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Amongst the world’s growth markets, the ASEAN trade bloc is a particularly notable success story. It significantly out-performs many developed territories as well as those which are still developing.
HKTDC Research recently undertook a market research trip to the Philippines, the second-most populous ASEAN country, with the intention to examine the consumer market development there, as well as identifying business opportunities in this key Southeast Asian trading territory.
An archipelago state which is home to more than 100 million people, the Philippines is gradually transforming into a burgeoning modern consumer market. Over the past six years, Hong Kong’s exports of consumer goods to the Philippines have grown steadily at a compound annual growth rate (CAGR) of 5%. Major consumer items being exported to the Philippines include clothing, toys, games, sporting goods and footwear.
Consumption Power Fuelled by Robust Economic Growth
In 2016, the Philippines recorded an impressive economic growth rate of 6.8% and this momentum is expected to continue. By the World Bank’s definition, the Philippines remains a lower middle income country at present, with a considerable income gap between it and richer ASEAN countries such as Thailand and Malaysia. However, if the current level of economic growth can be sustained, the Philippines is on track to become an upper-middle income country by 2022.
The chief factors fuelling the country’s current consumption power are foreign receipts from overseas remittance and business processing outsourcing (BPO) services. In 2016, overseas Filipino workers remitted a total of US$27 billion back to the country.
The remittance figure is much higher than the record US$7.9 billion in actual foreign direct investment (FDI) recorded by the Central Bank, Bangko Sentral ng Pilipinas (BSP) for the same year. However, the net FDI inflow in 2016 increased by some 40% from 2015 levels, as key reliable economic factors galvanised the country in spite of uncertainties caused by the change of president.
The fast-growing BPO sector is another important source of foreign exchange for the Philippines, and has become the country’s largest source of private-sector employment. The industry is driving income growth, as BPO jobs are among the highest-paying jobs at all levels.
It is estimated that Philippine BPO receipts amounted to US$25 billion in 2016. Overseas receipts from remittances and BPO have driven local consumption and property investment in the Philippines, generating a sturdy cycle of growth.
Final consumption expenditure of the Philippines almost tripled in the decade up to 2015 to a level of around US$247.9 billion, translating into an impressive CAGR of 11%. Anchored by strong economic growth, consumer confidence with the Philippines is now at a 10-year high and it topped world rankings in 2016.
The Philippines also boasts a very youthful population with a median age of around 23 years old. This skews even younger than other populous ASEAN counterparts such as Indonesia and Vietnam. Such a demographic signals a strong vibrancy within the labour market which is capable of sustaining economic growth. Also, it fuels consumer spending. Young people usually operate on a low saving ratio and have a higher tendency to buy discretionary items.
Modern Retail Landscape
Generally speaking, Filipino consumers still make use of the informal sector, mainly in the form of sari-sari stores (small neighbourhood stores), in order to shop for groceries and personal care products. Sari-sari stores offer low prices and a greater degree of convenience to consumers.
Driven by strong economic growth and increasing purchasing power, modern retail in the Philippines is expanding rapidly. It is projected that by 2020 the total retail value of the country will increase by US$20 billion to around US$94 billion, showcasing a CAGR of 3.2% during the period 2016 to 2020. Meanwhile, the total gross leasable area for retail is predicted to increase by 8% year-on-year, from 6,483,400 sq m in the first quarter of 2017 to 7,074,100 sq m in the first quarter of 2018.
Filipino urban dwellers usually visit large shopping malls in city centres for big ticket items and quality products. They regard visiting shopping malls as a weekend leisure activity which involves family and friends. Additionally, more than 80% of Filipinos are Catholic. It is not uncommon to find chapels in large shopping malls, alongside shops and restaurants.
Shopping malls in the Philippines have mostly been developed by local conglomerates such as the Ayala Malls, SM Supermalls, Robinson Malls and the CityMalls. Very often these giants operate subsidiary supermarkets or department stores inside their malls.
