Expanding opportunities: As Metro Manila becomes saturated, provincial areas are increasingly regarded as prime locations for expansion

The Philippines has a relatively advanced retail sector despite restrictions on foreign involvement. One of the most consumerist nations of Asia, household consumption in 2012 accounted for 74% of GDP, higher even than the US. The value added by retailers alone accounted for 14% of GDP, one of the highest ratios in the world. Expansion of organised retail has also been one of the main drivers of the construction boom driving recent acceleration of GDP growth.

While higher-end shopping is concentrated in the Metro Manila region and most national chains have little presence outside the main island of Luzon, chains and franchisers are increasingly spreading out to smaller towns and secondary islands, bringing modern supermarkets and shopping malls to a larger share of the country. With many people still doing most of their shopping in outdoor markets and neighbourhood convenience, or sari-sari, stores, there’s plenty of room for organised retail to continue its rapid expansion.

SECTOR PERFORMANCE & STRUCTURE: The retail sector’s growth rate has tended to slightly outperform the overall economy. In terms of real value added, retail sector growth came in at 7.8% in 2012 and at 7% year-on-year in the first half of 2013, according to data from the National Statistical Coordination Board (NCSB). The trade sector, including wholesale trade and maintenance of vehicles, grew at a 5.5% compound annual growth rate (CAGR) between 2002 and 2012, which compares to a 5.2% CAGR of GDP. In terms of dollar value added, the Philippines trade sector grew at a buoyant 10.1% CAGR, from $16bn in 2002 to $45bn in 2012. Of the 2012 total, $34.9bn was retail trade.

The retail sector’s unusually large share of GDP owes largely to remittances sent to the Philippines by citizens and former citizens working abroad, which have grown steadily as Filipinos find higher-paid foreign jobs and increasingly work on offshore rigs or ships that allow them to send home most of their incomes. Remittances came to $21.4bn in 2012, or 8.4% of GDP. The young average age of the Philippine population and higher proportion of young people in middle and upper income brackets also boosts consumer spending.

As in any developing country, food dominates the retail market. Purchases of food and non-alcoholic beverages came to P3.33trn ($80.25bn) in 2012, accounting for 43% of household consumption, according to NCSB data. Purchases of alcoholic beverages and tobacco came to P100.28bn ($2.42bn) in 2012, accounting for 1.3% of household consumption, and purchases of apparel came to P108.49bn ($2.61bn), accounting for 1.4% of household consumption. Purchases of other types of retail goods weren’t separately reported in the data. Spending at restaurants, not included in the trade sector, came to P97bn ($2.3bn) in 2011 and accounted for 1.4% of that year’s household consumption.

FOOD CHAINS: Within those numbers there has been an ongoing shift towards more organised forms of retail, especially in the food segment. In all sizes of food stores, from hypermarkets to convenience stores, the leading chains are growing faster than the overall sector by poaching retail customers from outdoor markets and other kinds of shops while also attracting away operators of sari-sari stores from other distributors.

Sari-sari stores are small, typically kiosk-sized stores, usually located in residential areas and run out of a portion of the owner’s home. They serve mostly serve low-income clientele who live nearby, offering short-term credit and small, single-meal-sized portions. Estimates of their numbers run as high as 700,000, or about one for every 150 Filipinos. Sari-sari stores typically charge high mark-ups, which makes them prime targets for competition from smaller food stores, especially in neighbourhoods with rising incomes. On the other hand, larger supermarkets and hypermarkets get much of their business from sari-sari store operators.

One of the leading drivers of this change has been Puregold Price Club, a locally listed company specialising in hypermarkets and expanding into supermarkets and smaller food stores. Founded in 1998, Puregold has grown to be the country’s second-largest retailer with P57.4bn ($1.4bn) of sales in 2012, up from P39bn ($939.9m) in 2011, according to company filings. In its 2012 annual report, Puregold said it had supply relationships with 230,000 sari-sari stores and other resellers, which accounted for about 35% of sales. Puregold had a market capitalisation of P112.9bn ($2.7bn) as of late November 2013.

