EDITION EVBN Agri-/Agrobusiness: The Meat Sector in Vietnam

Transcription

1 zz EDITION EVBN Agri-/Agrobusiness: The Meat Sector in Vietnam

2 Useful contacts EU-Vietnam Business Network (EVBN) 15 th Floor, 5B Ton Duc Thang, District 1 Ho Chi Minh City, Vietnam T: +84 (0) More information General Statistics Office of Vietnam: Vietnam Customs Statistics: Vietnam Trade Promotion Agency (Vietrade): World Bank Vietnam: The Landmark, 15th floor, 5B Ton Duc Thang St., District 1, Ho Chi Minh City, Vietnam Tel. +84 (0) Fax +84 (0) EVBN Agri-/Agrobusiness: The Meat Sector in Vietnam This publication has been produced with the assistance of the European Union. The content of this publication are the sole responsibility of EVBN and can in no way be taken to reflect the views of the European Union

3 Contents Executive Summary... 7 Vietnam Overview Demographics Vietnam Economics... 9 a. GDP... 9 b. Vietnam s trade structure Consumption a. Income and Expenditure b. Structure of consumer expenditure Overview of the Meat Sector Domestic Production Consumption Import a. Vietnam s meat import structure b. Vietnam s meat import by countries Export Trends of Vietnam s meat sector Key growth drivers Competitive Landscape Competitive landscape Example of a key player Dabaco Group Price structure Client and Distribution Profile of end users Potential distribution channels a. Meat flows and supply chain in Vietnam b. Trade distribution channels c. Domestic distribution channels An example of pig supply chain A local Mediterranean restaurant chain in Ho Chi Minh Regulatory and Legal Framework EVBN Agri-/Agrobusiness: The Meat Sector in Vietnam

4 1. Regulatory and legal framework Market entry forms Influences of the EU-Vietnam FTA SWOT Analysis Summary Annex References EVBN Agri-/Agrobusiness: The Meat Sector in Vietnam

5 List of Abbreviations ASEAN EU FSL FTA GDP MARD WTO Association of Southeast Asian Nations European Union The Law on Food and Safety Free Trade Agreement Gross domestic product Ministry of Agricultural and Rural Development World Trade Organisation Currency Exchange The currency is converted to EUR ( ) using the average value of 52W low and 52W high. Rates are compiled from Yahoo Finance. EUR/US$ 52W low W high 1.20 Average 1.12 EUR/VND 52W low 22, W high 26, Average 24, EVBN Agri-/Agrobusiness: The Meat Sector in Vietnam

6 List of Figures Figure 1: Age pyramid in 2015 and forecast for Figure 2: Forecast of rural and urban population in Vietnam and Asia Pacific in Figure 3: Vietnam s GDP by sector, 2000 to 6-month Figure 4: Vietnam's export structure in Figure 5: Total personal disposable income and consumption expenditure, f Figure 6: Structure of consumption expenditure per capita, Figure 7: Livestock production, f Figure 8: Consumption and Production of livestock, f Figure 9: Meat consumption, f Figure 10: Carcass consumption per capita by selected countries in Figure 11: Vietnam's meat import structure, Figure 12: Pork meat import value by countries, Figure 13: Poultry meat import value, Figure 14: Bovine meat import value, Figure 15: Profiles of some local meat companies Figure 16: Dabaco Group s sources of revenue, 3Q Figure 17: Dabaco's value chain Figure 18: Comparison of locally produced and imported meats Figure 19: Meat flows and supply chain in Vietnam Figure 20: Share of large- and small-scale slaughterhouses, Figure 20: Trade distribution channels Figure 22: Pig supply chain in Vietnam Figure 23: Vietnam's import tariffs EVBN Agri-/Agrobusiness: The Meat Sector in Vietnam

7 Executive Summary Since the economic reforms program (Doi Moi) in 1986, Vietnam has experienced multiple transitions. Vietnam is considered to be one of the region s most attractive markets for foreign investors with a steadily increasing GDP and booming foreign direct investment, a pattern which is forecasted to remain stable in the upcoming years. The first six months of 2015 observed the fastest GDP growth at a pace of 6.3% which is expected to reach around 350 billion in Vietnam s meat market has also seen considerable developments in recent years due to the country s rising population and economic growth, combined with social factors such as the influence of Western culture and changes in shopping habits. In 2014, 3.6 million tonnes of meat were consumed in Vietnam. With a compound annual growth rate (CAGR) accelerating 4.5%, this number is estimated to reach 3.7 million tonnes in 2016 and 4.5 million tonnes in The market value of the livestock sector is estimated to have reached 20.7 million in 2015, an increase of 2.6% in comparison with 2014 and accounting for 19% of Vietnam s agriculture GDP. Whereas this significant increase in meat consumption might lead to local supply shortages (except for pork), it obviously creates opportunities for foreign meat exporters on the other hand. Importation has increased considerably during , reaching million in Meat exporters benefit from competitive prices as well as superior safety and health standards. Overall, the meat market has become quite competitive, with relatively new exporters from the EU besides the long-time trade partners from US, Australia, and India. Furthermore, the recently signed EU-Vietnam FTA will eliminate most of the import duties and is hence expected to create competitive edges for EU investors in Vietnam. Local companies, realising the threat of losing market share to foreign investors, have enacted a restructuring scheme aiming to build both horizontal and vertical linkages to help reduce transaction costs, to improve efficiency of the sector, and to recapture market share. However, meat exports remain stagnant in recent years. The growth of Vietnam s meat market is due predominantly to the population growth, rapid urbanisation, and higher household income. Moreover, Vietnamese consumers are increasingly aware of health and food safety and prefer imported meats to locally produced ones because of their perceived premium quality and higher standards of food safety. Though shopping in wet markets is still practised by 86% of Vietnamese consumers, this behaviour is estimated to decrease with the rapid expansion of supermarkets and hypermarkets. Moreover, changes in young people s lifestyles and their growing concern for work-life balance are also expected to influence a shift towards modern trade channels. 7 EVBN Agri-/Agrobusiness: The Meat Sector in Vietnam

