Multiple online retailers in Vietnam have been struggling to gain profits for years due to high operational costs in a competitive market.
Tiki.vn, one of the most popular e-commerce firms in Vietnam, recently reported a VND322 billion ($14 million) loss in two years.
The loss in 2017 of the online retailer, which sells a variety of products including clothes, household items and electronic devices, has tripled its charter capital and is seven times its loss in 2016.
Tiki.vn is not the only e-commerce company in Vietnam that has been suffering from losses in recent years.
Before being acquired by the Chinese giant retailer Alibaba in 2016, Lazada Group said that it has lost $334 million in 2015 the Southeast Asia market, including Vietnam. This lost is double what it posted in 2014, according to TechCrunch.
Some local e-commerce companies like Lingo.vn, Deca.vn and Beyeu.com have also been forced to shut down due to prolonged losses.
Challenges for online retailers
According to experts, e-commerce is an industry which requires a long time to recover capital and gain profit, therefore the losses of these giants in the Vietnamese market is understandable. Big brands in the field such as U.S.-based Amazon and Alibaba has to go for 10 years before having profit.
Operating cost, especially logistics costs, is one of the main reasons for the losses. As large e-commerce firms often require massive warehouses covering thousands of square meters and hundreds of staff to work in them, logistics costs account for 60-70 percent of online retailers’ revenues, said trade expert Vu Vinh Phu.
This enormous cost can be seen from the case of Tiki and Lazada Vietnam, each has a storage of over 4,000 square meters (about 1 acres) with 300 staff in Ho Chi Minh City. It is estimated that the operating cost of one of these storages is VND1 billion (about $44,000) a month. With three warehouses in operation, the two companies spend about $2 million a year, according to local media.
In addition, marketing also plays a part in the high costs of e-commerce companies in Vietnam. When entering the market, Lazada Vietnam invested heavily in television and online advertising to attract users and gain market share. This company used to spend up to $2 million per month for advertising programs, local media said.
The popularity of shopping on social networks such as Facebook or Zalo is also creating challenges for big online retailers. “There is an unbalanced competition between e-commerce giants such as Lazada, Tiki and Shopee with social network sellers,” said Pham Thai Binh, head of retails at property consultancy Savills Ho Chi Minh City.
As businesses on social networks don’t have to pay high costs of investment, item price range is lower which in turn attracts the majority of Vietnamese people, Binh said. On the other hand, famous brands have to invest a great deal in terms of staff, operating system and other relating costs, he added.
As Vietnamese has a habit of physically “touching” a product, they often surf the Internet for prices without actually ordering from the online retailers. The lack of information and customer service tools also plays apart in the problem.
To compete in the market, retail giants in Vietnam are under pressure of price competition which leads to a loss of profit. Under pressure from investors, many businesses sometimes accept to sell 10 or 20 percent below market price, local media said.
Despite those difficulties, experts believe that there is still great potential for e-commerce in Vietnam in the future.
In a survey of about 1,000 participants conducted by CBRE Vietnam, a commercial real estate services and investment firm, 25 percent said that they will reduce the frequency of shopping at stores. About half of participants said that they will shop online more in the future.
In the annual survey of Vietnam’s Business Studies and Assistance Center (BSA), the number of people shopping online has tripled from 0.9 percent in last year to 2.7 this year. As young people start to participate more in online shopping, e-commerce is a potential area for retailers to exploit, which will bring many benefits to customers, said a representative of BSA.
E-commerce is a fast growing industry as customers’ behavior change every day, said Tran Tuan Anh, CEO of the online retailer Shopee Vietnam. “This year will be the year of e-commerce as Vietnamese people are now very familiar with online shopping,” he said.
Price will continue to be an important factor for Vietnamese customers, but product quality and service are becoming more important, he said. As more and more consumers are aware of e-commerce, the brand, service, technology and value added services such as shipping and payment will need to be improved, Anh said.
Tran Ngoc Thai Son, CEO of Tiki, also believes that the transition from traditional to online shopping is inevitable. E-commerce, now accounts for 3 percent of the $90-billion revenue of Vietnamese retail market, will grow to a 5 or 10 percent segment in the future, Son said. However, online shopping will not be able to replace brick and mortar businesses, he said.
“The growth rate of Vietnam’s e-commerce market is estimated at about 35 percent, which is 2.5 times higher than Japan,” said industry expert Duc Tam at the Vietnam Online Business Forum 2017.
According to one estimate, about 30 percent of the population will be buying goods and services over the internet in 2020, with each shopper spending an average of $350 per year.