Vietnam food drink report q1 2011

Nevertheless, the outlook for the food and drink industry remains positive, as investors continue to be attracted to the country’s drink and mass grocery retail sectors in particular.. t

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VIETNAM FOOD & DRINK REPORT Q1 2011

INCLUDING 5-YEAR INDUSTRY FORECASTS BY BMI

Part of BMI’s Industry Survey & Forecasts Series

Published by: Business Monitor International

Publication Date: November 2010

CONTENTS

BMI Industry View 5

SWOT Analysis 7

Vietnam Food Industry SWOT 7

Vietnam Drink Industry SWOT 8

Vietnam Mass Grocery Retail Industry SWOT 9

Business Environment 10

BMI’s Core Global Industry Views 10

BMI Food & Drink Core Views 11

Asia Pacific Risk/Reward Ratings 12

Table: Asia Pacific Food & Drink Risk/Reward Ratings - Q111 15

Vietnam Food & Drink Business Environment Rating 16

Macroeconomic Outlook 17

Table: Vietnam – Economic Activity 20

Consumer Outlook 21

Industry Forecast Scenario 23

Food 23

Food Consumption 23

Table: Food Consumption Indicators – Historical Data & Forecasts 25

Canned Food 26

Confectionery 26

Table: Value/Volume Sales of Selected Food Sub-Sectors – Historical Data & Forecasts 28

Trade 29

Vietnam Food & Drink Trade Indicators – Historical Data & Forecasts 30

Drink 31

Alcoholic Drinks 31

Table: Alcoholic Drinks Indicators 32

Coffee 32

Table: Drinks Indicators 33

Soft Drinks 33

Soft Drinks Indicators 34

Mass Grocery Retail 35

Table: Vietnam MGR Indicators – Value Sales by Format – Historical Data & Forecasts 37

Table: Grocery Retail Sales by Format - Historical Data & Forecasts (%) 37

Food 38

Industry Developments 38

Dairy Sector Experiences Bullish Growth 38

Multinational Investments Abound 39

Rice Exports On The Rise 40

Market Overview 41

Agriculture 41

Food Processing 42

Food Consumption 42

Drink 43

Industry Developments 43

Soft Drinks Catch Eye Of Industry Majors 43

Investments In Beer Production 44

Continued Dependence on Exports 44

Market Overview 46

Soft Drinks 46

Alcoholic Drinks 46

Mass Grocery Retail 48

Industry Developments 48

Regional Retailers Ramping Up Presence 48

Multinational Majors Also Want In 49

Market Overview 50

Table: Structure of Vietnam's Mass Grocery Retail Market by Estimated Number of Outlets 52

Table: Structure of Vietnam's Mass Grocery Retail Market by Estimated Number of Outlets 52

Table: Structure of Vietnam's Mass Grocery Retail Market - Sales Value by Format (VNDbn) 52

Table: Average Sales per Outlet by Format – 2008 52

Competitive Landscape 53

Table: Key Players in Vietnam's Food & Drink Sector – 2009 53

Table: Key Players in Vietnam's Mass Grocery Retail Sector - 2009 54

Company Analysis 55

Food 55

Unilever Vietnam 55

Nestlé Vietnam 56

Masan Food 57

Vietnam Dairy Products Joint Stock Company (Vinamilk) 59

San Miguel Purefoods Vietnam Co Ltd 61

Drink 62

Hanoi Beer Alcohol Beverage Corp (Habeco) 62

Saigon Beer Alcohol and Beverage Corporation (Sabeco) 64

Carlsberg 65

Mass Grocery Retail 67

Metro Cash & Carry 67

Saigon Co-op 68

BMI Food & Drink Methodology 70

Table: Returns 71

Table: Risks 72

Weighting 72

Table: Weighting 73

BMI Food & Drink Industry Glossary 74

Food & Drink 74

Mass Grocery Retail 74

BMI Food & Drink Forecasting and Sources 76

How We Generate Our Industry Forecasts 76

Sources 77

BMI Industry View

Vietnam's economy recorded an impressive 6.3% y-o-y real GDP growth in Q210, followed by a than-expected 7.4% y-o-y in Q310 These latest figures remain in line with our view that private

better-consumption and infrastructure investments would continue to drive economic growth Given that Q310 figures were above expectations, we are revising our real GDP forecast upwards to 6.0% for 2010 However, our real GDP forecast for 2011 remains at 5.5% in anticipation of a slowdown in external demand Although these figures are very impressive, we are increasingly concerned over the threat of higher inflation and widening current account and budget deficits Food price inflation is of particular concern owing to the impact this will have on spending in the food and drink sector in the short term Nevertheless, the outlook for the food and drink industry remains positive, as investors continue to be attracted to the country’s drink and mass grocery retail sectors in particular

Headline Industry Data

ƒ 2010 food consumption growth = +11.8%; forecast to 2015 = +71%

ƒ 2010 alcoholic drink value sales = +6%; forecast to 2015 = +46.4%

ƒ 2010 beer volume sales = +2.8%; forecast to 2015= +36.2%

ƒ 2010 mass grocery retail sales = +13.2%; forecast to 2015 = +81.1%

Key Company Trends

Dairy Sector Continues to Attract Investments – In August it was reported that in order to exploit the

rewards on offer in the country's dairy sector, Vietnam's largest dairy producer, Vinamilk, has started

construction on a US$120mn milk factory in the southern Binh Duong province, which should allow Vietnam to gradually reduce its import dependency over the long term The new factory will have a capacity of 400mn litres of milk per year when it becomes operational in 2012, and is expected to double its capacity by 2017 The company is also planning to increase its stock of milk cows to 80,000, which will allow it to boost its milk supply by 1.3mn litres a day This was followed by a September

announcement by Vinamilk that it has invested in acquiring a 19.3% stake in New Zealand’s Miraka Limited, in order to ease domestic milk supply shortages Vinamilk’s initial investment will be of

NZD121mn (US$88.2mn) in a new Miraka dairy processing plant, which will commence operations in August 2011, and will have a production capacity of up to 32,000 tonnes of milk powder annually

Beer Sector Expansions – Vietnam’s dynamic beer sector continues to attract foreign investors, and in

