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Modern retail food sector in the

Philippines: dominance of large
domestic retailers and their effects on
the supply chain
a
Larry N. Digal
a
School of Management, University of the Philippines Mindanao,
Mintal, Davao City, Philippines
Published online: 09 Apr 2015.
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To cite this article: Larry N. Digal (2015) Modern retail food sector in the Philippines: dominance of
large domestic retailers and their effects on the supply chain, The International Review of Retail,
Distribution and Consumer Research, 25:4, 407-430, DOI: 10.1080/09593969.2015.1023214
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The International Review of Retail, Distribution and Consumer Research, 2015
Vol. 25, No. 4, 407–430, http://dx.doi.org/10.1080/09593969.2015.1023214
Modern retail food sector in the Philippines: dominance of large

domestic retailers and their effects on the supply chain
Larry N. Digal*
School of Management, University of the Philippines Mindanao, Mintal, Davao City, Philippines
(Received 30 April 2014; accepted 7 February 2015)
The number of modern food retailers such as supermarkets and hypermarkets has
increased considerably in the Philippines. However, participation of foreign retailers
has been limited since opening the retail sector to foreign investment in March 2000
through Republic Act 8762. The rapid expansion of the sector came mostly from a few
large domestic food retail chains. This paper aims to examine the market structure of
the modern retail food sector particularly the dominance of the large domestic retailers
and their implications on supply chains notably, on small-scale food retailers and
producers. Results show that dominance of a few large domestic retailers has continued
despite liberalization as indicated by high concentration ratios (CRs). While CRs
initially reduced within 5 years after liberalization, they eventually increased through
joint ventures and buy out of foreign retailers. These are expected to increase further
with the proliferation of stand-alone stores and convenience stores under joint ventures
with foreign retailers and strategic partnerships with other large retail and property
development firms. There is some evidence of displacement of small traditional
retailers and only a few small suppliers to supermarkets succeeded, despite efforts of
the government and non-government organizations to help them access modern food
retailers. It is suggested that the review and subsequent amendment of RA 8762 should
be expedited and studies conducted to examine further the effects of the dominance of
large food retailers in the chain including the possibility of market power in the output
and input markets.
Keywords: market structure; concentration ratios; retail trade liberalization; super-
markets; supply chain
Introduction
In 2011, the Foreign Chamber of Commerce in the Philippines raised some concerns about
the limited participation of foreign retailers in the country. They argued that the current
policies to encourage foreign investment in the retail industry are not competitive with
other countries and do not provide a conducive environment for foreign retailers, especially
with the increasing dominance of domestic modern retailers such as supermarkets,
hypermarkets, and convenience stores. These concerns are raised as domestic retailers
continue to expand with only a few large retailers dominating the industry.
The expansion in the retail industry is largely driven by growing demand due to
increasing population and income of consumers. Demand for products sold in malls and
modern retail stores has also increased due to changing demographics and lifestyles. The
number of dual-income families and young professionals has increased who prefer to shop
*Email: larryd927@yahoo.com
q 2015 Taylor & Francis

408 L.N. Digal
in malls and modern retail outlets for convenience and to reduce time for shopping. Many
Filipinos shop in malls where the majority of the supermarkets are located not only for
convenience of one-stop shopping but also for entertainment.
However, aside from the limited competition from foreign retailers, there are a number
of concerns raised as the market for modern retail continues to expand. Some small
retailers have been displaced as shown in previous studies by Romo, Digal, and Reardon
(2009); Lopez and Reardon (2012); and Lucas (2013). Although there are opportunities for
small suppliers to service modern retail outlets, the requirements are difficult to meet given
their limited capacity.
This paper aims to examine the market structure of the modern food retail industry and
the factors that explain the limited participation of foreign retailers in the Philippines.
It also intends to analyze the ‘horizontal’ and ‘vertical’ impacts of modern retail that is
dominated by a large few domestic retailers. Horizontal impacts refer to the effects on
small and large retailers including the participation of foreign retailers while the vertical
impacts refer to the effects on suppliers particularly the small producers.
The paper is organized as follows. The framework of analysis used is discussed

first followed by an analysis of the dominant firms in the modern retail food industry.
The institutions and retail trade liberalization policy are then examined followed by a
discussion of the network and territorial embeddedness. Horizontal and vertical effects of
the dominance of large domestic modern retailers are then explored before concluding
comments are presented.
Framework of analysis
A number of studies that examined the effects of market power of retailers in the industry
used structure conduct performance (SCP) and new empirical industrial organization
(NEIO) frameworks (e.g., Villas-Boas 2009; Cotterill 1986; Digal and Ahmadi-Esfahani
2002). The SCP framework has been used to provide a basis in formulating a structural
model that relates concentration ratio (CR) or the sum of the market shares of the top 3
(CR3) or 4 (CR4) firms in the industry to profits (Bain 1951; Scherer and Ross 1990).
A positive and significant relationship of CR to profits indicates that leading firms may
price their products above marginal cost and therefore obtain excessive profits. NEIO
framework was developed because of the endogeneity issue in SCP models particularly in
using CR as one of the variables to explain profits (Bresnahan 1989). It started with using
conjectural variation models and since then, various variants of NEIO models including
game theory models have been developed (Soregaroli, Sckokai, and Moro 2011;
Michelson, Reardon, and Perez 2012; Igan and Suzuki 2012). However, one of the
constraints in using these quantitative models is the data requirement particularly on costs,
quantities, and prices. The effects estimated are usually on one node of the chain or
subsector in the industry only such as the effect of buying power on the suppliers or selling
power on the consumers. There have been bargaining models (e.g,, Azzam 1996)
developed that account for both selling and buying power. However, the sources of market
power are not explicitly captured in these models. A significant estimated market power
parameter in these models implies inefficiency and inequality because of deadweight or
welfare loss and transfer of benefits from one player to another.
An alternative framework that is useful particularly in terms of analyzing the effects
of power and its sources is the global production network. Applying this framework
particularly in the context of the Philippine retail food industry has several advantages.
For one, it does not need an estimation of a quantitative model that requires data that are
The International Review of Retail, Distribution and Consumer Research 409
difficult to collect such as firm level data on costs, prices, and quantity sold. Also, the
framework allows the ‘non-linear’ analysis of the effects and sources of power in the supply
chain. The vertical and horizontal effects of power including its sources can be non-linear
and can be difficult to capture in the SCP or NEIO models. The interactions between
dominant firms, institutions, power configuration, technologies, and markets and how these
affect development of the retail food industry in the Philippines can be more effectively
analyzed using GPN approach than the other two approaches. The limited competition in
the Philippine modern retail food industry is a multidimensional issue that is not only
affected by the dominance of incumbent firms but also by public and non-government
institutions and embeddedness of networks. Effects of liberalizing the retail trade sector in
the country, the network embeddedness of large domestic firms with domestic consolidators
and suppliers, degree of technology adoption and responsiveness to market requirements
including the influence of foreign business group are important factors that affect degree of
power of large domestic retailers. These elements can be examined more comprehensively
under the lens of the global production network framework.
Given the emphasis on power element within this framework particularly the
dominance of large domestic retailers, it is important to come up with a measure or
indicator of market power before exploring its sources and effects. In this paper, CR was
used to indicate the presence of market power because it is available or can be derived
from the Planet Retail database but not from public database such as the National Statistics
Office in the Philippines. Changes in CRs of large retailers before and after liberalization
in 2000 were assessed. However, CR is not enough to establish market power because
even if there are few firms who account for a substantial market share, firms can behave
competitively if the market is contestable or without market barriers (Baumol, Panzar, and
Willig 1982). Market power exists when firms have the ability to influence price and do
not take price as given but can price above competitive price or marginal cost.
Within the global production framework, the interactions between the firms,
institutions, networks, and technology determine the development and the performance of
the retail food sector. In the SCP approach, the structure is determined by the supply and
demand conditions faced by the firms in the industry, which in turn influence the conduct
of the firms. When competition is limited due to technological, cost or product or labor
quality advantages of a few dominant firms, the conduct or the strategies of these firms can
lead to exercise of market power. In terms of industry performance, issues on efficiency
and equity or distribution of benefits among firms in the industry can arise due to market
power. Inefficiency becomes an issue since firms with market power price above marginal
cost and limit the quantity produced or services provided. It can also lead to a transfer of
benefits from consumer to the firm if market power exists in the output market or from the
supplier if power is exercised in the input market.
After establishing an indication of market power through CRs, the effects of the
interactions of the firms, institutions, networks, and technology are examined. These are
categorized into horizontal and vertical effects. Horizontal effects refer to the effects of
dominant retailers on other local and foreign retailers. Vertical effects refer to the effects
of these dominant retailers on their suppliers. Since interactions and their effects under the
global production network are non-linear, these vertical and horizontal effects are also
non-linear at different levels and scales.
The effects examined are not comprehensive and the extent of analysis is limited by
the availability of data. Nevertheless, available data were used to provide some evidence
on the effects or sources of these effects. For example, the effect of the entry of a foreign
retailer on the sales of a large domestic retailer was examined using data available for one
410 L.N. Digal
category (canned fish products). Although the foreign retailer considered was eventually
bought by a domestic retail chain, its foreign brand was retained and a large portion of the
products it carries is imported. In addition, to explore some factors why many
microenterprises assisted to access high value markets such as supermarkets failed, a
technical efficiency analysis was done using a sample of 156 microenterprises. The data were
sourced from the Rural Micro Enterprise Development Program, a project implemented by
the Department of Trade and Industry from 2007–2013 and funded by the International Fund
for Agricultural Development. The category used was limited to processed food produced by
small enterprises due to data constraints. Although processed food products have high
potential to be sold in supermarkets, the number of microenterprises that was able to access
supermarkets was very low despite consolidation through clustering.
Technical efficiency is the ability of a firm or microenterprise to produce the optimal
output given a set of inputs (Kumbhaker and Lovell 2000). Factors included in the model
are level of development as represented by asset size and interventions provided by the
project to help access high value and institutional markets such as supermarkets. Three
variables were included to represent interventions: (1) credit assisted firms, (2) business
development service (BDS) assisted, and (3) given both credit and BDS. Data
envelopment analysis (DEA) was used to analyze technical efficiency, which involves
mathematical programming. It has the capacity to detect fully efficient decision making
units (DMUs) within the sample size (Thiam, Bravo-Ureta, and Rivas 2001; Guyader and
Daures 2005; Gul et al. 2009). The DEA component can be expressed as:
min l;x* w0i xi

