Investing in retail: Locals blazing the trail

The rules and regulations implementing the Retail Trade Liberalization law (RA 8762) gives big-time global retailers a two-year investment window from March 25, 2000, to own 100 percent of retail ventures in the Philippines.

This week, the two-year window lapses.

In the past two years, many global retailers have looked into the local retail market and announced ambitious plans to enter the Philippines. Most of them, however, ended up walking away, daunted by the challenges inherent in a developing retail market.

The Philippines has a large population base that make up one of the most attuned consumer market to Western influences and lifestyles. But purchasing power is a problem with per capita income of only about $1,000, which is only half that of Thailand. Global retailers are also amazed at how Filipino retailers manage to turn a profit with very low retail margins, and supply chain inefficiencies that add layers of non-value adding costs.

So far, only PriceSmart Inc., the California-based hypermart chain has made its presence felt under the S&R Price trademark, which has successfully launched two warehouse stores in line with its 10-store, $100 million investment program.

Recently, Hutchison Whampoa Ltd., the Li Kashing-owned Hong Kong conglomerate, forged a partnership with Henry Sy’s SM Prime to put the Asia-wide retail brand, Watson’s, in the Philippine market. Watson’s Philippines acquired SM’s Family Drugstore chain and its health and beauty business. Industry sources report that Watson’s is set to take over the 60-store iMart chain, which operates a food-drug convenience store format.

The global retail giant, WalMart, has also appeared in the Philippine retail radar screen, and is reportedly preparing for a retail alliance with the Aboitiz Group. WalMart has been identified as a possible buyer of Uniwide. Likewise, the French hypermart chain, Casino, also made a bid for Uniwide, but eventually backed-out when the global economy slowed down last year.

But while most multinational retailers have been tentative in taking advantage of the liberalized retail environment, local entrepreneurs have responded to shifting market dynamics with more optimism and more aggressive investment programs. The established retailers and real estate companies have made decisive moves to position their companies for a more bullish retail market once consumer spending recovers.

The SM Group, for example, has just opened new malls in Davao and Pampanga under an expansion program that will give the group 2.7 million square meters of retail space in 17 mega malls by 2004. Gokongwei’s Robinson’s has recently launched an aggressive retail diversification and multi-format store expansion plan. The group now has a flotilla of department stores, supermarkets, hypermarts, convenience stores, and a drugstore chain under the TMC brand. In the drugstore business, Mercury Drug has been tightening its grip of the market with an expansion program of 30-40 new pharmacy-cum-convenience stores per year. It will have 500 stores by end of 2002.

Local real estate players have also been positioning for a retail upswing. Ayala Land has redeveloped its 11-hectare Greenbelt property to add high-end retail space to the Glorietta mall. Other recent projects catering to the high-end retail market include Power Plant at Rockwell and SM’s Podium in Ortigas Center.

The local retail scene will also see the emergence of "non-traditional" players entering the retail business. A recent study of the various sectors in the retail industry indicates that there are attractive opportunities for investors to fund emerging local retailers in the Philippines. The study, commissioned by Luis J.L. Virata, chairman and CEO of CLSA Exchange Capital, Inc., identified several "niche-players" operating various retail formats that make good candidates for venture capital funding, buy-ins, M&A and other private equity deals.

Virata cited the drugstore industry as an example where there are a number of well-managed but undercapitalized medium sized chains. This has prompted him to organize a venture company which has undertaken a recent corporate restructuring of two old pharmacy chains based in the Central Luzon and Metro Manila areas which together have over 40 outlets.

Other non-traditional formats are emerging in the local retail scene. The recent launching of Franchise One will push the Strip Mall retail concept to the less urbanized markets. All over the country, petrol companies such as Shell, Caltex and Petron are, likewise, broadening their retail presence.

Meanwhile, as going to the mall becomes more and more popular among Filipinos, a trend toward entertainment-based retail is taking hold. Mall owners and developers are expected to focus on improving designs and adding amenities that will retain shoppers as the industry matures and competition heats up.