18 Sept 2014
Selling to the Philippines: Syncing with the New Retail Reality
The growing spending power of Filipino consumers, along with the country’s evolving modern retail landscape, presents real opportunities for Hong Kong lifestyle products.
- Chart: GDP growth (%)
- Chart: Growing income a driver of consumption
- Table: Modern retail trade penetration rate (2012)
- Map: Locations of Manila and Cebu
- Photo: SM Megamall in Metro Manila
- Photo: Rustan’s department store in Metro Manila
- Photo: A shopping centre with a green landscape
- Photo: A playground set in the middle of a mall
- Table: Major mall chains in the Philippines
- Photo: Baleno in SM Department Stores
- Photo: Watsons in SM Aura Premier mall
- Photo: A Dr. Kong outlet in SM Aura Premier mall
- Photo: A Giordano outlet in a mall
The Philippines is one of Asia’s fastest growing economies, growing 6.4% year on-year (YoY) in the second quarter of 2014. The vibrancy of the archipelago’s economy started to attract attention in 2012 when its GDP growth soared to 6.8%, followed by even stronger growth of 7.2% in 2013. The Asian Development Bank now expects the Philippines to grow by about 7% annually over the coming few years, outpacing most of its ASEAN neighbours. This robust performance is now proving attractive to a significant number of foreign businesses and investors, with many of them now looking for opportunities in this rapidly-developing Southeast Asian country.
Compared to many of its ASEAN peers, the Philippines has long had a strong dependence on domestic consumption. In 2013, household consumption expenditure accounted for 73% of the country’s GDP. This also explains the resiliency of the country following both the Asian Financial Crisis of 1997 and the Global Financial Tsunami of 2008. At the time, many other ASEAN countries, notably Malaysia and Thailand, were hard hit due to their heavy trade dependency, currency depreciations and the considerable jitters in the financial markets.
Formerly the “Sick Man of Asia”, now an attractive prospect
The Phillipine’s strong economic fundamentals and new investment grade status have proved major boosts to confidence within the country. Following his 2010 election, the country’s President, Benigno Aquino III, embarked on an ambitious infrastructure programme aimed at bolstering the economy. He has also repeatedly asserted that the Philippines has dramatically moved on, making its former role as the “Sick Man of Asia” just a distant memory. Whether the Philippines can truly be considered Asia’s newest economic miracle, however, remains debatable. Its allure as a new and highly significant market for international retailers and traders, though, is clearly beyond doubt.
Driven by one of the fastest growth rates in Asia, the country’s per capita income expanded at a compound annual growth rate (CAGR) of 9% from 2010-2013, almost double that of Indonesia. In the Philippines, fast-rising disposable incomes have smoothly translated into greater spending power and actual consumption expenditure. This is, in part, thanks to its very young population, who, with a median age of 23, have a higher propensity to consume. As the second most populous country in ASEAN (after Indonesia) – its population exceeded 100 million as of July 2014 – the Philippines represents a huge consumer market and one that holds considerable promise for foreign businesses. In addition, the country is also home to ASEAN’s second largest middle-income population (approximately 32 million people), constituting a sturdy demand for lifestyle products, notably apparel, electronic gadgets, games and toys, gifts and premiums and luxury goods.
Strong inward remittances from Overseas Filipinos (OF) and growing receipts from the Business Process Outsourcing (BPO) sector (also known as the Information Technology and Business Process Management (IT-BPM) sector) are the two major factors underpinning the robust local consumption scene. In 2013, cash remittances from OF and IT-BPM revenues amounted, respectively, to about US$23 billion and US$16 billion. This accounted for 8.5% and 5.9% of the country’s GDP. Along with increasing spending power, the Philippines has one of the world’s most confident consumer bases, with the country ranking third out of 60 economies in Nielsen’s Consumer Confidence Index in Q1 & Q2 2014, trailing only India and Indonesia. These all bode well for the country’s expanding retail market, which, according to Euromonitor, is expected to grow at a CAGR of 7.8% from 2013-18. This is faster than Malaysia’s 4.3% and Thailand’s 6.1%, according to figures from the same source.
Modern retail a right distribution channel for lifestyle products
While the general economic prospects of the Philippines are promising, it cannot be denied that more than two-thirds of its population are low-income earners (social classes D and E, earning less than the national’s average gross income). In the Philippines, the modern retail penetration rate is around 25%, which is low compared with either Malaysia or Thailand, while the bulk of retail spending is transacted via neighbourhood convenience (or “sari-sari”) stores. Market segmentation is essential to the success of Hong Kong lifestyle product exporters and retailers, allowing them to effectively target the booming middle-income class in the Philippines. Product differentiation aside, choosing the right location for modern distribution channels is also important when it comes to ensuring that the target mix of consumers is reached.
Metro Manila, the National Capital Region of the Philippines (formed by the city of Manila and surrounding cities), is the country’s most developed and populous region – making it an ideal entry point for accessing substantial numbers of middle-income consumers. It is home to about 12 million people, many of whom are fairly sophisticated consumers, with their consumption expenditure accounting for almost one-quarter of the country’s total. Most of the upscale malls are situated in Metro Manila. The SM Prime Group, the largest mall operator in the country, for instance, has more than one-third of its 49 malls located in Metro Manila, indicating the high concentration of consumer spending in the region. In an interview with the Oxford Business Group, Leonardo Dayao, president of Puregold, the second largest modern food retailer in the Philippines, said the modern retail penetration rate in Metro Manila is around 50%, far higher than the national average (including the rural areas).
