Analysis of H&M’s Vietnam Expansion
H&M is a Swedish multinational clothing retail store that caters to young adults and children. Since its inception, the brand has evolved to include accessories, footwear, cosmetics and home furnishings. H&M is one of the top retail stores in the world and has positioned itself as a low cost- quality clothing supplier. H&M and its competitors occupy a niche segment of the retail clothing industry known as fast-fashion, characterized by the ability to serve consumers who demand the most up-to-date styles at an affordable price. Retailers must meet several specific customer expectations to remain competitive in this segment, as well as maintain a highly efficient internal operation to meet the requirements of the industry.
H&M’s expansion into Vietnam is part of the company’s larger overall global expansion strategy to open stores with a target of 10-15% sales growth coupled with an introduction of online retail to emerging and unexploited retail markets (H&M Group, 2016). Vietnam has seen recent increased growth in foreign direct investment and expanding retail market. Consumers in Vietnam have a demand for large Western brands and have increased disposable income to spend in the market(Deloitte, 2014). In Vietnam, barriers to entry remain low for H&M and other industry competitors. H&M and other foreign retailers have the capability of opening their initial retail spaces in Vietnam without extreme difficulty (Deloitte, 2014).Â In 2016, Zara, H&M’s largest competitor opened a retail store in Ho Chi Minh City signaling an increase in foreign retail investment in the country (“Zara Enters Vietnam”, 2016). It appears that the landscape in Vietnam is changing in the favor of foreign retail firms and government policies are being shaped to attract more foreign investors.
Industry Requirements and Expectations
H&M and its competitors occupy a niche segment of the retail clothing industry known as fast-fashion, characterized by the ability to serve consumers who demand the most up-to-date styles at an affordable price. Retailers must meet several specific customer expectations to remain competitive in this segment, as well as maintain a highly efficient internal operation to meet the requirements of the industry.
Expectations within the fast-fashion industry have become increasingly more customer-focused and demanding with the success of retailers such as H&M, Zara, and Forever 21. Because the industry’s core market is highly sensitive to changes in trends and seasonality, retailers need a keen awareness of the fashion landscape to proactively update their inventory at locations worldwide. Successful players in the industry must also have an in-depth understanding of the local markets of their varying locations to serve their customer’s specific tastes. Fast-fashion’s most dedicated consumers also depend on the affordability that retailers offer to allow them to keep their wardrobes stocked with the latest styles.
Highly efficient supply chain management is the cornerstone of the fast-fashion industry, and is the key requirement for any retailer’s success. Demands for rapid turnover and affordable prices hinge on the retailer’s ability to keep internal costs to a minimum to avoid passing on costs to the consumers. The industry requires retailers to keep an extremely low product life cycle (PLC), which is typically achieved through the combination of a just-in-time inventory system and a strategic distribution and fulfillment network within the countries of operation.
Location is also a critical requirement when operating in fast-fashion, both for retail stores and proximity to distribution centers. In order to capitalize on the benefit of operating within this industry retailers must secure locations for their retail stores that are both highly visible and densely populated, while distribution and fulfillment centers require central location to serve the maximum number of retail locations as quickly as possible.
Low Trade Barriers
In 1986, Vietnam created an open-door policy with reforms in three essential areas: i) the right to foreign trade, ii) trade instruments and policies iii) liberalization of foreign trade. Since then, the Vietnamese economy has been growing at a rapid pace.
Since Vietnam’s inception in WTO in 2001, Vietnam removed many non-tariff barriers including “quantitative restrictions on imports, quotas, bans, permit requirements and licensing requirements.” (U.S. Department of State, 2014). However, there are still some existing industry specific trade barriers in Vietnam. For example, price stabilization and restriction is implemented by the Vietnamese government when prices are too high or low for essential goods. Other examples of trade barriers include import taxes on automated products and services, permits on foreign investment in cinema construction only through local joint ventures and land use rights. Vietnamese land, a property of the state, cannot be owned by investors nor any Vietnamese nationals (U.S. Department of State, 2014).