*
st 2 qi þ Ql $ 0;
xi 2 X l $ 0;
*
I10 l ¼ 1;
l $ 0;
where: wi is a N £ 1 vector of input prices for the ith DMU; xi is the cost-minimizing
*
vector of inputs calculated by the Linear Programming model given the input prices wi and
the output levels qi;l is a I £ 1 vector of constants; and I1 is an I £ 1 vector of ones. The
value of u obtained is an efficiency score of the ith DMU, which satisfies 0 # u # 1:
Input-oriented and output-oriented approaches were used in DEA. The former
minimizes the inputs while producing the same level of output, whereas the latter
maximizes the output using existing inputs. Adjustments are possible due to slack inputs/
output. Furthermore, two assumptions are possible: Constant returns to scale (CRS) and
variable returns to scale (VRS). In this analysis, VRS assumption was employed since
perfect competition in the market cannot be assumed. DEAP v2.1 written by Coelli (1996)
was used.
Dominant firms and foreign retailers

The retail trade sector in the Philippines is growing faster than the overall economy. From
2000 to 2011, it grew by more than 7% compared to GDP’s average increase of 5%
(Table 1). Sales of leading retail chains grew by 17% during the period covered, which is a
little higher compared to other second wave1 countries like Thailand and Malaysia except
Indonesia (Romo, Digal, and Reardon 2009).
Table 1. Sales of leading modern retail chains that sell some food, and GDP growth, over selected
Asian countries, over 11 years (2001 – 2011).
Sales (Billion
USD)
2001– 2011 Annual compound Real GDP compound growth
Wave 2001 2011 sales growth rate (%) rate 2000– 2008 (%)
First wave
South Korea 16.9 58.7 13.3 4.5
Taiwan 8.1 22.1 10.5 –
Second wave
Indonesia 2.1 12.3 19.5 5.2
Malaysia 2.1 9.1 15.9 5.5
Philippines 2.0 9.6 16.7 5.1
Thailand 5.2 23.8 16.3 5.2
Third wave
China 12.4 116.8 25.1 10.4
India 0.2 8.5 42.9 7.5

Vietnam 0.1 2.5 34.1 7.7
Source: Planet Retail data as cited in Lopez and Reardon (2012).
The growth was even higher at 26% per year based on banner sales, which include food
and non-food items of the top modern retailers in the Philippines. Grocery sales, on the
other hand, grew by 33% per year from 2000 to 2005 and increased faster by about 70%
per year from 2005 to 2010. Grocery sales account for an average of 55% of banner sales
while food products contribute about 70% of the total grocery sales. Of the food products,
sales of fruits and vegetables grew even faster. From 2000 to 2005, it increased by 34% per
year and grew faster from 2006 to 2010 by 88%. Thus, food sold in modern retail has
increased rapidly, which raised concern about the possible displacement of traditional
food retailers. A recent study by AC Nielsen (2013) as cited by Lucas (2013) showed
evidence of this displacement due to increasing number of supermarkets established in
areas previously served by these traditional food retailers such as ‘sari-sari’ or mom and
pop stores.
The growth in the modern retail food sector is largely driven by large domestic
retailers that include supermarkets and hypermarkets. In terms of banner sales, the top four
and three firms accounted for 72% and 68% of the sales, respectively, from 1999 to 2010
(Table 2). The difference between the CRs of the top four and three firms is small, which
means that the top three firms contributed the bulk of the total sales. During this period, the
average share of the largest retailer, SM Retail Group, was 38%. Combining this share
with the second largest retailer already accounts for more than half of the entire sales of the
modern retail sector.
SM Retail group started in 1958 and currently has 205 retail stores composed of 46
department stores, 37 supermarkets, 34 hypermarkets, and 88 Save More stores. It also has
47 malls in the Philippines that include 6 malls in China as of May 2013 with a total floor
area of 5.5 million square meters. Hypermarkets combine goods carried in department
stores and supermarkets while Save More stores are a chain of grocery stores outside the
malls, which are considered to be the modern wet market by SM group. There are also
some hypermarkets, supermarkets, and department stores that are located outside the
malls. Recently, SM Investments forged a partnership with Waltermart, which is one of
the large retailers in the country that operates 17 malls and supermarkets and owns one of
the largest appliance stores (Abenson Appliance) in the country (Dumlao 2013a, 2013b).
412 L.N. Digal
Table 2. Concentration ratio of top 3 and 4 retailers (1999– 2010).
Concentration ratio 4 (CR4) Concentration ratio 3 (CR3)

