Economic progress underpins tissue growth

The Philippines, although lying on the fringes of the booming Asian economy, has not been immune to the dramatic economic improvement which has spread across the region. Since the onset of the global recession, however, the rate of economic progress has faltered, GDP posting growth of just 2% in 2009, followed by a boom in 2010 with 10% growth – an anomaly influenced by a government facing a tough election year stoking the national economy.

Since then, the Filipino economy has settled into a pattern of 6-7% growth in 2011, and with 2012 looking similar and rates of per capita disposable income growing in similar proportions, the economy continues to show favourable signs.

Against this background, tissue sales have remained fairly robust, with volume up around 3% annually since 2010. Although given the pace of economic development as well as population growth 3% may appear unexceptional, 3% growth taken against increasing unit prices globally does indicate that tissue products have continued to win over consumers even in what can be considered more challenging economic times.

Whilst the fact that the tissue category remains less developed compared to some of its neighbours due to lower incomes commonly found in the Philippines is unsurprising, there remain some striking features which mark out this country and consumers’ relationship with tissue products out as fairly distinctive.

Retailers drive consumption trends

The key to the Filipino market is the products relationship with middle class consumers. Middle class consumers form the key consumer group (as they do for much of the developing world) for tissue products and owing to this, purchasing trends are very much dominated by the penchant these more affluent Filipino consumers have for mall shopping. Unfazed by the less than upbeat economic performance of 2011, shopping malls have continued to proliferate especially in the key Manila Metro districts where 12 million of the country’s 100 million population currently reside. Among these developments, Ayala Corp’s Abreeza Mall in Davao City and SM Investment Corp’s SM Masinag in Marikina City are all recently completed large scale developments. In addition to these larger outlets, retailers such as Robinsons Retail Group, and Puregold Price Club Inc have continued to expand into the local market by opening supermarkets whilst a plethora of convenience stores have also made an appearance with the Puregold Jr and 7-Eleven facia both expanding aggressively.

While the prevalence of modern grocery and shopping malls has served to increase the consumer’s exposure to modern FMCG products in general, tissue products in particular benefited as a result of their somewhat umbilical link to modern retail formats. The rise of shopping malls and competition between them for patronage has meant that the services and facilities offered by these complexes have come into focus as a means by which to win the affections of consumers.

Retail outlets of all sizes are now expected to offer their clientele a higher end experience which often includes the provision of high quality bathroom facilities, replete with good quality toilet paper. There has also been investment in vending machines found in these facilities, typically, vending sanitary protection and also pocket handkerchiefs, all serving to expand consumer’s exposure to all kinds of retail opportunities.

Also the development of more lucrative destination type retail has encouraged consumer foodservice channels like fast food, full service restaurants, and bars/cafes. Located in fast growing provincial cities, these new shopping malls could further expand the market base of AfH players especially on toilet paper and paper tableware.

Brands have less of a foothold

A further influence related to the power of chained retailers in the Philippines has been the advancement of private label brands.

For manufacturers of branded goods the development of a modern retail structure is ultimately something of a double edged sword, allowing on the one hand for efficient distribution of products to consumers, but, on the other, the same retailers can develop their own following and with it the potential to develop private label. The development of private label is particularly interesting in developing markets where consumers on the whole look for brands, often the bigger and more internationally recognised the better.

In tissue which is still on the margins of what mainstream consumers are willing (or able) to purchase, private label has taken a 16% value share of the Filipino tissue market, a trend driven by difficult economic conditions, with private label performing a useful role in providing consumers (again those who find themselves at the margins in terms of affordability) with a refuge from the price inflation which has typified the broader tissue market.

Value growth of private label brands was accordingly reported at 9% in 2011, outpacing the tissue market in general and indicating that consumers even in developing markets are quickly buying into the idea that retailers are brands in themselves. Given that these retailer are spending large sums to give shoppers a first rate retail experience this cannot fail in promoting the retailer as brand in itself and ultimately the private label it offers.

Local manufacturers hitback at multinationals

Interestingly the tissue market continues to behave differently from the wider FMCG market in the Philippines due to lack of awareness and, as a result, large international brands are less common. While this has a link to affordability and Western manufacturers still not seeing huge value opportunities in the Philippines, it is also an indication that the category is under exposed.

While across the majority of the Asia Pacific, Kimberly Clark or APP generally lead the share, there are two examples in the Philippines and Malaysia where local manufacturers rule the roost. The Philippines is more unusual as Kimberly Clark has had a market leading position wrestled from it by domestic player Sanitary Care Products, whilst another local manufacturer Papertech Inc has expanded rapidly in the era since SCA closed down one of its plants in 2008. Together Sanitary Care Products and Papertech account for roughly one third of the Philippine market for tissue whist Kimberly Clark, SCA and APP together can only muster a 25% share, also in 2011.

Amid the leadership of these multinationals, domestic manufacturers tried to secure their market base through ensuring that they do not only compete on price with the big international brands but also in terms of quality. Both Papertech Inc and Sanitary Care Products Asia have invested in developing and sustaining brand quality as they look to further establish their brands as a credible challenger to their larger international rivals.

With local manufacturers committed to securing their market leadership through competitive pricing and improving product quality, it is expected that these players will continue to enlarge their market base especially among the middle and lower income consumers in the Philippines.

The shape of things to come

As things stand in 2012, a reasonably stable economy looking forward to 5% annual GDP growth over the medium term bodes well for further market growth. Add to this a growing population, a growing number of households, as well as rising levels of disposable income, all bode well for the tissue market in the Philippines.

The expansion of modern retail and its influence on consumer perception of brands as well as private label are all likely to converge to produce consistent growth and ultimately the broadening of tissue consumption beyond its current core of the urban middle classes. Where metro Manila leads others will follow meaning that there will likely be some concerted period of inward investment or M&A coming into the country from international players who really need to think about playing sooner rather than later.