They also form partnerships with foreign retail brands to introduce international brands into the malls. It is also worth noting that Filipino-Chinese citizens are influential in the retail sector. For example, the SM Group and the up-and-coming DoubleDragon Properties are Filipino-Chinese owned.
The retail landscape of the Philippines is already rather competitive. Both local and foreign retailers are eyeing this burgeoning market and have been utilising various marketing and promotional initiatives. Major international fashion retail brands such as Zara, H&M and Mango have already gained a foothold within the country. Furthermore, Japanese investment has taken place in a wide range of retail sectors including convenience stores, fashion, home & lifestyle.
Aside from business opportunities, foreigners continue to face a somewhat restrictive investment situation when looking to enter the retail market of the Philippines. Full foreign ownership in retail trade is only permitted for investment levels above US$2.5 million, or retail trade in high-end or luxury products with no less than US$250,000 capital investment per store.
No foreign ownership for retail trade is allowed for investment below this level. Under these restrictions, retail FDI only accounts for less than 1% of the Philippines’s total FDI. The majority of foreign retailers with stand-alone stores such as H&M, Uniqlo and Forever 21 have entered the Philippine market by forming partnership with local businesses. Smaller brands and SMEs, including those from Hong Kong, could work with local retail operators to supply their supermarkets and department stores.
The visibility profile of the Philippine market has been low among Hong Kong businesses due to a number of specific concerns. These include the preponderance of bureaucratic ‘red tape’, corruptive practices and the Manila hostage issue (now resolved), along with the tension between China and the Philippines over the South China Sea. The investment environment in the Philippines is now undergoing changes for the better, as President Duterte is taking a strong hand in tackling corruption and inefficient bureaucracy. For recent developments under the Duterte Government, see The Philippines: The Prospect for Manufacturing Relocation.
Urbanisation Shaping Consumer Lifestyle
Urbanisation is an important factor in driving modern retail growth and influencing consumer lifestyle within the Philippines. As an archipelago state, the population spread of the Philippines is highly uneven across the country. Metro Manila (also known as National Capital Region, the NCR) alone accounts for 14% of the population of the country. Besides, 40% of the population are concentrated in Central Luzon and Calabarzon (the part of Luzon Island south of Metro Manila), which are the most developed parts of the Philippines.
Unsurprisingly, it is the households which fall within these three regions that have the highest purchasing power in the country.
Booming business activities in the metro or urban areas also nurture an expanding middle class with strong consumer demand. These households can afford to spend more on discretionary items such as electronic tablets, fashion and lifestyle goods and dining out. As shown in the table below, the NCR, Calabarzon and Central Luzon contribute to over half of the Philippines’ family expenditure.
In these urban areas, modern retail is booming in the form of large shopping malls housing foreign brands, supermarkets and food and beverage outlets. Consumers can easily find imports from Japan, Korea and other ASEAN countries, clear evidence of the keen degree of competition. On the other hand, consumers have attained a certain level of sophistication and specialised stores selling high-end consumer goods are also available. Convenience stores, which can be seen everywhere in Metro Manila, are gradually replacing sari-sari stores. Many workers in 24-hour operations such as BPO centres often visit convenience stores to shop for snacks, daily necessities and fast food items.
|High-end supermarket selling imports from the UK.|
|Foreign fashion brands can be found in big shopping malls.|
While the more developed parts of the Philippines have a growing middle class to support modern consumer lifestyles, more than half of the people in the Philippines still live outside of metro areas (generally referred to as ‘provinces’). Supported by strong economic growth, spending power and urbanisation is spreading out across the provinces, notably in Visayas (where Cebu is located), Cagayan and the Davao region. BPO centres have also started expanding to second-tier cities outside of Metro Manila.
In the provinces, sari-sari stores still dominate for the time being, but they are being gradually replaced by community shopping malls and supermarkets. Consumption of basic fast-moving consumer goods (FMCG) such as shampoo, soap, detergents and deodorants is growing fast in these areas. With improved incomes, families are able to afford consumer durables such as fridges, washing machines and air conditioning units. However, these products have yet to fully penetrate every household in the provinces.