August it was reported that Asia Pacific Breweries (APB), the joint venture (JV) between Heineken and Fraser & Neave, doubled its beer bottling capacity to 50,000 bottles an hour at its brewery in Danang,

through its domestic beer operations Vietnam Brewery Limited (VBL) in a clear bid to capitalise on the

sector's strong growth potential.Ongoing expansionary investment by multinational and domestic

brewers alike bodes well for the sector's long-term growth prospects as they seek to meet the growing beer demand and to improve the affordability of domestically-produced alcoholic drinks

Key Risks to Outlook

Infrastructure Upgrades Urgently Needed – The success of government initiatives to promote

alternative sources of growth will be heavily dependent on Vietnam's infrastructure

developments over the coming years Despite witnessing relatively strong real GDP growth in recent years, chronic power shortages and congested roads are evidence that the economy faces risks of overheating, as well as operational bottlenecks for businesses The government's master plan for seaport development will require around US$4bn to build additional ports by 2020, and foreign direct investments are expected to play a major role The government has been running persistent fiscal deficits in recent years, and has increasingly turned to the Public-Private Partnerships (PPP) model to finance the country's growing demand for infrastructure investments in the coming years

Inflation Creeping Up – Food price inflation has become a growing concern as the food and foodstuff

component of the CPI rose by 10.8% y-o-y in September, compared with 9.6% and 10.0% in July and August respectively Although regional economies are also witnessing a steady increase in food prices,

we note that Vietnam is in a much more fragile situation With inflation remaining persistently high at more than 8.0%, we see growing risks that the central bank may be forced to hike rates aggressively if inflation expectations get out of hand

SWOT Analysis

Vietnam Food Industry SWOT

Strengths ƒ 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 the likes of Unilever, Nestlé and San Miguel

ƒ Vietnamese consumers, particularly the young and affluent, are interested in brands and, accordingly, renowned Western products backed by investment in marketing and promotions tend to have highly successful launches

ƒ The wealthy urban centres of Hanoi and Ho Chi Minh City now provide highly receptive consumer audiences

ƒ 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

ƒ The economic boom has lifted many Vietnamese out of poverty, with the official poverty rate in the country falling from 58% in 1993 to 20% in 2004

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

consumption patterns vary significantly according to income

ƒ The food-processing industry remains largely fragmented except for a few key sectors, such as dairy and confectionery

ƒ 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

ƒ 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

ƒ The lack of white goods among large sections of the consumer base slows down the development of the high-potential dairy sector

Opportunities ƒ 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

ƒ Rising income levels and changing lifestyles, particularly in urban areas, are increasing consumer demand for snacks, convenience and luxury food items

ƒ 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

ƒ The country’s agricultural sector is in need of significant investment and willing investors can expect assisted entry

ƒ A growing tourism sector fuels interest in convenience categories

Threats ƒ Vietnam’s WTO membership may result in smaller companies unable to cope with

the increased competition being forced out of business

ƒ Inflation and deficit concerns have caused some investors to re-assess their hitherto upbeat view of Vietnam If the government focuses too much on stimulating growth and fails to root out inflationary pressure, it risks prolonging macroeconomic instability, which could lead to a potential crisis

ƒ Rising agricultural commodity costs will remain a risk for the profitability of processed-food manufacturers; farmers themselves also claim this as a threat, with the primary level reportedly seeing little in the way of these higher prices

Vietnam Drink Industry SWOT

Strengths ƒ Vietnamese consumers, particularly the young and affluent, are interested in brands,

and, accordingly, renowned Western products backed by investment in marketing and promotions tend to have highly successful launches

ƒ The wealthy urban centres of Hanoi and Ho Chi Minh City now provide highly receptive consumer audiences

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

ƒ Vietnam has been one of the fastest-growing economies in Asia in recent years, with GDP growth averaging 7.6% annually between 2000 and 2009

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

consumption patterns vary significantly according to income

ƒ The drinks industry remains largely fragmented except for a few key sectors, such as alcoholic and soft drinks

ƒ 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

Opportunities ƒ 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

ƒ 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

ƒ A growing tourism sector is fuelling interest in convenience categories, in addition to sub-sectors such as soft and alcoholic drinks

ƒ In line with consumers’ rising disposable incomes, there are opportunities for premium-branded products in the soft and alcoholic drinks sub-sectors

ƒ The global trend towards health-consciousness provides an opportunity for drinks manufacturers to diversify into perceived healthier options

Threats ƒ Vietnam’s WTO membership may result in smaller companies unable to cope with

the increased competition being forced out of business

ƒ Rising raw-material costs threaten profitability in this competitive market in which higher prices cannot easily be passed on to consumers

ƒ Prolonged macroeconomic instability could prompt the authorities to put reforms on hold, as they struggle to stabilise the economy, making the market less attractive for international investors

Vietnam Mass Grocery Retail Industry SWOT

Strengths ƒ The potential size of the MGR market makes it an attractive target for foreign

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

ƒ Hypermarkets, supermarkets and convenience stores have all proved popular in Vietnam, catering to different types of consumers and different shopping occasions

ƒ A growing multinational presence in the retail sector has aided the acceptance of modern retail best-practices in Vietnam, particularly things like added-value in-store services

ƒ Vietnamese economic growth has averaged 7.6% annually since 2000, fuelling a steady middle class emergence and growing consumerism

ƒ The economic boom has lifted many Vietnamese out of poverty, with the official poverty rate in the country falling from 58% in 1993 to 20% in 2004

ƒ The formation of buying groups has proved an effective means of facilitating quicker expansion among smaller industry players

Weaknesses ƒ Vietnam’s retail distribution networks remain underdeveloped and

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

ƒ 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

ƒ Poverty levels among the country’s vast rural population hugely inhibit the potential audience size for modern retail in Vietnam

ƒ Vietnam remains one of the world's most corrupt countries Its score in Transparency International's 2010 ‘Corruption Perceptions Index’ was 2.7, placing it in 22nd place

in the Asia-Pacific region

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

grows, this format will represent an immense growth opportunity

ƒ Modern retail is currently focused on the major urban centres of the north and south, which still boast space for new entrants, and central Vietnam and the provinces provide further opportunities still

ƒ Modern retail concepts, such as discounting and private labelling, should prove popular with price-conscious Vietnamese consumers as familiarity with modern retailing builds

ƒ Rapid urbanisation and the development of new housing complexes provide ideal locations for the rolling out of modern retail outlets with a large and receptive audience

Threats ƒ Were industry majors Tesco, Carrefour and Wal-Mart all to enter Vietnam, the

window of opportunity for other entrants would rapidly close

ƒ 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

ƒ Inflation and deficit concerns have caused some investors to re-assess their hitherto upbeat view of Vietnam If the government focuses too much on stimulating growth and fails to root out inflationary pressure, it risks prolonging macroeconomic instability, which could potentially lead to a crisis