8 Vietnam Overview 1. Demographics Located in Southeast Asia, with a landmass of 330,972.4 km 2 and a vast sea area, Vietnam is the 14 th most populated country in the world with approximately 91.6 million people in In 2030, the population is forecasted to reach over 103 million Male Female Million people Million people Figure 1: Age pyramid in 2015 and forecast for 2030 Source: GSO Despite Vietnam s positive demographics, its population is ageing rapidly. Vietnam is currently going through a period known as the golden population structure as the number of people in working age is twice as high as the number of dependent people. However, the number of young people aged 0-29 is expected to decline by nearly 3.5million (equivalent to 7.6%) because of low birth and fertility rates. Additionally, the largest population increase is forecasted for people aged 60-79, which will increase by 8 million people in the next 15 years. In summary, these trends will lead to an ageing population, a trend that is happening at a faster pace than in neighbouring peer countries. 8 EVBN Agri-/Agrobusiness: The Meat Sector in Vietnam

9 GDP (EUR mn) Vietnam Asia Pacific Urban 43% 44% Rural 57% 56% Figure 2: Forecast of rural and urban population in Vietnam and Asia Pacific in 2030 Source: UNDP Although Vietnam remains predominantly rural, it is expected to undergo significant urbanisation in the next 15 years. By 2030, the urban population is forecasted to increase by 9%, reaching 44.3million people, or 43% of the total population of Vietnam. This rapid urbanisation is caused predominantly by the growth of urban cities and the expansion of the urban-based industrial and services sectors. 2. Vietnam Economics a. GDP Gross domestic product (GDP) growth has increased by 6.4% reaching billion in At this rate, Vietnam continues to be one of the fastest-growing economies in Asia. This growth is expected to continue at the same pace, reaching billion in Vietnam s GDP per capita ranks 6 th amongst the Association of Southeast Asian Nations (ASEAN) members and is expected to reach over 2,000 in 2015, and over 3,000 in month 2015 Figure 3: Vietnam s GDP by sector, 2000 to 6-month 2015 Source: GSO, MPI Agriculture, forestry & fishery Industry & construction Service 9 EVBN Agri-/Agrobusiness: The Meat Sector in Vietnam

10 Vietnam s economy has shifted towards the industrial and service sectors. More particularly, in the first six months of 2015, the industrial and construction sectors saw an increase of 9.1% y-o-y compared to the same period in The services sector rose by 5.9%, whilst the agriculture, forestry and fishing sectors grew a slight 2.4% y-o-y. b. Vietnam s trade structure Vietnam s total export value reached billion in 2014, an increase of 14% and 350% in comparison with 2013 and 2005, respectively. Although over 46% of Vietnamese labourers work in the agriculture, forestry, and fishery sectors, those sectors do not contribute significantly to the country s exports. Vietnam s two major export products are seafood and coffee, respectively contributing 5.2% and 2.4% of the country s export structure in The US was Vietnam s largest export partner, receiving 19.1% of Vietnamese outbound shipments. A recovering US economy will have a favourable export outlook for Vietnam. Moreover, EU-28 continues to be a key commercial partner, ranking second with 18.6% of the export value. 30.7% 15.7% EUR 133.9bn 13.9% 2.4% 7.6% 3.7% 4.1% 6.9% 4.8% 4.9% 5.2% Telephones and parts Textile, sewing products Computers, Electronical products Footwear Seafood Machinery, accessory Crude oil Wood and wooden products Means of transport and equipment Coffee Others Figure 4: Vietnam's export structure in 2014 Source: GSO Vietnam s total import value reached 132 billion in 2014, an increase of 12% and 400% in comparison with 2013 and 2005, respectively. The import structure remained generally unchanged between 2005 and 2014 with the predominance of machinery, equipment, and accessories importation. Due to low economic development level and low-skilled labour, Vietnam s main imported goods are machinery, equipment, and electronic products followed by raw materials and fuel. It is estimated that the cost of imported materials and components totalled 90% of Vietnam s exports of manufactured goods. With nearly 30% of the total imports, China is the largest import origin. The import value from China is twice as much as the second country, i.e. Korea. The EU-28 is the fifth largest import partner with 6% of the country s total import value. Main imported products from EU-28 are machinery, appliances, and chemicals and related products. 10 EVBN Agri-/Agrobusiness: The Meat Sector in Vietnam

11 EUR EUR bn 3. Consumption a. Income and Expenditure Disposable income has increased significantly in the last decade and is expected to continue to grow in the coming years. Vietnam has emerged as a lower-middle income country with anticipated total personal disposable income reaching 137 billion and anticipated total consumer expenditures totalling 122 billion in This growth in total income is forecasted to create an upward trend in consumer spending, which may create attractive opportunities for foreign investors e 2016f 2017f Total personal disposable income Total consumption expenditure Figure 5: Total personal disposable income and consumption expenditure, f Source: Seiko Ideas b. Structure of consumer expenditure In 2014, Vietnamese consumers spent on average 43% of total expenditures on food, beverages & tobacco, and 10% on housing & household fuels. Although expenditures on food, beverages & tobacco continue to account for the largest portion of consumer expenditure per capita, a slight shift of consumption is foreseen until 2019 as Vietnamese consumers allocate funds to other kinds of goods like health, leisure & education and transport & communications e 2016f 2017f 2018f 2019f Other Leisure & education Transport & communications Health Household goods & services Clothing & footwear Housing & household fuels Food, beverages & tobacco Figure 6: Structure of consumption expenditure per capita, Source: EIU 11 EVBN Agri-/Agrobusiness: The Meat Sector in Vietnam

12 Overview of the Meat Sector 1. Domestic Production The market value of the livestock sector is estimated to have reached 20.7 million in 2015, a 2.6% increase from 2014, and accounting for 19% of Vietnam s agriculture GDP. This increase is correlated to the recent growth of domestic meat production as shown below: , , e 2016f , , Poultry Pork Beef 2017f , f , f 1, , ,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 Livestock production ( 000 tons) Figure 7: Livestock production, f Source: BMI Pig production continues to dominate the domestic meat sector in the next 5 years with 2015 s output reaching 2,493 thousand tonnes and accounting for over 65% of total livestock production in Vietnam currently ranks 5 th worldwide in terms of the total number of pigs, and 6 th in terms of pork production according to live weight. After recovering from two disease outbreaks in 2006 and 2011, pork production has witnessed an ongoing upward trend driven by population growth, rising domestic demands for a more varied diet, and an expanding middle class. Meanwhile, poultry production, with an average growth rate per annum of 5% during , registered the strongest growth amongst the livestock sectors, in comparison with 2.4% and 1.3% for pork and beef productions, respectively. After pork, poultry is considered the second most important meat for Vietnamese consumers. White meat production increased rapidly in 2010 and 2011 with a double-digit growth rate of 12% before levelling off at around 4-6% during It is anticipated that the broiler meat industry will reach over 1 million tonnes in EVBN Agri-/Agrobusiness: The Meat Sector in Vietnam

