BANGALORE, INDIA: Vietnam has ended India's three-year reign as the most attractive emerging market destination for retail investment according to the seventh annual Global Retail Development Index (GRDI), a study of retail investment attractiveness among 30 emerging markets conducted by management consulting firm A.T. Kearney.

"The critical factors that have powered Vietnam to the top of the Index this year are rapidly growing per capita income of the Vietnamese consumer and drastically opening up of regulations for new entry," said Saurine M. Doshi, Partner, A.T. Kearney India.

"India has enjoyed the peak of the Index for the past few years, mainly due to steep and consistent rise in the income levels of Indian consumers. Going forward, India's inability in opening up the FDI regulations for foreign retailers will start to hit the industry's competitiveness more than ever before," he added.

Vietnam's leap from fourth in the 2007 GRDI to first place in 2008 was driven by strong GDP growth, changes to the country's regulatory structure favoring foreign investors, and increasing consumer demand for modern retail concepts. India, Russia and China, the top three countries in last year's GRDI, fell to second, third and fourth, respectively, in the 2008 GRDI. While these countries remain important retail investment destinations, high real estate costs in large cities and growing competition have decreased their attractiveness relative to prior years and forced retailers to look for opportunities in tier II and III cities.

Published since 2001, the GRDI helps retailers prioritize their global development strategies by ranking the retail expansion attractiveness of emerging countries based on a set of 25 variables including economic and political risk, retail market attractiveness, retail saturation levels, and the difference between gross domestic product growth and retail growth. The GRDI focuses on opportunities for mass merchant and food retailers, which are typically the bellwether for modern retailing concepts in a country.

"India continues to be a dominant force in A.T. Kearney's annual GRDI report. While India has slipped to number two this year, it continues to be a "hot" destination for global retailers. However, the growing challenges with doing retail business in India have caused the slippage in the rankings. Challenges such as sky-rocketing real estate costs, lack of good commercial real estate and the complexity around regulations, especially for foreign retailers" said Hemant Kalbag, Principal, Consumer Industries & Retail Practice, A.T. Kearney India.

"These growing challenges are now starting to shrink the window of opportunity for new entrants to India. However, most large foreign retailers with plans to be relevant in India already have offices and operations in the country. The large domestic players have also hit the ground running and most are executing extremely aggressive growth plans," he added.

While Vietnam's $20 billion retail market pales in comparison to India or China, the absence of competition and 8 percent GDP growth make it an attractive expansion opportunity for global retailers. Vietnamese consumers are among the youngest in Asia, with 79 million below the age of 65, and increased their consumer spending by more than 75 percent between 2000 and 2007. The country is growing increasingly urbanized and concentrated with more than one million people a year migrating into the two large cities of Ho Chi Minh and Ha Noi.

The Vietnamese government is expected to remove controls on 100 percent foreign ownership of retailers in the country and has established a new program to develop wholesale and retail real estate by 2010. The region has already seen the recent emergence of modern retail in neighboring countries such as Thailand, Philippines and Malaysia.