Investment project analysis of a packaged fresh cake manufacturer

1.2 OBJECTIVE OF THE STUDY Due to the above attractive factors, this study endeavors to evaluate the feasibility of a investment project of packaged fresh cake manufacturer in Vietnam b

TR NG I H C M TP HCM UNIVERSITÉ LIBRE DE BRUXELLES

HO CHI MINH CITY OPEN UNIVERSITY SOLVAY BRUSSELS SCHOOL

MBAVB4

NGUYEN NGOC HONG

INVESTMENT PROJECT ANALYSIS OF A PACKAGED

FRESH CAKE MANUFACTURER

MASTER PROJECT MASTER IN BUSINESS ADMINISTRATION

(PART-TIME)

Tutor’s Name: Dr NGUYEN MINH HA

Ho Chi Minh City

(2011)

ACKNOWLEDGMENT

I extent my thanks for all professors taking part in Vietnam Belgium master program who are doing full of meaning jobs to open opportunities for me to approach a new different education Each lesson is a granted valuable gift which is always behind me during my life and career path

I would like especially thank to my tutor Mr Nguyen Minh Ha for his help during period of doing thesis I am appreciate his devoted and meticulous comments on my written paper from the commencement There is no doubt that without his help, I would not finish this paper

I owe the debt of gratitude to my parents, brother and sister who always support me

by their own way and encourage me so much during the two year MBA course They make

me feel a peaceful living to pursue my studying target for a better future

Finally, I wish to thank my MBAVB4 friends who are willing to give the class their supports which are derived from their kindness in a collective studying team I am also thank to friends in my studying group who have spend their time with me to debate issues, search materials or patiently re-guide me lessons

Without all these kindness of life, I would not be as I am today Thank you

EXECUTIVE SUMMARY

Since Vietnam joined the World Trade Organization (2007), the economy of country has improved, which has led to rising disposable household incomes and continuous improvements in living standards Therefore, Vietnamese consumers are now able to take better care of their health and well-being In addition, the means of communications feature health-oriented articles and programmers that are regularly broadcast encouraging Vietnamese people to pay more attention to their health in order to live happily as well improve life expectation For these reasons, the health and wellness trend continued to grow strongly in Vietnam throughout the review period, especially in large cities such as Ho Chi Minh, Ha Noi and Da Nang

On the social sight, the consuming expenditure has ever increased promptly as not ever been before The expenditure habit is gradually changed due to higher standard living from higher income It is also required products being suitable with life style which carry out characteristics of convenience and easy for using Food processing industry is not out

of modern tendency Packaged food products are seem to become booming of demand Although it is a traditional market where famous brand name are existing, there is still opportunities for new comers entering the market with its innovation and differentiation The changing in demand of food processing industry is on the sight of a group local investors The idea of implementation of project is executive in which catching the new consuming trend by supplying top qualify, delicious and freshness packaged cakes that satisfy convenience and healthy required from consumers And, the project is being considered to building a factory for production to exploit the local market The idea is from analyzing demand, supply, competitive and new consuming trend in term of market size, growth and differentiation of products It is discovered a new market segment to products served for health and wellness of consumers From the overall outlook, the production capacity will be calculated for further investment consideration When investing in long term assets, many aspects are also considered such as location of the factory, life time estimation or production machine system And finally, financial figures are used to measure the efficiency of the project Risk analysis is carefully considered in the project under impact of one and two variables senario as well as simulation analysis to find out sensitive factors to the result for effective management The aspect of operation and

production management is also mentioned as inventory, organization structure, human resource, the cost of goods sold and working capital requirement The final purpose of all analysis is to rightly assessment the project and well management its performance after investment decision

By the end of analysis, the investor should be able to see the possibility and profitability of this project that are used for further investment decision For this project, it has financial indicators as positive NPV and IRR greater than return on equity It is supported by others such as MIRR greater than return on equity, PI greater than 1, less than the life of project to payback period of 5 years 8 months and discounted payback period of

8 years 2 months and ADSDR greater than 1 Based on these indicators, the project is feasibility and the expected profitable return of investors is satisfied Moreover, the simulation analysis method figures 68.75% probability for NPV > 0 Therefore,the investor should implement the project

However, the investor should pay their attention on four sensitive factors as unit price, productivity, raw material and sales cost for well management the performance In which, unit price is much more considered than others due to 72.3% contributed to variance view Moreover, during the project on operation, the investor should be caution on controlling modern technology, spreading brand name and persuading distributors by sales cost strategy In conclusion, the next detail action plans after investment must be considerate carefully to ensure a effective project

