analysis of Vietnam confectionery market and case of Kinh Do

A company, operating in a highly competitive business environment, would be successful in sustaining and improving its economic objectives, if it knows its market or industry structure and the forces driving competition, as well as, adopts appropriate competitive strategiesVietnam has a population of over 88 million people with a young population structure (source: General Department of Vietnam population). As a crowed population, the demand for confectionery – one kind of necessary goods is high too. In addition, in some recent years, Vietnam is been ranked as one of the most potential retailing market. In 2008, Vietnam reached the first ranking of attractive retail market in the world, thanks to strong economic growth, friendly improvements in policies with foreign investment and consumer demand for the model modern retail. However, in 2012, Vietnam relegate from the top of potential retailing market in the world because of recession and the weakness in government policies. Although the Vietnam retail market does not as attractive as before, many economists believe that this market is still potential because of the high number of consumers (source: Consultant A. T. Kearney Corporation)Since 2010, Vietnam''''s economy face to many unstable problem including high inflation rate, consumer tighten their expenses and high interest rate. This situation causes many companies in Vietnam into crisis plus high price of raw material, high cost of labor and electricity.With a large market, Vietnam has been identified as a very potential confectionery market. According to many experts worked long time in confectionery industry, the confectionery market of Vietnam will become the leading market in Southeast Asia and the world. (Source: German Association of Confectionery). As the estimation of IBA (GHM), the yields of Vietnam confectionery increase about 1.5 times from 2008 to 2012. The growth rate of retail sales of confectionery in the Vietnam market is 114.71% per year, meanwhile this figure of other countries in the region such as China is 49.09%, Philippines is 52.35% Indonesia is 64.02% , Thailand is 37.3% and Malaysia is 17.13% . (source: cafeF.vn).

TROY UNIVERSITY Page 1 of 37 CLASS: MBA TROY CLASS: MBA TROY JULY, 2012 Managerial Economics Assignment: “A company, operating in a highly competitive business environment, would be successful in sustaining and improving its economic objectives, if it knows its market or industry structure and the forces driving competition, as well as, adopts appropriate competitive strategies”. TROY UNIVERSITY I. Market 1.Market structure analysis 1.1. Analysis of confectionery market in Viet Nam Vietnam has a population of over 88 million people with a young population structure (source: General Department of Vietnam population). As a crowed population, the demand for confectionery – one kind of necessary goods is high too. In addition, in some recent years, Vietnam is been ranked as one of the most potential retailing market. In 2008, Vietnam reached the first ranking of attractive retail market in the world, thanks to strong economic growth, friendly improvements in policies with foreign investment and consumer demand for the model modern retail. However, in 2012, Vietnam relegate from the top of potential retailing market in the world because of recession and the weakness in government policies. Although the Vietnam retail market does not as attractive as before, many economists believe that this market is still potential because of the high number of consumers (source: Consultant A. T. Kearney Corporation) Since 2010, Vietnam's economy face to many unstable problem including high inflation rate, consumer tighten their expenses and high interest rate. This situation causes many companies in Vietnam into crisis plus high price of raw material, high cost of labor and electricity. With a large market, Vietnam has been identified as a very potential confectionery market. According to many experts worked long time in confectionery industry, the confectionery market of Vietnam will become the leading market in Southeast Asia and the world. (Source: German Association of Confectionery). As the estimation of IBA (GHM), the yields of Vietnam confectionery increase about 1.5 times from 2008 to 2012. The growth rate of retail sales of confectionery in the Vietnam market is 114.71% per year, meanwhile this figure of other countries in the region such as China is 49.09%, Philippines is 52.35% Indonesia is 64.02% , Thailand is 37.3% and Malaysia is 17.13% . (source: cafeF.vn). Page 2 of 37 TROY UNIVERSITY Today, there are about more than 30 companies produce confectionery in Vietnam. Among them, the 4 biggest confectionery firms hold 46 percent of market share including Kinh Do, Bibica, Haiha Kotobuki and Huu Nghi.(source: Phugia securities corporation). To understand more clearly about the whole picture of Vietnam confectionery market, we will demonstrate by the diagram below. Figure 1: Market share in confectionery industry (source: Triviet Investment) To see the diagram above, the 4 largest firms capture 46% market share, other domestic companies hold 37% and other imported companies hold only 17% of market share of confectionery. Domestic confectionery companies are increasingly asserted its position in the market (83% of market share) with the variety of products, good quality that are suitable to the taste of Vietnam. Whereas, the small production base is shrinking due to low capital, backward technology, lack of warranties in food safety. Ten years ago, a lot of circulated confectionery in Vietnam market came from China, Thailand and Malaysia. However, in some recent years, domestic brand names in confectionery market have asserted increasingly in the country because of some reasons as follow: - Almost the domestic products have the lower price than exported confectionery product from 10 to 20 percent (source: Triviet securities Corporation). Page 3 of 37 TROY UNIVERSITY - In the quality aspect, the qualities of domestic product are not lower than foreign product. In addition, almost domestic businesses apply the international standards as HACCP, ISO 9001-2010 so they meet the need of customers who care more about food safety quality. 