analysis of Vietnam confectionery market and case of Kinh Do

A company, operating in a highly competitive business environment, would be successful in sustaining and improving its economic objectives, if it knows its market or industry structure and the forces driving competition, as well as, adopts appropriate competitive strategiesVietnam has a population of over 88 million people with a young population structure (source: General Department of Vietnam population). As a crowed population, the demand for confectionery – one kind of necessary goods is high too. In addition, in some recent years, Vietnam is been ranked as one of the most potential retailing market. In 2008, Vietnam reached the first ranking of attractive retail market in the world, thanks to strong economic growth, friendly improvements in policies with foreign investment and consumer demand for the model modern retail. However, in 2012, Vietnam relegate from the top of potential retailing market in the world because of recession and the weakness in government policies. Although the Vietnam retail market does not as attractive as before, many economists believe that this market is still potential because of the high number of consumers (source: Consultant A. T. Kearney Corporation)Since 2010, Vietnam''''s economy face to many unstable problem including high inflation rate, consumer tighten their expenses and high interest rate. This situation causes many companies in Vietnam into crisis plus high price of raw material, high cost of labor and electricity.With a large market, Vietnam has been identified as a very potential confectionery market. According to many experts worked long time in confectionery industry, the confectionery market of Vietnam will become the leading market in Southeast Asia and the world. (Source: German Association of Confectionery). As the estimation of IBA (GHM), the yields of Vietnam confectionery increase about 1.5 times from 2008 to 2012. The growth rate of retail sales of confectionery in the Vietnam market is 114.71% per year, meanwhile this figure of other countries in the region such as China is 49.09%, Philippines is 52.35% Indonesia is 64.02% , Thailand is 37.3% and Malaysia is 17.13% . (source: cafeF.vn).

CLASS: MBA TROY CLASS: MBA TROY

Managerial Economics

Assignment:

“A company, operating in a highly competitive business environment, would be successful in sustaining and improving its economic objectives, if it knows its market or industry structure and the forces driving competition, as well as, adopts appropriate competitive strategies”.

I Market

1.Market structure analysis

1.1 Analysis of confectionery market in Viet Nam

Vietnam has a population of over 88 million people with a young population structure(source: General Department of Vietnam population) As a crowed population, the demand forconfectionery – one kind of necessary goods is high too In addition, in some recent years, Vietnam isbeen ranked as one of the most potential retailing market In 2008, Vietnam reached the first ranking

of attractive retail market in the world, thanks to strong economic growth, friendly improvements inpolicies with foreign investment and consumer demand for the model modern retail However, in

2012, Vietnam relegate from the top of potential retailing market in the world because of recessionand the weakness in government policies Although the Vietnam retail market does not as attractive asbefore, many economists believe that this market is still potential because of the high number ofconsumers (source: Consultant A T Kearney Corporation)

Since 2010, Vietnam's economy face to many unstable problem including highinflation rate, consumer tighten their expenses and high interest rate This situation causes manycompanies in Vietnam into crisis plus high price of raw material, high cost of labor and electricity

With a large market, Vietnam has been identified as a very potential confectionerymarket According to many experts worked long time in confectionery industry, the confectionerymarket of Vietnam will become the leading market in Southeast Asia and the world (Source: GermanAssociation of Confectionery) As the estimation of IBA (GHM), the yields of Vietnam confectioneryincrease about 1.5 times from 2008 to 2012 The growth rate of retail sales of confectionery in theVietnam market is 114.71% per year, meanwhile this figure of other countries in the region such asChina is 49.09%, Philippines is 52.35% Indonesia is 64.02% , Thailand is 37.3% and Malaysia is17.13% (source: cafeF.vn)

Today, there are about more than 30 companies produce confectionery in Vietnam.Among them, the 4 biggest confectionery firms hold 46 percent of market share including Kinh Do,Bibica, Haiha Kotobuki and Huu Nghi.(source: Phugia securities corporation) To understand moreclearly about the whole picture of Vietnam confectionery market, we will demonstrate by the diagrambelow.

