Favourable macroeconomic conditions – namely lower inflation and increased purchasing power – have bolstered consumer confidence in the Philippines. Likewise, enhanced business strategies and new product lines have played a key role in expanding the retail sector in recent years, as has the continued development of e-commerce and rising smartphone penetration.
Home to a diversified retail sector, President Rodrigo Duterte believes the Philippines can become the world’s 25th-largest economy in terms of purchasing power parity by 2020. However, while the country has maintained annual economic growth of approximately 6% under the current administration, the outlook for the retail sector remains constrained by relatively high levels of underemployment and poverty. Despite these persistent challenges, retail floor space has continued its upward trajectory, and infrastructure development and economic growth are propelling expansion within secondary and tertiary cities.
While the Philippines lags behind Indonesia in terms of the size of its e-commerce market and the scale of domestic innovations, online retail activity is expected to see considerable growth in the near future, supported by government policy and market leaders’ ambitions to expand their online operations (see analysis). In addition, the proliferation of warehouses and industrial parks in North and South Luzon is expected to boost the growth of the e-commerce industry. Combined with a pipeline of new expressways and railway links, logistics companies will be able to better implement last-mile delivery services, in turn facilitating online purchases and overall retail activity.
Traditional Outlets
Small informal outlets, known as sari-sari stores, have long played an important role in the sale of goods across the archipelago. With the lowest overhead costs and an easy registration process, sari-sari stores dominate the sector. These stores are a big part of the day-to-day lives of many Filipinos and are often attached to homes. Selling a range of products, from food to clothing and household goods, sari-sari stores also offer routine services, such as mobile phone credit and bill payments. Although they are mainly concentrated in rural and low-income areas, sari-sari stores can be found almost everywhere in the Philippines. However, the increasing presence of chain convenience stores – such as Ministop, 7-Eleven, FamilyMart, Alfamart and Lawson – is leading to the gradual decline of the neighbourhood sari-sari.
Structure
According to a report by US-based research firm Nielsen, the number of small-format supermarket chains nationwide rose from 220 in 2013 to 410 in the first quarter of 2018. At the same time, the number of convenience stores expanded from 1620 to almost 4300. Conversely, the total number of sari-sari stores declined by 1% in 2017, compared to 1% growth in the previous year. The number of market stalls remained flat in 2016, before falling by 3% in 2017.
Looking more closely at the structure of the sector, the most recent annual business survey by the Philippine Statistics Authority (PSA) showed that the formal retail sector comprised 115,998 stores engaged in wholesale and retail trade in 2016. According to the survey, the largest retail subcategory was apparel (excluding footwear), accounting for 8% of the total with 9231 establishments. Drug stores made up the next biggest category, with a 6.6% share of the formal retail segment, or 7659 stores. Motorcycle shops represented 5.5%, while petrol stations, hardware stores and grocery stores accounted for 4.1% each. The remaining 67.7% came from an array of categories, reflecting the varied nature of the market.
More than 1.1m people were employed in the retail sector in 2016, according to the PSA. The top-five employers accounted for over one-quarter of retail employment, or 296,219 workers. This was followed by department stores, which accounted for 6.2% of employment; apparel (excluding footwear), at 5.4%; petrol stores at 5.4%; supermarkets at 4.9%; and drug stores at 4.7%. The average number of workers per establishment was also highest in department stores, at 115, followed by hypermarkets (111 per outlet).
Liberalisation
While a burgeoning middle class is driving demand for international brands, a restrictive legal framework in the form of equity and capitalisation requirements has historically hindered foreign participation in the retail trade. Sherwin Gatchalian, chair of the Senate Committee on Economic Affairs, has pushed for further liberalisation of retail trade as part of his broader efforts to make the country more attractive for foreign direct investment.
Gatchalian has supported amending the Foreign Investment Act, the Public Service Act and the Retail Trade Liberalisation Act in order to encourage an inclusive, efficient and competitive business ecosystem. Under the foreign investment negative list, no foreign equity is allowed to participate in retail trade enterprises with paid-up capital of less than $2.5m. While proponents of removing this restriction argue that it would lead to further job creation and lower prices for goods and services, the Department of Trade and Industry has so far resisted taking action on the grounds that it would harm the competitiveness of sari-sari stores.
Performance & Size
The Philippines is home to a diverse retail sector with significant growth prospects. It is benefitting from favourable demographics in the form of a young and increasingly urbanised population, as well as rising incomes across the board that are fuelling sustained demand for consumer goods. Ranked 18th out of 30 developing economies in AT Kearney’s most recent Global Retail Development Index in 2017, the Philippines has strong long-term retail prospects thanks in part to relatively high disposable incomes and e-commerce expansion.
In terms of economic contribution, the retail sector generated P4.1trn ($76.3bn) in revenue in 2016, accounting for 25.8% of GDP. The retail sector also contributes significantly to tax revenue, with the value-added tax rate on the sale of goods set at 12%.