Year Banner sales Grocery sales Banner sales Grocery sales
1999 81 73 81 73
2000 58 49 58 49
2001 67 62 67 62
2002 67 60 67 60
2003 68 62 68 62
2004 67 61 65 58
2005 68 62 66 59
2006 71 66 68 62
2007 76 72 71 66
2008 78 77 70 68
2009 80 79 71 69
2010 82 81 69 68
Ave. 72 67 68 63
Source: Raw data from Planet Retail as cited in Romo, Digal, and Reardon (2009).
Robinsons, which is the second largest retailer based on Planet Retail data, accounts
for 16% of the total retail sales from 1999 to 2010. It operates 35 malls, 90 supermarkets
nationwide and plans to increase to more than 100 stores in 2014 (http://www.robinsons-
supermarket.com.ph). It also owns Robinsons Department Store, Handyman Do It Best
Center, Robinsons Appliances, Top Shop, Dorothy Perkins, Wallis, Toys R Us, and True
Value.
Puregold is the fastest growing retailer among the top five retailers with an average
growth of 61% per year. It contributes about 10% of the total industry sales and operates
159 stores (http://puregold.com.ph/company.do?id¼ 7690). Based on the Planet Retail
database, it increased its share from 2% in 2004 to more than 12% by the end of 2010,
which makes it the third largest retailer next to Robinsons (Table 3). In 2013, Puregold
announced the joint venture with Ayala group to set up a new brand of mid-market
supermarket chain that will cater to ABC market segments (Dumlao 2013a, 2013b).
While the banner sales of top retailers continue to increase since 1999, their share to
total sales declined shortly after the liberalization of the retail industry in 2000 although
SM started to recover after 2004. Puregold is an exception because the data from Planet
Retail only started in 2004 although it opened its first store in 1998 (www.puregold.com.
ph/company.do?id¼ 7690). Thus, as shown in Table 3, its share increased more than five
times from 2004 to 2010 and did not experience any decline. On the other hand, the share
of SM in 1999 was 52% and decreased to 44% in 2010 with its lowest share of 37% in
2002. Robinsons’ share in 1999 was 29% but went down to 16% by the end of 2010 while
Rustan’s share was 15% in 2001 and decreased to 9% in 2010.
One of the factors that explains why the shares of the top five retailers have declined or
have not increased significantly from 2000 to 2005 is the increase in the shares of retailers
outside the top five. These include the foreign retailers with domestic partners mentioned
above such Watsons and Seven Eleven and some local retailers such as Jollibee Bakery
and Mercury Drug. The bulk of the sales of Watsons and Mercury Drug come from the
pharmacy sections and posted growth rates of 19% from 2002 to 2010 and 13% from 2000
to 2010, respectively. Jollibee Bakery is owned by the largest fast-food chain in the
country, Jollibee Foods Corporation, which purchased Red Ribbon in 2005, one of the
largest bakery chain stores in the country. Its sales increased from USD 5 million in 2000
Table 3. Banner sales share of retailers, 1999 –2010 (in percentage (%)).
Retailers 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Est. Share of total
SM Investment Phils. 52 41 38 37 38 39 38 39 42 42 44 45 38
Puregold Phils. 2 3 4 6 8 10 12 10
Robinsons Phils. 29 17 15 17 18 16 18 18 17 17 16 16 16
Rustan’s Phils. 15 13 11 10 11 11 11 11 10 9 11
SHV Makro 14 10 8 7 7 7 6 3 5
Pricesmart (US) 1 2 3 2 1
Others 19 29 22 24 23 24 24 23 21 22 20 18 20
Total average 100 100 100 100 100 100 100 100 100 100 100 100 100
The International Review of Retail, Distribution and Consumer Research
413
414 L.N. Digal
to USD 141 million in 2010. Seven eleven, on the other hand, increased from USD 71
million to USD 183 million during this period.
However, market shares of top retailers started to increase from 2006 to 2010. While
retailers outside the top five have increased their sales, their competitors particularly SM
and Puregold have increased much faster. SM was able to reverse its declining share since
2005 partly due to the purchase of Makro. This increase in 2005 excludes its partnership
with Watsons. Robinson’s, on the other hand, decreased its market share but not as large
compared to Rustans’ although it is not clear whether Robinson sales included sales from
Ministop stores. Rustan’s declining shares might change direction starting 2013 with its
strategic partnership with Familymart and Ayala Land.
Another factor that contributed to the initial decline in the market shares of top retailers
is the entry of foreign retailers. These include SHV Makro (Netherlands), Pricemart
(USA), Seven Eleven (Taiwan/USA) and Watsons (Hongkong). Concentration ratios of
the top four and three firms in 1999 using banner sales were 81% (Table 2). These ratios
decreased to 58% and 49%, respectively, in 2000 and averaged about 66% from 2000 to
2005. However, Makro and Pricemart were eventually absorbed by SM and Puregold,
respectively. When SHV Makro started in 2000, it was partly owned by the largest retailer
SM and Ayala group, which is one of the largest property development companies in the
country. SHV Makro was bought by SM in 2008, and some stores were converted into SM
stores. This partly explains the increase in the share of SM starting 2007. Similarly,
Puregold also increased its share, when it acquired S and R stores in 2006. Pricemart was a
partnership with S and R (USA) when it started its operation in 2000. Watsons entered as a
partnership with SM Prime Holdings in 2002. Seven Eleven, on the other hand, started in
1982, operated by Philippine Seven Corporation; it expanded rapidly when President
Chain Store of Taiwan, which is also the Seven Eleven licensee in Taiwan, purchased
50.4% of the share of Philippine Seven Corporation.
Although not included in the Planet Retail database, Ministop (Jusco Co. Ltd. Japan)
convenience stores were established in the Philippines in 2000 in partnership with
Robinsons and Mitsubishi Corporation. As of 2013, there are 300 Ministop stores in the
country (http://www.robinsons-supermarket.com.ph/about-us). Aside from Robinsons,
Rustan’s also partnered with Familymart of Itochu Japan and Ayala Land Inc. to establish
Familymart convenience stores. In 2013, 30 stores were planned and 300 more stores are
programmed from 2014 to 2018 (Dumlao 2013a, 2013b; http://business.inquirer.net/
107837/ayala-rustan-retail-venture-eyes-300-stores#ixzz2zsVxA15Q).
Unlike Makro and Pricemart, Seven Eleven, and Watsons have continued to increase
their sales since they entered the market. However, despite increasing sales particularly for
Seven Eleven and Watsons, their market shares have declined over time. This implies that
their sales have not increased as fast as their competitors.
The dominance of the top retailers diminished during the first 5 years after liberalization
and regained dominance starting 2006 onwards. The average growth rate of the top four
retailers from 2006 to 2010 was 29% compared with only 20% from 2001 to 2005. The top
retailers that grew above average from 2001 to 2005 were only Puregold (32%) and
Robinsons (22%). SM grew only by 19%, whereas Rustan’s suffered the most with an
average growth of only 9%. While SM’s growth slowed down during this period, Watsons’
grew by an average of 33% from 2003 to 2005. Also, during this period Robinsons already
established a partnership with Ministop and Puregold acquired Pricemart/S and R in 2005.
Rustans, however, only started to partner with Familymart in 2013.
The above analysis used banner sales and includes retailers such as Mercury and
Watsons where majority of the sales come from non-food items. Generally, the trend in
market shares for grocery sales is similar to banner sales. Only Puregold did not
experience any decrease in sales from about 3% in 2004 to 13% in 2010. SM accounted for
37% of industry sales in 2000 and posted lower market shares compared to 2000 until 2006
but reached as low as 31% in 2002. Its share surpassed the share in 2000 in 2007 and
reached 45% in 2010. Rustan’s started with 18% in 2001 and continued to decline its share
with only 9% in 2010. Robinson’s share, however, did not change that much compared to
Rustan’s but it declined from 12% in 2000 to 11% in 2001 and slowly increased until it
reached to 14% in 2010. Considering the share of other retailers in (Table 4), the share
declined from 30% in 2000 to only 19% in 2010. Thus, shares of the top retailers such as
SM, Puregold and Robinsons have increased. All of these top retailers have strategic
partnership with foreign retailers.
Grocery sales increased faster than banner sales, which implies that the sales of food
products in the modern retail sector such as supermarkets have increased. From 2006 to
2010, grocery sales grew by 70% while food products increased by 87%. Sales of fruits
and vegetables increased faster than the average during this period. However, in earlier
years from 2000 to 2005, the growth of fruits and food products category was only 20%
compared to 34% growth of food products. The high growth rate of 70% in grocery sales
and food products particularly from 2005 to 2010 was pulled up by the very high growth
posted by Puregold where grocery and sales increased by more than 225% per year during
this period. Taking out this outlier, the average growth of the top three retailers, SM,
Robinsons and Rustans during this period was more than 30% with SM leading at 57%
followed by Robinsons.’
There is a small difference between the CRs using banner and grocery sales. This
implies that the top retailers in food and non-food categories are almost the same.
In addition, CRs using grocery sales have also declined in the early years of liberalization
but eventually increased 5 years after. As discussed, this can be attributed to the entry of
foreign retailers and the increase in the market shares of some retailers outside the top five.
However, CRs have increased faster in grocery sales compared to banner sales from 2001
to 2005 to 2006 to 2010 (Table 2). The average CR of the top four retailers using banner
sales increased by 18% from 66% from 2000 to 2005 to 78% from 2006 to 2010. On the
other hand, CRs using grocery sales increased by 27% from 59% to 75% during the same
periods (Table 2). This difference implies that domestic retailers have recovered faster in
the sale of food products particularly fruits and vegetables as most of these are sourced
locally.
While the entry of some foreign retailers has some effect initially on the dominance of
domestic retailers, there are a number of strategies that make it difficult for foreign
retailers to compete without going into partnership with local retailers. One of these is the
development of malls particularly for the top two retailers. Most of their supermarkets and
hypermarkets are located inside their malls particularly SM. Malls provide more
convenience for customers as they house a variety of stores and recreation facilities that
increase traffic and complete their supermarkets and hypermarkets.
The spread of malls in other regions in the country aside from Metro Manila has been
quite fast. In the 1980s, there was only 1 mall in Metro Manila. As of 2013, there are 84
SM and Robinsons malls in the country and more than half of these are located outside
Metro Manila (Table 5). This excludes malls by other large retailers like Gaisano and
Waltermart. Moreover, malls have also put up bus or van stations as part of the strategy to
connect the malls to suburban and rural areas and make travel more convenient for
customers. Thus, there are cases where it is more convenient for customers located more
than 50 km away from the mall than those who are located less than 5 km to reach the mall.
416
Table 4. Grocery share of the modern retail in the Philippines (2000 – 2010).
% to total
Average
Store 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2000– 2010
SM 36.5 33.1 31.0 33.3 33.4 32.0 34.1 39.6 42.3 44.1 44.8 36.7
Puregold 2.6 2.8 4.1 6.2 8.5 10.0 12.5 6.7
Robinson’s 12.4 10.8 12.8 14.3 12.4 15.1 14.9 14.0 14.5 14.6 14.2 13.6
L.N. Digal
Rustans 17.7 15.7 14.0 12.4 12.2 12.7 12.4 11.6 10.4 9.1 12.8
Makro 21.3 15.3 12.3 10.2 9.8 10.1 7.8 3.7 11.3
Others 29.9 23.1 28.2 28.1 29.3 27.8 26.3 24.1 23.1 20.9 19.4 25.5
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Table 5. Number of SM and Robinsons malls per area as of 2013.
No. of malls per area