13 Regarding the bovine sector, production dropped slightly during , after which it recovered 1% growth rate, equivalent to 375K tonnes in Bovine production is foreseen to continue its growth at a pace of 2.5% per annum. In Vietnam s rural areas, the majority of cows and buffalos are raised for farming, dairy production or means of transportation and, in some cases, considered as fixed assets generating cash flow for the household. This helps to explain why the domestic slaughtering of beef and veal has remained stagnant for years. Despite the positive change in the livestock industry over the last few years, the domestic production continues to experience some problems. Since livestock production constitutes an important source of income for many rural households, the majority of livestock produced in the country results from small-scale and heavily dispersed households. Specifically, 86% of swine farms and nearly 90% of poultry farms in Vietnam are small-scale. Livestock production, consequently, is fragmented and struggles to meet the consumption demands in the country. Another drawback is the lack of investment by local companies in sub-sectors such as feed production and animal breeding, making those sub-sectors largely dependent on foreign investment. 2. Consumption Consumption Production , , , , e 410 2, , Poultry Pork 2016f , , Beef 2017f , , f , , f , , , ,000 4,000 3,000 2,000 1, ,000 2,000 3,000 4,000 5,000 ('000 tonnes) Figure 8: Consumption and Production of livestock, f Source: BMI Meat consumption in Vietnam has risen significantly over the last decade, fuelled by strong income growth as well as population growth amounting to 3.6 million tonnes in This number is forecasted to reach over 4.5 million tonnes in As mentioned before, meat output, despite its stable growth over the past few years, has not kept up with consumption demand. From the above chart, it can be noticed that whilst the domestic pork production is relatively sufficient for the domestic consumption demand, there is a significant shortage in the supply of beef and chicken. 13 EVBN Agri-/Agrobusiness: The Meat Sector in Vietnam

14 Carcass consumption per capita (kg) Meat consumption ( 000 tonnes) e 2016f 2017f 2018f 2019f 2020f Figure 9: Meat consumption, f Source: FAPRI Broiler Pork Beef and Veal Pork has long been the traditionally consumed meat in Vietnam and constitutes an indispensable part of consumers daily diet. In 2015, pork consumption continues to be the dominant meat consumed, accounting for 68% of total consumption, and increasing at an annual growth rate of 3%. Poultry, the second most popular meat, also shows a steady increase in consumption with a 5% y-o-y growth rate. The bovine consumption growth rate hovers around 3-4%, which also correlates to its production growth output. Per capita consumption of carcass in Vietnam can be considered relatively low. In 2015, consumption per capita was 33.2kg, one-third of the consumption in the US (107kg), and half of the EU s consumption (76kg). Compared with China, where consumer s habits are similar to those in Vietnam, consumption was also lower (56.4kg). In the ASEAN region, Vietnam s meat consumption was on par with Thailand but higher than the Philippines (27kg) and Indonesia (11kg). The underlying reason for the differences seems to be the relatively low per capita income in Vietnam with increasing household income a greater consumption of meat and other animal-derived foods is expected Beef and Veal Pork Broiler Figure 10: Carcass consumption per capita by selected countries in 2015 Source: FAPRI 14.2 US EU China Thailand Vietnam Philippines Indonesia EVBN Agri-/Agrobusiness: The Meat Sector in Vietnam

15 3. Import a. Vietnam s meat import structure It is estimated that in 2014, the value of imported livestock was around million. Poultry remained the most imported product category during Although the import value of poultry increased by 31.1 million during , its contribution to Vietnam s meat imports reduced from 72% to 51% whereas the share of bovine meat rose sharply during the same period % 5% 2% 86.1mn 72% 2014 Poultry Pork 41% 183.8mn 51% Meat of bovine animals, fresh or chilled. 4% 4% Meat of bovine animals, frozen. Figure 11: Vietnam's meat import structure, Source: UN Comtrade As explained above, bovine and poultry meat are imported in large quantities, with bovine meat experiencing the sharpest increase. The period of saw a four-fold increase in bovine meat s import value from 22.4 million to 82.6 million. Cattle meat imported to Vietnam is classified into two main categories: fresh/chilled meat and frozen meat. Whilst there was a significant surge in the total value of imported frozen meat, the fresh/chilled meat value experienced a slower increase of about 1.2% per annum. In 2014, the import value of frozen bovine meat was recorded at eleven times higher than the fresh/chilled category. 15 EVBN Agri-/Agrobusiness: The Meat Sector in Vietnam

16 b. Vietnam s meat import by countries Pork % 4% 4% EUR1.5mn 73% USA Canada Australia Denmark 31% 9% 10% 19% EUR7.9mn 1% 16% 6% 8% USA Canada Australia Denmark Netherlands Germany Spain Others Figure 12: Pork meat import value by countries, Source: UN Comtrade The pork sector saw a remarkable change in the number of importers during In 2010, pork was imported into Vietnam from mainly four countries: United States, Canada, Australia and Denmark. In 2014, the import value increased to 7.9 million with EU countries such as Denmark, the Netherlands, Germany and Spain getting a significant market share. The US saw the biggest lost in market share with only 10% in Spain has emerged as the largest exporter of swine meat to Vietnam, reaching over 2.4 million, followed by Canada ( 1.5 million) and Denmark ( 1.3 million). Poultry 2% 1% 2010 USA 1% 1% 7% 2014 USA 8% 7% EUR 62.2mn Brazil Rep. of Korea Argentina 11% 23% EUR93.3mn 57% Brazil Rep. of Korea Poland France 82% Others Others Figure 13: Poultry meat import value, Source: UN Comtrade 16 EVBN Agri-/Agrobusiness: The Meat Sector in Vietnam

