EU-Vietnam Food Processing M&As: The Time is Ripe

12/06/2023    425

Vietnam’s food processing industry is currently struggling, and firms are looking to sell assets or even part of their companies to survive. Here’s what EU firms looking for opportunities in Asia should know about the current state of Vietnam’s food processing sector.

Companies in multiple sectors around Vietnam, including food processing, have struggled to remain at full capacity in recent months due to a credit and resource crunch. Responses to inflationary pressure have led to a lack of access to credit, leading to a spate of business suspensions, asset sell-offs, and even bankruptcies.

The food processing industry is therefore ripe for investment by foreign companies and industry insiders are predicting an uptick in mergers and acquisitions (M&A) over the next two years. This provides a unique opportunity for foreign companies to enter the market by partnering with local food processing companies or purchasing assets outright.

EU companies also find themselves in an especially advantageous position to enter the market, due to the close trade ties between Vietnam and the bloc, as well as a favorable image of European products among Vietnamese consumers.

In this article, we look at the growth prospects of Vietnam’s different food processing sectors and discuss how EU companies can capitalize on the current opportunities in the market.

Vietnam’s food processing industry
Food processing is one of Vietnam’s most important industries. In 2022, the industry grew by 8.8 percent year-on-year, according to research by the US Department of Agriculture (USDA), with over 8,500 companies registered in the sector.

Benefiting from its fertile land and favorable climate, Vietnam has historically been a net exporter of food. In 2022, the agricultural sector reached a record US$53.22 billion in exports, including a trade surplus of US$8.5 billion.

However, growing domestic demand is now also contributing to the country’s own food manufacturing and processing industry. As income levels across the country rise, so does domestic consumption, which is reflected in the growing demand for food services, and high-quality agricultural products.

Vietnam’s growing middle class, which is expected to account for around 40 percent of the population by 2030, is becoming a major driver of the food industry’s growth.

In 2021, the food and beverage (F&B) manufacturing industry contributed US$17 billion to the country’s GDP and employed three million people, according to Statista. Meanwhile, the food service industry is expected to record a CAGR of 8.5 percent between 2022 and 2027, with a growing trend toward dining out.

The industry has experienced a healthy recovery since the pandemic, with the end of lockdowns triggering a return to the high levels of consumption that have been typical for the country in recent years. Vietnamese people are estimated to spend between 20 to 48 percent of their household income on food and beverages.

Advantages for EU companies investing in Vietnam’s food processing industry

The EU-Vietnam Free Trade Agreement
EU companies are at a relative advantage compared to many other developed nations. This is a result of the EU-Vietnam free trade agreement (EVFTA), which will, over the course of the next 10 years, see the elimination of almost all import duties between Vietnam and the bloc.

The EVFTA significantly improves the prospects for bilateral agri-food trade, which would see an increase in the availability of both specialty Vietnamese products in the EU and European products in Vietnam.

A notable aspect of the EVFTA is the inclusion of geographical indication (GI) for certain food products. GI is a type of intellectual property that protects a product produced in a certain geographical location. The EVFTA automatically recognizes the GI of 39 Vietnamese food products and 169 European products. This will help consumers in both markets recognize the authenticity of the products and provide a leg-up for companies when it comes to marketing their products in the respective markets.

Demand for high-quality food products
In the same vein, EU investors may also be able to capitalize on the growing taste for high-end, high-quality, and organic products in Vietnam. In the food service industry, consumers are keen to explore new cuisines and ingredients, while niche high-end segments present opportunities for the introduction of specialty products, such as European wines, cheeses, and processed meats.

European products can benefit from a reputation of being safe and healthy, and in specific segments, being high-quality with a premium price tag. European food products are therefore well-situated to market themselves as desirable commodities in Vietnam.

Robust food processing infrastructure
Due to its legacy as a food processing center, Vietnam already has a well-developed supporting infrastructure and supply chains. The country’s thriving agricultural sector, in particular plant-based agriculture, means that raw materials for the production of certain types of foods are easily accessible.

The country is also home to hundreds of industrial parks, many of which offer incentives or support for companies to establish themselves.

In addition, the relatively low labor cost in Vietnam makes it a competitive option for the location or relocation of manufacturing and processing facilities.

Key market segments in Vietnam’s food processing market

Dairy products
Consumption of dairy products in Vietnam has spurred the development of the domestic milk production industry. According to a Research & Markets report, Vietnam had over 200 dairy producers and produced 1.2 billion liters of fresh milk in 2021.

However, the country remains reliant on dairy imports, as domestic production is currently only able to meet around 40 to 50 percent of demand. Geographical limitations, such as few areas of suitable grasslands, means that the country has a shortage of dairy cows (as well as meat cattle). Imported dairy products reportedly reached US$11.8 billion in 2021, up 12.4 percent year-on-year. Meanwhile, retail sales of dairy products are expected to reach almost US$5 billion in 2023.