Retailer Metro Manila Other Luzon Visayas Mindanao Total
SM 14 24 4 4 46
Robinsons 9 14 8 4 35
Total SM and Robinsons malls 23 38 12 8 81
Source: SM Prime Holdings 2013 (www.smprime.com), and Robinsons Land Corporation 2013 (www.
robinsonsmall.com).
Those located far from the mall will travel for an hour to reach the mall with just one ride,
whereas those near the malls will have to take at least two rides, which would take an hour
or more to reach the mall.
While the number and size of malls have increased, large domestic retailers have
begun to venture into retail outlets outside the malls. SM does this with the hypermarket
and Save More stores. Robinson’s also have some supermarkets and hypermarkets outside
large malls and at the same time partnered with Ministop convenience stores similar to
Rustan’s strategy with Familymart and Ayala.
The concept of one-stop shopping applied in supermarkets and malls to lower search
cost and improve convenience has been expanded to build an area where malls, hospital,
hotels, church, school, residential and office condominiums and other facilities are
clustered. Examples of these in Metro Manila are Rockwell, Global City and the Fort but
expansion in the other large cities like Cebu and Davao is being done. This mixed
development projects require partnership of various corporations in different lines of
business. Thus, local retailers are in a better position to partner with local property
development firms and investors.
Moreover, procurement strategies particularly for fruits and vegetables have also
changed. They have adopted a concessionaire and preferred supplier system. This system
has narrowed down the number of suppliers to deal with and transferred the merchandising
responsibilities to the concessionaires.
Institutions and retail trade liberalization