17 In 2014, the total import value of poultry meat in Vietnam was 93.3 million, an increase of 50% compared to During this period, the US, Brazil, and Korea remained the three biggest providers of foreign broiler meat to Vietnam, constituting more than 90% of the import market share. Similar to pork, the poultry meat market has welcomed new players from the EU, including France and Poland which respectively exported 1.1 million and 0.9 million into the country in Bovine Fresh/chilled bovine meat Frozen bovine meat Others USA New Zealand Australia Others India USA New Zealand Australia Others India USA New Zealand Australia Figure 14: Bovine meat import value, Source: UN Comtrade For fresh/chilled bovine meat, Australia continues to be Vietnam s dominant trade partner, with an import value reaching 5.3 million in 2014, which is three times larger than the combined import value of the other countries. With frozen bovine meat, India and the US lead the market with 49 million and 14.5 million, respectively. It is expected that the import of bovine meat from most of the current export countries will maintain an upward trend and become more competitive in the future. 17 EVBN Agri-/Agrobusiness: The Meat Sector in Vietnam

18 4. Export In contrast to the robust growth of the import market, Vietnam s meat export market is less established and is also expected to remain stagnant in the future. Health and food safety concerns are the main obstacles preventing the export of domestic meat to potential markets such as the US and Japan, where standard requirements are stringent. Poultry exports saw the biggest increase from 116K in 2012 to 5.6 million in Bovine meat exports remained at a very low level accounting for 22.8K and 59.5K in but surging to 1.2 million in Pork exports are considered as a priority in accordance with the Government policy. In the past, the Vietnamese government applied various export subsidy programs to support pork, rice, and coffee products. However, after joining the World Trade Organisation (WTO), most of the direct export subsidy programs were gradually withdrawn, which discouraged the port export market. China and Hong Kong accounted for 83% (equivalent to 40.5 million) of the pork export market in Trends of Vietnam s meat sector With the rise of Vietnam s GDP per capita and its increasing urbanisation rate, Vietnamese consumers are changing their shopping habits and diversifying their diet. Although most Vietnamese consumers still prefer buying meat on a daily basis in open or wet markets for convenience and freshness, the younger generation s behaviour is shifting towards weekend shopping at supermarkets. Furthermore, the wide-spread presence of microwaves and refrigerators has allowed people to try packaged and processed food (mostly foreign) which gained popularity, especially with the young, urban population due to convenience and variety. Furthermore, the growing influence of fast food chains in Vietnam, e.g. McDonald s, KFC, Burger King, Pizza Hut, Lotteria, and the mass appearance of cafeteria-style outlets in the two biggest cities (i.e. Hanoi and Ho Chi Minh) have introduced Western food to a large group of different consumers including students, young office workers, teenager and children. Overall, these trends increasingly expose Vietnamese consumers to Western products which have also led to a perceived higher quality of foreign-originated products. This goes hand in hand with the meat market where imported meat from developed countries is perceived to be of premium quality and to comply with high standards of food safety. Consequently, Vietnamese consumers with high incomes tend to switch to foreign meats with better guaranteed quality. 18 EVBN Agri-/Agrobusiness: The Meat Sector in Vietnam

19 6. Key growth drivers Rising population, urbanisation rate, and income Vietnam is now ranked 14 th in the list of the most populated countries worldwide with roughly 91.6 million people in The growing population of Vietnam calls for the expansion of domestic meat production as well as the importation from overseas countries to meet consumer demands. The development of metropolitan centres and higher living standards has created an increased welfare and a higher demand for diversified foods. Health & food safety awareness Recently, as a consequence of epidemic disease outbreaks and rising medical and healthcare costs, consumers have become more aware of health and food safety. They pay more attention to products origins and quality indicators as well as to ingredients and nutritional information. Distribution channels Although traditional retail outlets and wet markets still dominate the food sector, recent years have seen the development of supermarkets, hypermarkets, convenience stores, and many other modern retail outlets. Trade Vietnam s international integration, with its accession to the WTO and the conclusion of FTAs and other bilateral trade agreements, has created various opportunities for the country s trade. As a result, imported meats are introduced into the domestic market and are easily accessible by consumers. This offers them more a diversified diet and a wider variety of choices. 19 EVBN Agri-/Agrobusiness: The Meat Sector in Vietnam

20 Competitive Landscape 1. Competitive landscape With the strong presence of scattered wet markets throughout the country, meat supply in Vietnam is highly fragmented with numerous competitors. At the retailing level, some of the notable domestic food companies include: Ha Long Canned Food Joint Stock Corporation (Halong Canfoco), Vissan Limited Company, and Dabaco Group. Company (Product Types) Ha Long Canned Food Joint Stock Corporation (JSC) (Halong Canfoco) Products: sausages, canned meat, canned fish, frozen products. Product Brands: Ha Long Canfoco, Bo Bee Bee, Heo Everyday, Bo Everyday, Chip Bong 2014 s Sales ( mn) growth % Distributors, retailers (supermarket and hypermarkets, food shops, wet markets and small grocers, export, HRI) End-use Channels Production Location Procurement Channels Ha Long, Quang Ninh Province Direct importer; may purchase through other traders/ distributors VISSAN Limited Company (VISSAN) Products: fresh & frozen meats, processed foods, canned foods from meats, seafood and vegetables. Product Brands: VISSAN, Hola, Ngon Ngon instant spring roll (*) 15% (**) Distributors, retailers (supermarket, hypermarket, and independent small grocers, export (1) Meat Processing Plant in HCMC; (2) Food Processing Plant in Tien Son Industrial Park, Bac Ninh Province; (3) Go Sao Pig Farm Direct importer; Purchases from local producers, or through traders / distributors Dabaco Group Products: Animal feed, Breedings, Fresh meats, Processed foods, Canned foods from meats. Product Brands: Dabaco, Topfeeds, Nasaco, Growfeeds, Khangti Vina, Kinh Bac % Distributors, retailers (supermarket, hypermarket, and independent small grocers, export 45 Farms and Meat processing plants in Bac Ninh, Bac Giang, Hung Yen, Hanoi, Vinh Phuc, Hoa Binh, Hai Duong, etc Direct importer; Closed chain (*) Data in the first three quarters of 2015 (**) y-o-y growth Figure 15: Profiles of some local meat companies 20 EVBN Agri-/Agrobusiness: The Meat Sector in Vietnam

