Last month’s TET celebration saw the usual exodus from the cities as residents boarded busses and trains to head home and spend the Lunar New Year holiday with family. But this year, some of the red envelopes they were receiving or giving may have been a little lighter, the gifts a little more modest or fewer in number than in the recent past. Undoubtedly on the minds of many Vietnamese were the surging prices for food and other goods that the country has experienced over the last 12 months.
By any account, Vietnam’s economy has been firing on all cylinders -- it takes just a quick glance around Ho Chi Minh City or Hanoi and the new property developments in progress to see that the country is in the midst of a boom. Vietnamese consumers have also started to enjoy the fruits of their labour with rising incomes, resulting in the continuing growth of an urban middle class. Along with this rapid growth in 2010, inflationary pressures surfaced as a natural by-product.
In 2010, the consumer price index went up 11.75 per cent, according to the General Statistics Office. In the first two months of 2011, inflation reached 12.24 per cent compared to the same period last year. Food categories were particularly hard-hit. Prices increased more than 16 per cent, with the cost of rice in particular increasing with a third by some accounts. At the beginning of March, gasoline prices went up nearly 18 per cent, diesel skyrocketed 24 per cent and the cost of electricity went up 15 per cent.
According to Nielsen’s analysis, FMCG sales at the retail level in Vietnam grew 27.3 per cent year-on-year in 2010, the highest rate seen in 13 markets across the Asia-Pacific region. Price increases accounted for more than 70 per cent of this stellar growth rate. In Q4 2010, FMCG retail sales grew 31 per cent compared to the same period in 2009, with more than a third of this due to price increases. It is clear the FMCG growth is driven largely by inflation, but consumers still remain relatively buoyant as they continue to spend on FMCG as well.
As inflation-related worries mount, consumers’ willingness to spend, the state of their personal finances and use of spare cash are likely to start changing as they take into account the impact of inflation on their lives and on the economy. We do not rule out a dent in the country’s Consumer Confidence Index ahead, as measured by Nielsen. In 2010, the Index was on average above the 100-point mark, which shows optimism.
To deal with skyrocketing prices for everyday goods, consumers may cut-back on non-essential spending such as out-of-home entertainment, technology or new clothes purchases. While they are continuing to spend, for now, consumers will be ever-more value driven, and may be forced to switch to lower-priced or private label products as strategies to stretch their household budgets. They may also allocate more to non-discretionary expenditures.
All of these factors put manufacturers of consumer packaged goods in a difficult position. At some point, they will likely need to pass on to consumers the increased costs of raw materials and production without causing too much loss in sales volumes. They, along with retailers, will have to step-up on marketing and production innovation efforts. Increasingly price-sensitive consumers will be looking for promotions to stretch household budgets - package sizes and ingredients can be adjusted. It is critical that retailers and manufacturers alike approach the high-inflationary environment in a strategic way that balances their needs with those of their customers.
Vietnam is not, of course, the only nation experiencing inflationary pressures. Rapid price rises are also seen around the region and much of the world. The government has revised its 2011 GDP growth projections down to a range of 6.5 to 7 per cent, from previous projections of 7 to 7.5 per cent. It has declared battling inflation the top priority despite devaluing the Dong, and measures are now in play, including cutting the budget deficit target, limiting credit growth and raising interest rates. These moves, aimed squarely at reining in inflation while continuing to encourage growth, will make all the difference to Vietnamese consumers and businesses.
Based on retail sales tracked by Nielsen on the widest possible basket of FMCG product categories