This content is from: Local Insights

A milestone year for retail

This year, 2009, is considered to be an important milestone in the trading and distribution sector in Vietnam. On January 1 2009, Vietnam committed under the World Trade Organisation (WTO) to allow full market access to foreign investors seeking to engage in the retail sector. This means that foreign investors are now allowed to establish a 100% wholly-owned company to engage in trading and distribution.

Following Vietnam's WTO commitments, since 2007 foreign investors were permitted to engage in trading and distribution activities in the form of a joint venture company (JVC) with a Vietnamese partner. Theoretically speaking, as of January 1 2008 there was no limit on the foreign investor's equity in the JVC. This year, the joint venture requirement is abolished and a 100% foreign-invested enterprise in trading and distribution services is now permitted.

However, there is scepticism regarding how implementation of licensing for investments in the retail sector will unfold for investors who intend to establish a 100% wholly-owned company this year. This scepticism is not unfounded: in 2008 many investors faced a great challenge in terms of obtaining an investment licence to establish a company to engage in the retail sector.

Last year, licensing authorities in Vietnam were very reluctant to grant investment licences in the retail sector, especially for JVCs where foreign investors were to own up to 99% of the equity in the JVC. In fact, the Department of Planning and Investment (DPI) of Ho Chi Minh City (HCMC) disallowed investment applications to establish JVCs in distribution services where the capital contribution ratio was 99% (foreign) and 1% (Vietnamese). In an official letter issued last July 2008, the DPI of HCMC noted that this kind of capital structure "is not feasible because the difference between the contributions of the two parties is so disparate that it does not express the correct spirit of business cooperation".

With this backdrop from 2008, there are mixed feelings from foreign investors interested in Vietnam's retail sector. Some are optimistic, but others are sceptical. More practical details need to be set in place in connection with investment applications to establish retail and distribution business in Vietnam. Over the past two years, since Vietnam became a WTO member, only existing foreign retailers like Metro and Big C have registered to open more retail outlets (both established before Vietnam became a WTO member). Since 2007, no foreign distributors were able to open retail outlets in Vietnam.

At present, there are no clear and detailed guidelines allowing investors to establish additional retail outlets. Pursuant to Vietnam's WTO commitments, the establishment of retail outlets beyond the first one will be allowed on the basis of an Economic Needs Test (ENT). Under the ENT, the foreign-invested company would have to apply for a separate licence for each subsequent outlet.

Based on present regulations, the establishment of additional retail outlets will be considered on a case-by-case basis, depending on: (i) the number of retail establishments; (ii) market stability; (iii) population density in a province/city; and (iv) approved planning of the province/city. Still, the criteria for passing this ENT remain unclear.

Hope still remains that 2009 will be a turning point for the retail sector in Vietnam. Based on the figures from the Vietnam Retailers' Association, retail sales rose 25% in the 2006 to 2008 period. Statistics also show that, as at December 2008, Vietnam has around 400 supermarkets and 2,000 convenience stores nationwide. It is expected that the number of supermarkets and retail outlets will continue to increase in the years to come. After all, Vietnam is still considered to be one of the most attractive emerging markets for retail.

Hong-Duc

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