Cebu City – the centre of the second most populous metropolitan region, Metro Cebu – is also considered the Philippines’ Second City for retailers. Although the number of upscale malls in Metro Cebu is not comparable to that of Metro Manila, its retail market prospects are promising, largely thanks to the rapid development of BPO services and other high added-value industries in the area. SM Prime is already operating two malls in Metro Cebu, while a new SM mall (with a floor area of 400,000 sqm, some five times the size of Hong Kong’s Times Square’s 83,700 sqm) will be opened in Cebu City next year.
As previously indicated, Filipinos retain a preference for shopping at sari-sari stores, a type of conventional convenience store. These form the most important distribution channels for daily necessities, as well as a number of fast-moving consumer goods (FMCG), for the lower income groups. It is estimated that sari-sari stores account for roughly 70% of the total consumer market in the Philippines.
Modernisation is the Philippines’ New Retail Reality
Although the majority of Filipinos still do the bulk of their shopping in sari-sari stores and outdoor markets, modern and organised retail is expanding rapidly. Shopping centres and retail projects are springing up across the Philippines, catering to the surging middle-income class, a group lured by both value-for-money products, and a convivial shopping experience.
A distinct mall culture is emerging among the Filipinos. Many shopping malls in the country now also provide a wide range of recreational services and facilities, including bowling alleys, cinemas, children’s playgrounds and even Catholic churches. This has resulted in visiting malls becoming a major social activity. As a result of the Philippines’ tropical climate, air-conditioned malls enjoy tremendous footfall, particularly during weekends, when Filipino consumers tend to spend almost the whole time there, accompanied by friends and families, while escaping from hot or wet weather. By comparison, street-level stores are at an obvious disadvantage, making it difficult for them to compete with malls for the patronage of middle-class consumers.
Hong Kong lifestyle products sellers who are interested in the Philippine consumer market are advised to specifically target shopping malls for the distribution of their quality products, as well as for the building of a brand image among target consumers. It is also important for them to keep abreast of the latest developments across the Philippine retail landscape.
Four groups of companies represent the major players in the Philippine retail sector - SM Prime, Robinsons, Ayala and Rustan’s. The first three are primarily mall operators and developers, while the fourth focuses on the operation of supermarket chains and high end department stores. Most of the malls operated by SM Prime and Robinsons target middle-class consumers, while Ayala runs several upscale malls, including the Greenbelt in Metro Manila. Essentially, the trends in retail modernisation are driven and led by these gigantic groups.
Of late, a number of large-scale integrated developments, featuring shopping centres surrounded by commercial and residential buildings, have been emerging as the major trend among property developers. This type of mixed-use project is now commonly seen in Metro Manila, where outdoor space for recreational use is very limited, with privately planned complexes and townships becoming increasingly visible. The Bonifacio High Street in Metro Manila’s Fort Bonifacio District, a newly developed commercial zone, is one of the latest showcases for this particular model of development.
Another emerging trend is the expansion of the mall networks to the second-tier cities and the regions beyond Metro Manila. In these areas, instead of establishing large-scale regional shopping centres, developers tend to build a greater number of district and neighbourhood centres with smaller configurations. According to Paul Santos, Vice-President for External Affairs of the Philippine Retailers Association (PRA), this phenomenon has arisen as a result of the saturation of large-scale malls in the major cities.
Practical tips on selling to Filipino consumers
The most common and safest way to access the Philippine retail market is to find a suitable local partner, whether a franchisee, distributor or an equity partner. While wholly foreign-owned retail businesses are permitted under certain conditions, most of the Hong Kong and foreign brands with a presence in the Philippines have entered into partnership arrangements with local companies. This is either in the form of franchising or as a joint venture (JV). Japan’s Fast Retailing Co Ltd (the parent company of the Uniqlo brand) and Hong Kong’s Watsons, for example, have both formed JVs with the SM Group and opened a number of outlets in the country. Two other Hong Kong brands - Giordano and G2000 - are operated by local franchisees in the Philippines.
While partnering with local companies is seemingly the most popular way for foreign brands to enter the market, this is not the only route. There are a number of foreign brands and retailers, such as H&M, the Swedish fast-fashion retailer, seeking wholly foreign-owned arrangements in order to establish a foothold in this flourishing consumer market.
A prime reason behind this prevalent business partnership model between overseas brands and retailers and Philippine companies is the essential support that can be marshalled by the local partner. Apart from solving local administrative issues, a reliable Philippine partner can help a Hong Kong company build its brand and sell successfully in the Philippines. The local partner, for example, may assist in identifying the most effective distribution channels, devising the optimal promotion strategies for the local environment and managing the product mix best suited to different areas and seasons. Additionally, partners who have good relationships with the property developers - on many occasions actually being subsidiaries or affiliated companies - can help secure favourable retail locations within malls.
Related information: Philippines infographics