For the past few years, the middle class in Vietnam has been on the rise, spreading out geographically and growing increasingly diverse. Consumers are growing in number and becoming more demanding and discerning. It is estimated that more than half of the Vietnamese population will enter the global middle class by 2035, creating more disposable income and fueling consumption.
Middle-class consumers in Vietnam have generally been optimistic—a sentiment that appears to be prevailing as the country exits a period of economic slowdown and constraint. Vietnam’s prospects remain strong for the upcoming decade, since GDP growth is on the rise again—with year-on-year GDP growth of 2 to 7 percent expected between 2023 and 2030, McKinsey analysis shows. The core engines of Vietnam’s economic development seem robust: in Southeast Asia, wages for workers in the manufacturing sector remain among the lowest in Vietnam, and the country’s workforce is relatively highly educated.
However, against this backdrop of continued development, Vietnam is facing headwinds at the start of 2023 that are likely to impact the ability of its population to spend. For example, demand from key markets such as the United States and the European Union has decreased, leading to a lower forecasted growth in the value of Vietnam’s exports in 2023 (9 to 10 percent, compared with 14 percent in 2022). At the same time, inflation is projected to hover around 3.8 percent in 2023, which, though already high, can be perceived as even higher by consumers in the lower-income segments, who bear the brunt of inflation. This can squeeze the mortgage market and leave property developers vulnerable to liquidity pressures, which can have ripple effects on wealth and consumption.
Nevertheless, Vietnamese consumers’ overall optimism remains one of the highest among countries globally. In 2022, over 60 percent of Vietnamese respondents to a 2022 McKinsey Vietnam Consumer Pulse Survey indicated that consumers were optimistic that the country’s economy would rebound within two to three months and grow just as or even more strongly than before the COVID-19 pandemic (Exhibit 1). This is still true in 2023, with 70 percent of Vietnamese consumers planning to spend the same or more on the Tet celebration compared with 2022. There is also a clear intent by consumers to “splurge” and treat themselves, with more than 70 percent of respondents saying they intend to increase spending on categories of products or services they spent less on over the past year and a half.
However, Vietnamese consumers, for all their optimism, are also becoming more discerning and value conscious. More Vietnamese consumers anticipate a reduction in income and savings than consumers in other Asia–Pacific countries, with more than 90 percent noting price increases, fears of inflation, gas shortages coupled with higher fuel prices, and rising interest rates (Exhibit 2). These mounting financial pressures and uncertainties are accelerating consumers’ shift to more discerning shopping choices.
The evolving Vietnamese consumer
Vietnam’s consumers are becoming more sophisticated and seem to be evolving in four ways: they are more value conscious, prefer omnichannel platforms, have less brand and store loyalty, and look for purpose in what they buy. This can be captured in a framework called the “four zeros.”
‘Zero mainstream’: Consumers are value conscious, scrimping on some goods but splurging on others
Across categories, inflation and consumers switching to premium brands are driving higher spending, while a reduction in the quantities people buy seems to be driving lower spending.
The impact of this shift is twofold. First, consumers report negative net intent to spend in most categories, except the “core” categories such as groceries and fuel. Consumers are also willing to spend more on household supplies and personal care but less on dining out. A few discretionary categories, such as vitamins, over-the-counter medication, fitness products, and personal healthcare items, saw increasing net intent. Second, within categories, one can expect more spending directed toward either premium price points or more “value for money” offerings, while products priced in the middle could be at risk of being left unsold.
‘Zero boundaries’: Consumers prefer omnichannel shopping and demand a ‘phytigal’ experience
Omnichannel shopping that thrived during the pandemic seems to be prevailing. Most consumers—67 to 88 percent—who used alternatives to in-store shopping during the pandemic intend to continue using these channels (Exhibit 3), and 50 to 75 percent of consumers research and buy products through omnichannel platforms, a clear indication of how prevalent the use of these platforms is in Vietnam. Perpetuating this trend are the technology and media players that continue to deliver omnichannel offerings. At the same time, boundaries between product categories are also being eroded, as purveyors expand their repertoire of goods and services. There are specific items that buck this trend, such as groceries and vitamin supplements, which customers prefer to buy in-store, but these are the only exceptions.
Younger consumers are significantly more influenced by social media, with Instagram, YouTube, and Tik Tok driving their purchasing decisions. Gen Z is particularly influenced by social media content on skin care and makeup, accessories such as jewelry and footwear, personal-care products, and food takeout or delivery. A large number of consumers are buying digital and remote services, and they show every intent to continue doing so across service categories.
‘Zero loyalty’: Consumers do not feel tied to a store or brand
Consumers in Vietnam continue to exhibit little loyalty to both stores and brands and freely change their shopping habits to optimize their purchases. Among consumers in Asia–Pacific, those in Vietnam report being the least loyal, with 90 percent having switched stores or brands in the past three months (Exhibit 4). This behavior could be stronger in the southern part of the country, where more new brands and stores have been entering the market.
