Are shopping malls and brick-and-mortar stores dead?
This is the emerging question these days given that more and more people around the world are turning to the internet for their purchases. Especially during these times of lockdowns and quarantines because of the COVID-19 pandemic, people of all ages have seemed to turn to online shopping sites.
According to market research firm Statista, global e-commerce sales in 2019 reached a whopping $3.535 trillion. This number is even projected to almost double in value in just four years, growing by 85% to $6.542 trillion by 2023. Figure 1 below shows the projected value of global retail e-commerce sales until 2023. Based on these projections, the future is definitely bright for global e-commerce.
With the growth of internet retail, however, comes the consequent decline of traditional retail sales. Although the same research by Statista shows that brick-and-mortar sales still lead e-commerce sales in terms of volume (as seen in Figure 2 below), it is becoming evident that e-commerce adoption is rising and is starting to eat into the market of traditional retail.
Online Shopping vs. Traditional Retail Sales
In 2019, for example, only 14.1% of all global retail sales were made online (See Figure 2 below).
By 2023, this figure is expected to grow to 22%, which means that almost 1 in every 4 sales transactions worldwide will be done via online channels. As a consequence, traditional retail channels is predicted to suffer a market share decline from 85.9% in 2019 to just 78.0% by 2023.
Globally, developing countries are expected to drive e-commerce growth in the next few years. Figure 3 below shows the 15 countries expected to drive internet retail growth worldwide until 2021.
Statista reported that the top five (5) countries with high growth potential for e-commerce sales are:
- Malaysia – 23.7% projected growth from 2016 to 2021
- India – 23.0%
- Indonesia – 20.7%
- Philippines- 18.3%
- China – 17.4%
Other developing countries that complete the top ten (10), such as Vietnam, Thailand, Mexico, South Africa and Romania, are also forecasted to reach double-digit growth in retail e-commerce, as seen below.
“Retail Apocalypse” in the U.S.
It is generally expected that large, developed countries such as the United States will be at the forefront of e-commerce. Indeed, the U.S. e-commerce industry leads globally in terms of size, but industry growth has peaked and American customers appear to have already made the switch from brick-and-mortar to internet shopping. In 2017 alone, Statista reported that U.S. online retail sales amounted to a whopping $409.2 billion and projected to surpass $603.4 billion by 2021.
This shift in the American customer’s behavior is evident in the impact on the U.S. retail industry. While more and more Americans favor e-commerce, traditional and brick-and-mortar stores are closing shop one by one.
Bookstores were one of the first major casualties of e-commerce. This does not come as a surprise since e-commerce giant Amazon started as an “online bookstore” back in 1995.
Founder Jeff Bezos initially envisioned Amazon.com to be the “biggest bookstore in the world” and the website back then waged a direct battle against traditional bookstores. The promise of convenience, lower prices, and easy access to books of any kind made Amazon the dominant player years later.
As a result, large bookstore chain Borders in 2011 filed for bankruptcy protection, closing down more than 200 stores and laying off 6,000 employees in the U.S. Smaller bookstores followed suit. In 2017, Wisconsin-based Book World announced the closure of all 45 stores while Family Christian Stores, with 240 stores selling books and religious merchandise, announced its liquidation in the same year.
Still surviving today is Barnes and Noble, another traditional bookstore behemoth, but the company has suffered from flagging sales in recent years and has resorted to closing down 10% of its stores since 2011 and laying off thousands of employees in a bid to arrest declining profitability.
Aside from bookstores, apparel retailers are also heavily impacted by the shift to e-commerce. Offering a high level of customization, rapid fashion replacement cycle, and easy product returns, online apparel retailers were able to convince millions of Americans to just use the internet to purchase shoes, clothes and fashion accessories.
Brick-and-mortar apparel retailers are now bearing the brunt, with some big-named companies, such as American Apparel, Forever 21, J.C. Penney, Payless ShoeSource, J. Crew, Rockport, Aerosoles, RadioShack, Nine West, and Toys R’ Us all filing for bankruptcy.
Meanwhile Abercrombie & Fitch, Banana Republic, Gap, Macy’s, Michael Kors, Bed Bath and Beyond, GNC, and Under Armour, among others, have rationalized their operations by closing down dozens of stores worldwide.
This massive behavioral change is said to be causing the “death” of retail, and this phenomenon has been widely dubbed as the “retail apocalypse.”
Barriers to E-Commerce Adoption
Fortunately for Filipino retailers, the “retail apocalypse” does not seem to have reached Philippine shores yet. One possible reason is that internet retail is yet to make a big dent in the mainstream retail landscape.
