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The Battle of the Brands

Source:Happi Asia     Date:2015-06-30
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young Vietnamese female shopperIT WOULD be safe to say that the use of cosmetics in Viet Nam is far from a new phenomenon. In fact, Viet Nam as with most countries in the Asian region has a long history of manufacturing and using a whole array of fragrances, cosmetics and other body care products; and in some cases this history dates back thousands of years.
 
In more recent times Viet Nam has seen many changes in the development of the country’s cosmetic and personal care sector. The growth of the Vietnamese population and economy, the increase of the middle classes and the rise in disposable income all contributed to the steady growth in the supply and demand of personal enhancement products.
 
Although this emerging Southeast Asian economy has been experiencing continuous growth in the consumption and manufacture of these products, this growth has not been without some teething problems. When Viet Nam opened up the local markets to foreign manufacturers, local companies were somewhat complacent in establishing their various brands with consumers and were overshadowed by the slick distribution strategies and marketing campaigns of the multinationals.
 
Even though Vietnamese Government sources indicate that there are approximately 430 Vietnamese companies either trading in, or manufacturing cosmetics and personal care products, all these companies combined only account for a small share of the market, with the remaining 80% being held by foreign companies. Now, when we consider that the industry’s value here in Viet Nam is around USD 150 million per annum*, we can see why local producers are somewhat concerned.
 
Another factor to consider when analyzing the cosmetic and personal care sector here in Viet Nam is that the marketing, distribution and sales strategies tend to be territorial in focus. The reason for this is due to the differing lifestyles, income, demographics, traditions, and buying habits/brand preference in the different Vietnamese regions and cities: What happens in the south of the country is very different to the north, which in turn is different to the central region. Additionally, what happens in the regional areas is also very different to what takes place in the capital cities, i.e. HCMC, Hanoi and Da Nang. This difference in consumer buying habits amongst the various regions also creates diversity in market share amongst the leading brands. 
 
International Activity
 
When we look at the countries participating in the Vietnamese cosmetic and personal care sector, Korean companies have the largest percentage of brands available, followed by Japan, and the European brands, then Thailand and the US. However, in 2015 a regional bilateral and multilateral agreements signed by Viet Nam opened the door to big changes, particularly with the dropping/reducing of import tariffs on a large number of cosmetic and personal care products. This has given a strong strategic advantage for foreign companies, who will save a great deal importing products from their home country of operations instead of having to produce them locally. A number of companies have already started to take advantage of these changes and have slowed down or stopped their manufacturing operations here in Viet Nam. Sources indicate that around two-thirds of foreign cosmetics manufacturers with manufacturing facilities here in Viet Nam have already ceased production.  
 
Foreign cosmetics manufacturers operating in Viet Nam follow one of two business structures, either through Direct Foreign Investment (DFI) or franchise contract, such as in partnership with an agent/distributer. For example, one of first companies to set up manufacturing operations here in Viet Nam as a DFI company was the South Korean company DeBON (part of the LG group of companies). DeBON started manufacturing operations here in Viet Nam in the late 1990s, and since then have grown to be one of the market leaders.
 
Alternatively, Japanese-based cosmetics manufacturer Shiseido also set up shop in Viet Nam in 1997, but chose to follow a partnership structure with local distributors, Thuy Loc, which served the company well until 2012 when conflict between the two companies ended the partnership. As foreign-owned companies are now allowed to control their own distribution in Viet Nam, Shiseido have developed a stronger presences in the market.
 
Navigating the Market
 
With the growth of the cosmetic and personal care market here in Viet Nam, there are many companies competing to capture a share of market, and reports describe Viet Nam as a very competitive market to operate in, and where companies spend a great deal of time and money getting their brand awareness increased amongst consumers, and this will only increase as the competition gets even more aggressive.
 
Although at first glance Viet Nam with a predominantly young population of around 90 plus million people, looks like an ideal market to sell cosmetics and personal care products, the country’s spend on such luxury items such as cosmetics is still fairly low in comparison to other countries in the region, such as Thailand. A Nielsen survey indicated that present spending on cosmetic in Viet Nam is around $4 per person per annum, as opposed to Thailand which is estimated at around $20 per person per annum. This indicates that Viet Nam is still in the process of moving from a need-based to a want-based culture, although all indications suggest that this is changing rapidly.
 
When taking a serious look at the cosmetic and personal care market here in Viet Nam, one can only see optimism and continuing growth. However, if you also do a competitor analysis of the sector, it’s easy to see that the market is not for the faint hearted. New market entries, whether you’re a Vietnamese or foreign company, would have to work hard and have a great marketing and distribution strategy to compete with some of the larger overseas companies that have been operating here for 20 years or more.
 
On close examination of the various industry products and product positioning strategies within the market, we can see that there’s a number of different product pricing levels and differing product appeal amongst the various age groups and regions, we can still find gaps in the market, which creates potential amongst the SME manufacturers and distributors. There’s also the potential for the production of various grown and processed personal enhancement product ingredients such as citronella and peppermint.
 
Industry observers (including this author) are waiting to see how the industry will respond when the full effects and benefits of these new tariffs are felt. As with any major industry change, there will be winners and there will be losers, so it’ll be interesting to see how things turn out once the dust has settled. (ANTHONY EVANS)
 
* Viet Nam Chemical Cosmetic Association
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