Logistics Provision Upgrade Needed for E-tail to Thrive
Given the country’s young demographic, online retail in the Philippines has enormous potential. As of 2015, about 41% of the Philippine population were internet users. Filipino social media users top the world by spending an average of 4.3 hours on social media every day. Young, tech-savvy internet users are strongly influenced by trends in social media and often rely on reviews from social media when making consumer decisions. As such, mobile platforms can be vital in reaching young Filipino consumers.
E-tailing still Challenging
In spite of strong potential demand, though, the internet retail landscape of the Philippines remains challenging, currently accounting for only 1% of the retail sales total. According to the UNCTAD B2C E-commerce Index 2016 (compiled to assess criteria such as internet-use penetration, secure server per one million inhabitants, credit card penetration and postal reliability), the Philippines ranked low at 89 out of 137 economies, trailing Vietnam (75th) and scoring only slightly higher than Indonesia. In particular, the Philippines scored low in credit card penetration and postal reliability.
Practical factors, such as the lack of secure payment facilities and low credit card ownership, remain major obstacles in accelerating e-commerce development in the Philippines. Nevertheless, the situation is gradually improving as alternative payment methods such as ATM transfer, payment at convenience stores and cash on-delivery are being developed for e-tailing.
However, for now e-tailing development is heavily hindered by poor logistics performance, in particular with last-mile delivery. The Philippines is ranked 71 in World Bank’s Logistics Performance Index, lowest among the ASEAN-5 countries.
The Philippines scored especially badly in logistics infrastructure quality and efficiency of customs clearance. Last-mile handling, then, is a major issue for e-tailers in the Philippines. The logistics industry in the Philippines is in dire need of upgrading its warehouse management and delivery management capacity.
Traffic congestion in Metro Manila is so notorious that timely delivery is difficult, if not impossible. Outside urban area, logistics infrastructure is generally poor, making delivery times long and ultimately unreliable. Substandard logistics not only deter consumers from shopping online, but also make it difficult for sellers to operate with a profit. At present, some e-tailers are dealing with the logistics challenges by using the ‘clicks-and-mortar’ model (whereby customers order goods online and pick them up in-store). The more successful e-tailers in the Philippines such as Lazada and Zalora often engage in strategic partnership with store-based retailers in order to enhance the shopping experience.
The logistics infrastructure of the Philippines is expected to gradually improve in the near future, as President Duterte has already set out top-priority initiatives to expand infrastructure provision. Nevertheless, the e-tailing landscape will remain challenging until there is a significant upgrade in logistics provision.
The challenging e-tailing landscape notwithstanding, e-tailing offers a comparatively low-cost option for SME owners wishing to sell their products in the Philippines. Hong Kong businesses can consider selling through online marketplaces such as Lazada, Zalora and SM Store to enter the Philippine retail market.
Robust economic growth and rising disposable income are gradually creating a burgeoning modern consumer market of more than 100 million people in the Philippines, second only to Indonesia within the ASEAN. Aside from growth drivers, this overview highlights the broad retail landscape of the country, including locations where the strongest purchasing power is situated, and the nascent development of e-tailing as well as its related challenges. The forthcoming article on The Philippines: Accessing the Consumer Market will focus on preferences of Philippine consumers and practical approaches for tapping into the consumer market there.
 According to the World Bank, lower-middle income economies are defined as those with a GNI per-capita between US$1,026 and US$4,035; upper-middle income economies with GNI per-capita between US$4,036 and US$12,475; and high income economies with GNI per-capital of US$12,476 or more.  The Philippines 2016: BPO, Oxford Business Group  Q4 2016 Consumer Confidence Report, Nielsen  Colliers Quarterly- Philippines Retail 1Q 2017, Colliers International  Digital in 2017: Global Overview, report jointly published by We Are Social and Hootsuite  The Philippines (71) is ranked behind Malaysia (32), Thailand (45), Indonesia (63) and Vietnam (64).