THE REGION’S CHANGING RETAIL FOOD SECTOR

The Case of the Philippines

Salvador P. Catelo

Importance of the Philippine Retail Food Industry

Over the past decade, the Philippines witnessed a substantial growth in the retail industry.
Although there is a dearth of recent literature and statistics to support this observation, a
reconnaissance of places especially in the urban areas can attest to this. Growth is seen
not only in terms of numbers but more visible in terms of size, investment on structure
and modernization in operation.

Digal (2001) pointed out that the Philippine retail industry’s performance comprises
about 11 percent of the Gross Domestic Product (GDP) in 1997. There are clear
indications that this magnitude has been more or less maintained in the past 3 years. Total
retail sales in 2002 increased by 11.1 percent and its GVA contributed 10.6 percent to
GDP in the same year (www.euromonitor.com/Retailing in Philippines). About seventy-
three percent (72.84 %) of this share was in the trade sub-sector while 25.43 percent was
in the services sector. From 1981 to 1997, the industry grew by 5.83 percent annually,
outpacing the average annual GDP growth rate of 2.27 percent over the same period.

Combined with the wholesale sector, the industry absorbed 15 percent of the country’s
employed labor in 1998 (Digal, 2001). The food, beverage and tobacco industry
contributed 37 percent of the total employment in the wholesale and retail industry in the
Philippines in 1995. Within the food sector, 87 percent of the total employment comes
from small food retailers with less than 10 employees (Digal, 2001).

In the Philippines, food retailing industry involves a wide array of sellers from the
sidewalk vendors, wet and dry markets, sari-sari stores, groceries, supermarkets, hyper
marts, warehouse and discount clubs and convenience stores. Food means brisk business.
Food is intricately linked with its culture and traditions. In the family, food accounts for
43 percent of total expenditures. Outside the home, eating has become lucrative for the
retail business. Expenditures for dining out, excluding corporate representation registered
an average growth rate of 15 percent to 20 percent per annum in the last 10 years. In the
quick service or fast food segment, the total market in 2000 was over PhP 30 B. (Palma,
2005). According to the Family Income and Expenditure Survey (FIES) of the National
Statistics Office(NSO), household spending on food increased by 26 percent from 1997
to 2000. Personal consumption expenditure (PCE) on food and beverages in 2002
reached about PhP 448 B from PhP 401.7 B in 1998, or an average annual growth rate of
about 3 percent (Omaña, 2005).
Supply Condition

In general, the retail sector has continuously increased its value-added in the last decade.
However, the food retail sub-sector had a declining share of this value-added as
compared to the other retail sub-sectors. While the total retail floor areas occupied by the
large retailers in Metro Manila have increased by 13 percent annually from 1994 to 1998,
the selected respondents for this paper reported a decline in space rental especially in
2004-2005 owing to lower demand for retail items.

However, it was seen that the large retailers such as the supermarkets largely enjoyed the
growth in productivity of the sector. In terms of sales per worker in 1988, large retail
outlets generated more than twice that of the small ones. In 1995, the gross valued-added
of a single supermarket was 31 times larger than the smaller retail outlets. For the
supermarkets, total sales per worker increased by an enormous 117 percent, while for the
small retail outlets it has decreased by 60 percent in 1995.

The success of these supermarkets was reinforced by their use of high-tech facilities such
as the point of sales (POS) scanner system, value-added networks (VANs), and the
electronic data interchange (EDI) (PASI, 1995). The latter has significantly reduced the
inventory costs of retailers. This was because this technology has allowed them to
automatically purchase from their suppliers electronically. However, due to the high
capital requirement of this system, only the large food retailers, which have access to
credit, were able to take advantage of this.

In the Philippines, “sari-sari” stores dominate the retail market as they account about 70
percent of the total. “Sari-sari” store is defined as small grocery or convenient store that
serves the basic food and grocery essentials of the households. Sari-sari stores are usually
constructed as an extension of the owners’ house. Their dominance, especially in rural
areas, is due to geographical convenience, intimate customer service and payment
flexibility (Philippine Food and Beverage Retail industry: Opportunities for Canadian
Exporters, 2000).
.
Strategic Partnerships and Vertical Integration

Large manufacturers are establishing strategic partnerships with retailers. These

partnerships have been facilitated with the development of information technology and its
adoption in retailing. Such strategic partnerships, however, have implications in the
balance of power in the marketing system. By having access to better market information,
large retailers are able to increase their bargaining power relative to wholesalers and
farmers. Large food manufacturers, on the other hand, also benefit by tapping the rich
market information which retailers are able to source out from their POS system.
However, these strategic partnerships may reinforce the dominance of large retailers in
the input and output markets.