Powdered milk is one of the fastest-growing segments, with domestic production reaching around 152,000 tons, a year-on-year increase of around 13 percent. Other promising sectors include the production of yogurt, ice cream, baby formula, and condensed milk, among others.

Among the largest domestic players in the dairy market are Vinamilk, which had a market capitalization of around US$7 billion in 2022, TH Group, and Nutifood. Several large multinationals have already gained a foothold in the market, chief among them being Nestle, FrieslandCampina, and Abbott.

Meat processing
As with the dairy industry, Vietnam’s geography places limitations on the number of cattle and other large livestock that the country can raise, meaning it remains dependent on imports to meet its domestic meat consumption. For this reason, Vietnam is a net importer of meat products, despite a healthy domestic meat production industry.

Pork is both the most consumed meat and the product with the highest volume of domestic production in the country. In 2021, Vietnam produced over four million metric tons of pork. This was followed by poultry, at almost two million metric tons, beef with around 466,500 metric tons, and buffalo meat, at 123,000 metric tons.

Vietnam’s domestic pork market was impacted by the swine flu epidemic, which has led to a shortage of hogs, higher pork prices, and a higher reliance on imports.

The processed meat market has significant potential for growth, as demand continues to grow. Some analysts estimate that around half of the daily intake of meat in Vietnam by 2025 will be processed. The processed meat market is expected to grow at a CAGR of 6.77 percent between 2023 and 2028 to reach US$1.59 billion. The bulk of the processed meat industry is composed of cold and roast meat products, followed by ham and bacon, and finally sausages.

Traditional agriculture companies have begun to move into the processed meat market in order to capitalize on the growing demand. For instance, egg producer Ba Huan has shifted into producing various processed egg and poultry products, while Masan MEATLife, a subsidiary of Masan Group, commissioned a US$77.6 million MEATDeli Saigon Meat Processing Complex in Long An Province in 2020. In March 2023, Vinamilk entered into a joint venture with the Japanese Sojitz Corporation to establish a beef cattle farming and processing complex in Vinh Phuc Province, northern Vietnam, with an estimated investment of US$127 million.

Seafood processing
With a 3000-plus kilometer coastline, Vietnam is one of the largest aquaculture producers in the world. In 2022, the country produced around 4.9 million tons of aquaculture products and is expected to maintain a CAGR of 1.8 percent between 2023 and 2028.

As with other food market segments, demand for seafood is increasing along with the country’s wealth. In addition to domestic consumption, exports are a major driver of the industry’s growth. The value of shrimp exports is estimated to have risen by 10 percent year-on-year in 2022 to reach US$4.3 billion, and fish exports increased by 7 percent year-on-year to reach US$1.65 billion.

A new government-backed development strategy is seeking to further develop the country’s seafood processing industry, which is projected to grow the industry by 6 percent annually until 2030. Under the strategy, Vietnam’s domestic seafood processing market is expected to reach between US$1.75 and US$1.97 billion by 2030 and contribute around US$14 to US$16 billion in seafood exports annually.

Major seafood processors in Vietnam include Minh Phu Seafood Corporation, Cargill Vietnam, Sao Ta Foods, and Soc Trang Seafood.

The confectionery market is another segment with high growth potential. This is as a result of the country’s growing sweet tooth and the proliferation of supermarkets and convenience stores. Revenue in the confectionery market is expected to reach US$8.5 billion in 2023, and the market is poised to grow at a CAGR of 10.17 percent between 2023 and 2028.

In terms of products, confectionery in Vietnam is relatively localized, with consumers having a penchant for traditional flavors and ingredients, such as coconut, pandan, coffee, and tropical fruits. Many of these ingredients are also locally sourced. At the same time, an increase in health awareness among the country’s middle class is also driving demand for healthy alternatives, such as low-sugar and organic alternatives.

However, foreign confectionery is becoming increasingly popular. The chocolate confectionery segment, for instance, is expected to reach US$168.32 million in retail sales by 2025 and grow at a CAGR of 3.9 percent from 2020 to 2024.

Major confectionery companies in Vietnam include Bien Hoa Confectionery, Mars Incorporated, Nestle, and Perfetti Van Melle.

Seizing the investment opportunity
Vietnam’s food processing industry is increasingly becoming a magnet for foreign investment. The fast pace of development and strong growth prospects have already pulled in giants like Coca-Cola, Nestle, Carlsberg, and FrieslandCampina, and fostered the growth of a range of domestic producers. Vietnamese-foreign joint ventures and M&As have also increased in number in recent years.

The current combination of government-backed plans to grow the food processing industry, growing domestic demand for processed food, and a sector struggling for credit have created an ideal environment for foreign companies to invest. This could be through the establishment of new entities, joint ventures, or M&As.