21 2. Example of a key player Dabaco Group Dabaco Group was founded in Over the last 20 years of establishment, Dabaco has become a multidisciplinary group operating in several segments including livestock feed production, livestock breeds production, husbandry (pigs and poultries), slaughter, food processing, real estate, construction, and other business segments. In the first three quarters of 2015, the corporation accelerated at a rate of 17% to reach 177 million in revenue. In comparison with the same period in 2014, there was a considerable growth of husbandry/food processing and livestock breeds segments, accounting for 24% and 8% of Dabaco s total revenue, respectively. The case of the Dabaco Group manifests an exceptional success story of a company that is able to manage the entire supply chain. 3Q14 2% 1% 2% 3% 3Q15 Feed 11% 19% 5% 62% 10% 24% 8% 53% Livestock breeds Husbandry and food processing Commercial goods and supermarket Carton packaging Others Figure 16: Dabaco Group s sources of revenue, 3Q14-15 Source: Dabaco Dabaco aims to develop a strong group in the agriculture industry, using modern technology and a closed 3F value chain farming (breeding and farms), feed (producing livestock feed) and food (meat processing) in combination with Dabaco s supermarkets and fresh food shops. The corporation also owns a packaging factory, producing polyethylene plastic (PE) and polypropylene plastic (PP) packages for internal use and sale. Feed Mill Breeding Farm Processing Added Value Trademark & Market Feed Breeder Contracted Farming Fresh Food Processed Food Farm Foodstuff Figure 17: Dabaco's value chain Source: Dabaco 21 EVBN Agri-/Agrobusiness: The Meat Sector in Vietnam

22 3. Price structure Firstly, it is worth mentioning that only a limited number of big commercial farms in Vietnam can benefit from reduced cost of inputs (breeds and feeds), whereas the majority of producers is relatively small without being able to benefit from economies of scale. Overall, Vietnam s livestock sector has faced fierce competition from foreign exports in recent years. Liberalisation of import tariffs has led to new equilibrium prices in the market including manufacturer s prices and consumer prices. Imported bovine and poultry meats have flooded the domestic market and caused negative impacts on the welfare and output value of domestic producers. Consumers, on the other hand, have benefited from the structural shifts. Since imported meat prices are lower than those of local products and their safety and hygiene standards are thought to be superior, an increasing number of consumers are opting for imported meat, including food producers and restaurants. Figure 18 compares the reference production cost between locally produced and imported meat types. Meat types Production cost/kg Domestic Import Price difference (%) References Pork Beefcentral.com Bloomberg.com Beef Thanhniennews.com Chicken (*) VEPR, Impacts of TPP and AEC on Vietnamese Economy (*) Selling price in Vietnamese market Figure 18: Comparison of locally produced and imported meats Foreign producers mainly rely on economies of scale and access to cheap feed which enable them to enter the market with low prices. On the contrary, the dominance of small-scale farms hampers productivity gains of local producers preventing them from competing successfully in the market. To combat the flood of imported meats, the Government established an action plan, the Decision 210 (effective on 10 th February 2014), which aimed to restructure the livestock sector s horizontal and the vertical linkages to help reduce transaction costs and improve efficiency. Horizontal linkages aim to create large-scale enterprises that can attract smaller-scale households and firms as satellites to form separate areas for animal feed crops, livestock supporting industries and farm groups away from residential areas. Vertical linkages aim to promote cooperation within closed production chains, i.e. from breeds to table food. A large-scale firm that can manage the entire production chain from inputs to production, processing, distribution and selling, is thereby able to achieve competitive prices. As an example, the current value chain for pig production is as follows: household-based pig production could generate gross margins ranging from /kg live weight of pig produced, of which the farmer enjoys 49% of the profit, followed by the retailer (28%) and the slaughterhouse (24%). 22 EVBN Agri-/Agrobusiness: The Meat Sector in Vietnam

23 Client and Distribution 1. Profile of end users Vietnam s consumer market is still in the early stages of development but has been one of the fastest growing markets in Southeast Asia due to favourable demographics, continuing strong economic growth, and rising disposable income. Rising incomes and a changing consumer diet have also led to increased meat consumption in Vietnam. The diet is changing from being predominantly starch-based to a high proportion of animal protein. Pork is ranked as the most frequently consumed meat, and consumption is increasing, with estimates of average per capita consumption hikes ranging around 22kg between 2013 and However, it also is projected that Vietnamese consumers will diverse their diet towards seafood, poultry, eggs, and beef in the near future. The processing industry in the livestock sector is still limited due to the traditional purchasing characteristics of Vietnamese consumers. Buying fresh meat after slaughtering from wet markets is still practised by 86% of Vietnamese people. As of today, it is still not common to buy processed food from supermarkets or convenience stores as most consumers consider it more convenient to shop at a local market. The most preferred meat retailers are permanent markets and temporary neighbourhood markets. Moreover, Vietnamese consumers tend to shop daily for food items to ensure freshness. Hence, frozen meat is still new to the average Vietnamese consumer. In Vietnam, frozen meat is usually sold in grocery shops, convenience stores, supermarkets, or outlets of meat processing companies. Frozen meat is usually sold as meat cuts or ground meat, packed and labelled. However, the above described characteristics are gradually changing. The development of modern trade channels will further encourage processing of livestock products such as steaks, packaged meat, canned food, sausages. Vietnamese consumers are increasingly concerned about meat quality and its healthiness, especially in urban areas. The demand for low-fat and low-sodium food products is increasing, also translated in a preference for lean rather than high-fat pork. Nevertheless, the premium for better quality meat depends largely on income and location. While consumers might generally appreciate the quality and shopping experience of supermarkets, low- and middle-income households generally buy food at traditional markets and small-scale shops because of better prices and a perceived higher convenience. Higher-income households, especially in urban areas, are more and more willing to pay a premium for meat with guaranteed quality. They are also considered to welcome foreign products. Vietnamese consumers also prefer attributes such as light colour, good smell, consistency, and freshness. Pork from black/indigenous pigs is often perceived to have better taste and its quality is also preferred. 23 EVBN Agri-/Agrobusiness: The Meat Sector in Vietnam