Underground Economy

2
The contributions of the retail industry to the economy are said to be underestimated due
to the exclusion of the micro enterprises, which comprise the informal sector, or the so-
called “underground economy”. Based on the NSO-SHOA 1988, it was found that the
835,729 unaccounted enterprises had a total value-added contribution of $376 million,
which was 65% of the total value-added contribution of the retail trade sector.

These data support the idea that more households are engaging in retailing activities.
According to the 1991 FIES, one out of five families acquires income from either
retailing or wholesaling activities. Paradoxical situations persist during the economic
crises in 1985 and 1991, and during the 1988 economic recovery. In the former, the
industry experienced positive growth, while it decreased in the latter. These must be
because retailing has become an employment opportunity for unemployed individuals.

Another important observation was that more women are engaged in the retail/wholesale
industry. Almost 66 percent or 2.36 million women were employed in this sector as of
1994 (NSO).

As for the rural areas that are dominantly agriculture-based, farm produce are either
brought to the public market and sold to retailers and wholesalers, or are sold directly to
consumers. Moreover, because agricultural products are used as raw materials for retail
food production, the agricultural sector has become significantly dependent on the retail
industry’s performance. Recently, however, many farmers expressed concern on the entry
of agricultural commodities from abroad. The more liberalized trade regime compounded
by minimal efficiency gains in domestic production put them at a comparative
disadvantage.

Policies

Over the past two decades, the Philippine economy witnessed radical changes in its
policies from monopolies, cronyism, and excessive government intervention under
Marcos to more liberalized markets under Aquino and Ramos (Gonzales, 1999). During
the Marcos era, the main economic policy toward industrialization was import
substitution. However, its success rate was low as traders experienced high tariffs, quotas,
and an overvalued exchange rate. The government became dependent on regulatory
controls, public enterprise, investment incentives, and trade restrictions. The goal of the
government to undergo industrial development resulted into the concentration of
industries, sheltered domestic markets, and distorted price signals (Patalinghug, 1997).

Under the Aquino administration in 1986, most of the unfavorable economic policies
were removed. It was during this regime that foreign investment liberalization laws, such
as the Foreign Investment Act of 1991, were implemented. However, although there were
a number of policy reforms, the implementation was highly constrained by the lack of
adequate financial resources.

During the Ramos administration starting 1992, the policy of less government
intervention was sustained. To promote competition and efficiency, the foreign exchange

3
market, banking, transportation, and telecommunications were all liberalized. Build-
operate-transfer schemes were also implemented to fill in the gaps in the infrastructure
investments. Also, with the government’s aim to promote competition, it opened up duty-
free shops in the country.

In summary, the protection given to large food-processing firms, particularly those

producing highly advertised branded food products reinforces their market power and
weakens the bargaining power of food retailers and farmers. Also, domestic
concentration was triggered by the presence of government incentives, such as those
offered by the Board of Investments on duty-free importation. The capability of foreign
investors catering to the local market to advertise and to offer lower prices, erect barriers
to entry and exit (Abenoja and Lapid, 1991). On the other hand, due to the inadequate
and unorganized marketing support facilities, the bargaining power of farmers relative to
the traders weakened.

Regulatory Issues

To prevent the occurrence of unfair trade practices, the government has implemented a
series of policies to govern the retail trade sector. Some of these policies include: The
Price Act of 1991 (RA 7581) which protects consumers from price manipulation such as
hoarding, profiteering, and cartels; the Consumer Act of the Philippines (RA 7394) which
penalizes certain acts such as deceptive, unfair, and unconscionable sales practices in
both goods and credit transactions. It is the Department of Trade and Industry (DTI)
which is tasked to implement these policies through their consumer protection program.

