Arisaig has been investing in grocery retailers in emerging markets for over 20 years, at various points backing these businesses in markets as wide-ranging and diverse as China, India, Mexico and South East Asia. Although the COVID pandemic is receding into memory, it is clear that this episode has changed the way consumers shop for their groceries in developed markets. For instance, US consumers are now doing a smaller number of shopping trips and visiting fewer stores. The indications are that these habits will endure beyond the pandemic.
What does this mean in emerging markets where grocery retailing through chained stores is still at a very early stage? This was the question in our minds as the team headed off to Vietnam in April 2022 for a deep dive on the potential for this market.
Arisaig’s so-called ‘Research Excellence Process’ requires us to take a 360-degree view of companies which enter our research funnel. This involves speaking to multiple stakeholders within each company’s ecosystem, such as suppliers, distributors, competitors, former employees and most importantly the end customers. The objective is to build a picture of the long-term opportunities for a business, the culture of management, and the durability of its competitive advantages. We can’t do all of this from behind a desk and whilst mindful of our net zero carbon commitments, we like to get out into market as much as possible. Our 12-member strong research team is the engine room of this effort. Almost all of them have direct experience (either lived there or speak the local language) of emerging markets, enabling us to get a genuine on-the-ground perspective.
When travel restrictions relaxed, Vietnam was the first overseas market we visited. Partner and Co-CEO Gordon Yeo made the trip from Singapore along with David Goh, our Research Director for China and ASEAN, where they spent three days focused on the largest formal grocery players in this otherwise informal sector. As long-term investors, our focus was not who would bounce back for the next quarter but on how consumer behaviour has changed and what does this mean for the long-term potential in this market of 100 million people.
Few sectors offer a scale of opportunity comparable with that of grocery retailing in emerging markets. Countries such as Vietnam and India have less than 10% penetration of modern, chained retail compared to more than 85% in developed markets such as the United States. Formalisation is driven primarily by changes in consumer behaviour, making the growth of modern retail a structural trend which is fairly agnostic to shorter term macro factors. The experience of retailers in the developed world has shown that leaders in this space, once they perfect their model, can scale up at a rapid pace and occupy significant share of the market. The top five players in United States for instance have c.50% market share, compared with less than 5% for the leading players in emerging markets such as Vietnam and India. We have found through two decades of experience that identifying the consolidators in these markets can reward investors handsomely over the long-term.
A key player in grocery retailing in Vietnam is Mobile World Group (MWG). As the name suggests, this business has its history in mobile phone retailing. This combined with white goods and appliances (a natural extension for electronics retailers) still accounts for 75% of sales. MWG’s growth outlook for mobile phone retail has been eroded by eCommerce, despite having built a decent omnichannel offering. In contrast, the outlook for offline white goods and electronics retail remains solid, given Vietnamese consumers’ preference for buying these items offline, and the logistical difficulty in shipping items in a country where motorbikes are the main way of transporting goods through narrow, traffic-clogged streets (this is a massive contrast with China, where JD.com has become the market leader for these categories). MWG also provides services such as quality guarantees, installation, and service that online competitors cannot match. Furthermore, for that part of this market that does move online, MWG is able to offer delivery of electronic items within 2-4 hours in the major cities, something which online players like Shopee cannot hope to emulate.
The real excitement for MWG, however, is in the grocery retail arm, Bach Hoa Xanh (BHX). By way of context, 92% of the grocery market is still informal. This is comparable with India in terms of market development. Moreover, the quality of formal competition in Vietnam is low, with MWG’s direct competitors mainly comprising state-owned cooperatives. MWG has been highly aggressive in building out its store network, doubling store numbers to c.2,000 over the course of the pandemic. The large, experienced store acquisition team which MWG used for its other retail concepts has proven to be a huge advantage when it came to securing locations for the grocery business. Since the start of the pandemic, MWG grocery has grown 2.6x vs 1.2x for the wider market. It is only really present in the southern half of the country, with barely any stores yet in the north. We believe the grocery business could comprise the majority of group sales in about five years.
Our market visits revealed a few things. First, MWG’s grocery stores tend to be located in true ‘white space’ areas with very few chained rivals present, and with wet markets and small independent stores being the main competition. As the photos below illustrate, it’s quite easy to see why, across all emerging markets, there is an inexorable migration of customers from informal to chained retail. Efficient modern retail chains can offer comparable or lower prices, no haggling, greater assortment, cleaner stores and more dependable availability.
Second, MWG hasn’t tried to replicate a developed market retail playbook. Its stores are highly localised, essentially bringing the sort of things Vietnamese shoppers are used to in a wet market environment – fresh vegetables, live fish etc – into a clean, formal setting.
Third, the incredible store roll out over the past two years has created some variability in store quality for MWG. Some stores we visited were messy and with numerous out of stock items; whilst others were in great shape.
Valued at a Price to Earnings ratio of 15x, with Return on Capital Employed (ROCE) of 25% as of June 2022, reasonably visible sales and earnings growth over the next five years, and competition quite weak, the main risk for MWG is execution. Or put another way, the risk that operational mishaps mean the company does not hit our forecasts for earnings. As the saying goes, “retail is detail”. Retailers that can scale fast whilst getting the details consistently right will reap huge rewards in an emerging market context, but few are able to do this. Clearly MWG has stumbled here with its grocery arm, in no small part the result of 5x store expansion over the past three years, explaining the variability in store quality we observed.
We discussed this in some depth with the company’s Founder, Chairman Tai, who told us that MWG plans to freeze its grocery store expansion to focus on fixing the customer shopping experience, quality of store staff and backend operations. On the latter point, he mentioned issues such as the lack of a standardised planogram for each store and manual demand forecasting. Further, the Chairman revealed at the AGM that their plan is to reduce SKUs from 5,000 to a core essential range of 3,000-4,000 to meet daily needs.
He has taken direct charge of the grocery operation and will be overseeing the transformation before handing it over to one of his “lieutenants” to lead. So far, they have noticed that after the revamp, stores on average saw their same store sales grow by 15-20%. Our visits to the stores did reveal that a lot of work is going on to fix this issue, and we were impressed with the results at the newly renovated stores.
Under the Chairman’s leadership, MWG has a proven track record of exceptional execution in its core mobile phones and electronics businesses. Moreover, with 37% of the company owned by founders and employees, this is almost certainly the best-incentivised public company in Vietnam. And it is becoming even more so: each year, employees are awarded options equivalent to 3% of total shares outstanding. Thus, MWG’s people are well aligned with other shareholders in their desire to grow the business sustainably.
Despite being a public equity investor, Arisaig does not have the mindset of trading in stocks; instead we invest in businesses and their people, with the mindset of holding these enterprises for decades as they capture the long-term opportunity of emerging markets. It is research trips like this – where we validate the investment thesis and get insights into the success of management execution – that underpin this mindset.
 Mobile World Group Annual Report 2021
 Mobile World Group Annual Reports 2020, 2021
 According to the company
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