Philippine Business Magazine: Volume 8 No.2 - Agenda
What's in Store
The country awaits buyers into its liberalized retail trade sector
By Maricar T. Manuzon

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Shopping Pioneer is Here

Sari-sari stores, bangketa sales, rolling stores, peddlers, drug stores, groceries, supermarkets, boutiques, specialty stores, bazaars, tiangges, direct selling agents, department stores, and big malls. If you have not seen tens and more of these once you step out of your home, you are not in the Philippines. Fact is, Filipinos love to sell as much as they love to buy. This is evident in the proliferation of stores of all sizes as well as peddlers and sales agents everywhere. These buying and selling activities comprise the dynamics of the country’s retail industry.

Attractive Market
The retail industry — being one of the biggest contributors in the country’s national accounts — is a major sector in the economy. The country’s population of 76.4 million are buying basic and luxury items mainly on retail basis, with this activity comprising a substantial portion of the P751.93 billion Personal Consumption Expenditures (PCE) component of the Gross Domestic Product. This figure is yet to increase given that average household income is expected to grow by 20% annually and thus will double every five years.

The Philippine retail market is indeed huge at 10% of the country’s GDP. The opportunities in this sector are equally immense given the large and growing population, particularly the youth sector which translates to an expanding consumer base. Also, increasing per capita incomes, the shifts in social strata — mainly class E’s transfer to D (which means that they can now, albeit still poor, meet basic needs) — as well as improving employment opportunities in sectors like information communication technology (ICT) altogether strengthen the purchasing power of the Filipinos.

Moreover, advances in IT which widen the consumer reach of businesses, and supply chain integration which create better economies of scale are other factors which augur well for retail activities. The liberalization of retail trade is also seen to pave the way for partnerships with other successful foreign companies.

Good times or bad times, major retailers in the country – such as SM Shoemart, Robinson’s, Star Mall, Rustan’s, Glorietta, Ever Gotesco, Araneta Center, Festival Mall — enjoy continuous patronage. This only shows how resilient retail businesses are, especially because these large malls provide comfortable airconditioned spaces and an array of choices that induce more shopping activities even at the height of economic crises. The Filipinos have developed a malling culture and this newly-acquired habit is an opportunity for local retailers. Moreover, the country, with its large malls, has the potential of becoming a shopping district in Asia.

No Pain, No Gain
But though how promising the retail sector may appear, there are also difficult challenges industry players have to contend with. First, there exists fierce competition. There is a glut in retail floor space, too many grocery stores, too many malls, too many department stores, and too many outlets. Another thing is that low margins reverse profitability. Also, “category killers” threaten the survival of their competitors.

There are challenges in the area of attracting and keeping a loyal customer base especially that consumers have become more discriminating and demanding. Retailers need to know and respond immediately to what consumers want and be able to offer value-for-money products. They also need to start (if they are not yet doing so) or continue to invest in new technologies, build up capabilities to open up new distribution channels through the internet, and conceptualize business to consumers (B2C) strategies. This is especially important given the huge potentials of engaging in e-commerce.

There are many success stories within the retail industry like Henry Sy’s SM chain which grew to 11 malls and counting. The big gainers in the sector also include the Ayalas and the Gokongweis. However, there are also those who were unsuccessful like Uniwide.

Bringing the Big Ones In
The Retail Trade Liberalization Act (RA 8762) signed in March 2000 primarily aims to liberalize the retail trade industry. It encourages local and foreign investors to forge an efficient and competitive retail trade sector in the interest of empowering the Filipino consumer through lower prices, high quality goods, better services, and wider choices.

But more than a year after its enactment, there has been no shake-up in the industry yet. The present situation is quite far from the anticipated scenario where foreign retailers were expected to edge out local counterparts after the law is passed. So far, what have transpired are mostly expressions of interest by foreign groups to explore the local market or go into partnerships with local retailers. These include such groups as Carrefour and Casino of France, Wal-Mart of the United States, Tesco of the United Kingdom, and Royal Ahold NV of the Netherlands.

Among the foreign retailers, Wal-Mart, Sears, and Macy’s entry into the picture is much awaited by the consuming market. On the other hand, Wal-Mart’s track record of phenomenal success in the U.S. is enough to scare the country’s local retailer giants. In the U.S., for every Wal-Mart that opens, five to six smaller retailers go out of business. Furthermore, more than 200 jobs are given up in favor of only 150 jobs by Wal-Mart.

Although foreign groups have signified interest in investing in the country, the general perception is that the law is still restrictive. It might not be that attractive to actually bring in the big ones. For one thing, although it lifts the 45-year old foreign equity ban on Philippine retail operation, foreign land ownership is still not allowed. Also, the law’s capitalization requirement is highest in Asia. Singapore and Hong Kong have no minimum capital requirement while Thailand’s minimum capitalization is 10 times lower. Also, the law’s initial public offering (IPO) and 30% local content requirement in foreign retailer inventory are not palatable to international investors.

What Spells Success?
There are enough economic triggers in the form of upward trends in personal consumption expenditure, per capita income and population growth to sustain the growth of the country’s retail trade industry. Also, with political stability and investor confidence on the rise, the prospects for expanding retail businesses are substantial. The business horizon, however, is never bereft with threats and challenges.

The retail industry is an attractive but competitive market. To survive, retailing businesses should come up with more consumer friendly and more pleasant stores, good quality of goods, and wider choices of distribution channels. They also have to consistently be able to offer value-for-money goods. The bad news is, these things comprise the easier part.

They also have to invest on expensive ICT and systems infrastructure for survival. One use of ICT in retailing business is on the area of supply chain management which, being pointed out to be important in creating better economies of scale, enables the speedy movement of goods across distant areas. Drastic reduction of inventory is one of the most direct and immediate results of supply chain management.

For small-to medium-scale retail businesses (cut-off capitalization of P15 million), it might be harder to meet the above-mentioned requirements of the increasingly competitive environment. But, for them, the best way to go is to focus on their niche – to come up with competitive quality and prices and more interesting choices with the end goal of customer retention, if not generation.