There has been limited participation of foreign retailers since the country liberalized the
sector in March 2000. From 2000 to 2009, foreign direct investment in wholesale and
retail sector is less than 1% of total foreign direct investment. During this period, only 12
firms have invested in the retail sector, an average of one firm per year (JFC 2011). While
there were a few foreign retailers that came in, no major global supermarket chains that
belong to the top 20 invested in the country such as Walmart, Carrefour, Metro, Tesco or
Casino. There was, however, some interest (Romo, Digal, and Reardon 2009). Metro
explored in 2001 (Planetretail September 28, 2008) and actively explored in 2007
(Planetretail September 12, 2007). Walmart and Casino had discussions with the
Department of Trade and Industry and waited for the expiration of foreign ownership
clause (PlanetRetail March 15, 2002).
As shown, Pricemart/S and R and Makro ventured into supermarket formats but were
eventually bought by the domestic retailers. Makro was bought by SM, and Pricemart/S
and R was absorbed by Puregold. Before Makro was absorbed by SM, its banner and
grocery sales increased three years after it entered in 2001 and peaked in 2005 and
eventually decreased from 2006 to 2007. Pricemart, on the other hand, increased banner
418 L.N. Digal
and grocery sales from 2001 to 2004 although the sales in 2003 were almost the same as
that of 2004. Seven Eleven, Ministop and Familymart came in to the convenience store
segment under partnership with local retailers and the last two partnered with the large
domestic retailers Robinsons and Rustans, respectively. SM ventured with another large
domestic retailer (Waltermart) while Puregold partnered with S and R. The latter retained
S and R brand which has a strong American ambiance or features especially when it comes
to the products, they sold in their fast-food area inside the store like pizza, hamburger, fries
and burritos and the range of imported products sold.
Several factors have been identified why there is limited participation of foreign
retailers. Romo, Digal, and Reardon (2009) argued there are a number of provisions in
Republic Act 8762 that are restrictive. For one, the minimum investment is USD 2.5 million
and investment between USD 2.5 to 7.5 million can entitle the foreign retailer up to 60%
ownership for the first 2 years after the act. Full ownership is given if investment is more
than USD 7.5 million and each store costs more than USD 0.83 million. It is also required
that at least 30% of the products sold should be sourced locally. Foreign retailers are also
restricted from owning land but can lease up to 75 years. However, firms under joint venture
with 60% Filipino ownership can own land. However, joint ventures are perceived to be
unattractive for foreign retailers because the retail and real estate business are controlled by
six to seven families. Thus, it is difficult to acquire land in strategic locations except through
joint ventures with these families (Romo, Digal, and Reardon 2009).
In 2011, the Joint Foreign Chambers of the Philippines prepared a position paper for
Senate Trade Committee on Senate Resolution 476. This resolution urged
the senate committees on trade and commerce and economic affairs to assess, in aid of
legislation, the retail trade liberalization policy under Republic Act 8762 with the intention of
creating more favourable investment climate, generating employment opportunities for
Filipinos and encouraging a robust market competition.
In general, the arguments made in this position paper are consistent with Romo, Digal,
and Reardon (2009) particularly on equity requirements, access to land, and the
dominance of large domestic retailers. However, the position paper added more insights
into the constraints of the existing policy particularly from the point of view of foreign
retailers. One of these is the complicated documentary requirements in submitting a
request to the Board of Investments for pre-qualification that is duly signed and
acknowledged under oath by an authorized officer of the foreign retailer. These include
financial statements with minimum net worth of USD200 million for category B with
minimum paid-up of USD 2.5 million and USD 50 million for category D with minimum
paid-up capital of (USD 0.25 million), certifications, copies of franchise, and licensing
agreements. This capital should be maintained in the Philippines until they have notified
the Securities Exchange and Commission and the Department of Trade and Industry
that they will stop operations. A certification is also required by a foreign retailer duly
authenticated by the Philippine Embassy/Consulate that the applicant has been engaged
in retailing for the past 5 years with branches of at least five anywhere in the world or a
branch with a minimum capital of USD 25 million. If this certification is not met, copies of
licensing agreements are required to show proof of at least five branches. A certification is
also required from the home state of the applicant that the state will provide reciprocal
rights to Filipino individuals and enterprises.
Another issue raised in the current policy is the requirement of category B investments
in which foreign ownership exceeds 80% of equity, to offer a minimum of 30% of their
equity to the public.2 This is required to be done through any stock exchange in the
Philippines within 8 years from the start of business. This public ownership is considered
discriminatory since this is not required of local retailers. In fact, this was one of the
reasons cited by a foreign retailer who came in and eventually left the industry. There is
also a requirement on local procurement where at least 30% of the total cost of the stock
should be procured locally under categories B and C and at least 10% for category
D. Foreign retailers are not allowed to engage in retail activities outside their accredited
stores through mobile stores or carts, sari-sari or variety stores, sales representatives, door-
to-door selling and other similar activities.
Foreign investors have to look for local partners with land equity due to restrictions on
land ownership. The position paper indicated that foreign retailers prefer joint ventures
with local retailers to take advantage of their familiarity with the local conditions.
However, it also expressed concerns about possible disagreements in joint venture
arrangements with local partner as what happened to Price-Costco. The paper also
recognized the intense competition in the industry that can make operations less profitable
for foreign retailers compared to operating in other countries. There were at least 10
countries discussed in the paper to show that Philippine policies are more restrictive. It was
found that Philippines ranked second in terms of capital requirement next to Malaysia.
Also, of the 11 countries covered that include Bangladesh, Cambodia, China, India,
Indonesia, Japan, Korea, Malaysia, Singapore, Thailand, and Vietnam, six are open while
India, Indonesia, and Malaysia are partially open.
Network and territorial embeddedness

It has been observed that large domestic retailers have established their foothold in
Metro Manila, which is the largest market with more than 13 million people in the
Philippines. While the main retail formats of foreign retailers are supermarkets,
hypermarkets, and convenience stores, the formats of dominant domestic retailers
particularly before liberalization are malls with supermarkets, hypermarkets, and
department stores located inside these malls. Two malls in Metro Manila, namely SM
North Edsa and Mall of Asia belong to the top 10 largest malls in the world. These malls
occupy huge areas located in strategic areas in Metro Manila. After liberalization, large
retailers established hypermarkets and supermarkets outside the malls and eventually
convenience stores in partnership with foreign retailers. However, the focus is mainly
Metro Manila. Value is created for consumers going to malls by minimizing search costs
through one stop shopping and access to services such as banking. This is enhanced
further by improving access of malls by putting up transportation terminals or stations in
the malls for public transport servicing the customers from provinces and bringing retail
services closer to consumers by putting up more outlets outside the malls. Value is
captured as large retailers continue to expand into larger malls that bring together other
retailers under one roof. For example, in the past 5 years, SM aggressively expanded
their existing malls. This minimized competition with foreign retailers because they are
not into mall formats and they locate in areas where the value of one stop shopping is
less compared to malls.
Expansion of large domestic retailers in secondary cities outside Metro Manila followed
the strategy they employed in Metro Manila, which started with malls followed by
supermarkets and hypermarkets and convenience stores. It can also be observed that the top
retailers, SM, and Robinsons have aggressively expanded outside Metro Manila in the more
recent years. For example, there were 18 stores (mainly malls) established between 2012
and 2014 compared only with 11 stores from 2009 to 2011. For 2015, the top two retailers
will have established 22 where 12 of these will be located outside Metro Manila (Table 5).
420 L.N. Digal
Thus, the process of value creation, enhancement and capture is expected to be replicated in
areas outside Metro Manila.
The foothold and first mover advantage of large domestic retailers in Metro Manila as
well as in other cities in the country are reinforced with the network of related businesses
that these large retailers are engaged in. SM, for example, owns Banco de Oro, which is the
largest bank in the Philippines. They also own a chain of hardware stores (Ace Hardware)
and partly own Watsons stores, which specialize on retail of beauty and pharmaceutical
products. All SM malls house branches of these banks and stores including their own
department stores for dry goods.
Large and medium domestic retailers are also organized. They have the Philippine
Association of Supermarkets Inc. (PASI), the Philippine Retailers Association (PRA) and
the Philippine Amalgamated Supermarkets Association. These associations particularly
PASI, which prepared the position paper in 1995 highlighting concerns of local retailers,
played an important role in the discussions, formulation and passage of the retail trade
liberalization law (RA 6782) in 2000. On the other hand, small traditional retailers are not
well organized relative to the large retailers mainly because of their huge number and
majority of them belong to the informal sector.
Horizontal and vertical effects of large modern food retailers on the supply chains
There are horizontal and vertical effects of the increasing dominance of large modern food
retailers in the supply chain. The horizontal effects refer to the impact on the firms within a
particular node of the chain such as retail, wholesale, consolidation, transport and
production nodes. This analysis will cover only the retail, processor, and production nodes
of the chain particularly small producers of fresh and processed food products. The
vertical effects cover the impact of a node on another node of the chain. However, to
simplify the analysis, the chains covered were only those of fresh and processed food
products.
Horizontal effects
In what follows, the effects of the entry of a large foreign retailer on a large domestic
retailer are examined as well as the effects of the large retailer on the small and traditional
retailers.
Large retailers
As discussed above, the entry of foreign retailers has slowed down the increase in the
market shares of domestic large retailers but only within 5 years after the industry was
liberalized. Two of these foreign retailers have been absorbed by local retailers
particularly Makro and S and R/Pricemart. It was also shown that the grocery sales,
particularly food products, grew faster than non-food products. A case is presented below
to show the effect of large foreign retailer in partnership with local retailer (disguised to
protect identity) on another large domestic retailer.
To examine the effect, sales of selected products in a category were compared before
and after the entry of the foreign retailer. Also, since the foreign retailer (Retailer F) was
established a few meters away from the large domestic retailer (Retailer A), sales of two
branches of the local retailer located about 3 (Retailer B) and 5 km (Retailer C) away
from the foreign retailer were also compared. This was done to control for the effect of
Retailer A sales index for the period

