Vietnam’s dairy sector is experiencing strong sales growth on the back of a middle-class that is expanding by the day. In this article, Vietnam Briefing examines opportunities in the sector for foreign firms but also the hurdles they may face.

Vietnam’s growing population and the increasing wealth of its middle class is seeing demand for milk and dairy products in the country boom. In fact, per capita milk consumption is expected to increase by around 40 percent, from 28 liters in 2021 to 40 liters per year by 2030, according to Research and Markets.

However, Vietnam’s domestic milk production falls short of meeting the country’s demand. According to the Food and Agriculture Organization (FAO), in 2021, Vietnam produced 1,097 tons of milk domestically but had to import more than 3,705 tons. This stark contrast between supply and demand highlights the need for increased milk production and the growing importance of dairy imports to meet consumer needs.

Furthermore, the Vietnamese government is also actively promoting dairy as an important part of a balanced diet. In 2016, for example, the government approved the School Milk Program, which aims to provide daily milk to children in kindergartens and elementary schools.

There is also the ‘Stand Tall Vietnam Milk Fund’, operated by Vinamilk. Since 2007, this program has contributed significantly to boosting dairy consumption by donating over 42 million boxes of milk to more than 500,000 children across the country. This collective effort reflects a broader desire to ensure children have an adequate supply of milk.

Apart from liquid milk, there is also a shifting consumer preference for other dairy products in Vietnam. The growing influence of Western cuisine, with dishes like burgers, pizzas, and burritos is gaining traction and has contributed to an increased demand for cheese, butter, and yogurt.

With this in mind, many investors are eager to explore opportunities in Vietnam’s dairy industry. So how can investors most effectively enter Vietnam’s dairy market?

Investment opportunities

Dairy processing companies

One approach is to invest in established dairy processing companies that already have a presence in the market. These companies have often been involved in the production and distribution of dairy products for a long time, and this grants them valuable market knowledge. Investing in these companies can save investors time and effort that would otherwise be spent on extensive market research and developing market-entry strategies.

An example of this investment approach can be seen in the case of Growtheum Capital Partners. The investment firm has committed to investing approximately US$100 million to acquire a 15 percent stake in the Vietnam International Dairy Joint Stock Company (IDP).

“IDP is a unique opportunity for us to participate in Vietnam’s rising consumption story,” Trang Tran, the managing director at Growtheum Capital, told Bloomberg back in April.

Another foreign company that has recognized the potential of the Vietnamese market is the Morinaga Milk Industry Group, a leading milk producer from Japan. The group has taken steps to expand its presence in Vietnam, starting with its acquisition of all shares in Elovi Vietnam in 2021. Furthermore, In May 2023, Morinaga Milk Industry paid VND 106 billion (approximately US$4.5 million) to acquire a 51 percent stake in a joint venture with Hoa Sen Group’s Le May, a domestic dairy producer, forming the Morinaga Le May Vietnam Joint Stock Company.

Dairy farming

Investing in dairy farms is another option for dairy investors. However, it’s worth noting that effective dairy farming often requires expertise in animal husbandry whereas Vietnamese farmers tend to favor less predictable spontaneous breeding.

Interestingly, several domestic dairy companies in Vietnam have sought to address this shortage of expertise by establishing farms abroad. For example, VitaDairy has invested in a US$10 million farm with 1,000 cows in Tasmania, Australia.

On that note, Vinamilk, a prominent dairy company in Vietnam, has also expanded its dairy herd overseas by starting work on phase 1 of a dairy complex in Xieng Khouang, Laos, housing a herd of 24,000 organic dairy cows.

A robust dairy farm system is seen as crucial by dairy companies in Vietnam to ensure a stable supply of milk. Therefore, it is essential to have farms that meet international standards and to leverage livestock expertise and technology to maximize livestock productivity. This, however, will require skills and investment two areas in which foreign firms may be able to assist and profit.

Other dairy products

Foreign investors also have the opportunity to explore investments in companies specializing in the production of various dairy products beyond traditional milk. By capitalizing on specific consumer demands, companies can tap into niche markets within the dairy industry.

