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Philippine malls have gone from centers of daily life to all but deserted amid the coronavirus pandemic. (Photo by Kimberly Dela Cruz)
Business Spotlight

'Mini economies': Pandemic tests the Philippines' mighty malls

Retailers and consumers go digital in blow for major developers

CLIFF VENZON, Nikkei staff writer | Philippines

MANILA -- When one of the world's longest Christmas celebrations kicks off in the Philippines, its shopping malls are among the first to greet the season. Vast emporiums are spruced up with garlands, bells and candy canes as early as September, while big sales fire up the country's massive consumer sector.

But this year, instead of being greeted by Santa Claus-costumed staff, shoppers face thermal scanners and bottles of hand sanitizer. Promotional placards hang side-by-side with reminders to wear face masks and face shields and maintain a safe distance from others to avoid catching the coronavirus.

"Even with discounts, it's difficult to sell these days because people are afraid to go out," said a staff member who was singlehandedly manning a dimly lit U.S. outdoor apparel outlet in a Manila mall.

As microcosms of the Philippines' $377 billion consumer-driven economy, malls bore the brunt of the pandemic-induced lockdowns, the collapse in consumer confidence and the country's first recession in three decades.

Billions in mall developers' market value and retailers' revenue have been wiped out, and vacancy rates are approaching historic highs as spooked shoppers have stayed home to avoid infection.

Reminders to wear masks and social distance are now a common sight in shopping malls in the Philippines. (Photo by Kimberly Dela Cruz)

Even when the pandemic is over the shopping mall business may not be the same again. Retailers looking to cut reliance on brick-and-mortar shops, and consumers falling in love with online shopping, are set to shake up retail and force malls to reinvent themselves. "They must innovate or evaporate," said Joey Roi Bondoc, senior research manager at real estate services company Colliers International.

Developers -- some of whom are already laying the groundwork for a shift to e-commerce -- acknowledge the uncertainties they face.

"We believe that due to the unexpected extent of this global pandemic, after the dust settles, the behavior of consumers would surely no longer be the same," Injap Sia, chief executive of Double Dragon Properties, founder of newly listed retailer Merry Mart Consumer, told Nikkei Asia.

"I think we can all just make plain predictions as nobody really knows exactly what it will be, but for sure this situation will result in having winners and losers in terms of relevance to the consumers," Sia added.

In the tropical Philippines, air-conditioned shopping malls are the country's de facto public parks. In addition to restaurants, retail shops and cinemas, they host banks, remittance centers, clinics, chapels and government service centers. In 2016, authorities even considered allowing them to serve as voting precincts for the presidential election.

This all makes them favorite destinations for Filipino families, from the wealthy to the low-income.

"For many years it was our weekend family bonding," Jeaneth Delos Reyes, a 37-year-old shopkeeper with three children, told Nikkei. "We [would] dine, play and just stroll from noon to evening, and end up spending less than 1,000 pesos ($20)."

In September, many shops had more staff than customers as the coronavirus kept shoppers at home. (Photo by Kimberly Dela Cruz)

Delos Reyes said her family hasn't visited a mall since community quarantine restrictions were imposed in March, ordering children and the elderly to stay home.

Acting Socio-economic Planning Secretary Karl Chua has described the country's 865 malls as "like mini economies. You can actually do everything you want except sleep."

Last year, daily average foot traffic in the 74 domestic malls of SM Prime Holdings, the nation's largest developer, stood at 4.2 million people, equivalent to the population of Panama. The company also has seven malls in China.

Powered by $30 billion in overseas remittances and $25 billion in revenue from business process outsourcing companies such as call centers, the country's robust consumer sector has attracted foreign brands, including Japan's Uniqlo and Sweden's H&M, in recent years. Their arrival spurred competition for prime space in shopping malls, driving rents higher and creating a windfall for the landlords --the country's major conglomerates.

Now, the pandemic is forcing a retail rethink.

"A lot of retailers are re-evaluating our former default strategy of locating in shopping centers [for growth]," Paul Santos, chairman of the Philippine Retailers Association, told Nikkei. "It is not going to be business as usual even after this is over. Those that were previously reluctant with e-commerce will be more embracing [of it]."