24 2. Potential distribution channels a. Meat flows and supply chain in Vietnam In general, the meat supply chain in Vietnam is mainly based on small-scale farms. The finished meats go through several nodes in the supply chain before reaching the end consumers. Livestock processing in Vietnam is still not characterised by advanced technology or comprehensive equipment. For this sector, the term processing is often understood as slaughtering as it is the main activity done after livestock is taken from the farms and before it is sold to consumers. Nevertheless, the number of large-scale farms with more advanced technologies is forecasted to increase, developing Vietnam s livestock sector in a more industrial way and enabling it to expand at larger extent. Breeding Inventories Processing Mnfc. Death Suppliers Livestock Farms Slaughter Houses Distributors Retailers Export Import Export Input Supply Production Slaughter Distribution Retail - Domestic suppliers - Breeds - Feed Small-scale household Large-scale farms Animal (liveweight) Middle men Meat companies Slaughter houses - Meat (carcase weight) - By-products Wholesaler - Meat cuts - By-products Retailers Big retailers Figure 19: Meat flows and supply chain in Vietnam Source: Vietnam Institute for Economic and Policy Research Figure 19 presents the meat flows and supply chain in Vietnam. The number of post-farms nodes in the chain may vary as an actor can perform different functions. Many food processors in Vietnam use both locally produced raw materials as well as imported food ingredients in their operations. They also have their own distribution channels to wholesalers, distributors and retailers, as well as to hotels, restaurants and other industries nationwide. Livestock raisers: most of livestock farms in Vietnam are organised at a small scale (household level) and only a small number of them are farms of beef cattle. Vietnamese farmers often struggle to enter the bovine-raising sector because of the high initial investment with complex technical barriers and 24 EVBN Agri-/Agrobusiness: The Meat Sector in Vietnam

25 the longer cycle of bovine animals in comparison with swine or poultry. These reasons explain the erosion of the total bovine population and the stagnation of total bovine domestic output. Slaughterhouses: there are two types of slaughterhouses: intensive/large-scale (industrial) ones and small scale ones. o Intensive/Large-scale (industrial) slaughterhouses work directly with collectors who buy livestock from raisers or import them directly from abroad. o Small scale slaughterhouses supply carcass for markets or local retailers. Animal Total % of total Number of large-scale slaughterhouses Number of small-scale slaughterhouses Buffalo, cows, goats, sheep 1, ,761 Pigs 14, ,976 Poultry 9, ,902 Poultry and cattle 3, ,646 Total 29, ,285 Figure 20: Share of large- and small-scale slaughterhouses, 2011 Source: The Consultative Group for International Agricultural Research Distributors Retailers: most carcasses from industrial slaughterhouses will go to supermarkets or wholesales before being distributed to markets and local retailers. Another flow of carcasses come from small scale slaughterhouses to markets and local retailers; however, meats supplied by this channel are often sold in wet markets due to the substandard slaughtering techniques. b. Trade distribution channels Most large food processors (local and foreign) prefer to purchase raw materials through local importers or distributors to avoid the complication of import procedures. Most small food processors with low sales volume utilise local wholesalers who can take care of the necessary import procedures. (1) (2) Exporters Local importers/ Distributors Local importers Wholesalers Wholesalers/ Distributors (3) (4) Food processors Agent (5) Traditional sales channel/modern sales channel (6) Small/ household food processors Figure 21: Trade distribution channels Source: Global Agriculture Information Network 25 EVBN Agri-/Agrobusiness: The Meat Sector in Vietnam

26 Producer Consumer There are six distribution models usually adopted by food exporters in Vietnam. Models (1), (2), and (6) are the three most common practices in Vietnam where most food importers are also distributors. These models are preferable for exporting to Vietnam as they involve fewer intermediaries. Furthermore, Vietnam s limited distribution infrastructure and facilities, such as cold chains are significant constraints to importing certain food ingredients. Regarding cold chains, investments in cold chains and frozen food still lag behind. This is by and large due to aforementioned trend of purchasing fresh meat from wet markets (practised by 86% of the consumers). However, the continued entry of major retailers and the shift of consumers shopping habits towards modern trade channels are expected to drive demand for cold chain services. c. Domestic distribution channels An example of pig supply chain In general, Vietnamese meat s supply chain follows the process illustrated in Figure 19 above with key actors: livestock raisers, slaughterhouses, retailers, processors, and consumers. An exemplary study of the pig supply chain in Vietnam (Figure 21) conducted in 2015 revealed some of the underlying dynamics as different functions can be performed by one player. The example illustrates that roughly 56% of livestock was sent to the slaughterhouses, 42 % of live pigs were sold to collectors and 2.6% were slaughtered and processed directly be livestock raisers to sell to local consumers in the same village. 31% of livestock was processed by slaughterhouses before reaching consumers whereas the remains were sold to retailers or processors before reaching the end-consumer % 55.77% Slaughtermen 64.83% Retailer 4.02% Processor 41.62% Collector 100% Other provinces 2.61% Figure 22: Pig supply chain in Vietnam (Source: Vietnam National University of Agriculture) 26 EVBN Agri-/Agrobusiness: The Meat Sector in Vietnam

27 3. A local Mediterranean restaurant chain in Ho Chi Minh Located in the centre of Ho Chi Minh City, the restaurant chain (3 restaurants) features an extensive menu of superb Mediterranean staples. Since the establishment in 2011, the chain has positioned itself as the upperclass restaurants offering cuisines across the regions: the Middle East, North Africa, Greece, Italy, Spain, and southern France. All three restaurants have received numerous favourable reviews from customers for their food quality and great ambiance. According to the restaurant s chef, he uses imported beef and pork from the US, Australia, or New Zealand. He currently does not use beef imported from Europe due to the limited number of suppliers/distributors currently available on the market and, more importantly, the customers preference and exposure to EU meat. He also shared that the origin of the meat contributes very little to the final taste. Creativity and cooking techniques are what make a delicious food. According to his experience the EU-imported beef tends to be softer and fatter which creates a more attractive smell whereas the US and Australian beefs are better for grilled dishes. The local beef is cheaper but the quality does not differ significantly from the foreign-imported meats. As his customers still have a favourable perception towards foreign-imported meats, the restaurants will continue to use them to satisfy existing customers and attract new ones. For the processed foods such as hams or sausages and special ingredients such as duck/goose liver, the restaurants use EU-originated products. However, for poultry meat, the restaurant chain prefers local poultry meat due to the abundance of supply sources, freshness and price level. The restaurants use intermediaries to supply their imported meats (Channel 2: Supplier Local Importer/Distributor Food Processor) due to convenience and the limited size of his business. The chef stressed that there are not many meat importers/distributors in Vietnam and hence anyone operating in the restaurant business should now the relevant players, for instance Classic Fine Foods. The restaurants source their materials from various intermediaries in order to limit their dependence on one supplier as well as to take advantage of different suppliers selling propositions. 27 EVBN Agri-/Agrobusiness: The Meat Sector in Vietnam

