MINERVA BC NEWMAN
CEBU CITY — In 2021, the Philippine government passed a law that amended the Retail Trade Liberalization Act of 2000 to ease the requirements by setting minimum required investment for foreign retailers to enter the domestic market, yet, over a year since the law was enacted, the domestic retail sector has experienced minimal transformation.
Philippine Retailers Association (PRA) Chairman Paul Santos said, rather than witnessing an influx of new players, it is the established foreign retailers already present in the country that continue to pursue expansion, albeit after facing delays caused by the pandemic.
“This current floor amount for investing in the retail market will invite not the big foreign retailers that the law presumably wanted to invite into the country. It would make the Philippines now attractive to small and medium-scale foreign retailers who may want to do business in the Philippines competing with Philippine small and medium-scale enterprises,” Santos said.
Santos, interviewed by Retail Asia explained that foreign retailers are not too concerned about capitalization requirements as they are with incentives and the economic environment that would allow their business to grow. “Under the amendment, foreign retailers now only need around $446,000 (P25M) of investments, down from the previous $2.5M requirement. If the foreign retailer has more than one physical store, each store must have a minimum investment of $178,000 (P10M). They are also required to maintain a paid-up capital of $446,000 (P25M),” Santos added.
“On the change, it has not yet, actually happened,” he added that what the country is seeing would be existing foreign retailers already doing business in the Philippines expanding their presence. “But according to my knowledge, this has already been planned long before the epidemic but was just postponed,” he said
PH retail sector performance in 2022
According to Santos, reports suggest that 2022 retail sales performance was definitely a lot better than 2021 and 2020, mainly because movement restrictions were progressively lifted and people suddenly had the opportunity to go out again to their favorite shopping malls. But anecdotal evidence would suggest that the 2022 business is still lower than the pre-pandemic 2019 figures, he said.
“But there seems to be some more reason to be hopeful because household spending was recorded to increase anywhere from 5.1 to 5.5 percent over the previous year and moving on to 2023, they have reasons to be optimistic for better sales performance, and in the years ahead,” Santos bared.
He said that the greatest shift in 2022 and earlier is that consumers are far more relaxed and far more accepting of e-commerce. Beginning in 2020, people had no other means to go out and shop except try e-commerce. As the years went on, consumers wanted to find ways or were looking for ways or looking for retailers who combine the ease of e-commerce with in-store shopping.
In-store retailers should adopt e-commerce practices in their physical store businesses as well. It’s a cliche when people say omnichannel, but this is the direction that Philippine retailers are being dragged into, Santos opined.
“A lot of the changes occurred among retailers. A lot of it occurred in the back office. Prior to 2020, many retailers have been adopting more technological solutions to make their back-office operations more efficient. Now, with the pandemic and the lockdown occurring immediately thereafter, there was a need to make these processes available everywhere outside of their offices,” Santos went on.
Emerging trends and strategies employed by retailers
The greatest change amongst retailers, apart from the increasing pace of automation in the back office, is the adoption of cloud solutions to transfer as many of these processes to the cloud as possible, Santos explained that there are some processes that can’t be moved to the cloud like warehousing logistics, stocking the stores, displaying stores, displaying in the stores themselves dealing with customers but, whatever could be moved to the cloud, retailers did so.
The PRA has always held that investment in Philippine retailing is not just about liberalizing the market. A lot of it has to do with economic motivations. For example, before a foreign retailer would be putting up investment in the Philippines in terms of direct market operations, it would want to see for itself if the Philippine retail economy and the Philippine consumers could support or buy the goods and services that it is trying to sell.
“So, liberalization in and of itself, is not a guarantee that businesses would invest in the Philippine market. That being said, when the Philippine economy started to improve, beginning in 2010, you started to see a lot of foreign, more and more foreign retailers entering the Philippine market simply because looking at the Philippines as a track record, it made sense to do so,” Santos said.
Santos cited a testimony delivered by a government office when the PRA inquired about the potential of foreign businesses doing retail business in the Philippines. A lot of the respondents said, the original limit set by the retail trade liberalization law was no barrier to them doing business in the Philippines. What they were more concerned about were other issues that other foreign investors raised with this office like infrastructure, energy costs, the rule of law, the ability to repatriate profits at will and so on.
For example, in Thailand, they have the equivalent retail trade restrictions on foreigners. Notwithstanding this barrier, you still see a lot of foreign retailers doing business in Thailand because of its higher GDP compared to the Philippines. On that score alone, foreigners still decide to do business in Thailand, because simply put, they think they can make money because the market can obviously afford what they’re selling, Santos revealed.
Outlook for the Philippine retail industry
“Retail growth is assured, I think in the near to medium term because of this population growth. Some are saying that 2023 probably will be the year where their annual retail sales will be equal to or more than in 2019. The only clouds that we see on the horizon are basically inflation and political and economic uncertainties brought about by the war in Ukraine. We’ve seen supply chain disruptions during the pandemic and even after, so retailers are being more flexible and more resilient in the way that they source their goods from overseas or from domestic manufacturers,” Santos explained.
Santos went on that Filipinos thought that coming into 2023, that inflation would have been short-lived. Inflation doesn’t seem to let up. Wages aren’t going up yet because the government is afraid that if wages are increased, especially with a statutory minimum wage, that will simply stoke inflation even further.
The tools that the government has at its disposal to clamp down on retail inflation is short of a government decree compelling business to keep their prices at a certain level. “I don’t think they have that many tools left to persuade businesses not to increase prices because of their own inflationary pressures,” he noted.
The prevalence of e-commerce in the country, retailers are now taking that cliché omnichannel more seriously than ever before and it’s now the Holy Grail of retail operations. That would be the trend moving forward in 2023 onwards, to be able to compete not only with their fellow domestic businesses but also with foreign competitors as well, Santos said.
“Philippine retailers will need to adopt more and more omnichannel techniques in order to compete effectively this year and in the years beyond,” Santos concluded.