Table of contents

ACKNOWLEDGMENT i

COMMITMENT ii

TUTOR’S COMMENTS iii

EXECUTIVE SUMMARY iv

Table of contents vi

List of tables x

List of charts xii

List of pictures xiii

ACRONYMS xiv

CHAPTER I: INTRODUCTION 1

1.1 PROBLEM STATEMENT 1

1.2 OBJECTIVE OF THE STUDY 2

1.3 SCOPE OF STUDY 3

1.4 METHOD AND DATA OF STUDY 3

1.5 SIGNIFICANCE OF THIS STUDY 3

1.6 THE STUDY STRUCTURE 4

CHAPTER II: OVERVIEW OF INVESTORS AND THE PROJECT 5

2.1 THE OVERVIEW TO INVESTORS 5

2.2 THE OVERVIEW OF THE PROJECT 7

2.2.1 General information about the project 7

2.2.2 Introduction about products of the project 7

2.2.3 Introduction about the location of the project 9

CHAPTER III: THE MARKET ANALYSIS 11

3.1 OVERVIEW ABOUT INDUSTRY AND CAKE SEGMENT 11

3.1.1 General overview about macro-economics 11

3.1.2 The introduction about Packaged food industry 12

3.1.3 The introduction about Packaged Cake segment 15

3.2 DEMAND MARKET OF PACKAGED CAKE SEGMENT 15

3.2.1 The existing market size of Packaged Cake segment 15

3.2.2 The forecasting market size of Packaged Cake segment 17

3.2.3 The demand characteristics of Packaged Cake segment 18

3.3 SUPPLY MARKET OF PACKAGED CAKE SEGMENT 19

3.3.1 Classification of competitive groups of the product 19

3.3.2 Classification of price to competitive products 22

3.3.3 The main players in existing market 23

3.3.4 The competitive landscape 26

3.4 ENTERING INTO THE MARKET GAP BY CATCHING CONSUMING TREND AND DIFFERENTICATION 28

3.4.1 The consuming trend outlook 28

3.4.2 The product differentiation of project 30

3.4.3 The market opportunity to enter into new segment of product 31

3.4.4 The capacity of project 32

CHAPTER IV: THE INITIAL INVESTMENT AND TECHNICAL ANALYSIS 34

4.1 MAIN PRODUCTION MACHINE SYSTEM 34

4.1.1 Auto-Bake technology 34

4.1.2 Overview the production process 35

4.1.3 The operation mechanism of production machine system 35

4.1.4 Supplementary equipments for auto-bake main production system 38

4.1.5 Capacity of production machine system 40

4.1.6 Supporting instruments for production 41

4.2 BUILDING PRODUCTION FACTORY 41

4.2.1 Cost for land using right 41

4.2.2 Building the main factory 42

4.2.3 The costs related to construct main factory 43

4.3 ADMINISTRATIVE COSTS UNDER PROJECT CONSTRUCTION 44

4.4 DEPRECIATION PERIOD TO CATEGORIES OF INITIAL INVESTMENT 44

CHAPTER V: OPERATION AND PRODUCTION MANAGEMENT ANALYSIS 48

5.1 SALES AND MAKETING MANAGEMENT 48

5.1.1 Production capacity exploited 48

5.1.2 Inventory and consumption ratio 50

5.1.3 Forecast revenue, marketing and sales cost 52

5.2 ORGANIZATION STRUCTURE 52

5.3 HUMAN RESOURCE AND ADMINISTRATIVE MANAGEMENT 53

5.4 COST OF GOODS SOLD 55

5.5 FINANCIAL STRUCTURE OF PROJECT 57

5.6 PRO-INCOME STATEMENT 58

5.7 WORKING CAPITAL REQUIREMENT 61

5.8 PRO-CASH FLOW STATEMENT 64

CHAPTER VI: PROJECT EVALUATION AND RISK ANALYSIS 66

6.1 THE EXPECTED RATE OF RETURN OF INVESTORS 66

6.1.1 Estimating the factors of CAPM base on characteristics of project 66

6.1.2 Estimating the Return on equity, Re 69

6.2 FINANCIAL ANALYSIS ON EQUITY POINT OF VIEW 69

6.3 PROJECT VALUATION CRITERIA 70

6.3.1 Net present value - NPV method 70

6.3.2 Interest Rate of Return - IRR method 70

6.3.3 Modified Internal Rate of Return – MIRR method 71

6.3.4 Profitability Index – PI method 71

6.3.5 Regular Payback – RP method 71

6.3.6 Discounted Payback – DP method 71

6.3.7 The Annual Debt Service Capacity Ratio – ADSCR method 71

6.4 THE RESULT OF PROJECT VALUATION 72

6.5 RISK ANALYSIS 72

6.5.1 Sensitivity analysis under impacted one variable 72

6.5.2 Sensitivity analysis under impacted two variables 77

6.5.3 Scenario analysis 81

6.5.4 Simulation analysis 82

6.6 THE IMPACT OF A DEBT STRUCTURE 84

6.7 PROJECT VALUATION UNDER INFLATION ENVIROMENT 85

CHAPTER VII: CONCLUSION AND RECOMMENDATION 89

7.1 CONCLUSION 89

7.2 RECOMMENDATION 90

REFERENCES 91

APPENDIX 1: AUTO-BAKE PROCESS AND TECHNOLOGY OVERVIEW 94

APPENDIX 2: BUILDING MATERIAL STANDARDS FOR FACTORY 106

APPENDIX 3: INTRODUCTION ABOUT BID TENDERS 109

APPENDIX 4: CALCULATION RATE OF RETURN (Re) BY CAPM METHOD APPROACH 112

APPENDIX 5: FINANCIAL MODEL WITH REAL VALUE 118

APPENDIX 6: FINANCIAL MODEL WITHOUT DEBT STRUCTURE 132

APPENDIX 7: FINANCIAL MODEL UNDER INFLATION 135

List of tables

Table 2.1: The investors of project and their chapter capital 6

Table 3.1: Compare between competitive products in the market 20

Table 4.1: The separate equipments assembled in machine system and its suppliers 37

Table 4.2: The list of main machines in a fully production line 40

Table 4.3: Oven Power Loading and Out Put Chart of production system 40

Table 4.4: The price for renting the land located the factory of project 42

Table 4.5: Price offering of 6 tenders for constructed categories 43

Table 4.6: The list of items of total initial investment capital 44

Table 4.7: The depreciation period applied on initial investment categories of project 45

Table 4.8: Depreciation schedule for initial the project of initial investments 46