Demand Side Drivers

Demand side drivers of the Philippine retail food industry include population growth,
overall economic growth, consumer education, fast changing lifestyle and higher
awareness of food quality and safety. The rate of increase in the country’s population is
considered one of the highest in the region, notching annual increase of no less than 2
percent over the past decade. Since the growth is skewed towards the youth, this trend
will represent a higher potential demand for food (Palma, 2005). The remittances from
abroad continue to contribute significantly to income of many households. This translates
to higher personal expenditures particularly on retail food and non-food commodities.
Recently, however, the inflation-adjusted estimates showed a decrease of 10 percent in
average income and 8 percent decline in average expenditure from 2000 to 2003 (NSO,
2005).

Although the share of food in total spending had declined, expenditures on food
continued to increase. Household food expenditures increased by 26 percent from 1997
to 2000. For the same period, personal consumption expenditure on food and beverages
grew by 3.4 percent per year. Moreover, food consumed outside the home has been in an
upward proportion (Palma, 2005).

4
The DTI and a number of concerned consumer groups have been active in promoting
consumerism. Consumers are now being educated about their rights and on how they can
get the best vale for their money. Improved communication systems have also triggered
this consciousness. Through the ownership of television sets and radios, information is
now more accessible to the consumers. As a consequence, there is increased competition
among retailers to improve their service (Digal, 2001).

With higher disposable incomes, fast changing lifestyles and the growing number of
dual-income families, the need for mobility have made convenience food a necessity.
Preference for supermarkets has gone up both in urban and rural areas. This is because
supermarkets, as compared to the other types of retail outlets, are usually cleaner,
comfortable, spacious and well-maintained. Moreover, supermarkets offer a wider range
of choices for the consumers, including both perishable and non-perishable goods.

This growth translates into competition. The entry in the industry has been more
profound with new fast food chains and more branches joining the bandwagon. The
dominant players include McDonald’s, Wendy’s Kentucky Fried Chicken, Kenny Rogers
and Pizza Hut. However, it is the Filipino-owned company, namely, the Jollibee Food
Corporation, that has cornered a bigger share of the pie as it accounts for about 52
percent of the total fast food market (Omaña, 2005).

Due to the consumers’ increased quality consciousness, retailers are now mindful of
providing high quality food, which conforms to the taste of the consumers, as well as the
speed and efficiency of service in a clean environment. The high rate of competition has
made these factors necessary for the growth of the retail food industry (Palma, 2005).

Also, food safety has become one of the major issues of today. With this, the government
has established reasonable standards of quality for food products. The Department of
Health (DOH), together with the Bureau of Foods and Drugs (BFAD), was mandated to
ensure the safeness of the food being sold and distributed to the general public for their
consumption. Moreover, the DOH, with authorization from the owners, enters and
inspects the equipment, raw materials, containers and storage facilities being used by
these firms to ensure that the food they produce are safe for human consumption (Palma,
2005).

Investment in the Retail Food Sector

In 1993, a bill was proposed to open the retail industry to foreign investors. In October
1996, former President Ramos signed an executive order advocating the full liberalization
of the Philippine retail trade sector. It was in March 2000 that President Estrada signed
RA 1180, or the Retail Trade Nationalization Act for implementation. However, due to
the dominance of large food retailers, which is believed to raise the possibility of market
power, RA 1180 was amended and was replaced by RA 8762, or the Retail Trade
Liberalization Act of 2000.

5
The last five years saw a phenomenal growth in the food service business with the entry
of large retailers. Local store chains, particularly convenience stores are expanding in
major urban areas. In 2000, more than one third (35%) of foreign franchises are in the
food business. Local franchises, on the other hand, have also gone international, such as
Red Ribbon Bakeshop, Max’s Fried Chicken, Josephine’s Restaurant, and Jollibee
(Palma, 2005).

Impacts on Traditional and Small Retail Outlets

Distribution of Retail Outlets. In the Philippines, the distribution of the retail outlets is
influenced by the size of its market, which is dependent on the consumers’ number and
purchasing power. In 1994, 80 percent of the 210,301 retail outlets in the country were
sari-sari (neighborhood) stores; 17 percent were market stalls, and less than 1 percent
were supermarkets. It is argued that the large number of sari-sari stores in the country
suggests the extent of low-income earners. These outlets are popular among low-income
earners particularly those who have no regular jobs or those who need to supplement their
incomes (Digal, 2001).

