Vietnamese media was abuzz with news that US giant Amazon is set to join the country’s fast-growing retail market this month, with representatives stating that the company will open its platforms to domestic small- and medium-sized enterprises. Despite the buzz, softly, softly is order of the day with the e-commerce giant aware that there’s plenty of regulation in the pipeline that will affect development of the e-commerce sector in Vietnam.
Amazon signed a deal with the Vietnam E-Commerce Association (VECOM) at the Vietnam Online Business Forum in Hanoi on March 14. The deal was discussed at a meeting late last year between the association and Amazon, according to Brand Finance Global Ranking.
With a young, hyper-connected population of nearly 100 million, Vietnam is a prime target for e-commerce development in Southeast Asia. Unfortunately for shopaholics, the representative from Amazon denied the company had intentions to trade in Vietnam at this time.
Instead, Amazon has agreed to provide e-commerce services for VECOM, which is a group of 140 local online businesses, marking the first time the association has collaborated with an e-commerce player. The Amazon deal will allow Vietnamese firms to sell and export goods through its ecosystem. In return, The Vietnamese market holds strong growth potential for Amazon in the future.
On the bright side, it may not be long before Amazon and other online retailers change their tune. Partnering with third-party merchants, like in the agreement with Vietnam, is likely a precursor to Amazon entering the market with its full slate of offerings. Similar steps were taken by the firm in Australia and Brazil.
Such deals can be considered a way for Amazon to get its foot in the door and build familiarity with consumers before introducing its full line-up of services. This could mean that Vietnam is the next target in the company’s Southeast Asian strategy, after rolling out in Singapore last year. As subscribers dwindle, expanding from saturated markets like the US and EU would be a good bet, and Southeast Asia as a whole provides a promising future for e-commerce.
In particular, Vietnam’s e-commerce market grew by 25 percent last year, and the growth trend is expected to continue. Revenue from online retail is forecast to hit US$10 billion by 2020, accounting for 5 percent of the country’s total retail market.
As it stands, Lazada dominates a third of the country’s online shopping market. Head of Chinese giant Alibaba, Jack Ma, stumped up US$1 billion to buy stakes in Lazada and enter the Southeast Asian market, including Vietnam. This move allowed deeper penetration into Vietnam’s e-commerce and brought products directly to Vietnamese consumers through the B2C (business to consumer) model.
It is this model that Amazon will seek to emulate. The Chinese firm is positioned primarily as an intermediary – connecting sellers to buyers, and operating a delivery network.
Amazon clearly sees the potential. The country has the ingredients for a thriving e-commerce economy thanks to a young population, rising incomes and growing internet and mobile adoption. This last point, the ubiquity of mobile phones, will prove crucial if online platforms are to succeed. The importance of mobile commerce in generating traffic is far greater in Southeast Asia than in other Western economies, so a mobile strategy will make or break a venture.
From street to screen
The changing tastes of the country’s young consumers is pushing traditional brick-and-mortar stores to rethink their strategies. Big retailers like Vincom, Lotte, AEON and Saigon Co.op have launched online shops with alluring promotions to attract buyers.
However, the market is still at an early stage of development, meaning challenges such as high cash-on-delivery rates, lack of customer trust and poor logistics infrastructure. Meanwhile, e-commerce companies are spending aggressively to gain market share, resulting in fierce competition.
Difficulties in turning a profit have led to a number of failures. VNG Corp reported a loss of over US$5.3 million from its investment in e-commerce firm Tiki.vn in 2017. Other local e-commerce companies like Lingo.vn, Deca.vn and Beyeu.com have been forced to shut down due to prolonged losses.
The blame for these failures has been placed on high logistics costs. According to experts, companies need to allocate enormous expenses for their e-commerce business, from sales and marketing to warehousing and logistics, easily eating into profits. Many platforms also overspend on promotions and discounts in early months to lure customers and increase their market share in a crowded environment.
However, the challenges don’t seem to have dampened enthusiasm and foreign players continue to pump money into the online retail sector. Undeterred, Lazada is investing in the growth of its first mile, last mile and fulfillment capabilities to keep up with the growth of e-commerce in Vietnam. In addition to developing automated sorting centres to speed up delivery, the company also cut commissions by 50 per cent to lure in more online retailers.
Online retail makes up just 1 percent of the total retail market in Vietnam, compared to 14 percent in the US and China. As such, there is plenty of room still to grow. The ongoing expansion of the marketplace, and continued investment pouring in, will help Vietnam to develop an e-commerce ecosystem, allowing for opportunities in logistics, warehousing, and online payments.
For more information about e-commerce in Vietnam, please contact Giles at GTCooper@duanemorris.com or any of the lawyers in our office listing. Giles is co-General Director of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office.