Business Environment

BMI’s Core Global Industry Views

Developments within the global food and drink industry in the past three months have continued to reflect

and support BMI's core industry views In major developed markets, fiscal austerity measures and slow

recovery in employment continue to weigh on our expectations for growth in the medium term However, over the last quarter, emerging markets have again demonstrated their ability to outperform the wider market and have continued to attract investment One major trend during the quarter has been the

increased role of private equity groups in the food and drink sector, which we think is indicative of its

‘safe haven’ status and the uncertainty surrounding the strength of the wider economic recovery

In many markets the strength of the recovery has disappointed, with little sign of resurgence in consumer demand across the US, Western Europe or emerging markets that were particularly hard hit by the

downturn, such as Venezuela and Romania In line with our wider economic outlook and our core term view, we believe the recovery in demand will continue to be muted Our caution can be traced to the fact that unemployment in many markets remains high and shows little sign of retracing, with companies still wary about the strength of the recovery and holding back on hiring Meanwhile, many consumers who are still in employment have yet to be hit in the pocket by the downturn, but this is set to change as fiscal austerity measures are implemented

short-Over the last few months, emerging markets have again shown their importance, delivering significant outperformance over their developed market peers, in line with our core long-term view However, even

in those markets that bounced back strongly from the global downturn, such as Brazil and China, we remain cautious, due to signs of slowing growth in H210 as the knock-on effects from a weaker US and eurozone weigh on global demand Despite this relatively subdued short-term outlook, the long-term picture is undoubtedly favourable and investment continues to flow into the most attractive regions

Our core view that government legislation will continue to play a role in marginalising unhealthy foods and drinks has come to the fore in the alcoholic drinks sector over the latest quarter, with a rise in excise duties in several key markets This trend is likely to have been accelerated by a drop in tax revenues as a result of the downturn, with excise duties an easy way for governments to help prop up their tax income Perhaps the most significant movement has been in Russia, where restrictions on the sale of alcohol and hefty tax hikes have led to higher average prices and a significant drop in consumption, while other markets hit by tax hikes include Turkey, Greece and Spain

BMI Food & Drink Core Views

Short-term Outlook

Consumer demand in developed markets remains too weak to support a strong rebound in sector growth

A stuttering recovery in the US and Eurozone will increasingly way on the performance of emerging markets

Commodity price volatility will continue to affect producer earnings

Premiumisation will remain on hold

Private labels and off-trade alcoholic drinks will outperform their respective sectors

Discount grocery retailers will continue to gain market share

Government fiscal policy – austerity – will be unsupportive of industry growth

Government monetary policy – the reduced likelihood of further rate hikes – will help limit demand destruction

Major takeovers will remain scarce, leaving room for the private equity sector to step in

We continue to favour private consumption-led economies, over export-oriented states for consumer goods investment

Long-term Outlook

Companies with strong emerging market exposure will continue to outperform

Emerging market multinationals will increasingly pursue frontier market investments

Tension between producers and retailers will remain

Investment in innovation will increase as producers seek differentiation; emphasis will be placed on protecting

innovations

Brand builders will continue to leave sectors under threat from private labels

Government legislation will play an increasing role in marginalising unhealthy food and beverage products; notably alcohol

Demand for convenience in retail and food will continue to grow

Functional foods will be the highest growth sector in developed markets

Consolidation will continue as producers seek greater efficiencies

Beverage companies will continue to invest in diversification away from carbonated beverages and into healthier sectors

sub-Source: BMI

Asia Pacific Risk/Reward Ratings

We have often noted that many food

and beverage companies need to

strengthen their emerging market (EM)

exposure to sustain an impressive

growth trajectory over the long term

Emerging Asian economies, in

particular, are expected to outperform

markedly as compared to their global

EM peers Indeed, the ongoing flurry of

food and beverage investments in the

emerging Asian region are further

evidence of the very promising growth

prospects on offer here

With this in mind, BMI has identified

the markets that we consider to be the

most exciting regional growth stories,

while highlighting the relatively

immature markets that continue to offer

very bright medium-to-long-term

investment prospects that investors cannot afford to ignore This quarter (Q111), our Asian EM favourites China and India continued to score high in our ratings, while economies characterised by high investment risks and low per capita spending, such as the Philippines and Pakistan, remained at the bottom of our ratings ladder

China Tops Our Chart Again, Pakistan

Rise Of The Emerging Asian Giants

Given that we cannot talk about

emerging Asia without mentioning the

enormous growth drivers China and

India, it is unsurprising that they have

outperformed once again in terms of

investment opportunities Strong

forecast economic growth, favourable

demographic profiles and robust

growth in headline food consumption

levels in China and India have made

these economies enormously

attractive, as the flurry of investment

activities in recent years has

underlined

The two Asian giants, however,

present markedly different risks to

investors Despite India's solid

performance in terms of opportunity, the country's still-restrictive industry regulations and very weak distribution infrastructure have continued to hamper its prospects of enjoying a similar top-spot ranking to China This also explains India's mid-table position in our regional Risk/Reward ratings China,

comparatively, performs better in terms of its Risk score, which is 13 points higher than India's We believe this could be largely attributed to China's improving distribution infrastructure, favourable

monetary policy and a relatively well-developed labour market (compared to India's)

Developed States – Not To Be Left Out

We maintain that balanced geographic portfolios – that is, a diversified footprint across developed

economies and EMs – will play an increasingly important role in the regional growth strategies of

multinationals and this necessitates a relative look at developed economies in the Asia Pacific region Developed states such as Australia, Japan and Taiwan have been dominating the upper half of our ratings table due to their relatively low-risk business environments and high existing spending levels (which EMs have not been able to match thus far) These countries' developed infrastructure, higher-skilled labour force, stable financial and business systems and openness to foreign investment are reasons why we like these economies, despite the relatively modest growth opportunities on offer