Table 5.1: Production capacity planed to exploit year by year 49

Table 5.2: Products in volume produced and consumed year by year 51

Table 5.3: The detail of human resource cost 54

Table 5.4: The weighted and cost ratio between inputs and outputs 55

Table 5.5: Cost of goods sold of the project 56

Table 5.6: The detail of loan financed project 57

Table 5.7: Debt repayment schedule 58

Table 5.8: Financial structure of project 58

Table 5.9: Pro-income statement 60

Table 5.10: Turnover of working capital requirements 61

Table 5.11: Working capital requirement 63

Table 5.12: Pro-cash flow statement on equity point of view 65

Table 6.1: Calculate the beta of project by CAPM approach 68

Table 6.2: Calculate Return on equity (Re) by CAPM approach 69

Table 6.3: The result of project valuation 72

Table 6.4: Sensitivity of unit price on the NPV and IRR 73

Table 6.5: Sensitivity of productivity on the NPV and IRR 73

Table 6.6: Sensitivity of raw material cost per piece on the NPV and IRR 74

Table 6.7: Sensitivity of marketing cost on the NPV and IRR 75

Table 6.8: Sensitivity of sale cost on the NPV and IRR 75

Table 6.9: Sensitivity of human resource expense on the NPV and IRR 76

Table 6.10: Sensitivity of unit price and raw material cost on NPV 78

Table 6.11: Sensitivity of unit price and Productivity on NPV 79

Table 6.12: Sensitivity of unit price and sales cost on NPV 80

Table 6.13: Scenario analysis in best, base and worst case 81

Table 6.14: The result of project with a no dept capital structure 85

Table 6.15: The pro-cash flow statement under inflation 87

Table 6.16: The result of project under inflation 88

List of charts

Chart 3.1: Inflation rate year on year 12

Chart 3.2: Market size of Packaged Portion Bake in Volume 2005 - 2010 13

Chart 3.3: Market size of Packaged Portion Bake in Value 2005 – 2010 14

Chart 3.4: The scale of Packaged Cake on Packaged Portion Bake 15

Chart 3.5: Market size of Packaged Cake in Volume 2005 - 2010 16

Chart 3.6: Market size of Packaged Cake in Value 2005 - 2010 16

Chart 3.7: Forecast market size of Packaged Cake in Volume 2011 - 2015 17

Chart 3.8: Forecast market size of Packaged Cake in Value 2011 - 2015 18

Chart 3.9: The price of competitive products 23

Chart 5.1: Organization structure of the project 53

Chart 6.1: The NPV > 0 distribution by simulation run 83

Chart 6.2: The basis NPV distribution by simulation run 83

Chart 6.3: Sensitivity chart of variables 84

Chart 6.4: The inflation rate in Vietnam period July 2008 – July 2011 86

List of pictures

Picture 2.1: Long Hau Industrial Zone map location 10

Picture 4.1: Operation mechanism of production machine system 36

Picture 4.2: Paper Case Denesting unit equipment 38

Picture 4.3: Depositor unit equipment 39

Picture 4.4: Injection unit equipment 39

ACRONYMS

σ(i) : Standard deviation of Stock i

ρ(iM : Correlation between Stock i and the market return σ(M) : Standard deviation of the return of market

ACB : Asia Commercial Bank

ADSCR : The Annual Debt Service Capacity Ratio

bi : Beta coefficient of Stock i

BMI : Business Monitor International Ltd

CAPM : Capital Asset Pricing Model

Cfo : Initial cost

CFt : Expected future cash flow year t

COGS : Cost of Goods Sold

CPI : Consumer Price Index

DP : Discounted Payback

EBIT : Earnings Before Interest and Tax

ECF : Equity cash flow

Euromonitor : Euromonitor International Ltd

FIFO : First In First Out

G : Inflation rate

GDP : Gross Domestic Product

GMP : Good Manufacturing Practice

HACCP : Hazard analysis and critical control points

HCMC : Hochiminh City

IRR : Internal Rate of Return

ISO : International Organization for Standardization MIRR : Modified Internal Rate of Return

NPV : Net Present Value

PBT : Profit Before Tax

SBV : State Bank of Vietnam

TNS : TNS Global Market Research Vietnam TVC : Total Video Converter

USD : Unite State Dollar

VAT : Value added tax

VND : Vietnam Dong

WC : Working capital

wi : Weighted average of its individual stock i

CHAPTER I INTRODUCTION

1.1 PROBLEM STATEMENT

The demand continues growing as the packaged products become popular to Vietnamese consumers in term of consumption habits It is to see more and more frequent using habit in the school, the office, the tour, etc that rarely ever been before This habit is being to contribute to the industry growth Besides, consuming awareness is also change The Vietnamese normally used packaging as an reference for justify product quality The habit changing is explained by survey of TNS Vietnam (2010) who found out five top reasons rate for their favorite brands “59% by top quality, 39% by innovation, 38% by well designed, easy to use, 34% affordable good value of the money and 27% great advertising and marketing” Therefore, a top quality of product is required, customers are attracted by convenience products and be able to change their buying behavior by outward performance

or marketing image

A market report stated that “a big trend in consumer awareness is growing for health and wellness As the economy continues to improve and people have higher disposable income, they will be able to afford better products, and thus start to look at the nutritional value of the products they purchase instead of just taste and price” (Euromonitor, 2010) It is same with survey result of TNS Vietnam (2010) that 62% teens care about being healthy and maintaining a positive outlook – securing their future and 74% eating healthy Driven by rising incomes and the desirable better living standards, the health and awareness trend in Vietnam is expected to move along with the global trend and continues developing further in the future At most consumers will have better education, together continuous efforts from the government and manufacturers to raise the awareness

of people about health issues, they are expected to have better and more sophisticated knowledge about health and wellness, and have higher demand for these products Although healthy products are still a niche area in Vietnam, rising consumer awareness for this trend opens up new opportunities for the manufacturers The tendency market is demanded healthy fresh products

