Right to retail

Vietnam’s retail sector has long been a target of foreign investors eager to access its 88 million consumers with growing spending power and demand for quality products.

Vietnam’s retail sector has long been a target of foreign investors eager to access its 88 million consumers with growing spending power and demand for quality products.

Historically, retail has been one of the most restricted investment sectors for foreign
investors in Vietnam, with regulations and policies designed to limit their access in the
hope that domestic players would develop and fill the market space. Prior to WTO
accession in January 2007 very few foreign invested retail operations were licensed in
the country, and those tended to be negotiated on a case?by?case bilateral basis with the Vietnamese Government and accompanied by heavy capital investment commitments.

Upon joining the WTO, Vietnam agreed to a roadmap to open up market access in the
trading and distribution sectors in general and now foreign investors have on paper clear rights to access the market to import all non restricted goods and to provide all kinds of distribution services, including retail activities.

Despite this, practical and policy barriers have hampered foreign investment in this important sector and the government has been under increasing pressure to give meaningful effect to its WTO commitments in the field. Recent draft legislation, whilst welcome, suggests that change will be incremental.

Solid prospects:

The first nine months of 2010 have seen high levels of foreign investment commitment to Vietnam and an impressive trade surplus for the foreign investment sector of some $1.7 billion compared to the country’s overall $2 billion trade deficit. Despite this, registered foreign investment in the distribution sector remains low.
More than three years since joining the WTO, Vietnam has significantly changed its legal
and investment environment to open up and facilitate the distribution sector, especially
for retail activities. Not long ago, Vietnam ended India’s three?year reign as the most attractive emerging market destination for retail investment, according to the seventh annual Global Retail Development Index, a study of retail investment attractiveness among 30 emerging markets conducted by management consulting firm A.T. Kearney.

Vietnam’s investment attractiveness in retail was based on the longterm stability of economic growth, the stable political environment, a young population, increased consumer awareness and spending (an impressive 75 per cent increase between 2000 and 2007), and the rapid urbanisation of Vietnam (with more than 1 million people a year migrating to the two large cities of Ho Chi Minh City and Hanoi).

As at the end of 2009, Vietnam had 446 supermarkets, of which just 21 were foreign
invested, and a large proportion (425) being State?owned. Gross revenue reported by
foreign invested enterprises in the retail sector accounts for just 4?5 per cent of the total retail market’s gross revenue. While a number of flagship foreign invested retail operations have been licensed in Vietnam ? such as Metro Cash & Carry (Germany), Big C (France), Bourbon (France), Parkson (Malaysia), and Diamond Plaza and Lotte (South Korea) there is a distinct absence of smaller or non department/supermarket brands.

WTO commitments and domestic law.

Under its WTO commitments, Vietnam has to open up its service sectors to investors
from WTO member countries. The right to export/import and distribute are among
Vietnam’s WTO commitments and are to be opened to foreign investors in phases.

The forms of wholly foreign owned company (WFOC) and joint venture company (JVC)
are permitted for exercising provisions of distribution services in accordance with
Vietnam’s WTO commitments. Distribution services include (i) commission agents’
services, (ii) wholesale trade services, (iii) retailing services, and (iv) franchising. Upon
accession to the WTO, a foreign investor was allowed to establish a JVC with local
partners/shareholders to engage in distribution services, with the foreign investor’s capital contribution to be no more than 49 per cent of total charter capital. From January 1, 2008 a majority foreign?owned JVC was permitted and as of January 1, 2009, WFOCs were permitted in the distribution sector.

Trading rights vs. distribution rights:

Vietnamese law distinguishes between the acts of “trading” and “distribution”. The rules applicable to foreign invested enterprises (FIEs) wishing to engage in these activities differ depending on each activity.

Where a company is granted the right to engage in import and export (trading), it is given the right to directly import and export permissible goods, without having to go through a State owned or local trading company. The right to import is the right to bring goods into Vietnam and includes the right to sell such goods to properly licensed distributors in Vietnam. The goods that may be imported and exported are subject to a government list on such goods. FIEs licensed to trade, including both JVCs and WFOCs, may import goods and sell the imported goods to one or more local licensed distributor(s) for onward distribution. Pursuant to Decree 23, “distribution” means activities of wholesaling, retailing, agency for purchase and sale of goods and franchising in accordance with the law of Vietnam.