South Korea, interestingly, boasts a higher Risk/Reward rating when compared to many of its market peers and its higher food and beverage spending levels relative to developing Asian economies further endorses its favourable position In an increasingly-developed economy like South Korea, we believe there is still scope for considerable growth

developed-India Underperforms In Risk Terms

Asia Pacific Food & Drink Risk/Reward Ratings

– Q111

Source: BMI

By contrast, mature markets like Singapore and Hong Kong miss out on these dynamics due to their high level of market maturity and small population size (which translate into limited growth opportunities) These characteristics largely offset the benefits of a low-risk investment environment and a high

propensity to spend among consumers in these economies

Thailand And Indonesia – Very Bright Prospects

Thailand and Indonesia are other bright medium-term investment prospects that continue to enjoy table positions in our regional Risk/Reward ratings The shaky political situation in Thailand and its poor physical infrastructure continue to plague the country's appeal to investors and have caused it to slip slightly in our ratings table this quarter Yet Thailand's high tourism levels, healthy economic growth forecast and moderately-strong per capita food consumption growth will continue to fuel the dynamism within the country's food and drink sector, making it a very enticing investment destination in our view Another attractive investment prospect, in our opinion, is Indonesia Notably, Indonesia outperforms Thailand in terms of Rewards, but fares relatively poorly with regard to risk At present, Indonesia suffers from low existing consumption levels and limited growth opportunities in its alcoholic drinks sector owing to its large Muslim population Furthermore, corruption and perceived excessive bureaucracy will continue to blight the country's business environment, while security risks also remain That said, it should be noted that Indonesia's forecast food consumption growth remains at a respectable level and its favourable demographics suggest that the popularity of soft drinks and processed foods will continue to soar

mid-Pakistan – Rooted To The Bottom

Pakistan, on the other hand, remains rooted to the bottom of our Risk/Reward ratings table given its poor showing in terms of Risks and a relatively low score of 45 for Rewards Pakistan's large population size and the immature nature of its food and drink sector have failed to offset the country's very low food and beverage consumption level The situation is just as bleak on the Risk side, as Pakistan's excessive red-tape, widespread corruption and underdeveloped labour market remain key challenges for investors to overcome before they can fully tap the country's EM potential

Looking Ahead

It should be acknowledged that our Risk/Reward ratings paint only a near-medium-term picture and the continued dynamism and improving business environment conditions of our favourite EM economies such as India, Indonesia and Vietnam should push these countries up the ratings table beyond our current five-year forecast period, potentially outperforming their developed market peers that have consistently dominated the top-spots in our Risk/Reward ratings table

Table: Asia Pacific Food & Drink Risk/Reward Ratings - Q111

Industry Rewards

Country Rewards Rewards

Industry Risks

Country Risks Risks

Risk/Reward Rating

Regional Ranking

Source: BMI Scores out of 100, with 100 highest For full methodology see Appendix at the back of our Food & Drink Quarterly Reports,

or visit our online service

Vietnam Food & Drink Business Environment Rating

Vietnam once again holds 10th place in BMI’s Q111 Food & Drink Risk/Rewards Ratings for the Asia

Pacific region, a position it shares jointly with Singapore Vietnam has not managed to climb up our rankings, as it continues to perform rather poorly on both the Risks and Rewards indicators

Vietnam receives a score of 53 for the Rewards indicator, which places it in the bottom half of the region The country continues to be held back by very low levels of spending on food and soft and alcoholic drinks, largely as a result of the country’s majority rural population Huge income disparities continue to restrict medium-term spending growth, despite the gradual emergence of a growing middle class On the bright side, these very low current levels of consumption leave tremendous room for growth and also reflect the lack of market maturity, which is very attractive for investors willing to wait for long-term returns Furthermore, the country benefits from a very appealing food and drink trade balance

Although Vietnam does slightly better when it comes to the Risks indicator, this score is still very low by regional standards, placing it above only India and Pakistan Vietnam remains one of the world's most corrupt countries Its score in Transparency International's 2010 ‘Corruption Perceptions Index’ was 2.7, placing it in 22nd place in the Asia-Pacific region High levels of bureaucracy and poor labour and distribution infrastructure are also of concern Yet the government is looking to improve the situation, recognising the importance of investing in infrastructure, and is making headway to improve this by starting construction on a number of ports, power plants and road projects Furthermore, food and drink producers face few barriers to entry and a reasonably relaxed regulatory environment It should be noted that despite the risks associated with doing business in Vietnam, the country is increasingly attracting investment from key Asian economies, such as Japan, South Korea and Taiwan, with the number of investors interested in the country expected in increase in coming years

Macroeconomic Outlook

Private Consumption And Infrastructure Investment Cushion External Weakness

BMI View: Economic indicators in July provided an optimistic outlook for Vietnam's economic growth in

H210 We believe private consumption and investment in infrastructure development will continue to be the main drivers of economic growth However, we see external demand weakness leading to a widening

of the trade deficit, which will be a drag on growth Therefore, we are maintaining our real GDP growth forecast of 6.0% and 5.5% for 2010 and 2011 respectively

Vietnam recorded an impressive real GDP growth of 6.3% y-o-y in Q210 as the economy heads towards the government's growth target of 6.5% for 2010 Economic indicators in July also reinforced the

government's aggressive target after industrial production came in at a better-than-expected 16.0% y-o-y

in July To a certain extent, the encouraging numbers helped to alleviate concerns that weakening external demand from the US and EU would be a drag on the economy Industrial production accelerated after slowing down for three consecutive months, falling from 5.0% m-o-m in April to 3.3% and 2.2% in May and June respectively This prompted the Vietnamese government and the State Bank Of Vietnam (SBV)

to exert pressure on commercial banks to lower lending rates in June However, we expect loan growth to remain weak on a historical basis in H210 due to the threat of higher inflation, which forces commercial banks to keep lending rates high at around 12-14% Therefore, we do not see business investments contributing significantly to industrial production growth going forward Instead, we see private

consumption and government-supported infrastructure investment as the main drivers of economic growth in H210

Retail Sales and Tourist

Arrivals Point To Strong

Domestic Demand

Retail sales came in at 35.3%

y-o-y in July, reflecting the strong

momentum in consumer demand

We see retail sales as a relatively

good indicator of consumer

demand as private spending

makes up 85.8% of the indicator

Given that retail sales tends to

accelerate in the second half of

the year largely due to the

holiday season, we believe

private consumption will play a

more significant role in providing

support for economic growth in

H210 We note that the retail

sector is heavily dependent on tourist arrivals As the accompanying chart shows, the correlation between

tourist arrivals and private consumption is strong

Tourist arrivals rose 47.5% y-o-y

in July, in line with strengthening

retail sales figures The tourism

industry's pace of growth also

highlighted the industry's

growing potential as a source of

economic growth for Vietnam

The government announced in

July that it has set a target for Ho

Chi Minh City to host four

million foreign visitors by 2015,

raising the tourism industry's

revenues from an expected

US$2.1bn in 2010 to US$3.15bn

by 2015 (see 'Infrastructure

Development Key To Sustaining

Growth', July 13 2010) We

believe the government's tax

Picking Up The Pace

Vietnam – Industrial Production, VND bn (LHS)

