Retail in Vietnam is a PE Opportunity, With a Caveat

Vietnam lags behind other Asian countries when it comes to consumer spending in modern retail, and there are opportunities for private equity—under the right circumstances.

In Malaysia, modern retail attracts 53 percent of consumer spending; in Thailand, that figure is 46 percent; but in Vietnam, spending in that category accounts for only about 25 percent. Private equity sees an opportunity.

Vietnam is a bright spot amid other emerging markets countries facing a drop in capital outflows. The country is one of just five emerging nations—and the only one in Asia—whose economy has been growing above its average growth rate since 2010. Retail is one of the sectors growing fastest in Vietnam and one of the sectors with the most room for growth.

“Most retail in Vietnam is still extremely fragmented,” says Chris Freund, partner at Mekong Capital, a Vietnam-focused PE firm that has operated in Vietnam since 2001. “The leaders in each category have just single-digit market share. In some sectors the largest chain might have less than 1 percent.” As an example, almost all grocery stores in Vietnam are mom-and-pop operations, he adds.

There is a caveat to private equity’s opportunity in Vietnam’s retail sector, one that Freund believes will take several more years to overcome in order for the country to become a PE hotspot: “Most international firms are looking for $50M to $100M deals, which is generally still too big for this market,” he says.

Mekong Capital is interested in almost all retail categories. One of the firm’s most successful investments is Mobile World—the top mobile device retailer in Vietnam, with 39 percent of the market. When Mekong invested, in 2007, Mobile World had seven outlets. Today it has 588 stores nationwide (84-fold growth) and it is also the nation’s largest online electronics retailer. It was listed on the Ho Chi Minh City Stock Exchange in July 2014.

Other notable Mekong Capital investments are Phu Nhuan Jewelry, Vietnam’s largest jewelry retailer, and Golden Gate, the country’s largest independent restaurant chain. Mekong invested $2.6M in Golden Gate in 2008 and sold it to Standard Chartered Private Equity in 2014 for a net return of 9.1 times.

Another key challenge is how quickly these companies can put a world-class infrastructure in place. “For instance, we just invested in a retailer here and they had absolutely no enterprise software systems in place,” says Freund. “They were doing everything in a very manual fashion. But they were quickly able to implement a very sophisticated enterprise software system that will allow them to scale up.”

Mekong typically puts $8 million to $15 million in a company, Freund says, adding that most of these companies tend to be run by young, entrepreneurial teams, as opposed to state-owned or family businesses. “Since 2009 our average company has had net profit growth of 30 percent per year.”