Although existing competitors are densely and their capacities are always adapt to

existing market demand, there is still opportunity for new players entering the new segment market Market demand is changing which is higher required than previous The disadvantage of existing manufacturers is to switch innovate technology to adapt new demand The heavy investment on production capacity for existing products maybe lead to

be slower than new players in catching the new market demand Therefore, one of the competitive advantages of new players is modern technology producing modern products They also have new vision and clarify the new segment even it is the niche Nowadays, three ingrained product trends become be decisive factors for buying decision of customers which are indulgence, convenience, healthy and safety (TNS Vietnam, 2010) As the report, there are 89% said “I buy brands that are of good quality, even more expensive”,

“75% are prepare to pay more for products that make their life simpler” and 88% said “ I

am ready to pay a higher price for healthier foods” It means that there is a market gap to a new segment for packaged fresh and green products even been willing to pay more

The increasing of urban household income is still recorded The wealthy income class (higher 13,500,000 VND/month) has increased by 33% in 2010 compare to 2009, while the middle class in urban Vietnam has doubled in two years 2009 and 2010 (TNS Vietnam, 2010) Moreover, the expenditure on food on a per capita basis in Vietnam is expected to continue increasing over the next few years to reach increase more 80% in

2014 compare to 2009, reaching the volume USD 470 in 2014 compare to USD 262 in

2009 (Agriculture and Agri-Food Canada, 2011) Increasing income allows Vietnamese consumers to diversify and improve their diets and spend more on food in general

The products of project satisfy requirements about high standard living of people as

a naturally desire of increasing income As Maslow's hierarchy of needs, the safety in health is rising when people is satisfied the basic demand The implementation of project brings to consumers the products ensuring their health by freshness, satisfying their taste

by delicious and deserving their payment by top qualify

1.2 OBJECTIVE OF THE STUDY

Due to the above attractive factors, this study endeavors to evaluate the feasibility

of a investment project of packaged fresh cake manufacturer in Vietnam based on market analysis and financial indicators The result of assessment is used to support investors in

making decision whether should invest on the project with their expected return

The project is taken aim to calculate the production capacity that meet the target of investors for a expected certain market share Besides the financial aspect, followings are technology, sales, cost of goods sold, direct and indirect labor forces and organization chart put on the strategic to reach its mission

1.3 SCOPE OF STUDY

The study is scoped in term of financial point of view It is mainly focused on preparation stage However, it also includes forecasts after making investment decision during the life of project as revenue, costs as the means to calculate of financial indicators Therefore, economics or social point of view are not mentioned on this scope of study

1.4 METHOD AND DATA OF STUDY

The research will be implemented by in-depth interviews to managers and owners

of the project In addition, a survey of market data is carried out to support for the market analysis Focus groups will be made to explore more ideas and insights of customers

The price market of competitive products is collected by practical survey of own author at places where products are displayed The investment and production costs is collected by suppliers by their price offers on reality market

Information on macro economics is the main source of macro-economic, political, country outlook from BMI Vietnam Business Report General Department of Vietnam Customs, Ministry of Finance and Vietnam Government portal provide sources about legal documents, circulars, decrees and decisions

Information of the industry is mainly from reports of Euromonitor and TNS Global Market Research Vietnam surveys Other information is based on realistic reports of companies

1.5 SIGNIFICANCE OF THIS STUDY

This study aims to give full of analyzed information about market and technology

to investors Especially, financial information is analyzed leading to indicators supporting

to their making decisions The following propose is to manage the performance of project

by analyzing impacted input and output variables in order to management resources at the best effectiveness in changeable reality conditions

1.6 THE STUDY STRUCTURE

The project is covered by seven chapters Chapter one is introduction about overall thesis as it objective, scope and method research Chapter two is begun by introduction of the project about investors and details of project Chapter three is focused on the market analysis to seize the supply and demand market, find out the main competitors and identify the competitive landscape From that, consuming trend is on vision that lead the project a solution to enter into the market Further studying is chapter four that goes to inside the project by the initial investment and technology analysis The other inside analysis is operation and production management presented in chapter five The chapter six reports the result of project through project valuation and risk analysis The final chapter seven is conclusion and recommendation

CHAPTER II OVERVIEW OF INVESTORS AND THE PROJECT

2.1 THE OVERVIEW TO INVESTORS

The idea of implementation the project is taken shape from a group local investors They are business man who have been successful in two industries as real estate and pharmaceutical in the form of limited liability and joint venture company They currently are managers and members of management board of companies have their own capital Before gathering to join in this project, they have being experienced in management as well as leadership in many companies being effective performance The curriculum vitae records are persuaded that they have management and financial capacity, experience in Vietnamese market, good social relationship and foresee new visions

These local investors discovered a potential market to food processing industry from their business experience to young, large and crowded market as Vietnam Increasing income and gradually changing in the style of life is on their sight People become to require products satisfying their modern life by convenience and healthy Besides, they are also realized that existing market players are on heavy investment on machine system for existing products that are not less suitable to the required new demand Under business experience of investors and their keen in catching investment opportunities, the general observation to the tendency of market leads to cooperation decision to invest on the project