(July-October)
1,500
Sales index
1,000 2011
2012
500
2013
–
Sardines Mackerel Tuna
Selected commodities
Figure 1. Sales index of retailer A. Source: Confidential.
distance and type of consumers being catered to. Retailer A attracts more of higher income
customers while retailers B and C attract more of lower income customers. In addition, to
protect the value of actual sales, all figures were converted to indices where the base period
(first week of month 1) was given an index value of 100.
Data show that the sales of canned tuna products of Retailer A compared with the same
period in 2012 declined significantly compared with retailers B and C (Figures 1 and 2).
Same months are compared in the previous year to control for seasonality. Canned tuna
products are also sold in Retailer F, which only started its operations in July 2013. This
result is expected since retailers are significantly far from retailer F compared with retailer
A, which is 15 m away. For products that are not being carried by Retailer F such as
sardines, sales of retailer A did not decrease compared with the same period of last year.
Thus, the entry of a large retailer with a foreign format or ambiance has increased
competition and decreased the sales of a large domestic retailer, especially for products
where both retailers carry.
Small retailers
Reardon and Lopez (2012) showed that supermarket ‘shocks,’ which are measured by the
distance of small traditional retailers to supermarket, size and time of entry have decreased
the sales of traditional retailers. Most affected were sari-sari stores while retailers that are
Retailer B sales index for the period Retailer C sales index for the period
(July to October) (July to October)
1,000 1,000
800 800
Sales Index
Sales Index
600 600
400 400
200 200
– –
Sardines Mackerel Tuna Sardines Mackerel Tuna
Selected commodities Selected commodities
2011 2012 2013
Figure 2. Retailers B & C sales index. Source: Confidential.

422 L.N. Digal
mobile experienced less impact. Those retailers that are more mobile were able to adjust
better than those that are not. This is consistent with the finding of the study by Gutierrez
and Jegasothy (2010) that location is the main factor that determines decision of customers
to buy in supermarkets. Of the 500 respondents surveyed, about 40% identified location as
the key factor. In addition, the recent survey by AC Nielsen (2013) also pointed out that
supermarkets have attracted customers who used to buy from sari-sari stores due their
accessibility. More customers are enticed to shop in supermarkets near their homes as they
can now buy less since they can shop more frequently. With the increasing number of
stand-alone stores (outside the malls) and strategic partnerships of top retailers in
convenience stores, the impact of modern retailers on traditional retailers such as sari-sari
stores is expected to increase. On the other hand, the strategy of large retailers located in
malls to enhance its accessibility by putting up bus or van stations as part of the mall also
diminishes the location advantage of sari-sari or small variety (mom and pop) stores.
In both cases, small retailers are at a disadvantaged position.
One of the concerns raised regarding the entry of foreign retailers and increasing
dominance of modern food retailers is the impact on employment. SM reported that for
every Save More outlet, on average 250 individuals are employed in the area where it is
located (http://www.smsupermarket.com/smsupermarket/save_more.php). With the dis-
placement of sari-sari stores that offer self-employment opportunities to many Filipinos, it
is unclear whether the employment generated by modern retailers is sufficient to cushion
or offset the displacement of traditional retailers. A survey of establishments conducted in
1988 showed that informal sector enterprises such as sari-sari stores cushion the impact of
high unemployment rates (NSO 1988). Many Filipinos become self-employed by opening
up these sari-sari stores in their own homes. However, modern retailers and sari-sari stores
can complement each other as the latter acts as outlets of supermarkets in areas that are
beyond the reach of supermarket. The majority of sari-sari stores buy their supply at
wholesale prices from supermarkets. Although chains of convenience stores owned by the
large retailers compete with sari-sari stores in these areas, there are still areas that cannot
be penetrated by these chains of convenience stores such as those inside villages, rural
areas and urban areas without access roads. However, it cannot be denied that the areas
where sari-sari stores can operate profitably has diminished despite their location
advantage and credit facility offered to regular customers who are mostly neighbors.
Vertical effects
Processors
A wide range of processed food and non-food products are sold by large retailers
from large and small suppliers. However, very few of these products come from small
suppliers since most processed products are produced by large companies with powerful
brands.
In the Philippines, the food manufacturing sector is highly concentrated and the
highest in Asia (Roy 2006). Thus, there is strong competition and bargaining between
large retailers and large processed products suppliers. One extreme example is the
disagreement between a large multinational company (Colgate Palmolive) that produces
leading brands in toothpaste (Colgate) and shampoo (Palmolive) and the top retailer (SM).
As a result, products of the company are not sold in any SM outlet (Isip 2009). Colgate
Palmolive like other manufacturers with popular brands in food and non-food categories
invest in advertising as this enhances their bargaining power as they develop strong brand
loyalty (Connor 1997). These popular brands are expected to be available in supermarkets
to attract customers. However, SM did not seem to be threatened to lose strong brands in
their shelves.
In 1997, Cotterill advanced the notion that global food structures were converging
to USA manufacturer-led model where manufacturers dominate the industry or a UK
retailer-led model where retailers dominate the industry (Cotterill 1997). In the
Philippines, it is not clear whether the food industry is dominated by manufacturers or
retailers. Available data on CRs show that both industries have high CRs. According to
Roy (2006), Philippines has the highest CR for the food manufacturing sector in Asia with
about 34% of the total sales accounted for by the top four firms in the industry. However,
based on data from the National Statistics Office, the CR for the top four firms in the food
manufacturing sector in 1998 was about 64%. For specific sectors such as dairy products,
CRs are even higher which can reach more than 90% (Digal 2001). Large firms in the food
processing sector account for less than a percent of the total firms in the sector but they
account for about 80% of the total value added of the sector in 2003 (FAO 2013). A study
that examined a case of large retailer and branded dressed chicken category dominated by
3 popular brands using bargaining model showed that poultry integrators generally
dominate the large retailers (Digal 2010). However, the large retailer covered in the study
does not belong to the top five food retailers in the country.
A number of government programs have been implemented to help small food
producers that supply fresh produce or processed products access institutional markets such
as supermarkets. Examples of government programs to develop small-scale producers are
the one-town-one product, industry cluster programs and assistance to acquire certificate
from Food and Drug Administration. However, very few small processors are able to access
supermarkets despite assistance provided by the government. For example, one foreign-
funded project implemented from 2007 to 2013 by the Department of Trade and Industry
provided credit and BDSs to microenterprises such as product development, branding,
trainings, designs, market linkage support through trade fairs and display centers.
Microenterprises are those with assets of less than USD 68,000. In general, the project was
able to achieve its project objectives particularly in terms of employment and income
generation. Of the 33,873 microenterprises assisted, about 40% or 13,549 were into
processed food products such as coffee, banana, sweet potato and taro chips, pickled
vegetables and fruits. However, less than 0.1% were able to access supermarkets.
There is a wide range of issues why access to supermarkets by microenterprises is
limited. For one, whether individuals or organized, majority of them have not been
certified by Food and Drug Administration due to the lack of standard equipment and
processing area or capital to fund the expensive accreditation requirements. This
certification is necessary in order to sell food products particularly in supermarkets.
In addition, most of these microenterprises belong to level 1 category with asset size of
less than USD 11,400 or P500,000 and many of them are located in remote areas that are
not readily accessible with poor infrastructure facilities. Thus, volume of production is
small, costly and inefficient. Transportation and marketing cost is also very high.
Technical efficiency analysis of 156 microenterprises shows that efficiency level
increases as asset size increases (Figure 3). Microenterprises that have the lowest asset
level (1) have average efficiency scores of 0.23 compared with 0.33 and 0.4 for levels 2 and
3, respectively. Level 1 microenterprises are 43% and 74% lower compared with levels 2
and 3, respectively. This implies that size affects the ability of microenterprises to
optimally combine their inputs such as raw materials and labor to achieve a higher level of
efficiency. With a maximum efficiency score of 1 for most efficient firms, microenterprises
are way below the average even for level 3 enterprises.
424 L.N. Digal
Mean Technical Efficiency Score of