Figure 1: Market share in confectionery industry (source: Triviet Investment)

To see the diagram above, the 4 largest firms capture 46% market share, otherdomestic companies hold 37% and other imported companies hold only 17% of market share ofconfectionery Domestic confectionery companies are increasingly asserted its position in the market(83% of market share) with the variety of products, good quality that are suitable to the taste ofVietnam Whereas, the small production base is shrinking due to low capital, backward technology,lack of warranties in food safety

Ten years ago, a lot of circulated confectionery in Vietnam market came from China,Thailand and Malaysia However, in some recent years, domestic brand names in confectionerymarket have asserted increasingly in the country because of some reasons as follow:

- Almost the domestic products have the lower price than exported confectioneryproduct from 10 to 20 percent (source: Triviet securities Corporation)

- In the quality aspect, the qualities of domestic product are not lower than foreignproduct In addition, almost domestic businesses apply the international standards as HACCP, ISO9001-2010 so they meet the need of customers who care more about food safety quality.

1.2. Analysis the characteristic of oligopoly market in confectionery field

Vietnam Confectionery market is oligopoly market because of some reasons:

- Few sellers: in the chart, we can see that the 4 largest firms hold 46% of confectionerymarket share The number of the main seller in confectionery market is only 30 firms This is the mostimportant feature of oligopoly market

- Unique products: Among various confectionery firms, each firm has differentiated products Forexample, the products of Kinh Do focus on middle to high segment, dominated the whole market may

be mentioned include Cakes (76%), bread (64%), saltine AFC (56%) Bibica (BBC) is famous forbread products named Hura, accounting for 30% market share cake and candy leading market share.Meanwhile, Hai Ha serves ordinary customers

- Blockaded entry and / or exit: Because largest firms hold a large proportion of marketshare (43%), they also have strong capital, high technology so new small firms face difficulties whenentering to the market In addition, the Vietnamese government has just issued some law and policiesincluding Food Safety Law, Goods quality Management Law require clearly about product origin leadimported confectionery of unknown origin difficulties to penetrate into Vietnam confectionerymarket

- Imperfect dissemination of information: Because there are few sellers in theconfectionery market, buyers do not have many choices They must buy from some particular sellermust accept information in cost, price, product quality provided by the seller

- Opportunity for economic profit in long run equilibrium: Like monopoly market,oligopoly earn economic profit in long run while competitive market and monopolistic earn normalprofit Both type of market can set price so they can earn more profit than two other types

1.3 Analysis of 4 leading firms in confectionery market

Figure 2: Financial Report of Bibica (Source: Tri Viet Security)

1.3.3 Hai Ha

Hai Ha has the market share of 6%, with the major product including cookie, candies andwafers In the first quarter 2012, Hai Ha has the revenue of 178,593 billions, net profit 22,86 billionsVNDs (source: cophieu68.vn)

1.3.4 Huu Nghi

Huu Nghi is also a large company in the confectionery industry in Vietnam Confectioneryproducts of Huu Nghi include biscuits, jam and bread Particularly with salty bread, Friendship is themarket leader In 2011, Huu Nghi has the revenue of 1.081 billion VNDs.

Figure 3: Revenue Growth/ Quantity Growth in confectionery market

(source: BIM report)

We have the equation TR= P*Q From 2 charts above, we can calculate the price ofconfectionery as the chart follow:

Price of confectionery in the period 2005-2014 (unit: $

per tons)

0 500 1000 1500 2000 2500

Figure 4: Price of confectionery

To see in this chart, the price of confectionery does not change much over years and remain

the stable increasingly rate The price and estimated price of next following years is highest in 2009

Figure 5: GDP of Vietnamese people from 2000 to 2010

To see the diagram, GDP of Vietnamese person increase at the rate from 10 to 20 percent.With the stable increasingly salary over years, the demand for confectionery is expected to increase insome following years