The investors are on the consideration to implement the project They proceed with carefully analyzing issues related to the project And, they also consider about cooperative forms of whether only local investors or joint venture to take advantages of foreign partner

to exploit its technology in food processing industry

With least experience of local investors in food industry, they decide to invite a strategic foreign partner joining in the project at the beginning who owns a successful brand name of products similar with strategy of local investors in its country The share is divided to scale 60% to local investors and 40% to foreign partner The capital scale is planned to ensure the management of project belong to local investors It is certainly a joint venture company is established under the Law on Foreign Investment in Vietnam Under

the Law, the form of joint venture enterprise is legally stated in the investment license for each project in accordance with regulations of the Vietnamese Government

The capital chapter is VND 54 billion from the commencement This is an approximately amount 30% of total investment cost The details did not calculated at that time, however the added capital is considered during the implementation of investment project

Table 2.1: The investors of project and their chapter capital

Source: Calculated by author

After meetings for negotiation about strategy of company, it is defined the field of company is to produce and trade food processing products made from flour materials including bakes, cakes, breads, sugar and ice cream It is being perceived that a totally new comer in food processing industry at Vietnam desires to put their first steps into existing fierce competitive market where being available some dominants with the famous brand name and loyal customers The motivation of establishment company is derived from capacity of local investors and experience of foreigner partner Behind a legal entity have just born officially without any experience in the industry in prior, that is combination of talent business man and a successful brand name at its located country It is added the inspiration of investors who become confident to put their steps into a new market segment

by differentiation of the products will be accepted by Vietnamese market

It is also the foundation of enthusiasm and motivate spreading in all members in the company who are being oriented to the target and focusing all resources on strategy in order to input a totally fresh brand name in mind of customers and shape a certain proportion on market share scale

2.2 THE OVERVIEW OF THE PROJECT

2.2.1 General information about the project

From the orientation of investment, the foundation purpose of joint venture is to carry on an investment plan producing freshly-baked, high-quality goodies for mainly domestic market Its mission is to supply high quality and nutritious product for the evolution of the Vietnamese youth It therefore commits to bring the highest value for target consumers through products The end product is homemade-style baked goods which industrially packaged and mass production to supply to consumers fresh bakes without preserve chemical ingredients The ending products are fresh baked cupcakes that are filling, nutritious and packaged to be easy to eat anywhere

The project is the first business of company as soon as establishment Therefore, its role is decisive to continuous survival of performance to a joint venture company Starting from total unknown brand is really a big challenge putting pressure on company at the commencement So the implementation project is required total resources and well preparation from the setting up period It is applied new modern production machine system to gather with suitable technology as well as human resources, brand creation, strategic decisions or distribution system However, the investors believe on the success of new business from discovering new segment to be able to compete by the product differentiation on existing market of a densely-populated developing country The company is a new player in a game but gets benefits from invisible assets from joint venture relationship to the foreign partner as production technology, processing recipe, business experience nin the same industry and especially owning a successful brand name with similar products at its located country – a Asian one fairy homogeneous to Vietnam

2.2.2 Introduction about products of the project

First of all, the idea for products of project derived from required demand of a social being gradually higher income and a new trend in consuming in which convenience and quality are in priority Besides, the second reason is that a existing market gap at the current foreseen where packaged cake products are not freshness and fresh cakes are not packaged The last reason for idea of products is that exists a similar segment become popular in other countries while still be strange in Vietnam market

Being heritage of value of brand and valuable advantages from joint venture relationship is one of the determinants to shape products of the project The successful lesson from foreign joint venture partner to products and brands meeting a set of criteria included market dominance, customer loyalty, longevity, goodwill and overall market acceptance is exploited to shape products They are oriented to produce similar one which are baked goodies made from all-natural popped rice in the pack that are filling, nutritious and easy to eat anywhere There are three main product lines:

+ Whatta Tops Cupcake is a moist chocolate cupcake with a thick chocolate

topping with delicious cream filling A pack of Whatta Tops contains roughly around ten individually packed mini muffins These muffins are covered with chocolate on top, with some rainbow sprinkles, and are filled with different flavors such as Strawberry, Vanilla

+ Stuffins Cupcake is a soft chocolate cupcake filled with luscious filling in three

different flavors – Chocolate Fudge (Twin-Choco), Milk Cream (Choco-Milk) and Mocha Fudge (Choco-Mocha)

+ Cheese Cupcake is a delightful cheese-flavored cupcake that's rich in butter and milk; Butter Milk Cake is a creamy, butter cupcake that's oozing with real goodness; Ube Cake is a creamy, ube-flavored cupcake that's oozing with real goodness

2.2.3 Introduction about the location of the project

To implement the project, the inventors intend to rent a land area located on Long Hau Industrial Zone to build a production factory Long Hau Industrial Zone is a place far away 20 km away Ho Chi Minh City, 3 km from Sai Gon Container Port, 26 km from Tan Son Nhat Airport and 3 km from Phu Mu Hung new resident area It connects conveniently

to HCMC and neighboring region through heavy transportation system as North – South main street line, Ben Luc – Long Thanh highway, Sai Gon – Trung Luong highway or Long Hau – Tan Lap – Highway 50 street line It has beautiful landscape and green environment It gets many advantages to be easy for getting profits from using various production materials of Mekong Delta areas and quickly convenient transport to neighboring regions

Moreover, the location is easy for investors to approach technological, social infrastructure and professional services in HCMC Interior traffic system, inside the zone,

is relatively developed to connect Long An Province and HCMC Investors locating in the zone are committed by industrial zone authorizes for sufficiently stable production electric and water source Besides, this zone has the wastewater treatment system which can meet the legal requirements set by State regulation Telecommunication system is also completed as well as other services to ensure continuous production

