(April 24, 2014 12:00 am JST) MANILA — The Philippines’ richest family has built one of Southeast Asia’s biggest property conglomerates: SM Prime Holdings. Now the group is launching an expansion drive that includes shopping malls that are practically mini-metropolises. At the same time, a move into the virtual realm looks inevitable.

SM Prime, owned by the Sy family, aims to increase its network of shopping centers in the Philippines to 74 over the next five to six years, according to President Hans Sy. As of last year, the group had 48 domestic malls. 

In China, meanwhile, SM Prime plans to have 11 malls by 2018, up from five last year.

The company’s targets are two of Asia’s fastest-growing markets — the Philippines’ growth rate of 7.2% last year was second only to China’s 7.7%. For 2014 to 2018, an expansion budget of 400 billion pesos ($9 billion) has been set.

At home, SM Prime is hoping to build on the success of its first so-called lifestyle mall. The SM Mall of Asia, a 480,000-sq.-meter complex, sits on 42 hectares of reclaimed land in the city of Pasay, part of Metropolitan Manila. About half a million people pass through its doors every day. The facility is surrounded by a convention center, a sports arena, offices and residences.

“It is a city in itself,” Sy said of the mall during an interview at his company’s Manila headquarters. “Everything you need is here.”  

Soon, SM Prime will make it possible for shoppers to renew their passports, verify land titles and carry out other government transactions inside its malls. Sy said that while the shopping mall business used to consist of simply renting out space, his company attempts to offer services that “make customers want to come back.”

You could say Filipinos have made malls their parks, or perhaps second homes, as they seek to escape the tropical swelter. On weekends, the places are packed with families that stay almost the whole day. Customers dine, shop, watch movies, relax in spas or pass the time in amusement arcades. Some come even before the start of business in the morning to attend church services.

More customers, more competition

The Philippines’ economic growth last year was driven by consumption. The spending was largely fueled by money sent home by Filipinos working overseas — remittances came to a record $23 billion or so. But the country’s flourishing business process outsourcing industry is also enabling young, English-speaking professionals to earn more.  

These trends have given malls more customers — and triggered more intense competition. Other players, such as the Gokongwei and Ayala groups, have aggressively expanded their mall developments. Gokongwei’s Robinsons Land operates more than 30 malls, while Ayala Land has more than 10. Like SM Prime, both are planning new openings.

Philippine mall operators are constantly searching for ways to differentiate themselves, such as by offering free use of wheelchairs for the elderly. “I can never tell anyone that this McDonald’s in our mall is better than the McDonald’s in our competitor’s mall. So what do we do? We really focus on a lot of service programs for the public,” Sy said.

SM Prime is currently building another lifestyle mall on the central Philippine island of Cebu. It envisions the 50 billion peso project as a second Mall of Asia.

Company officials said they are mulling another such facility in the city of Davao on the southern island of Mindanao.

Lifestyle malls generally require more open spaces than conventional shopping centers. This narrows profit margins, since mall operators traditionally seek to maximize leasable space. But clearly the company believes the sacrifice is worth making.

Game changer

The SM group’s history goes back more than six decades. Henry Sy founded the company in the 1950s as a shoe store in Manila. The Sy patriarch, now the Philippines’ wealthiest man with an estimated net worth of $11.4 billion, changed the nation’s retail game.

“My father has always been a good marketing man,” Sy said. “He would always do surveys to check the competitors. He also opened the first air-conditioned store in the country.”

The elder Sy was so successful in attracting shoppers that he ran out of shoe inventory. This prompted him to offer clothes and other products. “He was doing extremely well (and) wanted to expand, but no one was putting up more shopping centers,” the current president said. “That’s why we started the shopping center business.”

In building the business, the founder broke some Philippine traditions, such as the early afternoon siesta and the Sunday day off.

“My father was the first to do that,” Sy said. His reasoning: Not everybody wants a nap, and, despite the Philippines being a predominately Catholic nation, not everyone wants to rest on Sundays.

Strength in unity

In the last five years, SM Prime’s sales and profits have grown steadily. The immediate expansion plan is to build two more domestic malls and one in China this year. In terms of capital expenditures, the company has earmarked 70 billion pesos for 2014.

The goal of increasing the domestic network to 74 malls is to be accomplished mainly through acquisitions of existing facilities in the provinces. This will fall under a five-year plan now being prepared.

SM Prime has more muscle to manage that plan after a round of consolidation last year. SM Land, the Sy family’s privately held real estate company, acquired publicly listed condominium builder SM Development and leisure property company Highlands Prime. SM Land then merged with SM Prime, which had focused on building and running malls. SM Prime was the surviving entity after the merger, making it the holding company for the family’s assets.

Sy suggested his company, which has a market capitalization of around $10 billion, now has the scale to conquer overseas markets. But this will not happen anytime soon. “Between the Philippines and China, our basket is full,” he said. SM Prime is hoping to crack China’s residential market, too, by building condominiums near its malls in Xiamen, Jinjiang, Chengdu, Suzhou and Chongqing.

“When I come to a location, I don’t eat up the pie, I make the pie bigger,” Sy said. “When we go into a town, after two or three years it becomes a city.”

If and when the company does seek to expand elsewhere, Sy said it is likely to do so through joint ventures. This could help to mitigate cultural differences. 

Yet while SM Prime is cautious about jumping into new markets, Sy sees opportunities in the Association of Southeast Asian Nations’ economic integration next year. “A lot of people are afraid of 2015, when Asean opens up,” he said. “But I believe it will help improve the economy. True, foreign companies may be dominant at first, but eventually, we will be more competitive.”

SM Prime is deeply entrenched in the bricks-and-mortar business, but Sy recognizes the company needs to keep up with the changing retail landscape. “I will soon introduce virtual malls,” he said. “I have to be ready for competition in Internet shopping.”

Straddling two realms     

Although a minuscule portion of the Philippines’ population currently shops over the Net, e-commerce is starting to gain traction as smartphone usage spreads. Details are scarce, but SM Prime is apparently planning to launch a service this year that will let customers buy goods online and pick them up at a real-world mall.

On the other hand, Sy is upbeat about the prospects for actual shopping centers despite a widespread perception that the market is close to saturation. The Philippines has nearly 100 million people, and the president stressed that in five years, both the population and economy will still be expanding.

“I am positive that growth in the Philippines will continue,” Sy said. “I still believe the Philippine market is far from saturated.”