1.2. Analysis the characteristic of oligopoly market in confectionery field Vietnam Confectionery market is oligopoly market because of some reasons: - Few sellers: in the chart, we can see that the 4 largest firms hold 46% of confectionery market share. The number of the main seller in confectionery market is only 30 firms. This is the most important feature of oligopoly market. - Unique products: Among various confectionery firms, each firm has differentiated products. For example, the products of Kinh Do focus on middle to high segment, dominated the whole market may be mentioned include Cakes (76%), bread (64%), saltine AFC (56%). Bibica (BBC) is famous for bread products named Hura, accounting for 30% market share cake and candy leading market share. Meanwhile, Hai Ha serves ordinary customers. - Blockaded entry and / or exit: Because largest firms hold a large proportion of market share (43%), they also have strong capital, high technology so new small firms face difficulties when entering to the market. In addition, the Vietnamese government has just issued some law and policies including Food Safety Law, Goods quality Management Law require clearly about product origin lead imported confectionery of unknown origin difficulties to penetrate into Vietnam confectionery market. - Imperfect dissemination of information: Because there are few sellers in the confectionery market, buyers do not have many choices. They must buy from some particular seller must accept information in cost, price, product quality provided by the seller. - Opportunity for economic profit in long run equilibrium: Like monopoly market, oligopoly earn economic profit in long run while competitive market and monopolistic earn normal profit. Both type of market can set price so they can earn more profit than two other types 1.3. Analysis of 4 leading firms in confectionery market Page 4 of 37 TROY UNIVERSITY 1.3.1. Kinh Do: Kinh Do is the largest firm in confectionery industry. In this project, I choose Kinh Do to analyze so we will illustrate more clearly in some following sections. 1.3.2. Bibica: Bibica (BBC) is the second largest firm in confectionery industry with market share of 8%. While Kinh Do focus on high-end segment, BBC selected the mass market segment with the main products include cakes, candies, chocolates and nutritional products. In which, bread product line offers the largest revenue with 40%, candy 35% and 10% of nutritional products in the revenue structure of the BBC. This table below will demonstrate more about the revenue and profit and some other financial indicators of BBC. Page 5 of 37 TROY UNIVERSITY Figure 2: Financial Report of Bibica (Source: Tri Viet Security) 1.3.3. Hai Ha Hai Ha has the market share of 6%, with the major product including cookie, candies and wafers. In the first quarter 2012, Hai Ha has the revenue of 178,593 billions, net profit 22,86 billions VNDs (source: cophieu68.vn). 1.3.4. Huu Nghi Huu Nghi is also a large company in the confectionery industry in Vietnam. Confectionery products of Huu Nghi include biscuits, jam and bread. Particularly with salty bread, Friendship is the market leader. In 2011, Huu Nghi has the revenue of 1.081 billion VNDs. Page 6 of 37 TROY UNIVERSITY 2. Market condition 2.1. Determinants of confectionery demand 2.2.1. Price of confectionery: The characteristic of the confectionery industry is that demand increases at the end of the year lead price to increase too. To understand more about the price of confectionery to estimate the demand function of confectionery market, we will calculate its price through out the year. Figure 3: Revenue Growth/ Quantity Growth in confectionery market (source: BIM report) We have the equation TR= P*Q. From 2 charts above, we can calculate the price of confectionery as the chart follow: Page 7 of 37 TROY UNIVERSITY Figure 4: Price of confectionery To see in this chart, the price of confectionery does not change much over years and remain the stable increasingly rate. The price and estimated price of next following years is highest in 2009. 2.1.2. Income Income is one determinant that affects to demand because when people have a lot of money, they tend to buy more goods. Income of Vietnamese people can be expressed in the chart below: Figure 5: GDP of Vietnamese people from 2000 to 2010 To see the diagram, GDP of Vietnamese person increase at the rate from 10 to 20 percent. With the stable increasingly salary over years, the demand for confectionery is expected to increase in some following years. Page 8 of 37 TROY UNIVERSITY 2.1.3. Interest rate on confectionery producing loans As other industry in Vietnam market, in 2012, confectionery is facing many difficulties from the long recession. One of the most difficulties is high interest rate. At the peak, interest rate raise to from 20 to 22 % per year. Now, although the interest is lower at 15% to17%, it is still too high to the tolerance of businesses. Figure 6: Interest rate (Source: JP.Morgan). This diagram above demonstrates the interest rate over years. To see this diagram, the interest rate increasingly by 2 times from 2010 to 2012. However, inflation reduces from 18.1% to 8.3%, the JP. Morgan Bank predicts that Vietnamese government will reduce interest rate in the last 6 months. 2.1.4. Advertisings The cost of advertising is also one determinant of demands. Cost of advertising can be seperate to 2 parts: cost for producing and broadcasting. It has been estimated that the average cost of producing a 30-second national TV commercial is nearly $350,000 (source; geabler.com). In Vietnam, the cost to run commercial is 150 million Vietnam Dongs for only 1 minute (www.vnexpress.com). To see the cost above, we can know that advertising is very high for businesses. 2.2. Determinants of confectionery supply: Page 9 of 37 TROY UNIVERSITY Similarly to demand, the quantity supplied can be affected by many factors as price of confectionery itself, technology, price of related goods, .Beside some factors that influence demand as price of confectionery itself, price of related goods, the market supply function also takes into account other factors as technology, input price 2.2.1. Price of input Some main inputs of confectionery are flour, sugar, milk, eggs. We will analyze following: Flour: Vietnam is a tropical country so firms must export flour from other countries. For this reason, the price of flour, beside the price of exported flour its self, it is affected by the exchange rate. Some statistics below give some example to understand about the price of world flour: Page 10 of 37 . II. Company analysis 3. Kinh Do – a leading firm in Vietnam confectionery market 3.1. Introduction Kinh Do is a leading confectionery firm in Vietnam, established. experience. For the case of Kinh Do, because of many strategies in finance, marketing, education, Kinh Do reduces the cost of production and distribution.