The land location plays an important role on the one hand to exploit advantages of infrastructure in and nearby HCMC On the other hand, saving transportation timing and cost to HCMC market is considered It is also convenient to import input materials and production machine Long Hau Industrial Zone is a good choice

Picture 2.1: Long Hau Industrial Zone map location

Source: Long Hau Industrial Zone

CHAPTER III THE MARKET ANALYSIS

3.1 OVERVIEW ABOUT INDUSTRY AND CAKE SEGMENT

3.1.1 General overview about macro-economics

The private consumption in Vietnam is booming when economy on the road recovery and growing personal incomes The judgment based on the foundations of reaching GDP per capita USD 1,160/year and achieving GDP growth 6.78%/year in 2010

It is separately counted for HCMC correspondingly USD 2,800/year and 11.5%/year (State Bank of Vietnam, 2011) Once the private consumption is confident then sets to expand domestic demand going forward It is supported by global market research results of The

Nielsen Company (Vietnam), Ltd assumed “Vietnam consumer confident index is the second highest over the world” and its General Director - Darin Williams - stated “With impressive increase recorded on our recent researches, Vietnamese consumer is available for consuming” (vnMedia, 2010) However, Nielsen Company (Vietnam) Ltd noticed

about a decreased index of consumer confidence in 2011 (decreased level at 7 points in total 104 points) due to worries about downturn economics (Saigontimes online, 2011)

But, the consumer confident index is also forecasted optimistic “Vietnam’s consumer outlook appears relatively positive over our five year forecast period (2011-2015) as confidence will be regained on the back of an economic recovery” (BMI, 2010)

However, there are opposition judgments from expects or market researchers that Vietnamese confident consumption index is seem to being downward under the pressure on price index and unstable economyin the early 2011 The economy is sustained by rocket interest rate up to 19%-21% per year depend on the purpose of loans (SBV, 2011), 20% limit credit growth rate applied on commercial banks (Resolution No 11/NQ-2011) or 18.58% higher consumer price index on 2011 than previous year (General Statistics Office, 2012) On the view point of author, these are contemporary situation of economy being controlled by State policies History data shows that annual average consumer price index relatively stable exception on 2008 although fluctuated in some different point-time in a year And, the following forecast is still under controlled with warn of the risks of overheating (BMI, 2010)

Chart 3.1: Inflation rate year on year

Source: BMI, 2010

The consuming confidence and GDP growth encourage investment capital pouring into economy And, inflation is forecasted under control linking to stable business environment The positive perspective indicates a consuming market continuing its operation during the life of project It also means costs of project in forecast period controlled and consumers go on willing to spend on daily activities including food expenditure

3.1.2 The introduction about Packaged food industry

3.1.2.1 The overall sight about Packaged food market

In recent years, packaged food industry has been one of the fastest-growing industries in Vietnam going together with development of economy and large youthful population The huge domestic market is one of the attractive characteristics to investors with 88.4 million people in which 58% under 35 years old (Euromonitor, 2010) Moreover, potential growth was more optimistic than ever And, the spreading of modern lifestyles is opening up huge potential growth for untraditional food such as Snacks, Biscuits, Pastries, Yoghurt, and Cheese etc

Packaged food market in Vietnam defined by categories: Chocolate confectionery, Sugar confectionery, Gum, Baked goods, Biscuits, Breakfast cereals, Snack bars, Meal replacement products, Spreads, Ice cream, Drinking milk products, Yoghurt, Cheese, Other dairy products, Oils and fats, Baby food, Sweet and savoury snacks, Soup, Pasta, Noodles, Sauces-dressings-condiments, Ready meals, Canned/preserved food, Frozen processed food, Dried processed food and Chilled processed food (Euromonitor, 2010) In which, it groups similar products as a specific market segmentation of packaged food which are a sweet food made from a part or whole mixture of flour, eggs, butter, sugar, flavour etc and

a similar characteristics as small portion size, portability, nice package and frequent use

The group has such categories as Confectionery, Pastries, Cakes, Biscuits, Ice Cream, Sweet and Savory Snacks Here, it is called Packaged Portion Bake

3.1.2.2 The size of Packaged Portion Bake market

Packaged Portion Bake record growth rate of 9.98% to reach 245,018.00 tons in volume and growth rate of 15.62% to reach 19,514.50 tons in value during the period 2005-2010 The demand is increasing for comfort food due to busier lifestyles, thus pushing growth this product group

Chart 3.2: Market size of Packaged Portion Bake in Volume 2005 - 2010

Source: Euromonitor, 2010

Chart 3.3: Market size of Packaged Portion Bake in Value 2005 – 2010

Source: Euromonitor, 2010

3.1.2.3 The characteristics of Packaged Portion Bake market

Packaged Portion Product carries specific market characteristics Firstly, the price

of this product group has upward tendency under the pressure on increasing price of imported materials and high CPI impact on local operating expenses It is proved as the value growth rate always higher than volume growth rate in the sector Main production ingredients are flour, sugar, milk, egg, etc almost are imported These costs play an important role on effecting on the price of products which are been fluctuated by price index on foreign market Besides, the current situation is devaluation of VND over USD through exchange rate leading to increasing expenses The inflation issue is being a different threat to producers as all other operating expense up warded leading to a increasing in price On the situation of price become a priority consideration, these fluctuation expenses rise a necessary calculation to turn it competitive advantages if do not

want to be disadvantages Secondly, this kind of products is obviously seasonable The

output usually rocket from annually lunar August to new year festival As traditional custom, nice packaged products are chosen as a presented gift while the output on months after lunar year and in summer is lower than seasonable one

