Multinationals operating in the Philippines are heavily reliant on their channel partners – more than 80% of their revenue comes via the indirect channel. Their success in the market, therefore, is heavily dependent on their ability to effectively manage channel partners. Understanding the nuances of the Philippines distribution landscape and improving channel performance is, as a result, critical in building an effective strategy for the Philippines market.
The Philippines exhibits a unique mix of challenges that limit MNCs’ direct access to the market. There are four market characteristics that make the indirect channel particularly vital in the Philippines:
- Localized business relationships: Philippine business culture is extremely relationship-driven. The concept of “suki,” or loyal customer, is widespread and works like an unwritten contractual relationship between parties. Working with local partners who have time-honored relationships is therefore crucial in the Philippines
- Archipelagic geography: The geography of the Philippines necessitates a multistage and multimodal distribution model, comprising a mix of domestic maritime shipping and port-to-warehouse logistics. As a result, the skills and competencies required to effectively get goods to market in the Philippines varies quite dramatically from most other ASEAN countries, increasing MNCs’ reliance on local distributors
- Poor infrastructure development: The Philippines lags behind many of its ASEAN peers when it comes to infrastructure development. Long dwell times at port, inconsistencies in customs procedures, and poor road maintenance create massive bottlenecks. Uncertainties in timelines and the inability to predict costs increase MNCs’ reliance on distributors
- Concentrated economic activity: The Philippine economy is heavily centered around the National Capital Region (NCR). The NCR captures 36% of domestic economy activity and when combined with the two surrounding regions—Central Luzon and Calabarzon—controls 63% of the economy. This makes the NCR the most reasonable point of entry for MNCs; most dispatch bulk imports to the NCR and subsequently send smaller domestic shipments across the archipelago
A unique two-tiered distribution landscape:
Combined, these four characteristics lead to a unique, two-tiered structure of distribution in the Philippines, one that consists of a master distributor along with a sub-distributor network (see visual below).
The NCR’s unique positioning gives disproportionate power to distributors in the Manila area. Upon expanding beyond the NCR region, MNCs typically rely on their existing partner(s) to directly manage channel growth, as the national marketplace is geographically fragmented, difficult to navigate, and most non-NCR distributors are hyper-localized.
Because of these market characteristics, the high dependency on distributors, and unique two-tiered distribution landscape, MNC suppliers face four common challenges to effectively managing their distribution partners in the Philippines. Watch out for our upcoming blog post discussing these issues in more detail.