Microenterprises (n=156)
0.45
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
Credit Assisted
Business Development
Service (BDS)assisted
Both Credit and BDS
Level 1
Level 2
Level 3
Mean Technical
Efficiency Score
Type o fRecepient Level of Development

(microenterprise) based on asset size
Figure 3. Technical Efficiency Score of Microenterprises under the Rural Microenterprise

Promotion and Development Program.
Results also show that microenterprises provided both technical assistance or BDSs
and credit have higher efficiency compared with when only BDS or credit assistance is
provided. BDS include trainings on operations, marketing, organizational development,
product development, and packaging. Those who received both credit and BDS assistance
are 26% and 12% more efficient compared with those who received only BDS and only
credit, respectively. This is expected as BDS improves capacity of microenterprises,
which will help their enterprises become more profitable and enhances their ability to
repay what they borrowed. However, very few microenterprises are able to access credit
from formal institutions like banks because of stringent requirements such as collateral.
Thus, many of them turn to informal sources of credit, which charge high interest rates
compared with formal sources.
Moreover, organizing these enterprises within a cluster and value chain framework
helped address the volume and other requirements of supermarkets such as regularity of
supply. However, most producer organizations are weak and need to be able to lower
production and marketing cost per unit and respond to the discipline necessary to meet
requirements of modern markets particularly in terms of quality, regularity, and volume.
In addition, listing fees and penalties imposed by supermarkets for run out are quite high.
Also, supermarkets pay from 15 to 90 days after delivery of products, which discourage small
suppliers as they are used to deal on cash basis particularly when they supply to wet markets.
Thus, aside from stiff entry requirements of supermarkets, small suppliers are faced
with competition from large suppliers with similar products. While some branded products
from small enterprises are differentiated to minimize competition from substitute
products, the economies of scale and scope from large-scale production eventually erode
competitive advantage of small suppliers. An example is an organic rice (F and C Healthy
Rice brand) product with supply from small organic rice farmers consolidated by their
producer organization. They are packed and marketed by a non-government organization

with people experienced in supplying to supermarkets gained from previous employment
from multinational corporations. Having a first mover advantage, it became a leading
brand and increased its market shares in the first 3 years. However, market share
eventually reduced as new brands and substitute rice products entered the market produced
by large vertically integrated millers and rice traders. Some of them advertise their brands
in national newspapers such as Dona Maria.
Farmers
As shown in Table 6, there is a growing demand for fresh produce sold in supermarkets.
Indirectly, increasing sales of food products in supermarkets implies increasing demand
for raw materials used for processed food products. For example, microenterprises that
supply processed food products either source their raw materials from small farmers and
fisherfolks or from their own farms, relatives, and communities. Moreover, this increasing
demand for fresh produce in supermarkets offers opportunities for farmers to directly
supply to supermarkets. For example, clusters of vegetable farmers composed of 5– 10
members per cluster that supplied to supermarkets were able to earn profits 21% to 234%
higher compared with supplying to wet markets or ‘palengkes.’ (Table 7) (ACIAR 2012).
This is despite higher production and marketing costs incurred when farmers supply to
supermarkets. For example, production and marketing costs for sweet pepper sold in
supermarkets was 28% and 21% higher compared with wet markets, respectively. For
tomatoes, production and marketing costs sold in supermarkets were 19% and 232%
higher. Production costs are higher to meet quality grade requirements of supermarkets,
whereas higher marketing costs were due to increase in transport costs and cluster fees
based on higher sales.
The above example of a large supermarket chain does not adopt a concessionaire type
system unlike the ones adopted by the top two largest supermarket chains in the country.
Under this system, the merchandising function in terms of the variety of products, number
of stock-keeping units to manage, pricing, visual merchandising, sourcing and
replenishment of stocks, and inventory management are done by the concessionaire.
This allows the supermarkets to simplify the business by handling only the tracking of
sales through the point of sale system, storewide promotions, and leasing of shelf and
storage space in exchange of a percentage of sales generated by the concessionaire. In fact,
the largest supermarket concessionaire of fruits and vegetables (Dizon Farms) has branded
its own fresh produce and diversified its products to include pre-packed, ready-to-eat
salads as well as salad dressings.
There are also large suppliers of fresh fruits and vegetables such as Dole Philippines,
a multinational company, Basic Neccessity and Gourmet Farms who brand their own
products. On the other hand, small farmers do not brand their products such as the example
discussed above. Some concessionaires like Dizon Farms set up buying stations near
wholesale and trading posts in production areas in various provinces with a fleet of large
trucks that deliver the produce in the main consolidation and processing center near Metro
Manila.
Concluding comments
The above analysis shows that the modern retail food industry has been expanding. Large
local retailers amid this expansion have increased their market shares. Although these
426 L.N. Digal
Table 6. Growth rate of grocery share of banner sales, and food share of grocery sales of modern
retail in the Philippines (2000, 2005 and 2010).
Sales in millions USD % Growth rate
Store 2010 2005 2000 2010 2005
SM
Grocery 2399 619 248 288 150
Ambient 665 150 54 343 178
Chilled and frozen 410 94 32 336 194
Beverages 248 56 20 343 180
Fruits and vegetables 207 47 16 340 194
Share of food in grocery (USD) 0.72 0.625 0.51 15 23
Puregold
Grocery 672 55 1,122
Ambient 239 15 1,493
Chilled and frozen 97 6 1,517
Beverages 75 5 1,400
Fruits and vegetables 56 3.4 1,547
Share of food in grocery (USD) 0.78 0.8 (3)
Robinson’s
Grocery 761 292 84 161 248
Ambient 182 67 17 172 294
Beverages 90 29 4 210 625
Fruits and vegetables 66 25 7 164 257
Share of food in grocery (USD) 0.65 0.64 0.52 2 23
Rustans
Grocery 486 236 106
Ambient 138 65 112
Chilled and frozen 99 49 102
Beverages 44 20 120
Fruits and vegetables 58 30 93
Share of food in grocery (USD) 0.78 0.76 3
Makro
Grocery 195 145 34
Ambient 68 51 33
Chilled and frozen 36 27 33
Beverages 19 14 36
Fruits and vegetables 26 20 30
Share of food in grocery (USD) 0.79 0.79 –
President Chain (7 – 11)
Grocery 145 69 56 110 23
Ambient 11 5 4 120 25
Beverages 44 21 17 110 24
Fruits and vegetables 1 0.4 0.4 150 –
Others
Grocery 834 449 132 86 240
Ambient 109 72 25 51 188
Chilled and frozen 14
Beverages 85 47 24 81 96
Fruits and vegetables 25 15.4 75.8 62 (80)
Table 7. Comparison of costs and returns of vegetable cluster farmers selling to different markets.
Wet market Supermarket Wet market Supermarket