& % chg y-o-y (RHS)

Source: General Statistics Office, BMI

Poised For A Strong Bounce

Vietnam – Tourist Arrivals (LHS) &

Retail Sales VND bn (RHS)

Source: General Statistics Office, BMI

policies aimed at promoting investment in the tourism sector will continue to provide support for the industry's growth in H210

Infrastructure Development To Support Construction Industry And Jobs Growth

In a previous report (see 'Aggressive Government Policies Risk Overheating', July 2), we highlighted that

infrastructure projects that are already initiated, such as the construction of a number of ports, roads and thermal power plants, will continue to provide support for the construction sector in H210 and 2011 We believe growth on this front will help to support demand for building materials such as cement and steel, which Vietnam produces domestically, thus having positive spill over effects Indeed, looking at the breakdown of industrial production data in July, cement production increased by 27.4% y-o-y, while steel production remained stable at 1.5% y-o-y

External Demand Weakness

Supports Forecast

In line with our view that strong

private consumption will drive

domestic demand in H210, we

expect the trade deficit to widen

in 2010 The construction sector's

need to import large quantities of

materials and capital goods for

ongoing infrastructure projects

will also keep imports elevated

over the coming month

Furthermore, with Vietnam's

exports remaining concentrated

on the US and EU, the country's

trade deficit looks set to widen

significantly based on our view of

a slowdown in the US and EU in H210 (see chart) The widening trade deficit will no doubt be a drag on

Vietnam's economic growth in H210 Therefore we are maintaining our real GDP growth forecast for

2010 at 6.0%, slightly lower than the government's target of 6.5%

A Cause For Concern

Vietnam Exports and Imports Growth, % chg y-o-y

Source: General Statistics Office, BMI

Table: Vietnam – Economic Activity

Nominal

GDP,

VNDbn 2 974266.2 1144014.6 1478695.0 1645481.0 1869502.9 2103348.3 2344535.7 2625877.9 2926496.6 Nominal

Consumer Outlook

Vietnam’s consumer outlook appears relatively positive over our five-year forecast period as confidence will be regained on the back of an economic recovery Recent GDP growth figures have been very strong, and while a breakdown of growth by expenditure is unavailable, we believe that private consumption is booming and is set to bolster domestic demand moving forward, as confidence continues to improve and interest rates remain accommodative While our GDP growth outlook remains positive, we are growing increasingly concerned over the threat of higher inflation and widening current account and budget deficits Consumer price inflation (CPI) is increasingly becoming a concern, and we believe that the overheating economy will see accelerating CPI going into 2011 This suggests that the central bank will

be forced to hike interest rates aggressively to cool the economy Coupled with an expected slowdown in external demand, this will slow economic expansion into 2011, and could dampen consumer confidence

in the short term

Vietnam has been one of the fastest-growing economies in Asia in recent years, with GDP growth

averaging 7.6% annually between 2000 and 2009 This economic boom has lifted many Vietnamese out

of poverty, with the official poverty rate in the country falling from 58% in 1993 to 20% in 2004 It has also led a growth boom in the retail sector, with a far wider variety of products now available to

consumers In recent years processed food and drink products and modern retail outlets have been rapidly gaining popularity Vietnamese consumers, particularly the young, urban and affluent, are interested in brands, and, accordingly, renowned Western products backed by investment in marketing and promotions tended to be very successful

Economic growth and consumer

confidence both took a hit during the

economic downturn, with low

consumer confidence and inflation

effecting retail sales This drop in

confidence and slowdown of demand

was felt in the food and drink sector,

with companies reporting losses and a

slowdown of growth, with inflationary

pressures adding to difficulties

However, looking forward, the outlook

is considerably brighter, although food

price inflation does remain a concern

According to data released in June by the General Statistics Office Of Vietnam we see evidence of a strong pick up in private consumption in the coming months Retail sales rose 26.7% y-o-y in June,

Macroeconomic Indicators

2005-2014

e/f = BMI estimate/forecast Source: IMF (General Statistics Office)

underlining the effervescent state of consumer confidence in the economy and strong domestic demand, while data from September showed that retail sales figures registered a 2.4% m-o-m increase We note that retail sales have traditionally been an accurate indicator of private consumption Thus, resilient retail sales figures in September suggest to us that private consumption will remain a key factor driving

domestic demand However, CPI figures for September show a 8.9% y-o-y rise, largely due to surging food prices We note that the SBV's decision to devalue the Vietnamese dong by 2.0% in August also had

a direct impact on import prices Therefore, we believe the 1.3% m-o-m surge in September could be a one-off and CPI figures in October should provide a clearer picture on the trend of consumer prices in the coming months Nonetheless, we continue to see evidence of inflationary pressures due to the Vietnamese government's expansionary policies

Our long-term outlook for Vietnam’s retail sector remains bullish Urbanisation will continue to be a long-term growth driver, with the UN forecasting the urban population to rise from 29% of the population

to more than 50% by the early 2040s A major driver behind our strong long-term outlook is the

increasing amount of foreign investment we expect Vietnam to receive in the retail sector in coming years The country has been very successful in attracting multinational investment in spite of its often-restrictive foreign investment policies and underdeveloped infrastructure This investment has led to job creation, which in turn has led to the emergence of a new consumer class in the country – in major urban centres at least – which has an interest and can afford to participate in modern consumption methods

Risks To Outlook

While we remain optimistic on Vietnam's long-term economic growth, we note that the success of

government initiatives to promote alternative sources of growth will be heavily dependent on Vietnam's infrastructure developments over the coming years Despite witnessing relatively strong real GDP growth

of 5.3% in 2009, chronic power shortages and congested roads are evidence that the economy faces risks

of overheating as well as operational bottlenecks for businesses In particular, businesses that are reliant

on a stable supply of electricity and smooth logistics (such as the MGR industry) may struggle to

maintain efficiency and stay competitive in the coming years Most importantly, we are increasingly concerned that the government's failure to make infrastructure investments in time due to its growing debt could greatly limit the economy's potential for growth We believe infrastructure development in Vietnam remains pertinent in raising the country's productivity and keeping inflationary pressures in check