Internet in the Philippines is certainly thriving and growing, with total e-commerce sales reaching P32.9 billion in 2017, based on a Euromonitor market research report. Although this seems to be a huge number, it is still minuscule compared to total store-based sales transactions in 2017 which amounted to a whopping P3.5 trillion.
Retail Sales in the Philippines
| (in PHP Billions) | 2015 | 2016 | 2017 |
|---|---|---|---|
| Traditional Retail Sales | 3,148.80 | 3,306.00 | 3,509.80 |
| Online Shopping Sales | 22.049 | 26.981 | 32.887 |
| Other Non-Store Retail | 61.551 | 63.919 | 67.613 |
| Total | 3,232.40 | 3,396.90 | 3,610.30 |
Market Share of Retail Channels in the Philippines
| 2015 | 2016 | 2017 | |
|---|---|---|---|
| Traditional Retail Channels | 97.41% | 97.32% | 97.22% |
| Online Shopping Channels | 0.68% | 0.79% | 0.91% |
| Other Non-Store Retail Channels | 1.90% | 1.88% | 1.87% |
| Total | 100.00% | 100.00% | 100.00% |
Internet-based retail merely accounted for less than 1% of all Philippine retail sales in 2017, but expect this to surge in 2020 given the COVID-19 pandemic which forced millions of Filipinos to be cooped up in their homes and to resort to online shopping. With shopping malls and retail stores required to be closed during the quarantine lockdown from March until May 2020, expect online shopping sales to balloon at the expense of sales from traditional retail channels.
Joy of tactile experience
There are various reasons why Filipinos remain to be laggards in e-commerce adoption. According to a Nielsen Shopper Trends report, one possible reason is that Filipino consumers still prefer the “brick and mortar” experience when making purchases. This is why, according to Nielsen Philippines, 93% of Filipinos still prefer to conduct grocery shopping in-store.
“The love for shopping is alive among Filipinos,” explains Nielsen Philippines’ shopping insight unit head Lou-Ann Navalta. “They find joy in going up and down the aisles to check out grocery items.”
The same sentiment was echoed by Paul Santos, president of the Philippine Retailers Association. In an interview with ABS-CBN News, Santos believe Filipinos “still want tactile experience” which is why brick-and-mortar retail is still growing.
Live-Work-Play concept
Santos also views shopping malls as the “de facto public space” in most cities and provinces in the Philippines where the people can gather and hang out. As such, malls will continue to be a major part of the Filipino culture.
This seems to be the case, especially now that real estate developers such as Megaworld Corp. (MEG), SM Prime Holdings (SMPH), SM Development Corp. (SMDC), Ayala Land Inc. (ALI), and Robinsons Land Corp. (RLC), among others, have adopted a “live-work-play” concept in real estate development, wherein they merge residential and office spaces with malls and retail shopping outlets.
Internet connection
Another major obstacle to e-commerce adoption appears to be the country’s slow internet connection. In an interview by ABS-CBN News, Rustans Supercenters CEO Irwin Lee lamented that in the Philippines, “we have a lot of people with mobile phones, but internet speed is quite low. You want to do online shopping, but you lose the signal or WiFi does not carry through.”
Credit card and online payment options
The lack of availability and inconvenience of payment options also add to the problem. Very few Filipinos have access to debit or credit cards or other digital payment options — which are, of course, necessary to make online purchases.
According to the World Bank’s Financial Inclusion Data, only 3.5% of the Philippine population used the internet to “pay bills or make purchases” in 2014. Just around 2.2% of the population used a credit card for internet transactions. A Philippine Star article reported that credit card penetration rate in the Philippines in 2019 remains below 10%.
This is a small figure compared to the at least 60% penetration rates in Japan, Hong Kong, and South Korea, the three nations with the highest credit card penetration rate in Asia Pacific, according to the Global Economy.
Even as credit card has low penetration in the Philippines, the Nielsen Shopper Trend Report also revealed that credit card security emerges as a primary concern for online shoppers, with respect to divulging their personal data and credit card information online.
Online shopping websites, such as Lazada and Shopee, have partly addressed this by offering COD or Cash on Delivery option. This way, users can make a purchase without having to complete the payment online. Payment of cash only occurs when the ordered item is delivered to the customer’s home. This, in a way, addresses customers’ fear of internet fraud and concerns on data security.
There is also a move to convince customers to go digital, with Shopee and Lazada heavily incentivizing users to use their “online wallets”. The online wallet or e-wallet system allows users to make purchases using their Lazada Wallet or Shopee Wallet which can be funded using online or offline means. Online funding could be done via online fund transfers from a credit card or bank account or even through other e-wallets such as G-Cash or Paymaya , while offline funding or offline “cash in” is made through payments in a brick-and-mortar shop such as 7-11 and SM Bills Payment Center.
