Economic growth attracts international retailers to the Philippines

Operating in lockstep with the economy as a whole, the retail sector continues to exhibit consistent growth, fuelled by overall GDP expansion averaging 6.7% annually between 2012 and 2014, and coupled with low inflation rates and steady population growth. The increasingly affluent and relatively youthful population is providing an increasingly attractive market for domestic retailers, as well as drawing increasing amounts of interest from larger international brands. Taken together, these and other positive factors have combined to drive household expenditures at quarterly growth rates of between 6.7%-8.2% from 2013-15, according to the Philippine Statistics Authority, resulting in a windfall for the retail sector across the country. With the national and regional urban centres already flush with competition, and with affluence spreading out of these areas into the provinces, new opportunities are also being explored outside the traditional markets around the greater Metro Manila area and other regional capital cities.

The higher- and medium-end retail segments are largely dominated by four major local players: Ayala Group, SM Investments Corporation (SM), Robinsons and Rustan’s. The latter three groups long ago turned their large real estate holdings into massive shopping malls and complexes, integrating to the point of becoming directly active as tenants in their own buildings by buying into foreign brands and competing against other tenants, primarily in the apparel segment. Ayala Group was the last to buy into retail activity but it has, over the past few years, diversified into retail partnerships, including food, department stores and convenience stores.

Householding Spending

Already with one of the largest populations in South-east Asia, the Philippines is also now in an ideal position in terms of economic growth, as well as consumer demographics in terms of traditional age-related spending habits. As a result, household expenditure has continued to exhibit strong growth patterns in recent years. Annual household final consumption expenditure for 2015, at constant prices, stood at P5.3trn ($117.7bn), which represents an increase of 6.2% over the previous year’s total of P.4.9trn ($108.8bn), according to the Philippines Statistics Authority (PSA). In terms of retail spending, the food and beverage market continues to lead household expenditure in both value and growth rates. Lagging a good way behind the food, beverages and tobacco categories, which accounted for around 43% of total expenditures in 2015, were miscellaneous goods and services in second place at 13.5% and housing, water, electricity and gas and other fuels, in third place, at 10.5%.

Rising Income Levels

This growth has also been increasingly centred among the higher income groups, the two highest categories of which have recorded the most substantial additions to their ranks over the past decade. The annual income brackets for families with incomes between P100,000 ($2220) and P249,999 ($5549), and P250,000 ($5550) and over, have each added around 3000 new families in the time between the most recent 2006 and 2012 government surveys for family, income and expenditure. These categories increased by 2794 and 2964 families, respectively, over the six-year span, while no other lower income group exceeded 1000 new additions during the same time period. Together, these two largest income groups represent an increasingly large share of both national income and total expenditure, accounting for 92% of total household income in 2012 (up from 84% in 2006) and 89% of total household expenditures (up from 81% in 2006).

In absolute terms, the IMF estimates that overall GDP for the Philippines, in constant prices, amounted to approximately P7.7trn ($170.9bn) in 2015, up from P7.2trn ($159.8bn) in 2014, resulting in a P500bn ($11.1bn) increase. With consumption accounting for roughly three quarters of GDP in the Philippines, this equates to approximately P375bn ($8.3bn) in additional consumption spread among local businesses in 2015 compared to the previous year. This domestic revenue stream is supplemented by the large number of overseas Filipino workers (OFWs) employed in countries around the world, from Dubai to Canada, which numbered some 2.3m in 2014. Aggregated non-resident workers’ remittances totalled some $20.4bn in 2014 alone, according to statistics from the central bank Bangko Sentral ng Pilipinas (BSP).

Youthful Demographic

Another significant factor apart from overall economic growth is the favourable demographic makeup of the Philippines. While more mature economies in Europe, North America and Japan have ageing populations which tend to spend less, the Filipino population is relatively youthful – a demographic prone to higher rates of spending and consumption.

Since 2000 more than 40% of the country’s population has been under the age of 20, according to the PSA. In each of the estimates taken at five-year intervals between 2000 and 2015, only the four youngest age demographic categories (composed of five-year age intervals) topped double-digit proportions of the population as a whole. By contrast, the four oldest segments – beginning with those aged 65 years and older – only accounted for a cumulative 4.9% of the population. This trend is expected to continue over the next decade before equalising somewhat, beginning around 2030, when the proportion of Filipinos under the age of 20 is expected to decline to 35.6% before dipping even further to 31.6% by around 2040. Aside from a relatively youthful population in comparison to Japan and Europe, the Philippine population is also relatively large in absolute terms, at 101.6m.

