What Vingroup and Masan hope to acquire from their retail merger

After many years of investing heavily and enduring losses to acquire its dominant share of the retail market, Vingroup, Vietnam’s biggest private conglomerate, is withdrawing from the business.

The merger deal that it has signed with food giant Masan Group will integrate its network of 2,600 Vinmart and Vinmart+ minimarts into a merged entity operated by the latter. Vingroup will remain a shareholder in the merged entity, it said Tuesday.

Although retail is a major asset in Vingroup’s commercial ecosystem, which includes real estate, education and shopping, it has not engaged heavily in backwards integration, i.e. the production of consumer goods. Masan, on the other hand, with its core business in fast moving consumer goods (FMCG), can potentially make much better use of the retail network that Vingroup has built.

And with Vingroup retaining an undisclosed stake in the new entity, its network could still be used to support the conglomerate’s core business in real estate, given that it has built Vinmarts in most of its residential and commercial complexes.

Gaining market dominance in Vietnam’s fiercely competitive $142 billion retail market has required considerable investment, and Vingroup, Vietnam’s largest diversified conglomerate, has been reporting retail as one of its highest loss making business activities in the last few years.

In 2014, its retail operations earned VND454 billion ($19.61 million) in revenues for Vingroup, but pre-tax losses were calculated at VND279 billion ($12.05 million). In 2018, revenues skyrocketed to VND21.26 trillion ($918.2 million), the highest earner behind its real estate segment, but pre-tax losses also expanded to VND5.1 trillion ($220.26 million).

With the latest merger, Vingroup can now reallocate resources to other segments it considers of higher strategic importance. To maintain a dominant position in the retail market, which is still in a highly competitive phase, Vingroup would have to continue investing heavily and enduring hundreds of millions of dollars in losses.

Although Vingroup has assets of around $15 billion, it needs capital to be focused on its core areas, which it identified publicly in August 2018 as technology and manufacturing. In the last two years, Vingroup had begun producing VinFast vehicles, two wheelers and made-in-Vietnam cars, VSmart smartphones, and is researching production in 5G-related technologies.

By the end of the second quarter of 2019, the group's total assets serving production and technology were worth VND73 trillion ($3.15 billion), second only to real estate, with VND130 trillion ($5.61 trillion). But in its early stage, production activities incurred VND2.9 trillion ($125.25 million) in pre-tax losses in the first half of this year.

Having the retail outlets taken off its management gambit would allow the group to focus both energies and capital into developing its core areas.

Masan ambitions

One of the nation’s top 3 private business conglomerates, with Massan Food, Techombank and Massan Resources as its subsidiaries, the Massan group has always seen retail as one of its core business areas.

The 2,600 store Vinmart network, therefore, would become a key asset in the group’s ambition to become an empire in consumer goods and retail.

In its 2018 annual report, Masan’s management outlined the group’s strategy to link its business segments to a commercial ecosystem designed to meet the daily needs of consumers. Masan envisaged setting up a series of "one-stop shops", that can satisfy a range of consumer needs including finance, groceries, foods, beverages, and healthcare. Vinmart already offers most of the above.

In addition, the Vinmart system would come in handy if Masan encounters competition from global retail giants like Amazon or Alibaba in the future.

At the FPT Techday 2019 in November, Nguyen Anh Nguyen, Deputy General Director of Masan, said that one of the key challenges the corporation faces is distribution as global giants enter the Vietnamese market.

"Alibaba and Amazon have begun entering Vietnam, and they are no ordinary competitors. If Vietnamese manufacturers, including Masan, are not careful, in three to five years we may still have our brand building and production capabilities, but we would have lost the distribution market," Nguyen said.

Although acquiring control of the Vinmart network would allow Masan to absorb intermediary profits in the long term, joining the distribution market still poses major challenges in the short term, especially profit-wise.

Last year, Masan Consumer Corporation reported pre-tax profits of VND3.8 trillion ($164.09 million), while VinCommerce lost VND5.1 trillion ($220.23 million). 

On Tuesday, when the new of the merger was announced, MSN shares of Masan Group on the Ho Chi Minh Stock Exchange crashed 7 percent, the lowest they could go in a trading day, wiping VND5.6 trillion off the stock’s market capitalization. As of 11.10 am on Wednesday, the stock had lost and additional 4.2 percent.

Retail is one of new industries in Vietnam that maintains a yearly double digit growth. Latest statistics from MB Securities (MBS) show that by the end of 2017, the market was worth around $142 billion, or 59 percent of GDP, expanding at a compound annual growth rate (CAGR) of 13 percent, almost double 2017’s GDP growth rate.

With the fastest growing middle class in the Asia-Pacific region, over 50 percent of the population of working age, and over 40 percent under 24 years old, Vietnam’s retail market is forecast to maintain explosive growth in the coming years, and could reach 27 percent CAGR by 2020, according to a Deloitte report.

According to data produced at the annual Vietnam Mergers and Acquisition Forum (MAF) in August, property, consumer goods, and retail are the sectors expected to lead the M&A market in 2019.

Of the $9.3 billion worth of deals in the 12 months leading to July this year, real estate-construction, multi-sector businesses and consumer goods accounted for 20 percent, 19.7 percent and 11 percent respectively, according to official figures.