Continued expansion of the economy and the increasing reach of leading shopping chains outside the major cities will help drive growth in the Philippines retail sector in the medium term. However, there is also a possibility that smaller outlets could be swamped by the rising tide of malls and large-scale developments.
Retail is one of the biggest economic sectors in the Philippines and is set to grow as private spending power increases. According to the Philippine Retailers Association – the industry’s professional group – the sector directly accounts for around 15% of GNP and roughly one-third of the national services sector. It is also one of the main employers, providing work for around 5.25m Filipinos, 18% of the national total.
Metropolitan Manila dominates the industry with 54% of existing retail space concentrated in the capital, though its grip is expected to ease as chains step up their expansion into the regions. Manila’s share is forecast to fall to 52% in 2013, and may tip below half by 2015. The establishment of major shopping malls in the provinces will offer the opportunity for smaller retail chains to ride into new markets on the back of anchor outlets.
While this expansion into the provinces will give more Filipinos access to national and international brands, it will also put pressure on local retailers who may struggle to compete with the appeal of malls and with the economies of scale that large chains can mobilise. The main weapon to counter this and maintain sales levels has been for established operators to leverage customer loyalty and convenience of. However, past experience has shown that many small retailers find it difficult to stem the flow of customers and revenue towards larger shopping developments.
A number of factors should contribute to healthy retail growth in the coming year, with inflation appearing set for only a moderate increase in 2013 and interest rates at record lows going into the new year. The Philippines’ consumer inflation is projected at 3.5% for 2012, well down on the 4.8% of the previous year. Set against GDP expansion of some 6% for 2012 and a predicted increase of 6.2% in 2013 and 6.4% in 2014, price rises are falling well behind economic growth and this widening gap should help encourage spending.
Combined with solid growth is the record low interest rate set by the Bangko Sentral ng Pilipinas (BSP), with the key lending rate reduced to 6.5%, a level aimed at encouraging domestic investment and consumption. In an end of year statement BSP’s governor, Amando Tetangco Jr, said the bank would continue to monitor price movements and growth conditions to develop policies to keep inflation in check while supporting growth.
These conditions may also have contributed to a strong improvement in consumer sentiment reported by the BSP in mid-December. Though the bank’s consumer confidence index showed sentiment was still negative, with the index standing at negative 10.4% for the fourth quarter of 2012, this still markedly better than the negative 13.3% of the previous quarter and a vast improvement on the minus 20.6% posted for the same period in 2011. Importantly for retailers, the bank’s survey showed respondents had a positive outlook for the coming year, based on expectations of continued growth in revenue and better employment opportunities.
“Consumers are confident that improvements in the economy and family finances will be carried over to the next 12 months,” the BSP said.
Retailers should also take heed of another of the findings of the BSP survey, which noted that the favourable outlook on the economy was largely driven by the sentiment of the low-income group, which recorded the biggest improvement in fourth-quarter 2012.
Though up to 90% of the population are rated as being in the low-income demographic, their combined earnings are estimated to be close to $71bn annually, according to a study conducted by research firm TNS. While this group as a whole may not attract high-end retailers, they are a significant force in the marketplace, especially for basic goods and services. Retailers could be well advised to step up efforts to target those currently in the low- and medium-income brackets in their planning.