Hungry For More

The strongest growth traditionally has occurred in the food and beverage sector, while non-grocery sales have increased at a slightly lower rate. Food sector growth is primarily the result of population expansion, which has fuelled business in both supermarket and convenience stores. Food and non-alcoholic beverage sales grew 4.9% and 5.9% in 2013/14 and 2014/15, respectively. Consumption of alcoholic beverages and tobacco increased at a even higher rate – by 14.8% in 2013/14 – before dropping to 6.3% in 2014/15. The food and beverage segment in the Philippines is controlled primarily by four major supermarket players: SM, Pure Gold (in conjunction with Ayala Group), Robinsons and Rustan’s. While detailed financial data from the privately held companies of SM, Robinsons and Rustan’s is unavailable (they are not subject to public disclosure requirements), the listed Pure Gold company, which operated a total of 248 retail outlets as of the end of 2014, has exhibited substantial growth in recent years. Gross sales for the retailer surged by 47% from 2012 to 2014, with annual receipts totalling P57.6bn ($1.3bn), P73.3bn ($1.6bn) and P84.9bn ($1.9bn) in 2012, 2013 and 2014, respectively. This has given rise to a corresponding increase in gross profit from P9.23bn ($204.9m) in 2012 to P14.5bn ($321.9m) in 2014, while net income spiked from P2.7bn ($59.9m) to P4.5bn ($99.9m) over the same time period.

Not only are the larger supermarket chains expanding their operations, but the smaller convenience store market is growing as well. Following years of operating with limited competition after entering the Philippine market in the 1980s, the ubiquitous 7-11 chain is now facing increasing pressure from new rivals looking to enter the fast-growing market segment. With the transformation of traditional sari sari corner stores into modern, uniform convenience stores, a fertile environment for growth has begun to emerge. As a result, the past five years have seen a proliferation of rival chains across the county, including Family Mart, Circle K and Alpha Mart.

Secondary Market Growth

With little room left to expand in the greater Metro Manila market, much of the focus for new development is on saturation of the primary regional centres of Cebu and Davao and new expansion into other provincial urban centres. “In the 1980s and 1990s developers were focused primarily on super centres in the regional capitals. In the 2000s big box stores expanded out of Metro Manila and we are now seeing a dispersion to the second-tier markets,” Paul Santos of the Philippine Retailers Association, told OBG.

As the larger retailers continue to expand their presence, new market dynamics have come into play, with Manila-based conglomerates sometimes competing directly with smaller, independent operators, which already have a long-established presence after operating uncontested in the past. Some of these smaller regional players, such as KCC Malls in General Santos City in southern Mindanao have so far been able to hold their own against the big four, largely by capitalising on customer loyalty and targeting the lower-end retail segments.

Retailer Competition

Fuelled by strong household consumption, positive business confidence from both local and foreign brands, growing tourist arrivals and a maturing economy, the regional capital of Cebu has been one of the hottest retail markets in the country as of late. Competition among the primary retailers has been fierce around Cebu, as each company vies to carve out a share, leading to a series of shopping mall construction projects. SM, for example, completed the 472,400-sq-metre SM Seaside City Cebu at the end of 2015. The mall includes cinemas, an 18-lane bowling alley, a 1020-seat theatre and a 250,000- sq-foot roof garden. This is in addition to SM City Cebu and SM City Consolacion, which are already operating in the area.

Rustan’s is also boosting its presence in Cebu, with the opening in the second half of 2015 of a three-floor, 17,500-sq-metre department store inside Oakridge Business Park, which includes upscale international brands including Montblanc, Dior, Armani Jeans, Chanel, Clarins, Acca Kappa, Lenox, Bugatti and Swarovski. Not to be left out, Ayala Land also broke ground in early 2015 on its new 22,000-sq-metre Central Bloc project, which will include a five-floor mall containing upwards of 43,000 sq metres of gross leasable area (GLA) upon its projected opening date in early 2018. This new mall is also not Ayala Group’s first foray into the market, having already established the Ayala Centre Cebu. Last but not least, Robinsons opened its third mall in Cebu sometime in December 2015 – the four-storey 158,000-sq-metre Robinsons Galleria Cebu, which houses a modern movie theatre and a number of international brands. Its anchor tenants include Robinsons Department Store, Robinsons Supermarket, True Value, Robinsons Appliances, Daiso and Toys “R” Us.

Strategy

The dominant retailer companies are also tweaking their expansion strategies slightly as they move into less densely populated areas. Whereas large mega-malls cater largely to the coveted high and low-end shoppers on destination shopping trips, the new smaller stores are being built in larger quantities outside Metro Manila and other regional capitals to target a higher volume of every day shoppers. These more intimate stores range in size from 10,000-20,000 sq metres of GLA compared to mega-malls which reach up to 60,000 sq metres.

Away from mall projects, competition driven by the entrance of more national and international players to the market is prompting retailers of consumer products to increasingly look to provincial markets and diversify their product ranges. “The Metro Manila market for white goods has become a price war in recent years given the advent of many players, international and domestic,” Nobuhito Hayashi, president and CEO of Haier Philippines, told OBG. “Therefore, growth volumes are being driven by provincial demand. The strategy of most brands, given how commoditised many of their product lines are, is to capitalise on innovation and introduce unique products to address market needs.”

