Despite uncertainties, some industries continue to show not only resiliency, but the ability to bring in more much-needed investments. Wholesale and retail trade, telecommunications, and private services are considered the Philippines’ engines for growth.

Juan Santos, Chairman of Nestle Philippines, and Jaime Augusto Zobel de Ayala II, President and CEO of the Ayala Corporation, discuss these growth areas.

Consumers as an Engine of
Economic Growth
By Juan B. Santos

Nestlé Philippines, Inc. illustrates how growth can be achieved in an environment of natural and man-made upheavals. Nestlé’s business has grown unabated even as the country has gone from crisis to crisis – from the tumultuous years marking the end of the Marcos dictatorship, to the many failed coup d’ etats that President Corazon Aquino faced, the debilitating long power outages in the 90s, and the crisis of the failed leadership of President Estrada. Through all those upheavals, Nestlé grew annually by double digits, its sales volume ballooning from less than P5 billion in 1986 to more than P50 billion in 2002. It has consistently been one of the most profitable Nestle subsidiaries in the world. It now ranks the biggest in South East Asia and the 12th largest worldwide.

By no means is the Nestlé experience exclusive. Many other local companies such as Procter and Gamble, Unilever, and San Miguel Corporation and numerous smaller local enterprises posted equally remarkable growth, defying the political and economic storms that lashed at the country in recent history.

Strength in Filipino Consumers

Why are certain business sectors growing despite setbacks in the business environment? Why is the Philippine economy expanding despite the political and terror-driven turbulence? Why are business leaders optimistic despite what doomsayers predict?

The answer: the large consumer base of over 80 million Filipinos, whose collective personal consumption has steadily climbed in the past ten years. In the last four years alone, personal consumption of Filipinos accelerated from 2.6% in 1999 to 4% in 2002. Projections indicate an average five percent annual growth in the next five years, promising greater spending on various consumer goods and services. The strength of the Philippine economy thus comes from within this huge domestic market, which has in fact eased our reliance on exports to keep the economy afloat. This explains why the Philippines performed better than neighboring economies that depended heavily on exports.

This large domestic market has also been enjoying improved purchasing power in the recent years, aided in part by low inflation rates pegged at three percent annually. According to the 2000 Family Income Expenditure Survey, aggregate household incomes grew at an average rate of four to six percent annually. In that same survey year, total household incomes totaled close to P2.2 trillion (roughly US$ 40 billion). With the economy growing by at least three percent since 2000, it is safe to assume that household incomes must have reached P2.6 trillion (US$ 47 billion) this year. The six percent growth in household income outruns the three percent inflation rate, which translates to improved purchasing power.

Since the average Filipino consumer spends 80% of his income, any improvement in purchasing power readily translates to increased consumption of goods and services.

Despite the SARS epidemic and the uncertainties brought about by the Iraq war, the Philippine GDP grew by 4.6% in the first quarter of 2003 while the GNP grew even faster at 5.5%. One big factor for this growth is the significant amount of remittances from overseas Filipino workers that end up in the pockets of their locally based families. Statistics show that seven to eight million Filipinos – nearly ten percent of the total population – work abroad, and they pump about US$ 7-8 billion into the economy every year.

The combination of these factors – market base of over 80 million Filipinos, improved purchasing power due to increased income and low inflation rate, and the growing GDP and GNP boosted by dollar remittances from overseas Filipinos – makes a strong foundation for a flourishing economy.

Impact on Industries

Without a doubt, consumers have become the growth driver of the Philippine economy. Many industries and companies tapping directly and indirectly into this large consumer market base will continue to grow their investments and post attractive returns despite the hostile business environment. Obviously, consumer goods such as food, beverage, and clothing will benefit greatly from a consumer-driven economy. Many others have a good chance of recording hefty returns.

Packaging. As demand for consumer goods such as beverages and food products increases, more and more manufacturers and distributors need materials to package their goods.

Logistics. Logistics covers a wide range of integrated activities – physical distribution, warehousing, managing of inventory, and even collection, and bar coding of goods for various consumer good industries. Logistics is becoming more and more indispensable to Philippine business links and connects its markets locally and globally.

Retail and real estate (malls). Business prospects for retail real estate are independent of traditional factors that drive the rest of the real estate sector. Walking closely in stride with mall expansion are franchise establishments that sprout wherever these shopping malls locate.

Media Communications. Many goods and services use classical advertising as well as new media channels such as SMS, direct marketing, sampling, and other below-the-line programs to reach their target audiences.

Telecommunications. The Filipinos’ penchant for short message services (SMS) and multi-media services (MMS) is pushing growth and investment

Outsourced services. In search of cost and operational efficiencies sparked by intense competition, many global and local companies have been force to focus on their core competencies and outsource non-core business processes.

Growth Drivers

The projected growth of these industries is grounded on a number of growth drivers.

Large domestic population. As mentioned earlier, the single most important driver of economic growth in the country is its large domestic population making up a huge market. The price stability in the economy has enhanced the purchasing power of the local population. A significant portion of the population also benefit from US$ 7-8 billion of remittances coming from loved ones abroad. This improved purchasing power of the local population has found its way into the coffers of many consumer- and service-oriented industries.

Reaching lower-income markets. Consumer goods, specially those targeted among the broad CD mass market, are generating strong growth due to innovation, affordability, and convenience. For example, innovation in the laundry detergent, hair care, and milk categories require sustained advertising efforts in order to deliver their messages. These, in turn, bring about trial and repeat purchases.

The use of small, oftentimes single-serve units, from food to hair shampoo to pre-paid phone cards, allow low cash outlay thus making these products affordable even to the lower-income Classes D and E, which represent 50% of consumers. Product penetration into these lower-income groups contributes further to the growth of the consumer business. This has also destroyed the myth that consumer goods in the Philippines cater only to the affluent Classes A and B, and middle income C.

Opportunities from Outsourcing. Outsourcing of manufacturing and business processes not only generates employment, the outsourced business activities also tend to form strong linkages among different sectors. For instance, manufacturing services or contract manufacturing contact centers and business process outsourcing require a strong telecommunications backbone. Thus, telecommunications is one industry that thrives in the growing global outsourcing market.

Another closely linked industry that is expected to ride on the crest of this trend is supply chain management. More and more manufacturers now appoint third-party distributors instead of using their own employees to handle distribution. Warehousing and transportation are also now operated adequately by third parties. Not only has this resulted in cost efficiencies, it has also multiplied employment and substantially enhanced product reach to rural areas.

Outsourcing also stirs business in real estate. Many global electronic manufacturers that have transferred their production platforms to the Philippines naturally required real estate. They also needed strong logistical support to facilitate the timely transport of their raw materials and final good to their respective destinations.

Rise of the service sector. The expanding role of service sector as one of the primary growth engines has tagged along a host of benefits for the country. It has generated both the jobs as well as the competitive edge for a country that is blessed with a large pool of educated manpower. Services are also more flexible and able to adjust well to the demands of competition, ensuring greater chance of surviving tough times than a typical manufacturing plant that has to go through a lot of adjustments in its systems before it can change its processes and methods.

Conclusion

Despite political, social, and other crises, the Philippine economy has reason to hope for continued growth and expansion. As demonstrated by some business companies in the last 20 years or so, business can actually flourish in the Philippines even in an adverse environment. The secret lies in the huge domestic market of 80 million Filipinos, a consuming public that serves as the backbone of the Philippine economy.

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