Food price inflation is another concern The food and foodstuff component of the CPI rose by 10.8%

y-o-y in September, compared with 9.6% and 10.0% in July-o-y and August respectively-o-y Although regional economies are also witnessing a steady increase in food prices, we note that Vietnam is in a much more fragile situation With inflation remaining persistently high at more than 8.0%, we see growing risks that the central bank may be forced to hike rates aggressively if inflation expectations get out of hand

Industry Forecast Scenario

Food

Food Consumption

Vietnam has weathered the global

financial storm relatively well, with the

economy recording stronger than

expected GDP growth of 7.4% y-o-y in

Q310, supported by robust growth in

the construction and manufacturing

sectors In fact, Vietnam has been one

of the fastest-growing economies in

Asia in recent years, with GDP growth

averaging 7.6% annually between 2000

and 2009 This economic boom has

lifted many Vietnamese out of poverty,

with the official poverty rate in the

country falling from 58% in 1993 to

20% in 2004, while also fuelling the growth of a middle glass and a growing appetite for consumerism

Looking ahead, food consumption in Vietnam is forecast to experience strong growth of 71% between

2010 and 2015 at which point consumption is expected to reach VND487,941bn Meanwhile, per capita food consumption is forecast to grow by an impressive 62.8% over the same time period, reaching a fairly modest VND5,256,287 by 2015, reflecting the low starting base Food consumption as a percentage of GDP is expected to decrease slightly from an estimated 15% in 2010 to 13.5% in 2015 as incomes grow Over time, the continued investments in the country’s food, beverage and retail industries will ultimately stimulate food consumption growth However, in the short term, food prices are expected to remain low, with modern retail remaining beyond the reach of the average Vietnamese consumers, who continue to live in rural areas and can only afford essential food and drink items

Beyond 2015, investment in the agricultural sector should help improve living standards outside of the major cities Investment in agriculture is an area in which Vietnam’s government can take much credit, and the improvements in agricultural output seen in recent years is a major reason why Vietnam has been second only to China within the region in terms of y-o-y GDP growth However, domestic processing is

an area that could be considerably improved to help the agricultural sector realise its full potential This would take pressure off the need to import luxury goods like chocolate, while giving the Vietnamese economy a chance to ease its current account deficit

Food Consumption

2005-2015

NB Excludes beverage consumption e/f = BMI estimate/forecast Source: General Statistics Office of Vietnam, BMI

The ongoing expansion of the mass grocery retail (MGR) 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 BMI upwardly revised its food consumption figures for

Vietnam in Q208 following the release of segmented household expenditure figures by the General Statistics Office of Vietnam (GSO) These figures reflect reported food and beverage spending; however,

BMI would urge some caution when viewing the figures, owing to the potential for under-reporting of far

lower consumption levels among some rural groups We will continue to benchmark GSO data against other available sources to provide the most accurate assessment of the food consumption outlook

Looking further ahead, we expect foreign investment into the manufacturing sector to continue to drive growth over the next 10 years, and to help Vietnam move up the value-added chain as the advantages of sourcing production in the country become apparent for a wider range of manufacturing firms However,

we believe the global environment will be less conducive to external demand-driven economies in the years to come, meaning that Vietnam will not be able to reach real GDP growth rates above 8.0% as seen

in 2004-2007

However, in the food sector we do expect a return to a more familiar growth trajectory in 2011 and beyond, supported by favourable population demographics (Vietnam has a young and high-growth population), which should guarantee a receptive and growing audience for branded food and beverage products in the medium term

Table: Food Consumption Indicators – Historical Data & Forecasts

Canned Food

BMI is currently forecasting very

strong value growth of 50.3% in

Vietnam’s canned food industry, as

well as strong volume growth of 29.1%

between 2010 and 2015 The majority

of this demand will continue to come

from the country’s urban centers, as

increasingly busy lifestyles fuel the

demand for convenience foods

Vietnamese consumers are

experiencing a growing awareness of

hygiene concerns and food origin as

their living standards improve and

numerous health scares beg their greater caution This will further encourage consumers to purchase processed foods over fresh produce, while strong investment in this sector from both domestic and international operators should also 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, as canned and processed foods are up to 20-30% cheaper than fresh ingredients, with major retailers such as

Saigon Co-op reporting a recent spike in sales

Confectionery

The confectionery sector continues to

be one of the most dynamic in

Vietnam’s food and drink industry,

demonstrating enormous growth

potential to 2015 Over our forecast

period we are forecasting growth of

18.5% in volume sales, and far higher

growth of 49.9% in value sales in local

currency terms, reflecting growing

premiumisation Chocolate sales will

contribute most to this growth, with

value sales growth of 64% expected our

forecast period, while sugar

confectionery sales are forecast to

experience the lowest growth rate of 10.3%

Canned Food Sales

While annual confectionery sales growth slowed to an estimated 4.9% in 2009, as demand for

discretionary items abated amid economic uncertainty and lower tourist numbers, looking ahead to 2015

we expect robust demand growth to return, thanks to rising incomes, a large youthful population and ongoing urbanisation

Rising disposable incomes will encourage the consumption of these non-essential goods, while continued exposure to Western brands and consumption habits will also contribute to the growth of the industry The latter driver will in particular be responsible for value sales growth, since it should lead to the

emergence of new premium and added-value brands, which carry higher sales prices Companies such as

South Korea’s Orion Confectionery and Lotte Confectionery, which are planning investments for the

industry, should ensure that it continues to grow at a rapid rate through product innovation and ongoing marketing and promotional initiatives

Meanwhile, Vietnam is investing heavily in its cocoa industry, which should help the confectionery sector With many countries in the region experiencing moderate-to-high GDP growth, the appetite for luxury goods has increased exponentially However, cocoa production within the region is nowhere near high enough to meet this demand, resulting in the need to import cocoa and value-added derivatives from further afield The existence of a strong cocoa industry in the area would not only benefit Vietnamese cocoa farmers, it would also give rise to the opportunity for investing in cocoa processing and value addition Moreover, neighbouring countries will have access to a supply of value-added cocoa at a

relatively cheap price Not only would this feed the growing demand for luxury confectionery, resulting from strong economic performances, it could also improve trade relations in the region, thus leading to further investment

Table: Value/Volume Sales of Selected Food Sub-Sectors – Historical Data & Forecasts