Puregold has pursued a strategy of rapidly expanding its network while also acquiring smaller chains. In May 2012 the company completed two acquisitions: long-time partner Kareila Management Corporation, making Puregold the sole operator of six popular warehouse membership shopping clubs; and smaller firm Gant Group, operator of 19 Parco brand supermarkets. In January 2013 Puregold acquired E Corporation, operator of 15 Grocer E and Eunilane supermarkets and convenience stores, for P330m ($8m).

On top of those acquisitions, Puregold opened six new stores in 2012 and planned to open 26 more in 2013, which would bring its store count to 197. New openings in 2012-13 include the company’s first ventures outside the main island of Luzon to the Visayas, Mindanao and Palawan, areas where retail is dominated by local companies. In July 2013, Puregold announced a joint venture with major builder-developer Ayala Land that would operate supermarkets within Ayala’s mixed-use developments under a new jointly owned brand.

DIVERSIFIED RETAILERS: Puregold’s main competitor, SM Group, is the country’s largest retailer, mall operator and developer of retail real estate. Through its SM Food Group, SM Group operated 161 hypermarkets, supermarkets and smaller stores as of June 2013. Although slightly behind Puregold’s store count, SM Food Group was well ahead by sales, with P89.3bn ($2.2bn) in 2012, according to the annual report of its locally listed parent group, SM Investments Corporation (SMIC).

Tim Daniels, SMIC’s investor relations officer, told OBG the company is increasingly making use of its smaller-format Savemore Market stores to push into less-served rural areas. He said SMIC sees room for the Savemore chain to grow to about 1000 stores from 88 in mid-2013. “What Savemore and our rival Puregold are both doing is creating a formal sector,” Daniels said.

SMIC also operates 47 department stores through its SM Department Stores unit, which racked up P67.8bn ($1.6bn) of sales in 2012, according to SMIC’s annual report. Most of the department stores and many of the larger grocery stores are located within the group’s 46 malls spread across the Philippines, operated by SMIC’s SM Prime Holdings unit, which also operates cinemas and other entertainment venues within the malls. That unit reported P30.7bn ($739.9m) of revenues in 2012, of which P28.2bn ($679.6m) was earned by its malls in the Philippines and P2.5bn ($60.3m) by its five malls in China. SMIC’s retail and mall operations accounted for 85% of the company’s 2012 revenues and 51% of its net income. SMIC, which also has banking, real estate, hotel and convention centre arms, had a market capitalisation of P581.3bn ($14bn) as of November 2013.

SM Group also operates more than a dozen chains of specialised stores, mostly located within its malls, such as Ace Hardware, a franchise of the US brand. SM Group also operates stores in joint ventures with Japan’s Fast Retailing, owner of Uniqlo, and A.S. Watson, a multinational health, beauty and pharmacy retailer that is part of Hong Kong conglomerate Hutchison Whampoa. The Philippines Watsons chain had 275 stores as of January 2012, according to its website. However, the leading Philippine health, beauty and pharmacy chain, Mercury Drug, has more than 900 stores.

The number three retailer, Robinsons Retail Group, is similarly a diversified retailer within a larger group of affiliated companies, which includes the country’s second-largest mall operator, Robinsons Malls. As of October 2013, Robinsons Retail Group had 940 stores, including 72 supermarkets and more than 300 convenience stores, most of which are franchised. Robinsons Retail Group debuted on the Philippines Stock Exchange in November 2013 with a $620m IPO that gave it an P80.3bn ($1.9bn) market cap. It made P32bn ($771m) of sales in the first half of 2013, according to its prospectus. Robinsons Malls had 30 malls as of November 2013 and reported P6.4bn ($154.2m) of revenues in 2012. The mall developer-operator is owned by JG Summit Holdings, a sprawling conglomerate owned by the same family that owns Robinsons Retail Group. JG Summit Holdings also owns Universal Robina, one of the Philippine’s top producers of packaged foods.

THE RISE OF SHOPPING DISTRICTS: Consumerist culture is most on display at the Philippines’ increasingly numerous, large and extravagant shopping malls. Besides SM Prime Holdings and Robinsons Malls, other major players include Ayala Malls, a unit of developer Ayala Land, with 12 malls, and Megaworld Lifestyle Malls, a unit of developer Megaworld, with five malls.