Displacement of Small Retailers. Output contribution-wise, sari-sari stores are now being
displaced by large food retailers in spite of their number. While there are only a few
supermarkets in the country (1%), they have the largest share of gross value-added
among the retail outlets. In 1995, the supermarkets had a 68.2 percent share of the total
value-added.

Output. The small retail outlets increased their output contribution by 2.14 percent from
1975-1995, while the large ones, particularly the supermarkets continued to expand by
46.3 percent.

The competition between the large supermarkets and the small retailers could be seen on
their relative share in consumer expenditures. The share of supermarkets in consumer
expenditures grew from 37.3 percent in 1989 to 57.4 percent in 1994. In contrast, the
shares of sari-sari stores dropped from 17.3 percent to 10.7 percent during the same
period. Then in 1994, the share of supermarkets is already 57.4 percent, while that of the
sari-sari stores decreased to only 10.7 percent. Similarly, the share of market stalls
declined from 22.1 percent in 1989 to 10.8 percent in 1994.

The dominance of large retailers is more pronounced in the Greater Manila Area where
supermarkets controlled 79 percent of the total food market. In terms of employment, the
share of sari-sari stores dropped from 66.59 percent in 1975 to 32.58 percent in 1995. As
these trends are expected to continue, there is a threat that the market share of sari-sari
stores will continue to decline. Supermarket revenues have been projected to grow by
18.6 percent per year between 1996 and 2000 (Digal, 2001).

The trend contradicts assumptions that the two types of retail outlets have different target
markets.

6
Concentration

Although large food retailers appear to dominate the retail food industry, these retailers
argued that they face stiff competition especially among supermarkets and have to
practice loss –leader pricing to maintain their market shares. They practice giving
discounts, regular bargain sales, reduction in margins, expansion of target markets, bigger
store space, and good product quality (Patalinghug, 1996).

One possible way of proving this claim is through the computation of the concentration
ratios. Available data on these concentration ratios showed that supermarkets are actually
not concentrated even in Metro Manila. Rather, the top four supermarkets only have a
1.08% concentration ratio and that they only have about 1% share of total sales.

Generally, data on concentration ratio support arguments that the retail industry is fairly
competitive. One of the arguments in the retail industry is that it is not the retailing sector
but the food manufacturing sector that is highly concentrated. Canning and processing
vegetables, vegetable juices, smoking of fish and other marine products, wine
manufacturing industries among others have 100 percent four-firm rations (Digal, 2001).
Eleven of the 53 industries under this sector have four-firm concentration ratios of 100
percent. Almost half of the 53 industries sectors in the country are extremely
concentrated, having ratios of at least 90 percent.

Impacts on Domestic Agriculture

The growing competition within the convenience food industry has important
consequences for the agricultural sector. First, the industry has become a lucrative market
for agriculture. However, certain conditions must be satisfied. For instance, because of
stiff competition the players in the food industry must be ensured of quality and freshness
of raw materials. Also, they must tie-up with reliable suppliers of raw materials for
smooth operations.

Atomistic farmers and wholesalers are the primary sources of vegetable and fruits by the
retailers. However, due to the geographical characteristics of the Philippines, distribution
of these goods has become costly. This situation is further complicated by the poor
infrastructure facilities, primitive sea and air transportation systems, and the lack of a
grading system for these goods. Due to these inadequacies in the distributional system,
trading between buyers and sellers has been greatly constrained (PASI, 1995). In
addition, grading system is sometimes based on subjective judgment of size, quality, and
variety, rather than on well-defined and objective standards (Lantican, et al., 1996).
Altogether, these have limited the integration of markets and have provided an
environment that is conducive to exercising buying power among the wholesalers, food
processors and retailers directly buying from primary producers.

Farmers usually receive lower prices due to the agriculture products’ high perishability
and the lack of adequate infrastructure facilities in the country. They have lost their
bargaining power, which on the other hand is being enjoyed by the retailers and

7
wholesalers who have the resources and better knowledge of the market situation.
However, this advantage of both retailers and wholesalers are not absolute, for they are
deprived of such power when they are into processed goods.