The Philippines has one of the highest rates of COVID-19 infections in the region despite enforcing one of the world's longest and strictest lockdowns. Fear of catching the virus and stay-home orders have fueled a surge in online shopping.

According to the Philippines' trade department, the number of registered online businesses jumped to 75,876 as of Sept. 2 from 1,753 in January to March 15. Transactions handled by e-commerce platforms such as Lazada and Shopee also exploded during the lockdown.

In contrast, physical shops are being shuttered. Colliers International expects the vacancy rate in Metro Manila's malls to rise from 9.8% last year to 14% this year, matching that of 1999 in the aftermath of the Asian financial crisis.

Rents in the capital where shopping malls are concentrated are projected to fall by 10%, eclipsing the 7.4% drop in 2009 after the global financial crisis. Rents are set to drop by 2% next year, before growing by 1% in 2022, Colliers' Bondoc said, adding that new mall openings will also likely be pushed back or delayed.

Meanwhile retailers, some of which saw sales fall 80% in the first half, might shut weak outlets permanently, according to Santos of the retailers group. "I think you will see more retailers being ruthless ... in cutting underperforming branches," he added.

The rise in vacancies is already prompting malls to rethink business models with an eye on e-commerce.

"We are looking into transforming some spaces within the malls into fulfilment centers for e-commerce, and possibly repurposing some for office use," said Arlene Magtibay, senior vice president at Robinsons Land, the second-largest mall developer.

"Malls will have to be increasingly present in the digital arena, not just for marketing purposes but, more importantly, in driving sales and traffic," Magtibay told Nikkei.

Tenants are already boosting their online presence. Swedish home furnishing giant Ikea has announced it will open an online store first before launching its first outlet in the country next to the sprawling SM Mall of Asia near Manila Bay next year. SSI Group, a leading luxury retailer, has launched a multi-brand online store and a personal shopper service for those hesitant to go out. Many have also set up accounts on Lazada or Shopee.

Because of their outsized presence in the economy, malls are prized assets for Philippines' biggest family-owned conglomerates.

SM Prime is a unit of SM Investments, the most valuable conglomerate, controlled by the Sy family, the richest in the Philippines. SM Investment also controls the nation's largest retailer, SM Retail. Robinsons Malls are under the Gokongwei family's JG Summit Holdings, while Ayala Malls are owned by the Philippines' oldest conglomerate, Ayala.

Investors saw malls as symbols of the country's robust consumer sector. In 2017, SM Prime became the first Philippine company to hit 1 trillion pesos ($20 billion) in market capitalization, crowning the integrated real estate developer as the country's most valuable company. Foreign funds including Vanguard Group and BlackRock are among its backers, according to FactSet.

But as the economy has gone south, these companies have also suffered. The market value of SM Prime, which historically generated over half of its business from malls, has fallen by 19% this year to 953 billion pesos as of Nov. 4.

The Philippines has struggled to contain the coronavirus, despite introducing some of the world's strictest lockdown measures. (Photo by Kimberly Dela Cruz)

To retain retailers and prevent them from closing down shops for good, SM and Ayala Land, which has over 30 malls, have waived 11 billion pesos and 5 billion pesos worth of rents, respectively, in the first half at the expense of their bottom lines.

But despite the grim near-term outlook for the industry, developers will likely innovate as they did when they forayed into "lifestyle centers," in which they built residential and office towers around shopping centers to boost foot traffic in malls, according to Claro Cordero, Philippine research head at Cushman&Wakefield.

"We have seen the death of malls practically in Singapore and the U.S., but the mall experience -- unlike in other markets -- for the Philippines is a shared experience," Cordero said.

Developers meanwhile are keeping their faith in malls -- albeit with a revamped business.

"We anticipate that post-pandemic, Filipinos will go back to the shopping centers. We are a highly social people, and the malls will continue to be an important gathering place for families and groups of friends," Magtibay said. "But with the heightened awareness on the importance of health and well-being, we expect to redesign the mall experience to align with this new lifestyle."

Delos Reyes, the shopkeeper and mother of three, is one of those waiting for the pandemic to pass. "We will probably come back to the mall when we're sure that the virus is gone."

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