28 Regulatory and Legal Framework 1. Regulatory and legal framework Vietnam s import tariffs on meat and poultry are relatively high, in comparison with other markets in the ASEAN region. Import tax for fresh meat ranges from 14-40% whilst processed meat s import tax varies between 10-30%. The full import tariffs table is attached in the Annex. HS code Description Favour tax (%) 0201 Meat of bovine animals, fresh or chilled Meat of bovine animals, frozen Meat of swine, fresh, chilled or frozen Meat and edible offal, of the poultry of heading 01.05, fresh, chilled or frozen Meat and edible meat offal, salted, in brine, dried or smoked; edible flours and meals of meat or meat offal Figure 23: Vietnam's import tariffs Source: Vietnam Customs Vietnam s National Assembly promulgated the Law on Food Safety 55/2010/QH12 on 17 th June, The Law on Food Safety (FSL) entered into force on 1 st July, It provides organisations and individuals with rights and obligations to ensure food safety; conditions for food safety; food production and trading; food import and export; food advertisement and labelling; food testing; food risk analysis; prevention and dealing with food safety incidents; information, education and communication on food safety; and state management of food safety. However, in practice it proves cumbersome to understand the complexity of regulations due to overlaps and frequent changes on food standards and safety regulations in Vietnam. According to FSL, all imported food, food additives, substances used in food processing, tools and materials used for packing and containing imported food shall be subject to state inspection for food safety, except for cases where the state inspection of food safety is exempted, in accordance with governmental provisions. Imported food is only allowed customs clearance once the inspection results show that the imported food meets import requirements. Three categories of food inspection outlined by the FSL include: strict inspection, ordinary inspection, and loose inspection. Depending on the product type, the Ministry of Health, the Ministry of Agriculture and Rural Development (MARD), or the Ministry of Industry and Trade are in charge of developing specific guidelines on food safety inspection. 28 EVBN Agri-/Agrobusiness: The Meat Sector in Vietnam

29 Quarantine of animal and products of animal origin is governed by the Ordinance on Animal Health and other governmental statutory documents. According to this ordinance, cattle, poultry, and products of those animals are subject to quarantine. Nevertheless, the Ordinance on Animal Health will expire on 1 st July, 2016 since the new Law on Animal Health (Vet Law), which provides some new provisions on quarantine and hygiene inspection of food of animal origin, shall enter into force. The law stipulates that MARD is responsible for issuing the list of terrestrial animals and food of animal origin subject to quarantine and the list of terrestrial animals and food of animal origin exempted from quarantine. Vietnamese law imposes strict requirements on the labelling of goods. The Decree 89/2006/ND-CP of the Government dated 30 th August, 2006 on the Labelling of Goods, Circular 9/2007/TT-BKHCN issued by the Ministry of Science and Technology, and Circular 14/2007/TT-BKHCN are the key pieces of legislation governing labelling matters in Vietnam. General requirements for labelling of goods include: Labelling language must be in Vietnamese and cover all mandatory contents. Depending on the requirements of each type of food, the contents written in a foreign language can be added but they must be the same with the Vietnamese ones and their font size cannot be larger than the relevant ones in Vietnamese. The mandatory labelling contents include: product name; composition; product weight; production date; timeline for use; direction for use and storage instruction; name of the person or the organization responsible for the goods; origin; number of receipts of conformity statement or certificate in accordance with the provisions of food safety; and recommendations or warning on food safety. As a result, it is advisable for EU exporters to carefully study the market potential and to look for a reliable and experienced local partner. Furthermore, they are encouraged to seek guidance on export guidelines and updated policy reports. They may also contact the International Cooperation Department of MARD for assistance with procedures and cooperation opportunities, preferably through a local intermediate to facilitate the exchange. 2. Market entry forms Although Vietnamese law allows foreign players to operate as 100% foreign-owned entities in the trade and distribution sector (including retail), this type of business is hardly adopted because of several reasons: Imports of meat and poultry can only be undertaken by a Vietnam company that is officially approved as a trader in meat and poultry products. Local importers continue to play a major role in distributing and promoting imported products in Vietnam. Typically, local importers have their own sales agents and distribution fleet and are in direct contact with supermarkets, wholesalers, and in many cases, also with thousands of small-scale grocery stores. As a result, foreign companies operating in this industry tend to export directly to their local partners in Vietnam (conf. Trade distribution channels part). The complication of import procedures and processes explained in EVBN Agri-/Agrobusiness: The Meat Sector in Vietnam

30 Another type of market entry form is setting up a representative office. This type of office requires a business license issued by Department of Industry and Trade in the province/city that foreign companies want to locate their representative office. With this type of business entity, foreign investors may closely monitor and work with their local partners, but will not be allowed to directly trade, distribute goods, or manage the distributors. However, also this form of business entity is not commonly adopted by foreign companies. The most frequent strategy at current stage is to work with local importers. 3. Influences of the EU-Vietnam FTA The recent conclusion of the EU-Vietnam Free Trade Agreement (FTA) will promote the trade of goods and services once it will come into effect. Lifting the barriers in custom duties and other tariffs is expected to increase in the competitiveness for EU-originated products. For the meat sector, frozen pork meat will be liberalised 65% of import duty before being completely duty free in the next 7 years. The provision for beef is after 3 years and 10 years for chicken meat. The signed EU-Vietnam FTA is forecasted to spur changes in the domestic meat market in the upcoming years, with the importation of EU-originated meat in the market and the flow of investment into the sub-sector industry. 30 EVBN Agri-/Agrobusiness: The Meat Sector in Vietnam