Impacts on Trade

In some cases, the agriculture sector has limited carrying capacity to provide the
industry’s bulk requirements. In turn, many agricultural raw materials and ingredients
have to be imported. These include beef, potato, cheese and other dairy products (Palma,
2005). In particular, the local livestock sector cannot provide enough beef supply. On the
other hand, local potatoes do not meet the quality required for production of French fries,
a major food item in the fast food industry.

In a more recent study, Macabasco (2004) pointed out two essential attributes that make
imported vegetables more attractive to the institutional markets and the supermarkets
who cater to the high-end consumer markets. First, imported vegetables are cheaper by
30% to 50% compared to some of the locally produced ones. Second, they are better
packed and generally of better quality. In turn, importations of vegetables have grown
sevenfold since 1996 to 2002.

However, the local food chains seldom export. What they just usually get from other
countries are the cooking equipment and utensils that are specifically made for their
products, and which will be used in their overseas branches (Palma, 2005).

LITERATURE CITED

Abenoja, R. and D. Lapid. 1991. Barriers to Entry, Market Concentration and

Wages in the Philippine Manufacturing Sector, 1987. The Philippine Review
of Economics and Business 28(2):191-217.

Digal, L.N. 2001. An Analysis of the Structure of the Philippine Retail Food
Industry. Philippine Journal of Development.

_________. 2005

Gonzales, S. O. 1999. Remember the Truth: Marcoses are back – FVR. Philippine
Daily Inquirer.
(http://www1.inquirer.net/issues/feb99/feb23/news/news_2htm).

Lantican, F.A., K.E. Licardo, L.R. Cabebe, E.E. Dumayas and D.S. Harder. 1996.
Commercial Crops Subsector: Fruits, Vegetables and Ornamentals,
Congressional Commission on Agricultural Modernization and Agricultural
Policy Research Advocacy Assistance Program. Draft report. University of
the Philippines Los Baños.

8
NSO (National Statistics Office). 1988. Family Income and expenditure Service.
Manila: National Statistics Office.

__________. 1991. Family Income and Expenditure Survey. Manila: National

Statistics Office.

__________. 1994. Family Income and Expenditure Survey. Manila: National

Statistics Office.

__________. 1997. Family Income and Expenditure Survey. Manila: National

Statistics Office.

Omaña, R. M. G. 2005. A Peek into the Philippine Convenience Store Industry.

Agriculture and Agri-Food Canada. (http://atn-riae.agr.ca/asean/e3476.htm).

Palma, A. C. S. 2005. An Update on the Philippine Fast food Industry. Agriculture

and Agri-Food Canada. (http://atn-riae.agr.ca/asean/e3395.htm).

PASI (Philippine Association of Supermarkets Inc.) 1995. Position Paper: Retail

Trade Liberalization, Philippine Association of Supermarkets, Inc., Manila,
Philippines: PASI.

Patalinghug, E. 1997a. Competition Policy, Technology Policy and Philippine

Industrial Competitiveness. Quezon City, Philippines: University of the
Philippines, College of Business Administration.

__________. 1997b. Current Conditions and Future Prospects of Competition Policy

in the Philippines. Bangkok: Tariff Commission.

9
The Region’s Changing Retail Food Sector
The Case of the Philippines
Salvador P. Catelo
University of the Philippines Los Baños

PECC-Pacific Food System Outlook Meeting

Kun Ming, China
(May 11-13, 2005)
Retail Industry

vital lifeline of the Philippine economy

™ contributes around 11 percent to GDP since
1997
™ increasing growth rate
(5.83% per year from 1981-1997)
(11.1% per year from 2001-2002)
™ combined with the wholesale sector, it
employs about 15% of the labor force

estimates exclude the informal micro enterprises

(“underground economy”)
Food Retailing Industry in the Philippines

involves a wide array of sellers from sidewalk

vendors, wet and dry markets, sari-sari stores,
groceries, supermarkets, hyper markets,
warehouse and discount clubs and
convenience stores

primary or secondary source of living

 Distribution of retail food establishments by type,
Philippines, 1999.