According to the National Economic Development Authority, the sector expanded by 5.9% in 2018. Addressing attendees at the Philippine Retailers Association’s annual CEO briefing in March 2019, John Patrick Cua, managing director of analytics company Nielsen Philippines, said he expects sector growth in 2019 to be spearheaded by food and fast-moving consumer goods (FMCGs), which are responsible for 40-50% of consumption in the country.
According to the IMF, the Philippines recorded GDP per capita of about $8900 in terms of purchasing power parity in 2018, up from roughly $8300 in 2017. This placed the Philippines 120th out of 192 countries, behind ASEAN counterparts Singapore, Brunei Darussalam, Malaysia, Thailand and Indonesia, but above Vietnam, Myanmar, Cambodia and Laos.
In terms of the Philippines’ overall economic activity, GDP growth slowed from 6.5% in the first quarter of 2018 to 5.6% in the same period of 2019, according to data from the PSA. Despite the broader economic slowdown, the services sector grew at a rate of 7% – the fastest among the major sectors – followed by industry at 4.4%, and agriculture, hunting, forestry and fishing at 0.8%. Over the same period, per capita GDP was up 3.9%, while GNI per capita expanded by 3.3% and household final consumption expenditure rose by 4.6%. Supported by buoyant consumer confidence and increased purchasing power, total merchandise trade reached a value of $14.9bn in March 2019, up 3.5% yearon-year (y-o-y) from $14.4bn, according to the PSA.
When it comes to retail space, a rapidly growing economy and evolving preferences are giving rise to flexible, mixed-use projects that feature office, residential and retail space on the same site. According to a December 2018 report by global real estate services firm Colliers, 200,000 sq metres of new retail space is expected to be added to the market by the end of 2019. Vacancies are to remain around 8.5%, while lease rates are anticipated to record growth of about 1.5%.
Consumer Trends
According to the 2018 annual report on the Philippine market by consultancy Kantar Worldpanel, purchases of FMCGs increased by 11% that year. Data collected from 3000 households in rural and urban areas show that the segment that recorded the fastest growth in 2018 was personal care, which grew by 18% in value and by 11% in volume.
Meanwhile, constituting more than half of all FMCGs, the food segment expanded by 11% in terms of prices and by 4% in terms of volume. Over the same period, the beverages segment increased by 6% in value and by 13% in volume. Food and beverage production stands out among retail segments for its high and steady growth rates. In the first quarter of 2019 the industry – excluding alcoholic products – accounted for 38.7% of household expenditure, according to the PSA. This represented a 5.8% y-o-y growth rate, compared to a 5% y-o-y rate for the same period of 2018.
Rising consumption in the segment is directly linked to the middle class income growth retailers are seeking to leverage. “The expansion of domestic food and beverage retailers in the Philippines is directly related to urbanisation, which has driven demand in new urban centres outside of Metro Manila,” Lester Yu, founder and CEO of local food and beverage kiosk operator Fruitas Holdings, told OBG. “Lifestyle changes and growing awareness of the benefits of a healthy diet will lead to more consumers looking for freshly prepared products, even outside their homes, and we expect this to fuel the segment’s growth.”
Confidence
Consumption continued upwards – albeit at a slower rate – in early 2019, with election spending, higher incomes and more jobs leading to increased sales volumes. While 2018 was characterised by high inflation and a downturn in economic optimism, higher consumer confidence during the first three months of 2019 provided a boost to the economy.
In the first quarter of 2019 consumer and business confidence was upbeat due to easing inflation and higher public expenditure. Prospects of more jobs, better governance, and improved law and order have also led to rising sentiment, according to two surveys released by the central bank, Bangko Sentral ng Pilipinas (BSP), in March 2019. In its Consumer Expectations Survey, the overall confidence index that measures the average direction of change across three indicators – broad condition of the economy, household finances and household income – showed an increase, narrowing from a contraction of 22.5% in the fourth quarter of 2018 to a contraction of 0.5% in the first three months of 2019, representing the largest quarter-on-quarter improvement since the index began in 2007. Meanwhile, BSP’s Business Expectations Survey indicated a business confidence index of 35.2% in the first quarter of 2019, up from 27.2% in the fourth quarter of 2018. This represented a considerable turnaround from a decline for four consecutive quarters in 2018.
The fiscal and monetary response to heightened inflation in 2018 appear to have been effective in curtailing overall prices. In a bid to foster purchasing power, the BSP held an inflation target of between 2% and 4% for 2019. Although this target was missed in 2018, consumer prices eased in February 2019, with inflation at 3.9% compared to 4.4% the previous month. The drop in inflation is primarily attributable to the slower annual growth of 4.7% in the heavily weighted food and non-alcoholic beverages segment. The enactment of the Rice Industry Modernisation Act in early March 2019 is expected to further bring down rice prices and cut inflation by between 0.5 and 0.7 percentage points by the end of the year. Policymakers are expecting headline inflation to ease to approximately 3% in 2020, excluding certain food and energy items.