2.1.3 Interest rate on confectionery producing loans

As other industry in Vietnam market, in 2012, confectionery is facing many difficulties fromthe long recession One of the most difficulties is high interest rate At the peak, interest rate raise tofrom 20 to 22 % per year Now, although the interest is lower at 15% to17%, it is still too high to thetolerance of businesses

2.2 Determinants of confectionery supply:

Similarly to demand, the quantity supplied can be affected by many factors as price ofconfectionery itself, technology, price of related goods, Beside some factors that influence demand

as price of confectionery itself, price of related goods, the market supply function also takes intoaccount other factors as technology, input price

2.2.1 Price of input

Some main inputs of confectionery are flour, sugar, milk, eggs We will analyze following:

Figure 7 : Price of flour in the world

At this time, the retailing price of sugar in Hanoi is at 19.000-22.000VND per kilogram, alarge amount of sugar comes from produced sugar firms in Nghe An province

Figure 8: Demand for sugar of Vietnamese people

(Source: Tri viet Securities Corporation)

As the situation of sugar market now, many economists estimate that price of sugar willincrease in the near future because of some reasons:

- Now, the yield of domestic sugar still does not meet the demand of firms Meanwhile,sugar mills for some recent years did not operate correctly their power

- The price of sugar material has increased in some recent years because of the raise inproduction expense as employees, fertilizer, financial expenses Meanwhile, price of sugar materialcounted for 50% of sugar products price.

- From now to the end of this year, the demand of sugar and flour increase because thedemand for confectionery increase at the end of each year to serve Traditional Tet

II Company analysis

3 Kinh Do – a leading firm in Vietnam confectionery market

3.1 Introduction

Kinh Do is a leading confectionery firm in Vietnam, established in 1993 and has gone through

17 years of formation and development Up to now, Kinh Do has become a system of corporations inthe field of foodstuff including cake, candy, beverage, ice-cream and dairy product The developmentstrategy of Kinh Do is to maintain as one leading foodstuff group in Vietnam and orient to become amulti-sector group including foodstuff, real estate, finance and retail in order to ensure the sustainabledevelopment in the future

Total charter capital of Kinh Do Corporation is 3,483.1 billion dong Total revenue reaches3,471.5 billion dong, in which the revenue from foodstuff accounts for 99.2%, total profit reaches756.1 billion dong

Products under the Kinh Do trademark are selling in all provinces through a diversifieddistribution system nationwide including 524 distributors, 31 Kinh Do Bakery shops and 200,000retail outlets as well as franchised distribution systems with a growth rate of 30%/year The products

With the strategy of building the foodstuff as the core business for group, during the pastyears, Kinh Do has continuously invested in modernization of the technologies, execution thestrategies of merger & acquire, joint venture and cooperation such as acquisition of Wall Ice-creamfrom Unilever, acquisition of Tribeco as well as Vinabico; investment in Nutifood, Eximbank…

Especially in 2010, NKD and KIDO companies have been merged into Kinh Do Corporation(KDC) Kinh Do’s objective is to become a leading foodstuff group in Vietnam as well as to becomeone of the leading foodstuff groups in the Southeast-Asian region

Besides being a leading confectionery firm, Kinh Do has invested in other divisions such asreal estate, finance and retails business These business divisions will have interrelation to supporteach other, in which the holding company will maintain the role of specialized financial investmentwhile the subsidiary companies will operate in a particular field with specific industry under themaster strategies defined by the Corporation

3.2 Mission and Vision

Mission:

For each company, mission is the statement of the purpose of company or organization Themission statement should guide the actions of the organization, spell out its overall goal, provide apath, and guide decision-making As other companies, Kinh Do has its mission as the reason to exits

as follow:

materials from environmentally sustainable sources and the creativity and innovation of our peopleand selected external resources to produce and deliver an extensive range of affordable staple andpackaged foods, snacks, bakery products, beverages and juices, confectionaries and condiments,instant foods, processed meats and health supplements Our products are hygienic, healthy, satisfyingand conveniently available to all consumers

