Conglomerates taking steps to future-proof their business

By Krista A. M. Montealegre, published in BusinessWorld.

April 11, 2017

CONGLOMERATES Ayala Corp. and SM Investments Corp. (SMIC) -- owners of an expansive network of shopping malls in the Philippines -- are preparing for the future by joining the e-commerce wave, as brick and mortar shops in the United States succumb to online shopping.

The Ayala group acquired a 49% stake in the owner and operator of Zalora Philippines, the country's largest online fashion platform that offers a wide range of fashion and lifestyle products.

Two weeks ago, SMIC struck a deal to acquire a 30.47% interest in transport solutions provider 2GO Group, Inc.

For the conglomerate, it was an investment in an emerging sector, but analysts believe the deal will strengthen its retail business and its ability to cover the last mile, or the last distribution point of pre-ordered goods to the final destination, in e-commerce.

"They are making a long-term bet because that is the future," COL Financial Group, Inc. Vice-President and Head of Research April Lynn L. Tan said.

"Clearly at this stage it is not yet profitable, but they are already taking positions."

The Ayala group is continuously exploring other related investments in the e-commerce space that can complement its existing business.

"We believe e-commerce will continue to grow as technological and logistical infrastructure improves over time," said Ayala Managing Director Paolo Maximo F. Borromeo.

In the United States, department store operators Sears Holdings Corp.; Macy's, Inc. and J.C. Penney Co. are shuttering hundreds of locations combined, while brick-and-mortar retailers are closing physical stores because of a shift in consumer preference away from malls in favor of online shopping dominated by e-commerce giant Amazon.

E-commerce in the Philippines remains in the nascent stage and has yet to reach a critical level where it adversely affects the business of physical shopping mall developments, said Claro dG. Cordero, Jr., head of Jones Lang Lasalle (JLL) Philippines' research, consulting and valuation advisory services.

"Also, the Philippine mall culture is very different from the US where it is primarily just a shopping location. Filipinos enjoy going to the mall in general," Ayala's Mr. Borromeo said.

Instead of cannibalizing physical stores, Zalora can help drive traffic to Ayala-owned malls, which have a combined gross leasable area of 1.62 million square meters (sq.m.), by allowing customers to avail of other services like dining and cinemas, among others, and purchase at their convenience.

Hence, mall developers have been "future-proofing" their respective developments, incorporating lifestyle themes and attractions to increase mall traffic.

SM, which has a network of 60 shopping malls covering 7.7 million sq.m. in gross floor area across the Philippine, has transformed its malls into lifestyle destinations by offering more dining concepts, entertainment and services geared towards enhancing wellness and providing greater convenience, which now account for a combined 60-70% of total mall space.

For example, the expansion of SM Mall of Asia will include a rooftop botanical garden, a football field, a vast lifestyle area, a Galleon Museum and a performing arts theatre.

"We are not sitting on our laurels. We're doing something to prepare," said Corazon P. Guidote, senior vice]-president for investor relations at SM Investments Corp., noting that some of its retail brands have established their online presence.

The Trade department has drawn up an e-commerce road map that envisions e-commerce jacking up its contribution to the economy to 25% from the 10% in 2015 estimated by iMetrics Asia Pacific Corp.

"The future prospects of e-commerce are encouraging, as traffic conditions continue to worsen," JLL's Mr. Cordero said.

"However, these prospects hinge a lot on improving connectivity and securing strict cyber security, and legislations are in place."


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