Consumers are not just being brand or store agnostic, they are also not buying the same types of products. Driving this is the bifurcation of consumers wanting more premium products while also being more value conscious. Getting better perceived value is a primary reason consumers switch brands, with quality, novelty, and personal choices among other top reasons. In the early months of 2023, brands owned by retailers were also on the rise in Vietnam—and they can benefit from the current tailwinds by snapping up consumers who are willing to switch or try brands.
‘Net zero’: Consumers buy purposefully and are making healthier, more sustainable, and local choices
Discretionary categories associated with health and sustainability saw increasing net intent. For example, 75 percent of consumers surveyed intend to continue healthy behaviors such as using a wellness app and telemedicine providers; 28 percent expect brands to be purpose driven, which includes factors like sharing customer values and looking after their employees’ wellness. While consumers value aspects of sustainability, helping the environment seems to be of a lower priority—only 24 percent of consumers indicate that purchasing products using eco-friendly ingredients and recyclable packing materials is important, and only 31 percent say that they are willing to pay an additional premium or switch to premium, higher-priced brands to support the environment.
Consumer-facing companies need to transition to a new growth model
In line with Vietnam’s middle class becoming larger, more widely dispersed, and wealthier, companies competing in Vietnam may want to adjust their value propositions to tap into the increased demand this shift brings. Here are four detailed factors for companies to consider:
- Align portfolios and distribution channels with consumers’ value-for-money needs. This might require broader offerings, as well as experimenting with new retail formats, such as discounters, and promotional activities like loyalty schemes and cash-back programs.
- Shape a premium offering catering to affluent, less price-sensitive customers, especially the younger generations who are willing to splurge. This can have several implications. First, within existing categories, this means that companies will likely need to accelerate innovations to broaden the range of products they offer and tap into more sophisticated demands. Second, this may also signal the maturity of the Vietnamese consumer market in that there is space for more premium brands to enter. Companies with a portfolio of brands and established distribution may want to consider bringing their more premium offers to Vietnam.
- Expand distribution toward the next tier of cities in Vietnam. This may require companies to broaden their distribution of goods and route-to-market models while tapping into a consolidating but still fragmented retail network. For fast-moving-consumer-goods players, this means continuing to drive general trade distribution while increasingly working out favorable terms with the national chains that are expanding.
- Inject meaning into consumer offerings. Consumers increasingly look for products that are healthier and purposeful, such as food, beverages, and supplements featuring organic ingredients. Buying brands that are local or perceived to be local can also fulfill consumers’ desire to be purposeful, and strong local players seem to have significant market share (Exhibit 5). Developing these types of products are therefore likely to accelerate growth.
As Vietnam’s consumer market becomes more demanding, the capabilities companies require for success will also change. Specifically, the following five capabilities have become critical factors for consumer-facing companies:
- Localize global products innovatively. Local brands or brands perceived to be local fare better, as Vietnamese consumers tend to derive a sense of pride from them. Companies can cater to this nuance, which includes subsegments of customers and specific budgets, by localizing global product innovations while also prioritizing hero SKUs in traditional trade, rotating them strategically in limited shelf space.
- Master revenue growth management. Optimizing this for both affordability and “premiumization” is key, as 80 percent of revenue growth is driven by the consuming class having more discretionary spend. This will require consumer-facing companies to build analytical capabilities—for example, to automate some pricing and promotional decisions based on real market data, then tailoring product assortments to a type of store or region to maximize the return on promotional investments.
- Save to invest in an area of conscious spending. The ability to compete in an inflationary context, sometimes by compressing margins to retain value- conscious consumers, becomes more important than ever and requires resilience. To achieve this, consumer-facing players should drive end-to-end saving programs, which go across levers and across areas in the organization, from supply chain to people, procurement, marketing, and promotional spending. New skills are typically required to conduct these programs successfully, without disrupting the core mission of the company, while managing to extract value to “feed” the right investments.
- Adjust the operating model. Striking the right balance between ownership (either by region or by category) and discipline to allow for speed and agility can enable commercial organizations to produce innovative products and allocate resources effectively. For consumer-facing companies, this typically leads to redefining and reinventing commercial roles: on one hand providing additional digital and analytical support—for example semiautomated route planning and sales scripts in stores—and on the other hand ensuring that teams operating in regions or channels have the autonomy they need to be agile.
- Leverage new business models to fuel the growth. Using business model innovation can create additional value as the consumer matures and becomes more demanding and more connected. For example, retailers can invest in retail-media-network capabilities to better monetize their data or invest in digital ecosystems that allow them to better serve consumers by offering a more integrated experience.
Consumer businesses would do well to ride on the high levels of optimism that hold strong in Vietnam despite headwinds on the horizon. Adjusting their growth models to respond positively to current conditions could allow them to overcome existing challenges and leverage sizable opportunities, and at the same time tap into the growth trajectory, preparing them to compete in a more sophisticated playing field.
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