Neighborhood Stores

18% Groceries and

Convenience Stores “sari-sari” stores
9%
Department Stores (variety stores that
3% offer basic food &
70% Supermarkets
0% grocery essentials
Government-run in small quantities)
Farmers Market

Source: Phil Food Services Industry: Opportunities for Canadian Exporters

“wet and dry” markets or public markets

- typically one for every municipality
Wet and dry markets
- constructed and maintained by the municipality
- traditional meeting place of buyers and sellers
(distribution points of producers & market agents)
- low maintenance; substandard facilities

Neighborhood corner stores

- “sari-sari” stores
- tiny in operation compared to supermarkets
- highly informal but well-patronized especially
in rural areas (due to payment flexibility,
geographical convenience and intimate customer
service).
Supermarket Penetration

- rising rapidly
- less than 5% of total number but have significant share
of the total revenues from retailing
(guesstimate: > 50%)

output contribution (1975 – 1995)

small retail outlets – 2%
supermarket – 46%

Continued entry of new players

- convenience stores
- fastfoods
 Key Players in the C-Store Industry
(Number as of end 2002)

168

155

73 Star Mart

67 Shell Select stores

27 Treats c-stores

24 La Botique
 Road Map in the Food Retail Industry
can anticipate more drastic changes in
market structure, conduct and performance

High population growth (skewed towards the younger age bracket)

Overall economic growth (translates to increase in per capita income
and expenditures)
High remittances from abroad
Growing number of dual-income families
 Road Map in the Food Retail Industry
continuation . . . . .

Consumer education (ITC, media)

Fast-paced life style (esp. among working people in urban areas)
Food quality and safety consciousness
Use of credit card facilities
Malling as a leisure activity
 Trends & Features
continuation . . . .
Household Expenditures

Food 50.7% (1988)

43.6% (2000)
42.6% (2003)

Food regularly consumed outside the home

3.4% (1988)
5.0% (2000)
5.3% (2003)

PCE on food and beverages: increasing by about 3% per year

Consumption pattern may be altered by the level of family income,

purchasing power due to inflationary effects, among others; but is
seen temporary
 Trends & Features

Passage of the 2000 retail trade liberalization

 allow foreign retailers to operate independently

 can purchase directly, eliminating 20% to 40%
mark-up charged by importers and distributors

Local supermarket chains are modernizing, expanding

and broadening their imported brands
(Sources: House Bill 77 and PASI, 1995)

Enhances competition in the domestic market

thereby improving competitiveness and
efficiency
level of competition is already intense; lower
margins; more and better goods and services
Retail Trade Liberalization : Some Trends and Issues
(continuation . . . . .)

Improves level of services through the inflow of

foreign capital; more opportunities to tap resources
of foreign retailers via partnership

local retailers who have limited access to capital

and entrepreneurial capability are at the disadvantage
Retail Trade Liberalization : Some Trends and Issues
(continuation . . . . .)

Lower prices due to increased competition and wider

access to cheaper and quality goods and services

Case of imported fruits and vegetables: cheaper ;

better packed & generally better quality

High prices of locally produced commodities –

are due to high distribution costs and not
excessive margins
Retail Trade Liberalization : Some Trends and Issues
(continuation . . . . .)

Improves wages as foreign retailers offer higher

pay than local retailers

foreign retailers are not labor intensive which

may lead to labor displacement and eventually
offset any wage improvements
 Trends & Features
continuation . . . .

Prospects

to flourish more in the next 5 years

- still below the saturation level;
- exposure to sophisticated retailing - - consumers
become more discerning in their choices;
- expansion of malls w/c influence and allow
greater access to the food industry

modern store formats

- fast replacing traditional stores and retailing
practices
 Trends & Features
continuation . . . .

Issue

threat on retailing as primary or secondary source of

income of many Filipinos; threat to local producers

require rationalization in terms of product lines, sourcing

and procurement, pricing

public policy to promote the upgrading of traditional outlets,

making them more competitive with modern
stores; market niche; information technology,
infrastructure, distribution systems, support
services that bridge equal opportunities
Captures 52% of the fastfood market

- started out as a two-branch ice cream parlor in 1975

- 100% Filipino owned
- managed to attain market dominance despite the presence
of foreign food service giants
- more than 400 outlets nationwide
- outlets in the Middle East, US West coast, Brunei, Indonesia
Vietnam