Formats
With more than 1500 franchise systems, the Philippines has the largest franchise network in ASEAN, equal to about 25% of all retail sales in the region. Due to its large and dynamic internal market, the Philippines has become a popular destination for many international food and beverage franchises as purchasing power rises and dining out becomes more popular. A number of large international brands, particularly from the US, Taiwan, India and Thailand, are positioning themselves to take advantage of rising footfalls spurred by one of the fastest-growing GDPs per capita in the world. As of the first quarter of 2019 seven international brands were reported to be seeking local partners to establish franchises in the Philippines: Mango Chili, Coca, the Belgian Waffle Co, Yan Xiang Ting, Cha Ji Tang, Bingirl and Fidèle.
While small outlets continue to dominate the market outside major urban centres, new shopping malls are spreading across the archipelago and increasing their share of footfall in the process. In recent years real estate developers have favoured mixed-use complexes, which has led to a greater number of shoppers and increased demand. In April 2019 SM Prime Holdings, a local integrated property developer, announced it had plans to invest P88bn ($1.6bn) over two years to build four new malls in the Philippines and expand its presence in China. Some P80bn ($1.5bn) of this was earmarked for capital expenditure in 2019, primarily for the company’s land banking efforts and expansion plans, which will add 200,000 sq metres of gross floor area in the developing provincial cities of Olongapo, Zambales, Butuan and Zamboanga.
In May 2019 Robinsons Retail Holdings, one of the largest multi-format retailers in the Philippines, announced plans to launch 150 new stores across the country by the end of the year. The firm plans to invest P3bn-5bn ($55.8m-93m) on the store openings, following expenditure of P4.4bn ($81.8m) on openings in 2018. As of December 2018 the retail giant had 1910 stores nationwide, including supermarkets, department stores, do-it-yourself stores, speciality stores, drug stores and convenience stores. The expansion plans come on the back of a strong financial performance in 2018, which saw transactions increase by 1.5% and basket size by 6.1%, resulting in same-store sales growth of 5.9%. For 2019 Robinsons is targeting same-store sales growth of between 2% and 4%.
E-Commerce
While brick-and-mortar establishments are the preferred shopping experience for Filipinos, the nascent e-commerce industry is also set to see more growth in the coming years. Increasingly sophisticated consumer habits are driving the evolution of online offerings, underpinned by support from government policy. Overseen by the Department of Trade and Industry, the E-Commerce Roadmap 2016-20 aims to expand the contribution of online sales to GDP from 10% in 2015 to 25% by 2020. The roadmap is intended to especially benefit micro-, small and medium-sized enterprises – which make up over 99% of Philippine companies – by giving them access to new markets.
According to a 2018 market report by Dublin-based e-commerce platform eShopWorld, e-commerce revenue generated across all product categories totalled $1.5bn that year and is expected to grow to $2.6bn in 2021. Electronics and media was the leading product category in terms of e-commerce sales in the Philippines in 2018, accounting for $618.6m, followed by toys, hobby and do-it-yourself products, which generated $336.5m. With a wide variety of e-fulfilment services to be launched in the near future, other analysts have even greater expectations; a 2018 joint report published by Google and Temasek, an investment company headquartered in Singapore, predicted that the sector could be worth $10bn by 2025.
High smartphone penetration and expanding logistics networks are bolstering e-commerce. According to a 2018 Pew Centre Research survey, the smartphone penetration rate in the Philippines stood at 55% that year. While difficulties delivering products to the end user had previously made consumers and retailers reluctant to delve into online purchases, the government’s infrastructure programme is supporting the expansion of logistics companies and warehousing facilities. As previously hard-to-reach areas in Luzon are now being connected to Manila through expressways and rail lines, retailers can expect to benefit from greater interest in e-commerce (see analysis).
Outlook
The government aims to reach upper-middle-income status by 2040, and significant retail expansion is part of this equation. Given unfolding market dynamics, the industry has ample room to grow, particularly in regions outside of the capital city. With a favourable economic outlook breeding confidence, investors will continue to show interest in new franchise opportunities. Similarly, macro-trends such as ongoing urbanisation and the rising popularity of dining out will be major forces behind the expansion of the food and beverages segment in the years ahead.
While receding inflation, rising wages and a simplified tax structure should support an uptick in consumer spending in 2019, downside risks in the form of geopolitical uncertainty and supply constraints continue to present challenges. Nonetheless, the sector has a bright future given the country’s economic progress, supported by abundant opportunities for online trade. Signs of market buoyancy continue to be evident as outlets expand across the archipelago and the government’s goal of promoting new growth centres beyond congested urban areas – while also supporting the adoption of e-commerce – leads to greater job creation and enterprise opportunities in secondary cities.
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