Where a company is granted a specific distribution right, it is given the right to directly
sell goods to end users, either organisations or individuals (retail) or the sale of goods to
traders or other organisations, excluding the sale of goods directly to end consumers
(wholesale).

Investment certificate:

All foreign investors must apply for and obtain an investment certificate (IC) prior to undertaking their first investment project in Vietnam. An IC acts as the legal document
establishing the relevant FIE in Vietnam as well as setting out the specific business activities such FIE may engage in.

In investment projects in conditional sectors such as distribution services, foreign investors must undergo an investment evaluation by the licensing authorities and other relevant authorities such as Prime Minister, the Ministry of Industry and Trade (MoIT) or other ministries, for principal approval or consulting ideas. Such authority will ultimately exercise its discretion on whether to issue the sought?after licence. The exact procedure and documents required for the evaluation licensing process will depend on many factors, including size, scale, location and type of investment.

Specific distribution business license (the “baby permit”). FIEs involved in trading and/or distribution activities require a separate distribution?specific “business licence” in addition to an IC. For existing FIEs, the relevant provincial people’s committee is responsible for issuing such business licences after receiving written confirmation from MoIT that the application meets the conditions agreed to by Vietnam in its international commitments.

For newly established FIEs, the investor must submit “an application dossier for investment” to the licensing authority. This body must obtain the written approval of MoIT before issuing an “IC” establishing the FIE and acting as the legal basis for it to conduct stated trading and/or distribution activities.

Establishment of retail sales outlet(s). When a FIE is granted an IC permitting the business of retail distribution services, such enterprise has the right to establish its first retail sales outlet from which to conduct such retailing without submitting an application dossier for a licence for establishment of its first retail sales outlet.

Such FIE is prohibited from conducting retail activities outside the first established retail
sales outlet unless expressly licensed to do so. The operation duration of the first retail sales outlet ends on the expiration date of the IC.

The establishment of a second and subsequent retail sales outlets is permitted on a case by case basis subject to compliance with the so called “economic needs test” (ENT), which consists of analysis of a number of factors, including the proposed number of retail sale outlets, market stability, population density in the relevant city/province of the second or subsequent retail sales outlets, and conformity with the city’s or province’s municipal planning. An FIE wishing to establish a second or subsequent retail sales outlet(s) must conduct procedures to obtain a license for such outlet(s).

The licensing authority shall issue the licence upon receiving approval from MoIT. The
licensing process is to take from 33 to 48 working days, but in practice may take longer.

Anticipated changes.

Foreign investors are awaiting the issuance of a new Decree repealing Decree 23 on
retail activities, which may resolve outstanding issues on retail definition, establishment
of retail sales outlet(s) and the ENT. Under the draft new Decree dated September 2010
(the draft), the definition of “retail” has been amended in line with the WTO agreements, i.e. “the activity of selling goods directly to end?users for the purpose of consumption by individuals and households.”

The right to establish retail sales outlet(s) outside the first retail sales outlet shall be
considered based on appropriateness to municipal planning and three criteria: number
of retail sales outlets, market stability and population density. The draft provides more
clearly the contents, authorisation and principles for establishment of national and municipal planning for retail outlets. In order to reach unity of regulations on “municipal planning” between national level and provincial level, the draft stipulates further on the principle of planning retail sales outlets allocation, timeframe to complete the allocation, and procedures for publicising and approving drafts of allocation.

The draft also provides some further details on the ENT, with methods on calculating retail sales outlets within a relevant geographic area, evaluating the stability of the current market, and defining the density of the population. It is not currently known when the new Decree will be finalised but it is likely it will be issued and become effective in early 2011.

In conclusion, as Vietnam’s legislative framework continues to evolve and investment
procedures and practices are simplified, it is becoming a far more attractive investment
destination from a regulatory perspective.

Coupled with Vietnamese consumers’ rapidly growing per capita income and the country’s young population, economic growth and political stability, Vietnam’s position as one of the world’s most attractive destinations for retail investment is likely to remain.

For more information, please contact:
Giles Cooper
gtcooper@duanemorris.com
(registered foreign attorney)