One area of the market that has thrived in other countries but resisted success in the Philippines is the hypermarket. With domestic shopping trends favouring more frequent trips to shopping centres and markets to purchase a limited amount of goods during any one trip, the concept of infrequent trips for mass purchases and stockpiling is a concept which has so far failed to gain traction.

In addition to a strong performance by traditional brick and mortar outlets, online retail growth has exploded phenomenally over the past few years, although online sales remain just a fraction of total retail sales due to the fact that the segment has started from such a low floor. Much of the initial concern regarding online sales growth due to the lack of credit and debit cards in the Philippines has so far proved unfounded, as a substantial number of creative alternative payment methods have cropped up to circumvent this problem. These solutions include paying for purchases at convenience stores or banks, using phone credit, paying cash on delivery and even wire transfers of remittances.

High-End Demand

Because the Philippines was not as competitive as other comparable developing economies in the region in terms of per capita income, in the past much of the domestic retail sector has been focused on more inexpensive consumer products. The large, dispersed population and marginal transportation infrastructure necessitated producing large amounts of inexpensive goods for a volume over value approach. While this is certainly still true for a number of subsectors in the Philippine retail market, years of strong economic expansion, healthy remittances from OFWs and increasing urbanisation among the population has opened up opportunities for sellers of higher-margin products.

Over the past few years these factors have fostered a growing trend of consumer affluence, which is expected to increase the proportion of consumer expenditure for items other than necessities and basic goods. Consumer affluence is expected to primarily affect retail trade, gaming and entertainment sectors, resulting in the further expansion of malls — particularly those which showcase international brands in the clothing industry, along with the proliferation of upscale restaurants. The growth in consumer affluence can sometimes be limited by structural constraints. “Although the premium market pushes for sustainability and environmentally friendly technology, vendors have to be choosy with the vehicle models they introduce to countries like the Philippines, as proper infrastructure and access to quality fuels can be a challenge in some areas,” Willy Tee Ten, president of Autohub Group, told OBG.

Despite increasing consumer affluence, stricter taxation laws are causing the luxury goods market to slow. The main reason for a slowdown in the premium segment is taxation, particularly as stricter tax laws are being implemented, targeting primarily those with readily available cash – who are now trying to stay off the radar and who are cancelling purchases of luxury vehicles, which ultimately hurts retailers of luxury goods. Still, many of the Philippines’ top retail operators are increasingly partnering with Western and other well-known Asian retail brands that have proven popular in other South-east Asian markets but are not yet available in the Philippines. Strong cultural and trade ties with the US continue to fuel demand for American products in particular, with the country accounting for a 41% share of foreign retail brands in 2014. The UK and Japan tied for a distant second, each with 9% of the market, followed by Spain and France with 8% each and Hong Kong with 5%. This trend continued into 2015, with several new foreign brands entering the Philippine retail arena. In the third quarter of 2015, Applebee’s, PieFace, Laduree and Honeycreme all launched forays into the market. These followed close behind several retail outlets which entered the market in 2014, including Mr. Pizza, St. Marc’s Cafe, Triple O’s and H&M.

Market Attractions

In spite of the Philippines’ relatively low but rapidly growing per capita income, the country boasts impressive potential for global retailers looking to get into the rapidly evolving market. The Philippines ranks highly on a number of key retail market indicators in comparison to regional, and indeed global, competitors. Household spending as a percent of GDP remains the highest in East Asia, according to data published by the World Bank, which is well above other emerging regional markets, including Indonesia, Thailand, Malaysia, China and Singapore, which all posted ratios of no more than 70%. Another enticing factor for the Philippine market is that, while purchasing power in the country continues to increase steadily, rent for retail space remains a fraction of that in other major retail markets across Asia. According to the international property consultancy CBRE, retailers setting up shop in Manila paid an average of just $37 per sq feet for retail space in the third quarter of 2014 compared with $107 per sq ft in Bangkok, $139 in Hanoi, $549 in Kuala Lumpur and $672 in Beijing. Together, these factors have made the country one of the hottest retail markets in the world, with 26% of global retailers indicating that they viewed the country as one of the top-10 target markets in the region, according to CBRE. This placed the country 8th, behind leader China at 58%, Vietnam (48%), Malaysia (42%), Indonesia (39%), Singapore (35%), Thailand (29%) and Hong Kong (29%).

Outlook

The Philippines remains, largely, a consumption driven economy, with the majority of its GDP being derived from services, trade, overseas remittances and business process outsourcing. Because of this, the retail sector could eventually account for as much as a fifth of GDP. New growth will come increasingly from outside the major urban centres as retailers seek to widen their nets, targeting increasingly smaller and more remote markets in an effort to access a greater proportion of those Filipinos living outside urban centres. In addition to strong economic indicators propping up domestic consumption, lower oil prices that have decreased transportation and production costs should also boost consumption until a price recovery occurs. Most household consumption will remain focused on the food and beverage market, while rising spending power spurs a move towards greater spending on luxury items.

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The Report: The Philippines 2016

Industry & Retail chapter from The Report: The Philippines 2016

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