SCMAP Perspective: 16 October 2017

SCMAP Perspective is our fortnightly column on PortCalls, tackling the latest developments in the supply chain industry, as well as updates from within SCMAP. On this column, Henrik Batallones looks at the state of the convenience store business in the country, which is of particular interest to supply chain.

A question of scale

Two years ago I wrote, for our magazine Supply Chain Philippines, an article looking at the how the entry of foreign retail brands into the country could affect the supply chain landscape. There were many facets: new fashion labels, whether designer ones or fast fashion brands like H&M; new e-commerce players; new convenience stores.

That last item was of particular interest to me because of how it could upend – arguably, has already upended – distribution networks across the country, particularly for FMCGs. The advent of new supermarket formats had already provided challenges for logistics operators, compelled to make smaller deliveries in multiple stops.

The rise of the convenience store adds to the complexity, not just because we have additional customers to serve, but also because of how many saw these outlets. They were not just going to duplicate supermarkets, but rather serve as a point of contact for many transactions a Filipino may have: pay bills, send money, grab a quick bite at three in the morning (well, in the chance you are up and about at that time). Analysts also said the country is ripe for a convenience store explosion: a Nielsen study from 2015 revealed that the Philippines has one convenience store for roughly 40,000 Filipinos, a bigger ratio compared to neighboring countries, where penetration of such stores are high.

And so we went to war. The Ayala and Rustan’s groups brought Japanese brand FamilyMart to the country. It was soon followed by another Japanese brand, Lawsons, brought in by Puregold; an American brand, Circle K, brought in by Suy Sing; and a local brand, All Day, from the Villars. SM also got in on the act, bringing in the Indonesian brand Alfamart, although they positioned it as more of a mini-supermarket, complementing the retail giant’s existing offerings. The two existing players, 7-Eleven and Mini Stop, also upped their game, with a more refined offering and, in the former’s case, an ambitious bid for expansion.

Perhaps the idea of being a short walk away from a convenience store was alluring. It certainly provided for a lot of worry-free nights when I’m in a foreign city like Taipei, Hong Kong or Kuala Lumpur – there’s always one at every corner. Also, both new and old players were backed by retail giants with their own networks and expertise – and convenience stores rely on economies of scale to be viable. But then, the Philippines is different. You can only put up so many branches in urban areas. In rural areas, the landscape is different: it may not be able to sustain a 7-Eleven; residents may still trust their neighborhood sari-sari store more; and if anything, the one-place-for-all solution afforded by the Puregolds and SaveMores of the country still holds weight in these less-congested places. Having one convenience store for every, say, 3,000 Filipinos is a nice thought, but coming out on top in this logistics-intensive industry takes lots of work and patience.

And so we hear that Ayala and Rustan’s are looking to sell some, or all, of their stake in FamilyMart. The chain that first looked to shake up the convenience store scene in the country has been left behind, as 7-Eleven expanded aggressively (and also realized the virtues of “premiumization”, in the words of its head Jose Victor Paterno). They’ve long had a network in place and are in a position to weather any shake-up. On their part, Mini Stop is backed by the JG Summit empire, which includes a food manufacturer and a retail conglomerate. Also, at least two of the new players – AlfaMart and All Day – are also backed up by retail giants with wide interests in real estate, meaning they can plonk a branch or three in their residential developments. (An illustrative example: I live ten minutes away from three Alfamarts and two All Days, and all of them are within subdivisions.)

But is it really just all about scale? Size isn’t necessarily the answer to everything. Some of the best retailers may not have wide networks, but are agile and responsive, not just to the needs of its customers but also of its suppliers. This will play a bigger role as the convenience store showdown in the country heads towards a seemingly inevitable new phase.

I’ve had this question of scale in my head the past few weeks, as I pondered the other big change to the supply chain industry: the entry of new (old) players into the logistics arena. SM has bought into 2GO; Metro Pacific is establishing a presence by acquiring smaller players; other retail players like Ayala have also expressed interest. On one hand, it makes sense: a larger, more national footprint may do wonders for service levels. But will this be at the expense of agility and responsiveness? Perhaps that’s for another column.