Case study | Online Shopping Industry in the Philippines

July 28, 2020 by James Ryan Jonas

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.

Figure 1. Retail e-commerce sales worldwide, in USD billions (Source: Statista, 2020)

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.

Article Guide
 Online Shopping vs. Traditional Retail Sales
 “Retail Apocalypse” in the U.S.
 Barriers to E-Commerce Adoption
 Retail Sales in the Philippines
 Market Share of Retail Channels in the Philippines
o Joy of tactile experience
o Live-Work-Play concept
o Internet connection
o Credit card and online payment options
 Top 3 Online Shopping Websites in the Philippines
o #1 Online Shopping Site: Lazada Philippines
o #2 Online Shopping Site: Shopee Philippines
o #3 Online Shopping Site: Zalora Philippines
 Online Shopping Habits of Filipinos
 What Filipinos Buy Online

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).

Figure 2. E-commerce share of total global retail sales (Source: Oberlo, 2020)

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:
 1. Malaysia – 23.7% projected growth from 2016 to 2021
2. India – 23.0%
3. Indonesia – 20.7%
4. Philippines- 18.3%
5. 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.

Figure 3.
Retail e-commerce sales CAGR forecast in selected countries (Source: Statista, 2018)

“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

Source: Euromonitor (2018)

2015 2016 2017

Traditional Retail Channels 97.41% 97.32% 97.22%

 2015 2016 2017

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

Market Share of Retail Channels in the Philippines

Source: Euromonitor (2018)

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.

Figure 4. Monthly webs visits to Online Shopping Sites in the Philippines, as of 2nd Quarter
2019 (Source: Statista, 2020)

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

 (in PHP Millions) 2015 2016 2017

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

Source: Euromonitor (2018)

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.
CategoriesNews & Current Events
About the Author

James Ryan Jonas teaches business strategy, investments, and entrepreneurship at the

University of the Philippines (UP). He is also the Executive Director of UP Provident Fund
Inc., managing and investing P3.1 Billion ($56 Million) worth of retirement funds on behalf of
thousands of UP employees.