31 SWOT Analysis Strengths Weaknesses Opportunities Threats The natural fertility of Vietnam around the Red River Delta in the North and the Mekong River Delta in the South provides the country with a strong agricultural base. Meat sector s productivity has improved considerably since the opening up of the economy in 1986 ( Doi Moi program). Much of Vietnam's agriculture is based on small-scale farms with poor yields relative to more developed international competitors. There is little land available for further expansion, meaning future production growth will mainly rely on yield growth. Production infrastructure is often poor, influencing the exportation of meats and negatively affecting quality. The opening up of the economy in 1986 allowed more private involvement in agriculture, yields have improved dramatically and the pattern is forecasted to maintain in the future. The improvement in trade openness will help Vietnam's exports increase in the coming years. Vietnam's fast-growing population of more than 90 million and our forecast for Vietnamese GDP per capita to grow rapidly will both offer a large and growing market for agro-food products. Poor knowledge of good farming practices and hygiene standards leaves Vietnamese agriculture open to disease outbreaks of the kind that have plagued the livestock industry in recent years. Trade agreements liberalise most of import tariffs and therefore pose challenges for local producers in competing in prices. The rising population and increasing industrialisation of the economy will increase labour costs and competition for land use, threatening competitiveness and curtailing further the area available for the expansion of agriculture. 31 EVBN Agri-/Agrobusiness: The Meat Sector in Vietnam

32 Summary The meat market in Vietnam has already seen considerable developments in recent years. In 2015, the market value of livestock sector reached 20.7 million, an increase of 2.6% in comparison with An upward trend is forecasted and it is expected to account for 28% of Vietnam s agriculture GDP in In line with the increase in production and enhanced imports, meat consumption in Vietnam has risen significantly over the last decade, fuelled by strong income growth as well as population growth, from 3.3 million tonnes in 2011 to 3.6 million tonnes in This number is forecasted to reach over 4.5 million tonnes in However, the domestic production, especially bovine and poultry production, cannot meet the surge in demand. Hence, total import value of the livestock sector in 2014 reached million, dominated by bovine and poultry imports. Vietnam s meat import structure changed in the last ten years with the involvement of various trade partners such as the US, Canada, and India. EU countries have started to export to Vietnam with Spain being the largest exporter of swine meat to Vietnam in The conclusion of the EU- Vietnam FTA recently will further promote trade of goods and services and open up new opportunities for EU s meat producers to invest in Vietnam. Exportation, however, remains stagnant due to issues regarding health and food safety. Traditionally, Vietnamese producers operate their businesses on a small scale (mostly household) and are therefore losing market share to foreign players who are taking advantage of the economies of scale. However, the need for restructuring is acknowledged and the current supply chain structures which involve various nodes such as livestock raisers, slaughterhouses, distributors, and retailers, should be restructured to build both horizontal and vertical linkages thereby helping to reduce transaction costs, improve efficiency of the sector and eventually recapture market share. The growth of Vietnam s meat market is fuelled by rising population, urbanisation rate, and higher income levels. Vietnamese consumers are becoming more aware of health and food safety and prefer imported meats over locally produced ones as imported meats are perceived to be of premium quality and to have high standards of food safety. Though shopping in wet markets is still practised by 86% of Vietnamese consumers, this trend is expected to change with the development of supermarkets and hypermarkets. The changing lifestyles of Vietnamese young people and their work-life balance are also reasons for the expected shift towards modern trade channel. 32 EVBN Agri-/Agrobusiness: The Meat Sector in Vietnam

33 Annex Import tariffs to Vietnam HS code Description Favour tax (%) 0201 Meat of bovine animals, fresh or chilled Carcasses and half-carcasses Other cuts with bone in Boneless Meat of bovine animals, frozen Carcasses and half-carcasses Other cuts with bone in Boneless Meat of swine, fresh, chilled or frozen. - Fresh or chilled: Carcasses and half-carcasses Hams, shoulders and cuts thereof, with bone in Other 25 - Frozen: Carcasses and half-carcasses Hams, shoulders and cuts thereof, with bone in Other Meat and edible offal, of the poultry of heading 01.05, fresh, chilled or frozen. - Of fowls of the species Gallus domesticus: Not cut in pieces, fresh or chilled Not cut in pieces, frozen Cuts and offal, fresh or chilled Cuts and offal, frozen: Wings Thighs Livers Other: Mechanically deboned or separated meat Other 20 - Of turkeys: Not cut in pieces, fresh or chilled Not cut in pieces, frozen Cuts and offal, fresh or chilled Cuts and offal, frozen: Livers Other: 33 EVBN Agri-/Agrobusiness: The Meat Sector in Vietnam

34 Mechanically deboned or separated meat Other 20 - Of ducks: Not cut in pieces, fresh or chilled Not cut in pieces, frozen Fatty livers, fresh or chilled Other, fresh or chilled Other, frozen 15 - Of geese: Not cut in pieces, fresh or chilled Not cut in pieces, frozen Fatty livers, fresh or chilled Other, fresh or chilled Other, frozen Of guinea fowls Meat and edible meat offal, salted, in brine, dried or smoked; edible flours and meals of meat or meat offal. - Meat of swine: Hams, shoulders and cuts thereof, with bone in Bellies (streaky) and cuts thereof Other: Bacon or boneless hams Other Meat of bovine animals 15 - Other, including edible flours and meals of meat or meat offal: Of primates Of whales, dolphins and porpoises (mammals of the order Cetacea); of manatees and dugongs (mammals of the order Sirenia); of seals, sea lions and walruses (mammals of the suborder Pinnipedia): Of whales, dolphins and porpoises (mammals of the order Cetacea); of 20 manatees and dugongs (mammals of the order Sirenia) Other Of reptiles (including snakes and turtles) Other: Freeze dried chicken dice Dried pork skin Other EVBN Agri-/Agrobusiness: The Meat Sector in Vietnam

35 List of EU countries/territories can export foods of land animal origin to Vietnam No. Country/Territory Approved date/updated date 1 Austria 26/11/ Belgium 03/04/ Denmark 30/09/ Estonia 02/11/ Finland 27/10/ France 13/01/ Germany 26/01/ Hungary 06/01/ Italy 13/01/ Ireland 10/12/ Lithuania 29/11/ Netherlands 15/10/ Poland 30/06/ Spain 28/08/ EVBN Agri-/Agrobusiness: The Meat Sector in Vietnam

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37 37 EVBN Agri-/Agrobusiness: The Meat Sector in Vietnam