Overview of the event. Source: PwC Vietnam.
According to PwC, Vietnamese companies are not able to convert profits into cash but select industries are using working capital elements as levers to grow sales.
Fast-growing sector of opportunity
As of 2017, Vietnam’s consumer market value stood at US$120 billion, recording an annual growth rate of almost 10% over the period of 2012-2017, according to the “Vietnam Consumer and Retail report, Q1-2019” by BMI.
During the period, US$3.4 billion and US$1.9 billion were the total cash trapped in working capital for the largest companies within the consumer industry and retail sector, respectively. This amount has increased at 15% per annum on average, of which over 40% of the total working capital was contributed by inventory.
The report also suggested that Vietnam would be one of the fastest-growing consumer markets in the emerging Asia Pacific region, along with Indonesia, India, the Philippines and China, with double-digit growth over the next five years until 2022.
This is on account of increasing private consumption on the back of the country’s economic growth. Low level of unemployment and growth in minimum wages will further drive consumer spending.
PwC’s experts noted that apart from changing dynamics and macros, changing consumer preferences are reshaping how business is done in the consumer and retail industry every day.
For instance, the high mobile and internet penetration rates are boosting e-commerce activities, as competition among e-commerce giants builds momentum. Regional sourcing and manufacturing of consumer goods are also becoming more common.
Necessity to focus on working capital management
To respond to a volatile world and adapt to consumers who are becoming more digitally connected and disloyal, companies need to invest in growth, innovation and a solid foundation for the future.
Freeing up cash and better managing working capital have emerged not just as a recommended priority, but a necessity for companies. Yet the understanding of many companies is restricted to working capital as a balance sheet item and source of cash blockage.
Recent brick-and-mortar retail chain collapses, such as those of Toys “R” Us, Sears, Rockport and many more have underlined the need for more rigorous management of customer risks, as well as payment flows. Better management of inventory days will also boost companies’ ability to adapt quickly to changing consumer demands.
“We have seen numerous examples, in the engagements we have done, of companies aspiring to expand at exponential pace and eventually running out of cash and struggling for survival. Topline growth coming at the expense of positive cash flows is a perfect recipe for non-sustenance of businesses,” said Johnathan Ooi, Deals Partner at PwC Vietnam.
To move forward, working capital management needs to be a strategic priority for companies, experts at PwC’s event agreed.
“It is vital that companies in the consumer and retail sector make better use of working capital to become more agile in this changing world,” said Mohammad Mudasser, Practice Lead, Working Capital Management of PwC Vietnam.
“In the face of rapid economic growth and low lending rates over the past few years, the credit crunch was not felt and capital was not difficult to come by. But will this continue? How long can organizations afford to grow at the expense of balance sheet deterioration? Companies need to manage their liquidity positions carefully to ensure they have enough cash flow to stay in business. For matured companies, working capital elements can be used as means to grow sales,” Mudasser concluded.