Vietnam retail market in the time of Covid-19
The retail landscape post-COVID-19 will be vastly different than it was before the pandemic hit
The outbreak of COVID-19 and its rapid spread across the globe has taken many by surprise, and businesses, communities and governments must now confront the reality of the seriousness of the situation. Global retailers must prepare to navigate a period of elevated risks to cash flow and increased operational costs arising from a slump in consumer demand and disruption to supply chains.
JLL observed that foot traffic in many malls and retail centres in Ho Chi Minh City (HCMC) declined by 80% during February and March compared to the same period last year as many mall operators have closed their retail spaces due to Covid-19. A few international brands postponed their launch plans this year in Vietnam, particularly in HCMC due to the impact of the pandemic. The pandemic will affect the opening plan of nearly 280,000 sqm GFA and 180,000 sqm GFA of retail space scheduled in 2020 in HCMC and Hanoi respectively, adding to over 2.3 million sqm GFA of current stock. Challenges may remain in the sector in Q2 2020 following the nationwide social-distancing period, effective from April 1st.
For Hanoi, in order to assist tenants in this pandemic outbreak, many landlords offered various temporary supportive measures. The most direct one was to reduce 10-50% of rents, depending on the sectors and the level of reduction varied from one landlord to another. Other indirect ones included promotion and advertising packages to attract customers.
Prior to the COVID-19 outbreak, the retail landscape within the last 18 to 24 months had been fairly robust. “E-commerce’s growth continued to rise,” said Trang Bui, Head of Markets at JLL Vietnam. “I don’t think it had deeply affected bricks and mortar retail; it was more of a complementary option.” As JLL’s data revealed, both retailers and mall developers need to focus more on developing online shopping platforms and non-cash payment.
“The challenges we’re seeing in the market currently is the overdue rent payment from retailers and tenants who have closed down. As this is an unprecedented event – nobody saw anything like this coming – the language used in most leases about business interruption and force majeure is a section that people never thought that they would have to look at. Yet, over the last two weeks, those are the clauses that are being read, re-read, and turned upside down and inside out” Trang said.
The drop in international travellers will most acutely impact the luxury markets and super prime retail destinations. Domestic retail spending may suffer a temporary decline from consumer reluctance or inability to visit destinations where infection risks are elevated. Non-essential goods items and leisure services will be hit harder than perishables and essential dry goods, which have seen elevated demand as consumers stockpile to avoid personal shortages. As the outbreak spreads, this behaviour can be expected to emerge in new geographies. Trang noted where money will be spent by consumers once the outbreak crisis is over. “Luxury items are hit the hardest as consumers tighten their wallets. We’re going back to shopping for essential daily needs” said Trang.
Liquidity in retail is a big issue, meaning how much money people have in the bank to keep their business alive. The sector struck the hardest might be the small to medium family-owned retailers. The average liquidity amongst these retailers is a couple of weeks, not six months.
Disruption to global supply chains will also significantly impact the sector. The contraction in China’s manufacturing sector is already causing supply shortages and the temporary suspension of production in downstream facilities globally. Reduced activity at major gateway ports and airports is resulting in falling utilisation rates and idle resources for warehouses.
If transmission of the virus slows by mid-year, the important Q4 seasonal sale period will be minimally affected, helping to lessen the full-year financial impact. Nonetheless, Lunar New Year sales have already been impacted and months of inactivity are unlikely to be covered. Significant downside risks exist across all geographies if the spread of the virus continues through year-end.
Protecting cash flow remains crucial for all retailers, and particularly for those operators with thin profit margins, including weaker retailers and non-food value operators. Those hit hardest may seek temporary rent reliefs from landlords. If liquidity and capital constraints arise, new store openings will slow and refurbishments will be delayed.
Some landlords have issued rent discounts in February and March, ranging from 10-30%, with top priority for general retail groups like food & beverage and entertainment. Other landlords have considered reducing rent by 10-50%, depending on the performance of each tenant. Particularly, one landlord also offered a rent deferment of 30% from March to May to the following months in the year when the situation expectedly improves. Domestic landlords can consider shifting from their traditional fixed rent model to base-rent and revenue sharing concept as applied by most of international landlords, to help share risks and enhance relationship between landlords and tenants.
Retailers with the infrastructure to fulfil online orders through home delivery are currently being perceived as beneficiaries of consumers’ reluctance to visit stores and we are seeing an increased conversion of people to online. Greater emphasis will be placed on the shift towards a flexible omni-channel retail model and sustainable fulfilment; strengthened partnerships between landlords and retailers will need to emerge to achieve this. No matter how adversarial the relationship can be between landlords and tenants at times, the bottom line is that we’re all in this together and the need to find common ground is more important than ever.
More insights can be found in the latest Vietnam Property Market Brief 1Q20
Get the latest on JLL's response to COVID-19 here.