Kinh Do Retail delivers pleasant and satisfying shopping experiences across all consumermarket segments Together with our strategic partners, we use our collective knowledge andexperience, together with in-depth market research and analysis, to develop, own and operatesupermarkets and convenience-stores, fast-food franchises, department store complexes, andrestaurant chains Our retail outlets are strategically positioned in targeted locations to take advantage

of rapid growth planned new urban developments and locations with rapidly increasing populationdensities

As their mission statement, Kinh Do has invested in new machinery, finance, human resource

to become the strong corporation in Vietnam

Vision

Beside mission is the purpose to exits for the whole life of company, company identifiesvision statement as the picture of company in the near future, the inspiration, the framework for allcompany’s strategic planning

For this reason, Kinh Do has the vision as:

- Kinh Do enriches people's lives by providing products and services which immediatelyrealize the needs and desires for Living Fine

- Applying our dynamism, creativity, foresight and other core values, we create productsand services which deliver consumers what they want and make us all proud

- People trust Kinh Do companies, products and services so much they rely on them forFine Living every day

- Kinh Do generates bonus personal, economic and commercial value and pride forstaffs, partners and stakeholders

Both mission and vision are guiding principles for all activities of the company, the target for

At the shareholder meeting date 21 April, 2012, the board of Kinh Do (KDC) has placed thecompany targets revenue of 5500 billion, up 29% to 2011 and pretax profit of 500 billion VND

To penetrate into the other areas of food and beverages, in February 2012, KDC hassuccessfully introduced new products: Sachi rice cakes, a joint venture brand between KDC and WantWant China, in which Want Want China produces and KDC has the role of product distribution

KDC will also cooperate with Glico in the fourth quarter of 2012 whereby KDC distribute ofGlico products including rice cakes and other snack products

3.4 Strategies adopted by the company to achieve its objectives

Strategy is the process to identify long-term basic objectives of the enterprise, identify actionsand allocate the necessary resources to implement these objectives, the nature of solutions tostrengthen long-term competitive position of enterprises in the market In the highly competitive aslong as the highly demand in confectionery, base on some strength and weakness, Kinh Do chosesome strategies that go through 4 stages as follow:

+ To establish mechanism to operate in the model group;

+ To create thinking and cultural growth;

+ To operate results as expected

- Stage 4: 2013:

+ Increase the efficient use of assets

+ Increase product sales by increasing quality

From the overall general strategic objectives, Kinh Do has adopted specific strategy in eachfiled as follow:

3.4.1 Non – price strategy

Financial strategy:

Finance and financial investment is one of four strategic business division focused by Kinh DoGroup in its long-term development roadmap The financial investment activities in confectioneryfield of Kinh Do are capital investment in other foodstuff companies of the same sector With mergeand acquisition activities, the Corporation continues to seek for opportunities to invest in potentialfoodstuff companies, which have market, medium size and expectation to list their securities on thesecurities market

Marketing strategy

In marketing strategy, companies take advantage of the strengths of the brand, distributionnetwork of the industry's leading confectionery firm in Vietnam In particularly, Kinh Do as a brandwas ranked number 4 in the Top 10 best known brands in Vietnam Kinh Do continued to build on itsiconic status during Mid-Autumn and Traditional Tet to become a symbol for gift of love andaffection The brand message “See Kinh Do, Feel Tet” reached far and wide to Vietnameseconsumers, who responded positively to it Other major brands such as AFC (crackers), COSY (sweetbiscuits), GOOD CHOICE (wafers), and ALOHA (buns and sandwiches) all took leadership positions

in their categories with market shares of 25%, 22%, 33%, and 55%, respectively, according toACNielsen’s monthly tracking of retail sales of consumer products (Retail Audit) Noticeably, amarket research by BMI shows that Kinh Do moon cakes dominated the category with almost 80% ofmarket share