owing to sharply higher demand for prime space from foreign retailers. “Retail is the most interesting of all the real estate sectors in Vietnam, because there is a huge demand from foreign retailers to get here,” said Leech. “We have a lot of demanding young consumers who have been exposed more and more to international trends in fashion, and they have an insatiable appetite for foreign goods.” That has translated into “an extreme shortage of supply in terms of formal trading centers. Most of the shopping is done in the informal shopping areas.”

Developers are rising to the challenge: In Hanoi a six-level retail-entertainment center recently opened in the new Vincom City Towers, built by Vietnamese development firm Vincom JSC. Cipura, Vietnam’s first regional mall, is going up six miles from Hanoi’s city center. With over 1 million square feet of leasable space, Cipura will have 1,200 shops when it opens in the third quarter of 2008. A 53,000-square-foot luxury mall whose tenants include Dolce & Gabbana and Versace opened in the summer of 2005 in Hanoi’s Dong Da district. In Ho Chi Minh City an ambitious mixed-use project called Sai Gon Paragon will house luxury retailers on the lower floors of a 10-story building that bears a striking resemblance to New York’s Plaza Hotel. It is scheduled to open sometime in the middle of next year.

In the coastal city of Haiphong, Vietnam’s third-largest metropolis, a new 300,000-square-foot center called TD Plaza will soon be anchored by a Malaysian-owned Parkson department store. And a factory outlet center, Saigon Factory Outlet Mall, will open in Binh Duong province next month, with more than 200 stores offering fashion, home decor, consumer electronics and a food court.

As in other emerging markets, the flourishing of supermarkets and hypermarkets is causing a stir in Vietnam, where most people still rely on small stalls for their groceries. In 1995 there were 10 supermarkets in all of Vietnam, according to the Vietnam Investment Review, a weekly magazine. By August of this year the number had risen to 140, the publication reported.

Among the most active foreign retailers are German chain Metro Cash & Carry, which has six stores in Vietnam, and France’s Groupe Bourbon, which owns a majority stake in the Big C hypermarket chain. Bourbon runs four stores now and has plans for three more next year. (The world’s biggest hypermarket operators — Wal-Mart, Carrefour and Tesco, in that order — have announced no plans to enter Vietnam.)

The government has loosened its grip on the economy somewhat, but not entirely. In fact, the two largest supermarket chains, Intimex Hanoi and Saigon Coopmart, are state-owned. Intimex, which has two stores in Hanoi, plans to open five more next year elsewhere in the country. Meanwhile, Coopmart hopes to grow from 13 stores in Ho Chi Minh City to 25 across Vietnam.

Vietnam also represents a potential windfall for foreign franchisers, including those from the U.S. Among them is Yum Brands’ KFC, which opened its first franchised store this summer in Hanoi and is drawing some 2,000 customers a day. “We are starting to look at Vietnam as an opportunity for our members,” said Marcel Portmann, the vice president for international development at the Washington, D.C.-based International Franchise Association. “We are seeing a lot of companies in Singapore and Thailand that are looking at Vietnam.”

But any foreign retailer interested in entering Vietnam faces obstacles. As in India, there are restrictions on foreign direct investment, so joint ventures are the order of the day. (Foreign companies are allowed to own up to 49 percent of a Vietnamese business.) And as in many emerging markets, finding qualified partners can be difficult.

Beyond that, Vietnam will need to develop a distribution network if modern retailing there is to get off the ground. Recognizing this, the government is encouraging foreign investment in distribution centers and has agreed to allow U.S. companies to fully own such centers starting in 2008.

It’s a world apart from the turbulence of the war and the years of political and economic uncertainty that followed the fall of the south in 1975. Leech has been in Vietnam for nearly four years, and the country has changed markedly even in that short period, he says. “You can really feel it,” he said. “The most noticeable changes have been in the habits of people, who have gone from shopping in the street markets to shopping in supermarkets.” One clear sign of the change: A 720,000-square-foot complex just opened in Hanoi selling building materials and home decor supplies. “In the last three years, there has been quite an increase in traffic,” Leech said. “The number of motorbikes and cars on the road has increased. There are more mobile phones, and more people are doing regional and international travel. Those are big barometers of change.”

And the war? “You know, that’s not really something that is ever brought up,” he said. “A whole generation has been born since the war ended.”