Indeed, three of SM’s malls, the SM City North Edsa, SM Megamall and SM Mall of Asia, all within Metro Manila, are among the world’s 15 largest malls, according to various publishers’ rankings. Megamall was undergoing an expansion in 2013 that would bring it up to about 450,000 sq metres of gross floor area, which will make it the world’s fifth-largest mall after two in China and one each in Thailand and Malaysia. SM City North Edsa, with about 425,000 sq metres, and SM Mall of Asia, with about 407,000, aren’t far behind.

The trend among developers is towards planned communities, with shopping at the centre of large mixed developments surrounded by office and residential buildings. Projects such as the conversion of Fort Bonifacio in Metro Manila’s Taguig City and reclamation of waterfront land from Manila Bay have opened up large land parcels for developments. With demand driven by rapid growth of the business process outsourcing (BPO) sector and the large numbers of consumer-oriented young people moving to Manila to take BPO jobs, developers are building malls and shopping districts partly to serve as attractions to help sell condominiums and attract office tenants (see analysis).

Another example of that strategy, Ayala Land’s Fort Bonifacio High Street development, centred around an outdoor walking mall of green spaces lined with shops and restaurants. Ayala’s “Market! Market!” indoor mall is at the end of the outdoor walkway, and the SM Aura mall and other retail spaces are in short walking distance. With surrounding office towers filling up with 20-something BPO employees, the area looked set to become one of Manila’s busiest shopping districts.

NEW HORIZONS: Paul Santos, president of camera and photo service retailer Picture City and vice president for external affairs of the Philippine Retailers Association, told OBG that the retail sector in Manila was “getting too saturated”. He said retail developers were finding growth by expanding into other regions, but second-tier cities Cebu and Davao would likely be saturated by projects currently in the pipeline. “The major cities have too many shopping centres already. Any more would just be subdividing the current market.”

Daniels of SMIC told OBG that the Fort Bonifacio developments are “impressive but a bit misleading. These are mostly A and B class stores that cater to the top one to two percent of the population. The real latent demand is in the C and D classes.” The big national mall developers were relatively early to spread outside Luzon, with SM Group, Robinsons Malls and Ayala Malls all starting in the 1990s. Robinsons is the leader outside Luzon with 10 malls in the Visayas and Mindanao as of late 2013. SM opened three malls outside Luzon in 2011-13 and Ayala opened two in 2012, bringing their mall counts outside Luzon to nine and three, respectively. Megaworld was also planning two malls in the Visayas, its first outside Luzon.

LIMITED FOREIGN INVESTMENT: Foreign investment in the retail sector is limited, largely due to a tradition of protectionist legislation dating back to the early independence era. Amid a wave of nationalism and rising resentment toward Chinese immigrant shopkeepers, a law adopted in 1954 banned even partial foreign ownership of retail businesses. The ban lasted until 2000, but didn’t foil the ambitions of Chinese immigrants such as Henry Sy, who obtained Philippine citizenship and began a shoe-selling business in the 1950s that grew into SM Group. The owners of Puregold, Lucio and Susan Co, and of Robinsons Retail Group and JG Summit Holdings, John Gokongwei and family, are also ethnic Chinese.

A 2000 law lifted the ban on foreign involvement in retail but replaced it with new restrictions, meant to allow deep-pocketed international retailers to invest in the sector while continuing to prohibit recent immigrants from setting up as small shopkeepers. The law allows foreign companies to operate retail business only if they: have a minimum net worth of $200m; operate through a Philippine subsidiary with at least $2.5m of paid-up capital; have been in business for at least five years; operate at least five stores globally, or at least one store with capital of at least $25m; invest at least $830,000 in each store in the Philippines; and, if foreign ownership exceeds 80%, divest at least 30% of the Philippine subsidiary’s equity within eight years of starting operations through a public offer on a local stock exchange. The law is more lenient for foreign retailers of luxury goods, who face no divestment requirement, need a net worth of $50m and must commit a minimum paid-up capital of $250,000 per store.