Trade

The outlook for Vietnam’s food, drink

and tobacco trade balance remains

strong, as the country is forecast to

maintain a healthy and growing trade

balance While exports are forecast to

experience growth of 58.3% between

2010 and 2015, imports are forecast to

experience growth of 56.7% over the

same period, although it should be

noted that export growth is growing

from a much higher base

A major driver behind the growth in

exports is the sustained government efforts to improve local food production and agricultural industries This will boost output and make more produce available for export, as well as improving the quality competitiveness of local exports However, it should be noted that the global financial crisis is now forecast to affect demand for Vietnamese exports in the short term, as weak growth in G3 markets will weigh on exports and prevent a marked improvement in net exports in spite of the devaluation of the dong

In the long term, increased urbanisation and continued exposure to Western influences are expected to result in growing import demand, while 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 2015, the government will be hopeful that its investments, and its 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

In the coming year, we expect upward pressure on rice prices, as we see a possibility that India, which has

in recent years alternated with Vietnam as the second-largest rice exporter in the world after Thailand, will have to import rice for the first time in 21 years after a dismal monsoon Adverse weather is also hurting domestic production in the Philippines, the largest rice importer in the world, with these

developments having an impact on Vietnam’s trade balance With strong demand on the export market for Vietnam’s rice, due to the poor outlook for India’s 2010 rice crop and threats of drought in Indonesia, prices may rise rapidly and this should mean an increase in export revenues in 2010

Imports Exports, Balance

2006 - 2015

Vietnam Food & Drink Trade Indicators – Historical Data & Forecasts

Drink

Alcoholic Drinks

The outlook for Vietnam’s alcoholic drinks industry remains very strong, as it continues to attract

considerable interest from foreign investors A number of industry majors have been attracted by bright outlook, with rising domestic consumption fuelled by strong economic growth and a fast-growing tourist industry With private consumption estimated to contribute four percentage points to economic growth in

2010 – dwarfing government spending and net exports – our expectations of Vietnamese domestic

demand strength further underscore our confidence on Vietnam's drinks sector growth

Currently we are forecasting an increase of 36% in volume sales between 2010 and 2015, while value sales are forecast to experience stronger growth of 46.4% as consumers will begin to trade up to higher value drinks along with rising disposable incomes Beer will continue to dominate the alcoholic drinks sector, accounting for the vast majority of volume sales, and will be 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 growth of 36.2% to 2015 Vietnam is an attractive market for beer producers owing to its high economic growth and its population’s increasing disposable personal incomes Meanwhile, growing tourism and a large expatriate population are also having a strong impact According to the Vietnam Alcohol, Beer and Beverage Association, per capita consumption is estimated to have reached around 28 litres by 2010

However, volume sales growth in the wine and spirits industry will also be strong over the forecast period

to 2015, albeit developing from much smaller bases Both are fairly immature industries, which have been held back by an absence of multinational investment and their relatively higher price tags However, both these factors are expected to decline in importance over the forecast period, as alcoholic drinks

manufacturers in Vietnam diversify away from beer and into less mature, higher-growth categories, and

as rising consumer incomes begin to erode consumer price sensitivity

Table: Alcoholic Drinks Indicators

Per capita beer consumption

2008 Over the same period, domestic consumption increased almost three-fold However, at just 7% of total output in 2008, domestic consumption levels leave coffee farmers export-dependent, while changing global coffee industry dynamics – not to mention recognition of the wealth of internal opportunities available – have underlined the need for producers’ associations to take steps to rectify this imbalance

That Vietnam represents a strong growth opportunity for domestic producers is not in doubt Strong GDP growth is fuelling demand for aspirational food and beverage products, with the availability of coffee in the local market only serving to further drive this demand Furthermore, Vietnam has a young population, for whom visiting cafés and drinking coffee is a growing lifestyle choice Between 2010 and 2015 we expect the sale of hot drinks (both coffee and tea combined) to increase by 71.8% in value terms as these drinks become increasingly popular, fuelled by advertising and marketing campaigns

Tapping into this immense opportunity is not, however, the only concern; exporters have been forced to contend with growing demand for higher-quality arabica coffee beans among leading importers as global wealth increases, while Vietnam produces mostly robusta beans Of course, still-restrictive disposable income levels in emerging markets mean that the substitution of robusta for arabica is not an immediate one, yet an increased demand for quality has led to the marginalisation of robusta beans in some blends

Table: Drinks Indicators

2008e 2009e 2010f 2011f 2012f 2013f 2014f 2015f

Hot drink sales

(VNDmn) 5,296,536 5,659,305 6,337,927 7,585,524 8,311,556 9,114,130 9,973,816 10,889,050 Hot drink sales

NB Combined tea and coffee sales only available data e/f = BMI estimate/forecast Source: General Statistics Office, Company information, Trade press, BMI

Soft Drinks

Vietnam continues to be one of the most promising soft drinks markets in the region, attracting

considerable investments from both Coca-Cola and rival PepsiCo Between 2010 and 2015 we are

forecasting growth of 53.4% in value sales in local currency terms, while over the same period, we expect volume sales to grow by 37% Economic growth, increasing urbanisation, external investments and rising tourist numbers will all serve to drive this growth Although Vietnamese consumers will retain an interest

in healthy living, even as Western influences pervade consumption habits, we would expect carbonated soft beverages to be the highest-growth sub-sector of the soft drinks industry to 2015, owing to their popularity among aspirational young Vietnamese consumers, and their relative affordability when

compared with energy drinks and premium fruit juices

There has also been a boom in bottled green tea, with the traditional beverage competing with bottled water and brands such as Pepsi, owing in part to their perceived healthiness comparative to other

beverages, which encourages consumers to pay the extra price – around VND1,000-2,000

(US$0.06-US$0.12) – over other soft drinks The Tan Hiep Phat Group became the first company to sell bottled

green tea in 2006, after investing US$20mn in production equipment and launching the O Degree brand

