By Darin Williams, Managing Director, The Nielsen Company Vietnam
Last month’s Tet -- the celebration of the Vietnamese Lunar New Year -- saw the usual exodus from the cities as residents boarded buses and trains to head home and spend the holiday with family. But this year, some of the red envelopes they were receiving or giving may have been a little lighter, the gifts 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. And Vietnamese consumers have started to enjoy the fruits of their labor with rising incomes, resulting in the continuing growth of an urban middle class. Inflationary pressures have surfaced as a natural byproduct of growth.
In 2010, the consumer price index went up 11.75 percent, according to the Vietnamese General Statistics Office. In the first two months of 2011, inflation reached 12.24 percent compared to the same period last year. Food categories were hit particularly hard: prices increased more than 16 percent, and the cost of rice has risen by a third, according to some accounts. At the beginning of March, gasoline prices went up nearly 18 percent, diesel skyrocketed 24 percent and the cost of electricity went up 15 percent.
According to analysis by The Nielsen Company, FMCG sales at the retail level in Vietnam grew 27.3 percent year-on-year in 2010, the highest growth rate seen in 13 markets across the Asia Pacific region. Price increases accounted for more than 70 percent of this stellar growth rate. In Q4 2010, FMCG retail sales grew 31 percent 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 buoyant as they continue to spend on FMCG.
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. Nielsen data suggests a dent in the country’s Consumer Confidence Index could be on the horizon. 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 purchases or new clothes. 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 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 increases have been seen around the region and much of the world. The Vietnamese government has revised its 2011 GDP growth projections down to a range of 6.5-7 percent, from previous projections of 7-7.5 percent. It has declared battling inflation its 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.