To be sure: Improving consumer confidence is supporting a rise in consumption

With a substantial portion of domestic production focused on the internal market, the retail and wholesale sector remains a crucial driver of the economy. According to statistics from the country’s central bank, Bangko Sentral ng Pilipinas, total expenditure on personal consumption has shown steady growth over the past seven years. In 2010 personal consumption reached P3.95trn ($89.67bn), up 3.35% over the P3.92trn ($88.98bn) reached in 2009 and nearly P1trn ($22.7bn) more than the P2.98trn ($67.65bn) in 2003. From 2003 to 2010, personal consumption expenditure rose by an average of 4.25% per year.

FUNDAMENTALS: The sector has continued its strong growth through the first half of 2011, reaching P2trn ($45.4bn), a tick above the P1.9trn ($43.13bn) reached in 2010. GDP grew by 10.7% between 2009 and 2010, largely attributed to increased consumer confidence and upbeat sentiment surrounding the election of President Benigno Aquino III. The Philippine Retailers Association (PRA) estimated that 2010 wholesale and retail sales reached P1.4trn ($31.78bn), up 12.2% over 2009.

According to Roberto Huang, the CEO of San Miguel Brewery, “The economic development seen over the past few years, notably the strong macroeconomic fundamentals, has laid the foundation for the improvement of consumer incomes, the emergence of new growth sectors, and an increasing middle class. These have, in turn, led to increased demand for consumer goods.”

GROWING CONFIDENCE: After years of uncertainty following the global financial crisis in 2008, consumer confidence spiked in 2010. The consumer outlook index reached 25.9% during the third quarter of 2010 after remaining in single digits from 2007 to 2009. Those surveyed attributed their more favourable stance to a perceived rise in employment opportunities, increased investments, higher salaries and more stable prices. This optimism has since been dampened, with the index tailing off to 11.7% in the third quarter of 2011, although it remains significantly higher than any time since 2007.

The continuously widening pool of consumers and their increasing spending power has spawned a new demand for recognisable, high-quality products, ranging from luxury automobiles and high-end electronics equipment to imported foods and other fast-moving consumer goods.

INFLUENCES: Traditionally, the strongest period for spending in the Philippines is the fourth quarter, thus results in early 2012 should be a good indication of whether or not improved market confidence will boost consumption. Retail sales in the Philippines reach their peak shortly after All-Saints Day due to a number of factors. Foremost is the traditional jump in spending associated with the holiday season, as well as the government-mandated delivery of bonus cheques, commonly referred to as “13th month” bonuses, which generally amount to a month’s salary. By contrast, the third quarter is generally the slowest for retailers, due to the beginning of the school year and the rainy season.

Another factor fuelling the local market is the steady increase of remittance payments from overseas Filipino workers (OFWs), which constitute a substantial chunk of the country’s GDP each year. Household income, and by default, spending power, is significantly influenced by remittances from OFWs. The value of remittances has grown steadily in recent years, with statistics from the central bank putting the 2010 total at some $18.76bn, a new high and up 8.13% over 2009 figures.

According to Paul Santos, the vice-president for external affairs at the PRA, “One bright spot in the retail segment has been the increase in the value of remittances back to the country, despite the drop in actual numbers of Filipinos working abroad. Increased spending from remittances is driving much of the expansion of the country’s middle class. Without this income, we would not be experiencing this amount of growth.” Remittance-based spending in the Philippines also tends to have a diversifying effect on the retail and wholesale markets, as OFWs hail from all corners of the country and the resulting payments often end up returning to rural or lessdeveloped areas of the country.

GREENER PASTURES: Manila and its surrounding area have long remained the undisputed focal point for commercial activity. But as the market in the metropolitan area has become increasingly saturated and as urban land more expensive, many retailers have been expanding outside of metropolitan centres. In addition to access to new captive markets, these retail centres often boast larger margins due to their lower rent and wage expenses.

“While traditionally the high-end market has been limited to Metro Manila, the country is currently experiencing the proliferation of wealth to alternate regions and cities, and with it a growing appetite for high-end and luxury items in those areas,” Maricar Parco, the president of the Asian Carmakers Corporation, the sole importer of BMW vehicles and motorcycles into the country, told OBG.

Current hot spots for the development of new retail centres include the suburban area surrounding greater Manila, as well as northern and central Luzon and Visayas. SM Investments, for example, currently operates retail businesses and is the largest developer of shopping malls in the country, but it has just 54% of its shopping mall gross leasable area (GLA) within the National Capital Region (NCR). Expansion plans put forth in 2011 continued this trend towards diversification, as the company intends to target growth of some 231,669 sq metres of GLA outside of the NCR, including Pampanga and Zambales in central Luzon and Davao, the largest city on the southern island of Mindanao.

“Rural areas hold more potential for large-scale developments given that organised retail does not really exist yet in many areas,” Corazon Guidote, the senior vice-president of investor relations at SM Investments, told OBG.

THINKING SMALL: While luxury sales have remained strong due to the growth of the middle class and sustained spending from higher-income brackets, the vast majority of retail transactions are completed by lower-income consumers. The spending habits of this group of consumers have given rise to what is known locally as the “sachet economy”. As many of these consumers do not have much disposable income, they tend to purchase smaller quantities – weekly or even daily supplies – on a regular basis. To capitalise on this, many retailers and goods producers have moved to cater to customers by designing and marketing a wide range of products that can be produced and sold cheaply in smaller sizes, but with higher margins than products bought in bulk.

This trend of small transactions has been reinforced by the drop in value of the peso, which has fallen from an index base level of 1 in the year 2000 to around 0.57 in October 2011, according to figures from the National Statistics Office (NSO). Over the same period of time, the retail price index has risen from 100 to 152.9. For the majority of Filipinos, inflation and purchasing power have also had an impact on the cost of living over the past decade, leaving them with less disposable income to spend on other non-essential items.

According to NSO figures, the consumer price index for fuel, light and water in the Philippines increased from 100 in 2000 to 234 in October 2011, while the core inflation rate averaged 4.85%. Inflation was, however, outpaced by growth in gross national income, which averaged annual growth of approximately 6.63% from 2003 to 2010.

OUTLOOK: The Philippines’ retail segment will continue to expand as more modern shopping centres open outside of the NCR, increasing competition and variety within the industry. Rising consumer confidence and income levels throughout the country should also stimulate demand. In the short term, central bank consumer confidence index surveys in the fourth quarter of 2011 indicate that Filipinos expected better times ahead, with the index for firstquarter 2012 and the year ahead rising to 2.8% and 14.6%, respectively, reflecting improved sentiment among households surveyed.

According to PRA estimates, 9% y-o-y growth is expected for the retail and wholesale sectors in 2011, and the industry is forecast to reach P1.7trn ($38.59bn) in sales by 2015. Although some sectors may take a hit in 2012 due to supply chain problems linked to the tsunami in Japan and the Thai floods in 2011, the long-term effects should be negligible.

Despite the continued growth of large-scale malls and hypermarkets, the retail market is fragmented and overdue for consolidation. As larger companies continue to expand, the number of fast-moving consumer goods outlets and supermarkets will likely begin to decline as bigger and more efficient operations start squeezing out weaker competitors.