The Philippines: Resilience amid crisis

The Philippines' acerbic local press has often pigeonholed the country as the 'Sick Man of Asia,' a label earned by the former US colony during the tumultuous years of the Marcos dictatorship. Whether or not the derisive title is well deserved, the Philippines has passed every acid test that came its way, showing resilience through the years.
Elsevier Food International, Vol. 5, Number 3, September 2002
Joel H.Vega

Expatriate business circles in Manila often paint a stark portrait of the Philippines, which at first glance may prove daunting to some investors. For the last 25 years, this archipelago of around 77 million people has averaged a 3.1 per cent annual GDP growth, but with a population rate of about 2.5 per cent, development has been almost static during the last two decades. Deep-seated politicking, corruption, an outdated agricultural system, inadequate infrastructure and security issues hold back the full benefits of recent economic reforms.
Despite all the bad news, the Philippines still has a lot going for it. The democratic system, though convoluted, is vibrant and the country's human resource factor remains a major asset. Philippine companies use English (the second official language) as the language of business. Moreover, thanks to the Philippines' second most important 'export: overseas Filipino workers are a major source of national income, contributing about seven per cent of GNP and 17 per cent of foreign exchange. Combined dollar remittances from Filipino expatriates provide an important stabilising factor in terms of consumer purchasing power, particularly in times of foreign exchange pressure.
Numbers also tell a story. In 2001, US consumer-ready exports to the Philippines topped $200 million, exceeding all other US markets in South-East Asia. In 1997 when the Asian financial crisis broke out, the US exported a record $220 million in consumer food. Although that figure was wiped out at the height of the crisis in 1998 and plunged to about $80 million, the country's annual GDP growth rebounded, the peso stabilised, and trade recovered the following year.

The retail sector
The retail industry in the Philippines has proven to be resilient. Total retail sales at current prices rebounded from a two per cent contraction in 1998 to a 17 per cent growth in 1999 and 15 per cent increase in 2000, amounting to 365 billion pesos (US$ 8.30 billion). Industry analysts also expect that demand for imports will expand in the near future mainly due to increased efficiency in the retail food sector, an improving economy with a forecast growth of around 4.5 per cent this year, and the Filipino consumer's fondness for western brands .
In the food sector, total family expenses on food rose by 25 per cent from 1997 to 2000. On a yearly basis, this growth averages 8.3 per cent. In a five-year period from 1996 to 2000, the total number of retail outlets in the Philippines increased from 103,556 to an estimated 128,632 in 2000, marking a 24 per cent increase. The figure only includes registered retail outlets with business permits and excludes the sari-sari stores (family-run neighbourhood stores) that form part of the grey market.
Food stores have surpassed the number of non-food stores in the same five-year period at a ratio of 1:75:1, with fast food outlets outpacing non-food outlets at an annual rate of 5.8 per cent versus 5.2 per cent. Although Filipinos still spend a larger amount of the family budget on food, the proportion with respect to total sales dropped from 55 per cent in 1996 to 52.5 per cent in 2000. Non-food sales rose by 12 per cent annually, compared to the nearly nine per cent growth in food sales. The trend implies that as Filipino households' incomes rise, they purchase more non-food items such as personal care products and household appliances.

Food sub-sectors
There are basically five food sub-sectors in the Philippines. The sector with the most potential for growth covers supercerures, hypermarkets, warehouse stores/clubs and supermarkets (see Table 2). These large retail stores usually have many suppliers, which include local manufacturing companies or their distributors. Supermarkets saw their share increase from 9.4 per cent in 1996 to 13.9 per cent in 2000 as big retailers forged ahead with expansion schemes.
In major urban areas such as Metro Manila, Cebu City, Davao, and Zamboanga, the sector covering convenience stores, gas marts and kiosks are gaining popularity with their longer opening hours (usually on a 24-hour basis). The last two sub-sectors, the sari-sari stores and the traditional markets account for around 90 per cent of food retail businesses. Sari-sari stores usually sell essential items like cooking oil, sugar, washing detergent and toothpaste. Markets, which sell fresh meat, fish, vegetables and mostly local farm produce with occasional imported items like fresh fruit, accounted for about 77 per cent of total food retailer sales in 2000 and remain the largest retail distribution network in the Philippines, especially in the countryside.