As more and more Filipinos get connected online and discover the convenience of shopping at the comforts of their home, millions of consumers are undoubtedly on their way to fully embracing e-commerce.
Currently, the Philippine e-commerce industry is dominated by foreign-owned companies with websites and apps operating in the Philippines. Below are additional company information regarding major e-commerce players in the Philippines.
Top 3 Online Shopping Websites in the Philippines
#1 Online Shopping Site: Lazada Philippines
Lazada is an online marketplace founded in 2011 by Rocket Internet with the intention of replicating Amazon’s marketplace model but focused on the Southeast Asian region. Lazada currently operates in Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam and has more than 560 million consumers in the region.
It is now primarily owned by Chinese e-commerce giant Alibaba, with an 83% ownership stake. In March 2018, Alibaba announced it is investing an additional $2 billion in Lazada to support the company’s foray into e-commerce in Southeast Asia.
#2 Online Shopping Site: Shopee Philippines
Shopee is an online marketplace platform owned by Singapore internet company Sea Ltd. It operates in “Greater Southeast Asia,” a region that includes Indonesia, Taiwan, Vietnam, Thailand, the Philippines, Malaysia and Singapore.
As an online retail platform, Shopee is very similar to Lazada, with product categories ranging from consumer electronics to home and living, health and beauty, baby, toys, fashion and fitness equipment, among others.
#3 Online Shopping Site: Zalora Philippines
Zalora is an online shopping website specifically in the fashion category. It was created by Rocket Internet in 2012 as a spin-off of Zappos, a U.S. online fashion portal. The website offers apparel, clothing, and fashion accessories for men, women, and children featuring in-house labels and local and international name brands. In 2017, the Ayala Group announced it has completed the acquisition of 49% of online fashion retailer Zalora in the Philippines.
According to Statista, Lazada Philippines dominates the country’s e-commerce industry with 25.15 million visits per month to their website, as of the 2nd Quarter of 2019. Shopee is a distant second, with more than 15.41 million web visits per month. A far third is Zalora, which registered only 1.46 million web visits per month.
Online Shopping Habits of Filipinos
What do Filipinos currently buy online?
A Euromonitor research report in 2018 shows that media products, specifically in-game purchases and purchases of digital mobile games, console games, and computer games, were the most popular products bought online.
Consumer electronics, apparel and footwear, and personal accessories and eyewear were the three other popular products categories bought by Filipinos online in 2016. The table below shows a comprehensive list of product categories bought by Filipinos via the internet from 2012 to 2017.
What Filipinos Buy Online
| (in PHP Millions) | 2015 | 2016 | 2017 |
|---|---|---|---|
| Media Products | 6,972.3 | 8,704.6 | 10,782.2 |
| Consumer Electronics | 6,565.8 | 7,857.1 | 8,969.2 |
| Apparel and Footwear | 5,490.0 | 6,881.2 | 8,855.6 |
| Personal Accessories & Eyewear | 1,644.8 | 1,953.4 | 2,223.7 |
| Beauty and Personal Care | 530.1 | 639.9 | 765.5 |
| Home Care | 2.1 | 2.2 | 236.3 |
| Homewares and Home Furnishings | 126.2 | 137.7 | 153.0 |
| Consumer Appliances | 127.1 | 122.5 | 124.0 |
| Food and Drink | 98.0 | 104.1 | 110.9 |
| Consumer Health | 23.8 | 44.0 | 64.8 |
| Pet Care | 52.2 | 53.7 | 59.4 |
| Home Improvement and Gardening | 34.2 | 35.0 | 41.2 |
| Video Games Hardware | 32.6 | 31.7 | 31.5 |
| Traditional Toys and Games | 20.5 | 22.7 | 25.3 |
| Others | 329.0 | 390.7 | 444.8 |
| Total | 22,048.80 | 26,980.60 | 32,887.40 |
Given the current landscape, it is obvious that brick-and-mortar stores remain to be the dominant retail channels in the country. Online shopping is growing but does not seem to pose a major threat yet to traditional retail. This, however, could soon be put to the test as Lazada, Shopee, and possibly Amazon in the future begin to wage a fierce battle versus traditional retail.
Without a doubt, shopping malls and brick-and-mortar outlets continue to be the dominant and preferred sales channels in the country then and now. But they simply cannot and should not hope that Filipino customers will not make the switch.
The fear of catching the COVID-19 virus in crowded malls, the ease of shopping without leaving their homes, and massive incentives and discounts offered by online shopping websites could convince Filipinos to embrace internet shopping. As seen in the case of the U.S. retail apocalypse, e-commerce can and will surely disrupt the retail industry in the Philippines. The battle has just begun.