To H&M’s advantage, the retail industry in Vietnam has very few trade barriers and restrictions for foreign investment. Thus, being one of the fastest growing countries in the ASEAN economy along with liberal retail policies, Vietnam is an obvious country of interest for EU business expansion. The country’s openness to foreign investment has been the cause of many trade reforms and lower trade barriers. For example, Vietnam provides investment incentives to foreign investors such as exemption from import taxes on necessary materials required for manufacturing that cannot be found in Vietnam.
Policies supporting FDI in Vietnam
Since November 1, 2015, Vietnam has allowed foreign retailers to set up 100 percent foreign-owned enterprises under its commitments to the World Trade Organization. This gives them access to supply sources and ideal business locations to operate from. Most international brands are opening stores in Vietnam through franchising or the granting of rights to a local partner, as franchisees are required to have a zero-loss business record and must be able to present their business development plan to the franchisor during the bidding process, which increases the likelihood of success for foreign investors in Vietnam. (VN Express – Retail market share,2016). These policies make expanding to Vietnam attractive for H&M. Franchising their retail stores in Vietnam is safer for H&M now because of these policies.
As Vietnam is becoming increasingly accessible to foreign investments, FDI inflows have seen a steady and strong increase over the previous years. In 2016, FDI inflows climbed to US$24.4 billion with a 9% increase from 2015. Out of these, US$15.1 billion flew to 2,556 newly registered projects, US$5.76 billion came from 1,225 existing projects adding to their capital, and US$3.4 billion flew in from foreign investors purchasing stakes in 2,547 companies. Vietnam’s rapid pace of integration into global commerce is likely to yield great opportunities for foreign investors. So, this is the right time for H&M to invest and expand into Vietnam. (Vietnam’s FDI Outlook for 2016)
In January 2017, foreign investors invested in 16 sectors in Vietnam, out of which Wholesale and retail ranked third with total registered capital of US$ 88.75 million, accounting for 5.6% of the total foreign direct investment. Relative high investment in Wholesale and Retail market bodes well for H&M. H&M is planning to open up its first retail shop in Ho Chi Minh City, where FDI investments are high. (Ministry of planning and Investment of Vietnam, 2017)
Vietnam’s retail industry has witnessed healthy growth rates of 8 – 10 percent annually in recent years. To continue, the industry is forecasted to reach $109 billion by 2017. With the population of more than 90 million, Vietnam’s retail market is growing rapidly, making it highly attractive for foreign investors. The country is currently ranked top 5 and 11 in Asia and globally respectively in terms of retail growth. (VN Express – Vietnam’s rapidly growing retail Industry, 2016)
Ease of doing business
The country’s ease of doing business – while still leaving room for improvement is developing, Vietnam ranked 82nd out of 190 countries, up nine positions from 2016. Government of Vietnam is actively privatizing its state-owned enterprises (SOEs) on top of its trade agreements and foreign direct investment policies. Since 2015, nearly 170 companies have been privatized and this trend will continue in the coming years. This creates many opportunities for foreign investors. (Vinkenborg, M. (2017). Vietnam in 2017: Spotting opportunities for FDI)
Policies restricting FDI in Vietnam
One complication for FDI in Vietnam is Vietnamese authorities have different definitions of a foreign invested enterprise. In practice the level of foreign investment that qualifies an entity as foreign differs from province to province. Unlike other countries in the region, such as China or some of the other ASEAN member states, Vietnam does not maintain a Negative List of industries with foreign equity ownership caps. (Restrictions on Foreign Direct Investment in Vietnam, 2015)
With the enactment of the Law on Investment and the Law on Enterprises however, the country is moving in the direction of such a Negative List system. The two laws, in addition to various other laws and regulations are applicable to industries that are termed ‘conditional’. When investing in conditional industries, the government examines the investment proposal and may choose to impose additional requirements. Distribution sector such as retail is considered ‘conditional’ in Vietnam and may prone to additional requirements from government of Vietnam. (Restrictions on Foreign Direct Investment in Vietnam, 2015)
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