Understanding local needs
The country's most densely populated urban area, Metro Manila, generally accounts for about 60 per cent of retail sales. In 2000, Metro Manila had a population of 10.5 million people, representing 14 per cent of the total population. The majority of metropolitan homes have refrigerators. Moreover, ownership of microwave ovens has also been increasing, a development that indicates potentials in the refrigerated food category. However, key market players say inefficiencies in the cold-chain system are pulling up prices of chilled and frozen goods.
Filipinos traditionally consume three main meals a day and tend to snack in between meals. Exports of US snack foods, one of the leading sales categories, totalled close to $49 million in 2000, up more than 80 per cent since 1995. Although Filipino consumers are familiar with major US brands, consumers are highly price sensitive. In the rural and suburban areas, consumers prefer products in smaller consumer packs for affordability. Sari-sari stores offer this advantage by selling essential products in small packages or sachets.

Liberalisation retail market
The Philippines recovered quicker from the Asian financial crises in the mid-90s than its neighbouring countries. However, the political crisis that engulfed the Estrada administration, which ended in Estrada's deposition by the military in January 2001, severely battered consumer confidence. With the arrival of the incumbent Gloria Macapagal, a former US-educated economist, consumer confidence is boosting personal consumption at a level of around five per cent, with full recovery expected by 2003. The Macapagal government, largely viewed as a pro-US administration, has placed emphasis on liberalisation and food security rather than on self-sufficiency. This policy has provided a friendlier environment for imports and a shift from the protectionist agricultural policies of previous administrations. Apart from rising incomes, Filipino consumers benefited from the increased flow of imported goods during the 1990s as result of the government's import liberalisation policies and the reduction of tariff rates. In March 2000, the passage of Republic Act 8762 (or the Retail Trade Liberalisation Act) marked the liberalisation of the retail trade sector. The Act, which lifted a 46-year ban on foreign companies entering the local retail market, is meant to boost overall industry sales and make it more competitive. With a shop density ratio in the Philippines that is lower than among most of its neighbours, large foreign retailers are in various stages of scouting for local partners. S&R Price Membership Shopping (Price Club) opened its first store in May 2001, becoming the first foreign and US retailer to establish operations since the passing of the retail law. Price Club opened two stores in 2001 and is expected to have a total of around ten stores by the end of 2003. 
Among those reported to be eyeing the Philippine market are Makro, Wal-Mart and French retailer Casino. Pilipinas Makro, a Dutch-Filipino venture which has been operating nine wholesale clubs since the mid¬1990s with local investors Ayala Land and SM Investments, is now planning to set up a wholly owned local retail operation via Okram Asia Holdings. In March, Ayala announced that it is considering divesting its interest in Makro where it holds a 22 per cent stake. Also, in March this year, Jose Sio, chief financial officer of SM Prime Holdings (one of the biggest Philippine retailers) said the company had been approached by Wal-Mart for possible co-operation.

Challenges
In response to the challenge of liberalisation, local supermarket chains are also modernising, expanding and broadening their line of imported brands, often via direct imports. Rustans and Shoemart (owned by SM Prime Holdings), with 22 and 16 outlets respectively, are the two largest local modern chains and have mapped out plans to expand their outlets. Although the development of private labels is still in its early stages in the Philippines, big retailers like the SM group carry private labels on basic commodity items like cooking oil, canned tuna, vinegar and sugar.
With regard to the domestic food processing industry, the main challenge is the limited and unstable supply of domestic inputs that often lead to high prices. Market observers say this is largely due to the inefficient and at times non-existent storage facilities. Previous administrations promised to deliver adequate farm-to-market support but so far infrastructure remains inadequate. Cost of electricity in the Philippines is also one of the highest in Asia, and the lack of it even made power supply a top election issue during the late 1980s before the election of the Ramos administration. Hence Philippine food manufacturers and processors remaining dependent upon imported food ingredients and packaging materials.