Those restrictions and other, general restrictions on foreign investment – such as the bar on ownership of land by foreigners and companies with greater than 40% foreign ownership – have kept foreign investment in the retail sector very limited. According to a 2011 statement by the Joint Foreign Chambers of the Philippines (JFCP), as of then only 12 foreign firms had invested in the sector. Addressing a Senate hearing on the issue, the JFCC pressed for foreign investment in retail business to be liberalised, arguing that the 2000 law “created an obstacle course rather than a red carpet. The results are apparent in the extremely low level of foreign investment in the retail sector.” But the Senate took no action, and with little sign that the retail sector is suffering from a shortage of investment, the government has shown little interest in shaking up the sector. Major multinationals such as Walmart have looked at investing in the country but stayed away.

The largest foreign investments are joint ventures, including A.S. Watson’s and Fast Retailing’s tie-ups with SM Group. Another major foreign investor is Dairy Farm, a multinational diversified retailer that is part of Hong Kong conglomerate Jardine Matheson. In May 2012 Dairy Farm bought 50% of Rustan Supercenters, the number four food retailer in the Philippines. Jardine Matheson reported in its 2012 annual report that $112m of acquisitions by Dairy Farm that year was spent “mainly” on the Rustan Supercenters stake. As of November 2013 Rustan Supercenters had 10 hypermarkets, 17 high-end Rustan’s supermarkets and nine supermarkets under Dairy Farm’s Wellcome brand.

The local family that owns 50% of Rustan Supercenters also owns Rustan Commercial, operator of six Rustan’s high-end department stores, and Stores Specialists, a mainly apparel retailer with a portfolio of more than 50 international brands, such as Ecco, Calvin Klein, Cartier, Banana Republic and Michael Kors.

The prevalence of diversified retailers and conglomerates makes relationships between retailers complex. For example, the JG Summit-Robinsons group is both a competitor to Puregold and SM Group and a supplier to them through its Universal Robina packaged food unit, and the Rustan’s Stores Specialists group is both a rival to SM Group’s and the JG Summit-Robinsons group’s department stores and a tenant in their malls. Santos told OBG that SM Group’s move into fashion retailing and other segments had been “creating some disquiet among independent retailers who are seeing SM as not just a landlord but also a competitor.”

CONVENIENCE STORES SPREAD: Another major foreign investor, Taiwan’s President Chain Store Corporation (PCSC), holds a 50.4% stake in Philippine Seven, the locally listed Philippines 7-Eleven licensee. PCSC, which is the 7-Eleven licensee in Taiwan, bought the stake in 2000, just after the ban on foreign investment in Philippine retail businesses was lifted, for some P992m (about $24m). The company had P13bn ($313m) of sales in 2012 and, as of late November 2013, Philippine Seven had a market capitalisation of P48.1bn ($1.2bn).

Philippines Seven controls some 60% of the convenience store market and is aggressively boosting its store count while expanding beyond the main island of Luzon into the Visayas. Store count grew from 600 in July 2011 to 900 in July 2013 and was expected to reach 1000 stores by the end of 2013 and 1300 by the end of 2014, according to the company. About two-thirds of the company’s stores are franchises. Franchising is also widely used in clothing and specialty retail stores and quick-service restaurants, and is a popular way for former overseas workers to invest their savings.

Another major Asian convenience store operator, Japan’s FamilyMart, entered the Philippines with its first store in 2013. FamilyMart and its main parent company, Itochu, own a combined 40% stake in the Philippines FamilyMart venture, while a 60% stake is split evenly by Stores Specialists and Ayala Land. Philippine Seven’s and FamilyMart’s main competitor is Robinson Retail Group’s Ministop chain of convenience stores, which controls about a third of the market.

OUTLOOK: With overall strong growth and key drivers such as BPO sector expansion and demographics still in place, the Philippines retail sector appears set to continue its relatively rapid expansion. The growth will continue to be in the food and convenience store segments, as national chains continue to take over business from the informal sector.

The pace of mall construction however is likely to slow somewhat, particularly in Manila as the huge Fort Bonifacio conversion project moves towards completion and developers focus on reaping returns from recent investments. Independent retailers are likely to be increasingly squeezed as large retailers, better able to operate on thin margins, find growth by expanding laterally. Many independent retailers are already repositioning into related businesses such as quick-service restaurants. One new growth area is online retailing. As cheap smartphones and laptop computers widen access to the internet, online retailing is beginning to take off and many retailers are developing websites.