3.1.3 The introduction about Packaged Cake segment

By divide the volume size of Packaged Cake group from Packaged Portion Bake one, it occupies 10.4% in total value And, it moves the same direction with overall upward trend and carries the same characteristics of the Packaged Portion Bake group

Chart 3.4: The scale of Packaged Cake on Packaged Portion Bake

Source: Euromonitor, 2010

3.2 DEMAND MARKET OF PACKAGED CAKE SEGMENT

3.2.1 The existing market size of Packaged Cake segment

Packaged Cake demand is recorded growth rate of 7.81% to reach 20,176.90 tons in volume and growth rate of 15.53% to reach VND 1,888.40 billion in value in 2010 (Euromonitor, 2010) The convenient feature of this kind product is small portable piece that increasingly consuming in busy and stressful lifestyles Especially in the big cities like

Ho Chi Minh and Ha Noi are one of the main factors contributing to growth as consumers looking for comfort food to soothe themselves after a long day at work

Chart 3.5: Market size of Packaged Cake in Volume 2005 - 2010

Source: Euromonitor, 2010

Chart 3.6: Market size of Packaged Cake in Value 2005 - 2010

Source: Euromonitor, 2010

Two charts indicate a regularly increasing consuming demand in the packaged cake segment year by year in terms of volume and value size The growth in value is higher than

in volume that means the consumer willing to pay more to own products There is existing

a market size in the segment where the project will be a new comer to enter the attractive growth in volume and value

3.2.2 The forecasting market size of Packaged Cake segment

The packaged cake segment is forecasted to continue in increasing annual average growth during period 2010-2015 is 6.37% in volume and 5.48% in value The year by year growth is detailed in two below charts in terms of volume and value

Chart 3.7: Forecast market size of Packaged Cake in Volume 2011 - 2015

Source: Euromonitor, 2010

Chart 3.8: Forecast market size of Packaged Cake in Value 2011 - 2015

Source: Euromonitor, 2010

The products of project is belongs to this product group so it is forecasted a increasing in annual production capacity following the demand And, the price of products also is considered on upward due to inflation

3.2.3 The demand characteristics of Packaged Cake segment

The demand is continued to growing as the packaged products become popular to Vietnamese consumers in term of consumption habits It is to see frequent using habit in the school, the office, the tour, etc that rarely ever been This habit contributes to the industry growth Besides, consuming awareness is also change The Western brands achieved trust to customers in terms of justify product quality as before Vietnamese consumers used to think that domestic cake goods had inferior quality in comparison with foreign one Today, they trust in Vietnamese brands such as Kinh Do or Bibica which become a priority choice of customers More importantly, the Vietnamese normally used packaging as an reference for justify product quality The habit changing is explained by survey of TNS Vietnam (2010) who found out five top reasons rate for their favorite brands

“59% by top quality, 39% by innovation, 38% by well designed, easy to use, 34%

affordable good value of the money and 27% great advertising and marketing” Kinh Do is

a typical local brand to get the intention of customers by its products instead of a foreign one In 2010, the promotions, advertising and brand creative activities of Kinh Do were more efficient by applied Business Information System It collects the information of customers from hundreds of distributors to analyze and forecast results Furthermore, the company also invested to buy market information from leading companies of the world It timely gets in hand objective information to manage the effect of results of marketing programs as well as overview look of the market, competitors and consumers to making strategic decision promptly and accurately (Kinh Do annual report, 2010)

Packaged Cake is a cheap common good thus customers are easy to change their choice from a brand to another by suffered from external effects such as promotion, media and friendly introduction It is exploited by companies in sector to attract customers for new products The Vietnamese way to get news and information is by television (84%), internet (58%), newspaper (24%), word of mouth (13%) and others (5%) (TNS Vietnam, 2010) These means effect to customer behavior in choosing a brand name

Vietnamese customer behavior effected by famous brand name Most choice known brands such as Kinh Do, Bibica or Orion thanks to quality product and prestige brand However, customer is less loyalty for specific brand name Therefore, companies must to be on the innovate product race to satisfy the demand of customer and the development of their brand name

well-3.3 SUPPLY MARKET OF PACKAGED CAKE SEGMENT

3.3.1 Classification of competitive groups of the product

There are seven companies including 13 products in the same segment with products of project who are Orion Food Vina, Kinh Do, Bibica Confectionary, Lotte Vietnam, Pham Nguyen Confectionary, ACB Bakery and Vietnam CJ Bake It is noted that such companies have multi-products in which some of them has the same segment to the project For example, Kinh do has 11 main products groups including 400 specific products

in the market (Kinh Do report, 2009) in which three kinds of them compete in the same segment such as Solite, Sophia sponge cake and Aloha bread

There are two kind of product segments in competitive market segment Packaged

unfresh product brands are Chocopie, Custas, Solite, Sophie, Aloha, Hura, Lotte Pie and