Item Sweet pepper Tomato
Volume sold 320 530 1,650 750
Farm price (P/kg) 71.25 87.50 12.00 40.00
Cost (P/kg)
Seeds 1.05 1.35 0.12 0.40
Fertilizer 4.33 5.56 0.29 0.95
Pesticide 6.77 8.69 0.30 1.00
Animal 0.00 0.00 0.00 0.00
Materials 0.82 1.06 0.27 0.88
Labor 4.26 5.46 0.79 2.60
Total production cost 17.24 22.12 1.77 5.83
Gross margin 54.01 65.38 10.23 34.17
Marketing cost 0.11 0.12 0.32 1.06
Transportation 1.27 1.37 0.40 1.32

Cluster fee 3.56 4.38 0.60 2.00
Net profit 49.07 59.52 8.91 29.79
Source: ACIAR (2012).
market shares have declined initially after the entry of a few foreign retailers, they
continued to increase 3– 5 years after retail trade liberalization. Some large local retailers
bought out foreign retailers and have formed joint ventures with them particularly in
convenience store format. Thus, large domestic retailers have continued to dominate in the
modern retail food industry.
Participation of foreign retailers in the country has been limited since it was
liberalized. Factors that explain this limited participation include high capital
requirements, complicated documentary requirements, restrictions on local procurement,
public ownership stocks, selling outside accredited stores and land ownership. Given the
current restrictions particularly on land and local procurement, they are constrained to deal
with dominant local retailers and investors who own the land and properties particularly
those located in strategic areas.
The dominance of a few large domestic food retailers has been shown by their
increasing CRs. Although these ratios are insufficient to show that they exercise market
power especially that stiff competition exists particularly among the top four retailers,
there are indications on the negative effects of the dominance of large food retailers.
Horizontal effects show that the entry of foreign retailers has not diminished
dominance of large food retailers. In fact, it eventually provided the push and opportunities
for them to expand as joint ventures accelerated the establishment of convenience and
stand-alone stores and supermarkets. A possible negative horizontal effect is the
displacement or erosion of markets catered to by small retailers in the wet markets
including sari-sari or variety stores.
One of the vertical effects of this dominance is the increased competition among large
suppliers particularly food processors. The effects on large food processors, however, need
to be further examined although one study showed that while countervailing power between
large retailer and large poultry integrator exists, the latter appears to dominate (Digal 2010).
Food manufacturing in the Philippines is concentrated and dominated by a few large firms.
For small food processors, however, opportunity to supply to expanding modern food retail
is limited due to lack of Food and Drug Administration certification, high production and
428 L.N. Digal
marketing costs, weak producer organizations and low technical efficiency. Most of these
constraints also apply to small fresh fruits and vegetable suppliers. The preference of large
food retailers to tap concessionaires denies small suppliers to directly access supermarkets.
The liberalization of the retail sector almost 15 years ago appears to have not achieved
its objectives. High and increasing CRs do not support the goal of enhancing competition
in the sector although they are not sufficient indicators that market power exists. It has not
also enhanced the tourism and export markets since those who entered the market were not
the large foreign retailers with wide global network of outlets.
The position of the Joint Foreign Chambers of Commerce of the Philippines to review
the RA 5672 should be considered. Further studies to further examine the horizontal and
vertical effects of the dominance of large retailers should be done, covering market power
in the output and input markets.
Disclosure statement
No potential conflict of interest was reported by the author.
Notes
1. See Reardon and Timmer (2007) and Reardon and Gulati (2008).
2. See Appendix 1 for definition of categories.
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Appendix
Appendix 1. Definition of retail investment categories under Section 5 of the Philippine Republic
Act No. 8762.
Category A Enterprises with paid-up capital of the equivalent in Philippine Pesos of less than
Two million five hundred thousand US dollars (US $2,500,000.00) shall be
reserved exclusively for Filipino citizens and corporations wholly owned by
Filipino citizens.
Category B Enterprises with a minimum paid-up capital of the equivalent in Philippine pesos of
Two million five hundred thousand US dollars (US$2,5000,000.00) but less than
Seven million five hundred thousand US dollars (US$7,500,000.00) may be
wholly owned by foreigners [except for the first two (2) years after the effectivity
of this Act wherein foreign participation shall be limited to not more than 60% of
total equity
Category C Enterprises with a paid-up capital of the equivalent in Philippine Pesos of Seven
million five hundred thousand US dollars (US$ 7,500,000.00) or more may be
wholly owned by foreigners Provided, however, That in no case shall the
investments for establishing a store in Categories B and C be less than the

equivalent in Philippine Pesos of Eight hundred thirty thousand US dollars (US
$830,000.00))
Category D Enterprises specializing in high-end or luxury products with a paid-up capital of the
equivalent in Philippine Pesos of Two hundred fifty thousand US dollars (US
$250,000.00) per store may be wholly owned by foreigners.)

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This article was downloaded by: [University of Otago]

On: 07 July 2015, At: 03:17

The International Review of Retail,

Modern retail food sector in the

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Modern retail food sector in the Philippines: dominance of large

q 2015 Taylor & Francis

The paper is organized as follows. The framework of analysis used is discussed

min l;x* w0i xi

Dominant firms and foreign retailers

India 0.2 8.5 42.9 7.5

Table 2. Concentration ratio of top 3 and 4 retailers (1999– 2010).

Concentration ratio 4 (CR4) Concentration ratio 3 (CR3)

Table 5. Number of SM and Robinsons malls per area as of 2013.

No. of malls per area

Institutions and retail trade liberalization

Network and territorial embeddedness

Retailer A sales index for the period

Figure 1. Sales index of retailer A. Source: Confidential.

2011 2012 2013

Figure 2. Retailers B & C sales index. Source: Confidential.

Mean Technical Efficiency Score of

Both Credit and BDS

Type o fRecepient Level of Development

Figure 3. Technical Efficiency Score of Microenterprises under the Rural Microenterprise

producer organization. They are packed and marketed by a non-government organization

Wet market Supermarket Wet market Supermarket

Transportation 1.27 1.37 0.40 1.32

No potential conflict of interest was reported by the author.

investments for establishing a store in Categories B and C be less than the

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