A notable success story in this regard is the Laughing Cow cheese brand, owned by Bel Group from France. In 2015, Bel Group invested approximately US$17 million to establish a factory in Vietnam. This strategic move increased production output specifically for the Southeast Asian market and proved to be very profitable.

Similarly, in recent times, Orion Food Vina (OFV), a subsidiary of Orion Korea, entered into a collaboration with Dutch Mill, a renowned dairy company with a 70 percent market share in Thailand. The objective of this partnership was to introduce new products to the Vietnamese market. As a result of this joint venture, two new product lines were launched: Choco IQ, a combination of barley milk and barley flour, and ProYo, a drinking yogurt, both showing promise among Vietnamese consumers.

Technology and equipment

To increase productivity and enhance efficiency within the dairy industry, the integration of technology becomes crucial. Investors can explore opportunities in technologies such as automated milking systems, feeding systems, storage equipment, and other innovative solutions. Providing these technological solutions not only addresses the challenges faced by the dairy industry in Vietnam but also presents a profitable venture for foreign farm equipment firms.

Challenges

Market competition

Statista’s data from 2021 reveals that Vinamilk, a domestic brand, held an impressive 43.7 percent market share Vietnam’s dairy market. Following closely behind were TH Food with a 14.1 percent market share and Friesland with 9.4 percent. The strong presence of well-established domestic brands indicates that they have already secured a firm foothold and enjoy widespread brand recognition among Vietnamese consumers. As a result, new entrants or foreign investors must carefully develop strategies to effectively compete against these local firms.

However, while the dominance of domestic brands in the Vietnamese dairy market presents hurdles for new entrants, it also underscores the potential of the market. Investors willing to invest the time and resources, and to do the careful planning requried can tap into the growing demand for dairy products in Vietnam and establish a successful presence alongside these well-established domestic players.

Regulations

The market competition for dairy products in Vietnam can be significantly influenced by free trade agreements and regulations. One such agreement is the European Union-Vietnam Free Trade Agreement (EVFTA). Under this agreement, import taxes on dairy products from the EU will gradually decrease. For many products, such as milk and cream without added sugar or products containing natural milk ingredients, the import tax will be reduced from 5 to 5 percent to 3.5 to 0 percent. This reduction in import tariffs will make European dairy products more competitive in the Vietnamese market.

Another trade agreement that may impact the dairy industry in Vietnam is the CPTPP. This agreement aims to gradually eliminate import tariffs on various goods, including milk and dairy products. As the tax rates approach 0 percent, it will create a favorable environment for foreign dairy products entering the Vietnamese market. Notably, countries like New Zealand, Australia, and Japan, which are major exporters of milk, stand to benefit immensely from this agreement.

While the reduced import taxes may pose challenges for domestic businesses, they also present opportunities for enhancing competitiveness. The availability of foreign products encourages domestic businesses to improve their production processes and foster higher quality standards.

Climate change risks

Vietnam’s agricultural sector, including dairy farming, is vulnerable to the effects of extreme weather events, changing rainfall patterns, and rising temperatures. These climate-related factors can have significant implications for feed availability, animal health, and overall farm productivity.

According to research conducted by the United States Department of Agriculture (USDA), when the temperature-humidity index (THI) exceeds 70, cattle are prone to heat stress. In Vietnam, where temperatures can exceed 25 degrees Celsius and relative humidity often surpasses 80 percent, THI goes over 75 regularly. These conditions can have adverse effects on the production capacity of dairy cows, ultimately reducing the overall milk output of the industry.

Moving forward

Vietnam’s dairy industry presents numerous opportunities for investors to explore and profit. Beyond traditional milk products, there is scope for investment in various sectors of the dairy industry including dairy products, farming, and the provision of farm equipment and technology.

However, it is important to note that along with the opportunities, there are also risks and challenges to navigate. In this light, firms looking to enter Vietnam’s dairy market should contact the market entry experts at Dezan Shira and Associates.

Source : Vietnam Briefing Nov 16th 2023