Jul 16, 2018

Philippines remains strong; beverage industry impacted by tax reforms

The consumer market is still growing quickly in Philippines, though inflation and new taxes may dampen consumer spending.

Philippines remains strong; beverage industry impacted by tax reforms

As part of our Asia's Top 1000 Brands report's deep dive into The Philippine's top brands, Nielsen has provided this look at the market's economic and consumer backdrop.

The Philippines, home to 106 million people, continues to be one of the strongest performing economies in the region following only Vietnam, India and China. Its growth has come predominantly from strong exports, while investment growth slowed significantly and consumption growth stabilised. Inflation has almost doubled due to rising prices across most sectors, primarily driven by higher prices due to excise taxes on oil and sugar-sweetened beverages, a weaker peso and adverse weather conditions.

The Tax Reform for Acceleration and Inclusion (TRAIN), the first package of the comprehensive tax reform program (CTRP), was implemented on 1 January 2018. It is envisioned by President Duterte’s administration, which seeks to correct a number of deficiencies in the tax system to make it simpler, fairer and more efficient. It also includes mitigating measures that are designed to redistribute some of the gains to the poor. Through TRAIN, every Filipino contributes in funding more infrastructure and social services to eradicate extreme poverty and reduce inequality towards prosperity for all.

The TRAIN involves lowering personal income taxes and simplifying donor and estate taxes, expanding the VAT base, adjusting oil and automobile taxes and imposing a tax on sugar-sweetened beverages. The biggest impact to the FMCG industry will be to beverage manufacturers but also caution should be noted for categories outside of sugar-sweetened beverages. Kamusta si Juan at Aling Nena, the Nielsen-syndicated qualitative study, found that while shoppers claim continuous purchase of these taxed drinks, they will adjust their purchase and consumption habits to be able to afford these beverages.

Such changes in their habits range from reducing the frequency of consumption, extending the use of products, and even taking other items out of their grocery baskets. While sales of sugar-sweetened beverages have been weakening in the past years, the accelerated rate of decline in sales in February or a month after the implementation of excise taxes reflects consumers’ typical reaction after a price increase. It would appear that sales declines have been more pronounced in sari-sari stores, for all five sugar-taxed beverage categories, since most impulse purchases happen in these neighbourhood stores that also mostly cater to the low income segment.

It will be critical for manufacturers and retailers to watch the impact of these regulatory changes in the coming quarters. Pricing strategies around line and price optimization, innovation and changing product formulation and the impact these strategies will have on shopping dynamics will be key to ensure companies transition successfully through these disruptive times.

With the government planning to use tax collection to build infrastructure, increased demand for skilled construction labour is expected. Local players continue to look outside domestic borders for expansion opportunities while regional players are exploring investments in the Philippines. Changes in government policies affecting foreign investments are being proposed. Among these is the lowering of the required minimum capital for foreign retail investors to $200,000, allowing more foreign players to do business in the country. If implemented, this will challenge local players to be more competitive.

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