Meanwhile, URC Vietnam spent US$14.5mn launching its market-leading C2 brand

Soft Drinks Indicators

Mass Grocery Retail

Vietnam continues to be one of the most promising markets for MGR in the Asia Pacific region, as we are continuing to forecast very strong growth rates in what is considered one of the retail industry’s brightest

new prospects Over our forecast period of 2010 to 2015 BMI is forecasting that value sales through

modern retail outlets in Vietnam will increase by 81.1%, with all modern formats present in the country – supermarkets, hypermarkets and convenience stores – contributing to this growth There are two primary drivers of this growth forecast One is Vietnam’s economic development The country has proved

successful at attracting multinational investment, in spite of its often-restrictive foreign investment policies and underdeveloped infrastructure This investment has led to job creation, which in turn has led

to the emergence of a new consumer class in the country – in major urban centres at least – which has an interest and can afford to participate in modern consumption methods such as mass grocery retailing With Vietnam increasingly becoming one of South East Asia’s top attractions, the country’s high tourism levels will also assist the emergence of modern retail, particularly in the convenience sector Recent government data shows that tourism levels fell in September 2010, yet despite the drop in tourist arrivals

in September, retail sales figures registered a 2.4% m-o-m increase We note that retail sales have

traditionally been an accurate indicator of private consumption Thus, resilient retail sales figures in September suggest to us that private consumption will remain a key factor driving domestic demand

Vietnam’s MGR sector is still dominated by independent stores, although smaller players are being pressured by the growing presence of multinationals Traditionally, multinational penetration was

restricted by legislation prohibiting foreign investors from holding shares in local retail entities However, the government is now prioritising foreign direct investment (FDI) inflows and WTO-membership trading opportunities over the livelihood of traditional retail operators Recognising the importance of investing

in infrastructure, the government is also making headway in improving its dilapidated infrastructure with construction on a number of ports, power plants and road projects commenced in 2009

It should also be noted that while multinationals pose a serious threat to local enterprises operating in the attractive urban centres of Hanoi and Ho Chi Minh City, secondary and tertiary towns and cities in outlying provinces could actually reap considerable benefits from multinational investment Thai Binh province is an excellent example of this Growing affluence is resulting in consumers in the province increasingly looking to trade up to modern retail outlets and away from traditional, independent formats; rapid industrialisation and urbanisation are serving to accelerating this process Multinational sector involvement will eventually lead to rapid crowding in Vietnam’s major urban centres, forcing retailers to turn to unexplored regions in search of growth Public sector retail investment, which will stimulate increased consumer demand and accelerate the establishment of industry best practices, could see

provinces like Thai Bihn become a beneficiary of this crowding

Sales through the convenience store format are forecast to experience the slowest growth rate, at 69.1% to

2015 The main reason behind this relatively modest growth in the format’s low starting point, with the concept still very much in its infancy Accordingly, the demand for convenience, with the pay-off of higher prices, is not yet on the agenda for most consumers – they are still familiarising themselves with the modern format in general Nevertheless, this subsector can be expected to attract growing interest

from retailers, with Japanese convenience retailer FamilyMart having recently opened its first outlet in

Ho Chi Minh City and with plans to have 300 stores in five years, as it looks to capitalise on the city’s young and increasingly busy population

Vietnamese consumers are most familiar with the standard supermarket format, as well as with

hypermarkets, owing to its popular combination of both food and non-food items Therefore, these two formats are set to witness the strongest levels of growth at 82.2% and 88% respectively over our forecast period In addition, the supermarket and hypermarket formats are set to receive the most attention from new retail investors, owing to their greater per-store profitability levels, which will be of vital importance

in a market where foreign investment in store openings is still limited

Regardless of these limitations, it is this investment that is set to be the second key driver of industry growth In line with its WTO accession requirements, the government has started to liberalise many of its key industry sectors – retail being one such industry The country has acknowledged the need for foreign investment if it is to get in line with industry best practices and accordingly, it has started granting

licences to international operators to establish store networks within the country Hong Kong’s Dairy Farm and South Korea’s Lotte Shopping are two such recent examples Investment of this nature and

the ability of these companies to offer low prices owing to their greater purchasing power will further stimulate interest in modern retail This will be particularly true among those price-sensitive consumers, who are still wary of the concept

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 levels in the market to

enormously 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 support modern retail development at present 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 This point is, however, still a long way off and 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: Vietnam MGR Indicators – Value Sales by Format – Historical Data & Forecasts

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

Table: Grocery Retail Sales by Format - Historical Data & Forecasts (%)

Food

Industry Developments

Dairy Sector Experiences Bullish Growth

Vietnam’s dairy industry is one of the most dynamic in the country’s food and drink sector, with increasingly affluence and urbanization driving bullish growth Vietnam's massive and relatively young population will continue to bolster demand for dairy products amid changing consumer preferences and increased affordability on the back of continuous production capacity increases from domestic players The country's economic recovery has lifted many Vietnamese out of poverty and we believe consumer spending will continue to hold up very strongly over the coming years, while the spread of modern retail outlets will provide greater access to dairy products

In August 2010 it was reported that in order to exploit the rewards on offer in the country's dairy

sector, Vietnam's largest dairy producer Vinamilk has started construction on a US$120mn milk

factory in the southern Binh Duong province We believe Vinamilk's expansion on its production capacity with the construction of a new milk factory will allow Vietnam to reduce its import dependency gradually over the long term The new factory will have a capacity of 400mn litres of milk per year when it becomes operational in 2012, and is expected to double its capacity by 2017 The company is also planning to increase its stock of milk cows to 80,000, which will allow it to boost its milk supply by 1.3mn litres a day

Vinamilk's increased production capacity is pivotal to alleviating price pressures from the country's dairy imports Despite the growth in milk production – a 400% increase from 54,000 tonnes to 262,200 tonnes between 2000 and 2008 – Vietnam still has to import around three-quarters of its dairy needs Due to its heavy reliance on dairy imports, Vietnam is particularly susceptible to the sustained high levels of global milk prices (Even though milk prices registered a fall in 2006 and

2009, they have remained high at an average level of US$16.45 per cwt for the past 10 years.) This need for imports also increases Vietnam's vulnerability to food price inflation in what is already an inflationary environment These pressures further attest to our view that expansion plans by domestic and multinational industry players are essential to improving the affordability of dairy products This was followed by a September announcement by Vinamilk that it has invested in acquiring a

19.3% stake in New Zealand’s Miraka Limited, in order to ease domestic milk supply shortages

Vinamilk’s initial investment will be of NZD121mn (US$88.2mn) in a new Miraka dairy processing plant, which will commence operations in August 2011, and will have a production capacity of up to 32,000 tonnes of milk powder annually While this is the company’s first international investment, it

is not expected to be the last, with Vinamilk stating that it is on the lookout for further international investment opportunities On the back of this statement, in October it was reported by Food

Production Daily that German food processor GEA won a EUR30mn (US$41.6mn) contract with