Companies tap rural Vietnamese demand

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Whether it’s Unilever’s Sunsilk shampoo or Procter & Gamble’s Downy fabric softener, most products in Nguyen Thi Thao’s tiny shop come in single-use sachets costing 500 Vietnam dong ($0.02) a piece.

She makes a profit of 50 dong on each sale and business is steady in Suoi, a dusty village in the mountainous Son La province, north-west Vietnam.

“Most people here are poor farmers so they usually buy one sachet at a time,” she says.

Nevertheless, companies ranging from household goods makers such as Unilever and Procter & Gamble to insurers such as Canada’s Manulife are increasingly targeting this large, expanding market.

Retail sales have risen at a fierce pace as Vietnam’s Communist government has opened up the economy and unleashed pent-up demand. The economy, measured by GDP, has been growing at an average of more than 7 per cent a year during the past decade but retail sales have been expanding at a much faster pace. Total retail sales reached $75bn last year, up 25 per cent from 2009.

While rural residents make up about 70 per cent of the country’s population of 87m, they account for just 30 per cent of retail sales, according to Sharang Pant, director of retail in Vietnam for Nielsen, a market research company. That is because they have less money to spend and are harder to reach both physically and in terms of marketing.

But with disposable incomes rising and infrastructure gradually being upgraded, the rural market will continue to grow strongly, says Tran Vu Hoai, head of corporate relations for Unilever Vietnam.

Unilever’s Vietnam sales have been growing at an average of 18.5 per cent a year over the past decade, hitting roughly $700m last year, according to Mr Hoai. The rural market accounts for half the company’s sales.

Fast-growing rural sales at Masan Consumer, Vietnam’s biggest producer of the country’s ubiquitous fish sauce, caught the eye of Kohlberg Kravis Roberts, the US private equity firm, which in April agreed to pay $159m for a 10 per cent stake in the company.

But reaching consumers in rural Vietnam is not easy. Only three cities have a population of more than 1m people and, outside the main urban areas, the retail sector is dominated by family-run stores.

Companies need extensive sales and distribution networks to ensure scattered rural customers can find their products. They also need clever, targeted marketing to persuade those consumers to part with their hard-earned cash, especially at a time when annual inflation has accelerated to 20.8 per cent.

On that front, TV advertising has proved vital in a country that has one of the highest rates of TV ownership in Asia, says Nguyen Thi Bich Van, vice-president of Unilever Vietnam’s hygiene products division. “Other approaches don’t have the same scale,” she says.

Pricing is also important. While Unilever and Procter & Gamble sell their products in cheap, single-use sachets, Pham Nguyen Foods, a Vietnamese snack maker, targets rural consumers with smaller, cheaper chocolate cakes while Halico, Vietnam’s biggest producer of spirits, switched from glass vodka bottles to plastic in rural areas to shave 15-20 per cent off costs.

Halico’s expansion drive in rural and urban areas was noticed by Diageo, the drinks group, which in January agreed to take a 24 per cent stake in the company.

Alcohol, shampoo and snacks are one thing but in a country where only one in five has a bank account and insurance premiums account for less than 1 per cent of GDP, selling financial services is a rather more complicated task.

Manulife, which has built up $307m of assets under management in Vietnam since setting up there in 1999, already generates around half of its sales from outside the main cities.

It is moving to further develop the rural market through a micro-insurance programme which, while not designed to generate much profit now, is aimed at establishing the foundations for future growth, says Carl Gustini, chief executive of Manulife Vietnam.

“The rural market is upwardly mobile and we can see the generational changes happening before our eyes,” he says.

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