Otto And, unpackaged fresh product brands are Duc Phat and Tour Les Jours The niche

segment appears Quasure bands advertised used for diabetes patients Packaged products

offered consumers convenience while unpackaged one seemed to have a more delicious

taste

Table 3.1: Compare between competitive products in the market

Chocopie Box: 6-12 pieces

22,000 vnd/box/6pcs

or 3,667 vnd/pcs

Orion Food Vina Company

Box: 6-12 pcs

22,000 vnd/box/6pcs

or 3,667 vnd/pcs

Orion Food Vina Company

5 Brand: Aloha

Fresh bread

From vnd/pcs 3,000 to 4,000

Kinh Do Corporation

vnd/box/12 pcs

or, 2,916 vnd/pcs

Bibica Confectionary Company

Light cream Spacial nutrious for diabet patients

65,000 vnd/box/12 pcs

or 5,410 vnd/pcs

Bibica Confectionary Company

Lotte Pie

34,800 vnd/box/12 pcs

or 2,900 vnd/pcs

Lotte Vietnam Comany Limited

Comfectionery Company

14,000 vnd/pcs Vietnam CJ

Bake Limited Company

Jours Slogan: Fresh bakery – fresh everyday

18,000 vnd/pcs Vietnam CJ

Bake Limited Company

Les Jours Slogan: Fresh bakery – fresh everyday

13,000 vnd/pcs Vietnam CJ

Bake Limited Company

Source: author’s collection from supermarkets, bakery shops and company websites

3.3.2 Classification of price to competitive products

The price of packaged cake segment is cheaper than fresh one which is maximum 5,000 VND/piece The price of fresh cake segment is premium from 12,000 to 18,000 VND/piece The price of health cake niche segment with special nutrition is a little higher than packaged cake as Quasure 5,410 VND/piece

Chart 3.9: The price of competitive products

3,667 3,667 4,000 5,000 3,500 2,916

5,410 2,900 3,500

12,000 14,000 18,000 13,000

Source: author collection from supermarkets, bakery shops and company websites

The project set its price of product on the packaged group in which the highest price level is 5,000 VND per piece Although the products of project are in the same segment with packaged cake group but it is added freshness particularity so the price is appropriate for competition While the unpackaged fresh cake segment keeps in much higher than packaged segment in price It is prospected to attract consumers in the segment

by switching their buying habit from bakeries to distribution retail shops due to cheaper price and convenience

3.3.3 The main players in existing market

With potential growing market as Vietnam, there are available suppliers ready to compete to position their brand name in the market The production technology of confectionery companies is fairy modern and comprehensive imported from developed countries as England, Japan or Denmark Therefore, competition is very rough thanks to equivalent production capacity and be easy to react to any competitive actions effecting on

market such as price battle, package or promotion Currently, there are three suppliers with firmly market share as Orion Food Vina Company Ltd, Kinh Do Corporation and Bien Hoa Confectionery Company in packaged cake segment and two suppliers confirmed their brand name in the mind of customer as Duc Phat and Tous Les Jours in fresh unpackaged cake

Orion Food Vina Company Limited

It is continued to be the most well-known name in packaged cake segment through Orion Chocopie brand With strong marketing activities continuously, the company owns a strong brand name locally imported from a global well-known one Moreover, with a wide distribution network throughout the country, it was able to reach out to position the market faster than many of its competitors in packaged cake Chocopie Orion and Orion Custas are two brand names become the priority choice of customers (Asia Strategy market research company, 2010)

On the look in the behavior of consumer which prefers foreign famous brand names, South Korea's Orion Confectionery who are one of the three biggest food companies in Korea investing in Vietnam ensure that it continues to grow at a rapid rate through product innovation and ongoing marketing and promotional initiatives (Orion, 2011)

The products of Orion are delivered to 65 countries all over the world Orion with brand name such as Chocopie, Custas, Frespie, Goute, Snack O’tar and Snack are producing and trading in Vietnam market In Vietnam, the company with 100% Korean investment capital specialize in production global well known sweet cake to supply local market demand and export to the countries in South West Asia area Currently, it owns two large production factories in Vietnam located in My Phuoc 3 Industrial Park, Ben Cat District, Binh Duong Province and Yen Phong – Bac Ninh Industrial Zone This is a third largest factory in Asia behind factory in China and Russia Moreover, their factory in Vietnam produces not only for local market also for export product (Orionfoodnvina, 2011)

Kinh Do Corporation

It is a leading confectionery company in Vietnam and be voted as Vietnamese high quality products by consumers in fourteen continuous years With active advertising and branding activities, Kinh Do Corp gained customer trust and loyalty with its high quality and continuous product innovation, even though it is a local company The distribution system of Kinh Do covers all of 64 provinces of Vietnam with over 200 distributors and 75,000 retail outlets Kinh Do products have been exported to more than 35 countries such

as USA, Europe, Australia, Middle East, Singapore, and Taiwan

In 2009, Kinh Do invested more two production lines for producing Cracker and Cup Cake value USD 10 million located Binh Duong in the purpose of high quality product in which Cake (Cup Cake, Layer Cake, Swiss Roll) reaches the production capacity 6 million cakes per day In addition, to approach its ambition maintaining the leader position in packaged food in Vietnam, it intensifies merger and acquisition activities The typical merge is in 2010 to merge North Kinh Do and Ki Do Company into Kinh Do Corporation It is one of the actions prepared to defeat its 30% annual growth rate target (Kinhdo, 2011)

Bibica Confectionery Company

It owns Hura cake production system imported from Europe with capacity 10 tons per day located in My Phuoc Industrial Zone, Binh Duong Province The distribution system covers all of 64 provinces of Vietnam with over 40,000 retail outlets It exclusively cooperates with Vietnam Nutrition Institute in production research rich nutritional products for the health of consumer to target to be the leader in nutrition segment Especially, Bibica

is exploiting the strategic support of main shareholder Lotte Corporation Lotte is one of the Korean largest confectionery corporation in Asia With the role of strategic partner, it supports Bibica in the field of technology, sale and marketing, develop research to upgrade Bibica become the leader in confectionery industry (Bibica, 2011)

ABC Bakery Company

Being a well known brand to Vietnamese, ABC Bakery brand name is heritage by Duc Phat value brand from 1989 and kept customer trust for their choice It has 25 bakery