Philippines consumers: Boom in a bottle

When TPG Capital's growth unit took a 40% stake in a rural Philippines bank earlier this year, it not only reflected private sector confidence in a diversifying consumer base but also represented an encouraging policy evolution. The investment in One Network Bank - a BDO Unibank subsidiary targeting unserved areas - underscores the economic gravity of the Philippines' increasingly empowered classes outside the major cities while leveraging recently relaxed foreign ownership rules.

Within the banking sector, the implementation of foreign investment liberalizations since 2014 has coincided with a strong emphasis on financial inclusion and a build-up in capitalization aimed at funding growth. These initiatives have all focused on a shifting demographic landscape that is set to deliver new opportunities and challenges for investors in consumer industries.

"The way I have seen more successful companies mitigate risk in the consumer sector is to put boots on the ground, but you can't just go in without a plan," says Reginaldo Cariaso, senior managing director and co-head of investment banking at Bank of the Philippine Islands (BPI), a historically corporate-focused lender that has recently allocated additional resources to grow the consumer end of its business. "You need to have enough capital to build a business, and invest in infrastructure and education to facilitate more financial inclusion so more Filipinos can participate in the growth."

This consciousness of the Philippines' improving social mobility has provided PE and VC players with a sturdy macro picture for consumer segment investment. The efforts of banks to ramp up support for local industries and deepen capital markets will help unlock the potential of this scenario, but investors, companies and government will also need to address a range of non-financial headwinds.

Strong fundamentals

Consumer investment sentiment in the Philippines is driven largely by a solid economic trajectory, with annual GDP growth of 6-8% over the past five years. The country's youthful demographics - the median age is only 23 - are also encouraging; it has been tied to social media usage rates that typically rank in the top-10 globally as well as a rise in e-commerce spending from nearly zero in 2000 to more than $2 billion by 2015, according to DBS Bank. Broadband penetration is still only about 25%, but smart phone usage is now around 50% and said to be growing at over 30% per annum.

"It is an interesting time because we're at the cusp of things being at critical mass," says Minette Navarrete, president at Manila-based Kickstart Ventures, noting that smart phone prices in the Philippines have recently fallen from around $500 to below the $200 mark. "This is a country of 100 million people with maybe five million credit cards, 20 million bank accounts and 50 million Facebook accounts - that's connected."

A 50-50 split between urban and rural populations, unique among Southeast Asian countries, has also been interpreted as setting up a transition from unskilled to skilled employment as an emerging middle class reinvests in its own education. Consumer markets in this context are expected to benefit from decades of increasing liquidity as the young population matures into a new middle-aged demographic of insured homeowners and drivers.

"This is not credit-fueled growth despite the low interest rates. This is growth fueled by income generation, with a lot of new jobs being created and a lot of optimism among the young that the future looks bright and they're ready to spend," says Vesi Kertikova, investment manager for Southeast Asia at LGT Impact Ventures. "Any kind of industry that has that youth component is definitely going to do well."

Although the potential of technology plays is often emphasized in light of the spiraling smart phone user base, no single industry is expected to take the lead in the Philippines' consumer growth story. The general nature of the sector's rise can be demonstrated by the expansion of some of the country's most ubiquitous and untechnical companies. Local McDonald's competitor Jollibee Foods, for example, has been tracking a parabolic growth curve since the 1980s and is now Asia's largest food service company with a market capitalization of about $6 billion.

Legacy issues

The traditional nature of the best performers, however, may also be an indicator of a major challenge facing domestic commerce in the online era. Physical asset-oriented legislation drafted in the 1950 and 1960s continues to dominate the policy environment and stifle commercial competition in digitized industries. While social media usage has proliferated across a number of brands, Filipinos shop on only a smattering of e-commerce outlets, notably including Lazada and Zalora.

"The onus is actually on the entrepreneurs to be successful and get the IPOs and the acquisitions because all of the investors are ready to deploy in the Philippines but there's just no track record," says Paul Rivera, co-founder and CEO of Kalibrr, a local recruitment services company that has been backed by Kickstart. "There are 10-20 start-ups that have raised significant funding and have a shot at these liquidity events. If just a handful of them get to that point, you'll see the ecosystem go from five VCs to 20 VCs."

Despite the potential for an explosion in start-up funding activity, the Philippines' advance toward a fully digital future will be gradual, necessitating the creation of products that work in low bandwidth to target transitional offline-to-online business models. The legacy thinking behind this incremental growth outlook is eroding at the government level, with initiatives such as the new bank ownership concessions. However, much needed taxation and comapny permitting changes remain in gridlock.

"It isn't about the government doing the jobs that investors ought to be doing, investing cash or building edifices," Kickstart's Navarrete says. "It isn't about the physical infrastructure. It's about the policy infrastructure and creating an environment that makes it possible for private sector investors to come and be confident that they have a fair shot at making a good return."

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• Topics
• Southeast Asia
• Consumer
• Financials
• Technology
• Venture
• GPs
• TMT
• Financial Services
• LGT Capital Partners
• Philippines