Trends in food retail services
Rustari's, the market leader in terms of innovations, introduced the 'Fresh' concept by the end of 2000 by offering rows of fresh produce (fruits and vegetables), pork, beef, seafood, delicatessen, dairy and baked goods. Six months later in mid-20m, Rustan's rivals followed suit by either expanding or launching their own 'fresh' food concepts, a trend that had led not only to a wider variety in grocery shopping but also to the availability of quality goods at reasonable prices. Rustan's also introduced Internet shopping, although the service is limited to Metro Manila's more affluent districts. Some retailers also offer a free delivery service but only within specified locations.
Neighbourhood convenience stores have also incorporated limited fast-food services such as coffee, snacks and light meals. Robinson's Retail Group introduced this format when they opened the Mini-Stop. Robinson's is mapping out plans to create a network of 500 to 1,000 Mini Stop outlets in the next three to five years in a bid to surpass the plans of 7-Eleven, one of the early entrants in the country's 24-hour convenience store sector. In the last decade, credit card ownership and auto-debit of purchases via bankcards have also increased, a trend that stimulates consumer spending.

Convenience stores: changing fortunes
During the last decade, convenience stores have gained popularity as the sector attracts Filipino consumers with its emphasis on comfort, 24-hour availability of products and ambience. The Philippines' biggest convenience store chain, 7-11, owned by the Philippine Seven Corporation, which in turn is 50.4 per cent owned by Taiwan's top retailer President Chain Store Corporation, witnessed a rise and fall in terms of annual profits in recent years. The retailer posted a net loss of 37.4 million pesos in 2001 compared to 11.9 million pesos in 2000. Sales grew by just 1.7 per cent last year to 2.92 billion, despite the opening of five new stores.
To boost sales this year, Philippine Seven plans to open new stores, close under performing outlets, pursue an aggressive marketing scheme and develop its franchising strategy. However, despite the fickle trends, the Taiwanese owners of Philippine Seven remain bullish. Located mainly in fast-growing urban centres, the 7-11 network operates 180 stores (See Table 3). Meanwhile, the ShoeMart Group of Companies is negotiating a joint venture with Hong Kong- based conglomerate Hutchinson Group to establish 250 Watson's outlets in the country. The Watson's chain, besides basic food products, plans to offer snacks and ready-to-drink beverages.

Missing the global retail boat?
Despite the seemingly antagonistic stance of local retailers towards foreign entrants, even the industry's leaders are quick to concede that there is "room for everybody" in the country's food retail sector. Roberto Claudio, president of the Philippine Retailers Association (PRA), said local retailers do not feel threatened by competition from foreign players. However, he acknowledged that smaller companies may eventually be forced to shut down due to increasing competition from foreigners.
In Claudio's view the Philippines is losing out to its closest Asian neighbours in terms of attracting foreign retailers, as he cited Wal-Mart's frenetic plans to set up its network in China. Wal-Marts plans remain on hold as a reaction to the political instability early last year. On the other hand, the Dutch-backed Makro is undaunted as it continues to firm up its strategy via Okram. Makro is well positioned to consolidate a strategic niche as it learns from its pioneering experience.
Claudio also believes local consumers will increasingly favour the hypermarket formula, as traditional department stores and supermarkets lose ground to newer retail concepts. Though he expects foreign retailers to eventually drop their cautious stance on the Philippines, the country's ability to surmount political and economic turmoil may yet prove crucial in winning back investor's confidence. However, ultimately, the challenge in the Philippines lies in pursuing the promises of global food retailers.