E-Commerce, Entrepreneurship, Philippines, Retail, Uncategorized

A Blueprint for SM’s Digital Future

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In 2014, TSC announced that SM will slowly grow its e-commerce business. Photo: Rappler.com

 

In 1846, Austria’s Vienna General Hospital had a maternity ward that was notorious for killing mothers and newborns. The deaths were caused by puerperal fever. You see, Vienna General was also a teaching hospital where doctors trained by cutting up cadavers. After handling corpses, doctors would head straight to the maternity ward to deliver babies.

One of the doctors, Ignaz Semmelweis, wondered if puerperal fever was transmitted from the corpses to mothers during delivery.

This was an era when doctors let blood stains on their gowns build up over time like a badge of honor. Like that old boyfriend of yours, hygiene wasn’t really a thing. When Semmelweis convinced some doctors to wash their hands, the death rate dropped enormously from thirty five to two percent.

The medical community vigorously rejected Semmelweis’ hand washing idea, despite the clear evidence that hand washing saves lives.

Semmelweis’ observations challenged two millennia of dogma that ruled medicine since the time of Hippocrates. The first is humorism, the belief that the body is composed of four fluids – black bile, yellow bile, phlegm, and blood – and that good health meant the balance of the four. The second is miasma theory, the belief that diseases are caused by inhaling “bad air”.

The idea that diseases could be transferred from cadavers to humans contradicted these strongly held beliefs. One doctor reacted that the idea of something being transmitted from doctor to patient could not possibly be true because doctors are gentlemen and a “gentleman’s hands are clean.”

Semmelweis was confined to an asylum where was has placed in a straightjacket and beaten continuously. He died after two weeks. With no one to supervise Vienna General, the doctors stopped washing their hands and the death rate went back to previous levels. It wasn’t until the time of Louis Pasteur did we discover germs and their role in diseases.

As we’ll see later, it’s dogma that prevents retailers from embracing their digital future.

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SM fascinates me. I think it holds the key to the digital economy in the Philippines. No other local company can bring our e-commerce future to fruition in the same way SM can.

Let me explain why.

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Imagine you’re a 25-year old Filipino. You’ve been working for four years now since you graduated from college. You work in Net Plaza in the Fort. The business process outsourcing firm that employs you just handed your first promotion. That’s a big increase in pay, and in your credit limit on your BDO credit card. You seriously consider a car loan for that new Vios model. You eat out more. You buy more groceries. You upgrade your wardrobe. You watch movies on Imax more often. You’ll reluctantly make the weekend trip to City of Dreams because your girlfriend sees Leo’s face all over town. There’s that concert too at SM Arena.

As the years go by, your savings grow and you finally have enough to make a down payment on that condo. And when you do, you’ll need to buy furniture, of course. You marry said girl and next thing you know, the kids spending your cash at Toy Kingdom. When vacation time hits, you take a trip down to Cebu, and stay in Radisson. During Christmas, the visting pinsans from abroad want to buy some handicrafts at Kultura. You’re in your late thirties now, and you decide to start a business. You hear Chinabank is offering loans for working capital, and that Citymall is offering new store space for tenants.

In every single transaction above, SM made money.  SM’s business spans many industries: retail, property (mall operations, residential, commercial and hospitality), banking, gaming, and even mining.

SM business units 031615_0

An overview of SM’s business. Source: http://www.sminvestments.com

If you peek at the official government stats on household expenditure, you’ll see that SM makes money on every single line item of consumer spending with the exception of communications.

Wait, actually they do – indirectly – when you pay your Globe / Smart bill in an SM payments center.

That is absolutely phenomenal.

SM is the ultimate platform business in the Philippines. SM owns the Filipino consumer. Every single Filipino alive today and born from this day forward will contribute to SM’s bottom line at some point in their lives. Let me give you a few seconds to digest that.

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How would SM start? The intuitive bet is that they’ll start at e-commerce. They’ve announced this. Online banking and online real estate listings seem more like channels than business models from SM’s point of view. E-commerce is where they can leverage an unfair advantage nobody else has.

To understand why, let’s first take a detour to Seattle, USA, then to China.

If you look at the history of e-commerce in every major market, there was always a unique set of circumstances that catalyzed the industry’s hyper growth in the early years.

In the United States, e-commerce was subsidized by cheap capital. The capital markets gave Amazon an outsized valuation that allowed it to aggressively grow its customer base and its physical distribution infrastructure without much regard for profitability. That’s something that can only happen in the US.

In China, the popular opinion is that e-commerce growth was driven by internet penetration, the growing middle class, and nascent demand from secondary cities. However, a prominent VC once told me that the oversupply of cheap, counterfeit goods available abundantly on Taobao was the underrated driver of e-commerce – a historical anomaly that is unique to China.

In the Philippines, it’ll be SM that drives e-commerce growth. Not Lazada or Zalora. Not Ayala Land or Robinsons. Not even Globe or Smart.

The popular view is that the two biggest barriers to broad e-commerce adoption are logistics and payments.

Well, SM already has both.

As the experience of Macy’s has shown, it turns out that a network of stores make great warehouses and fulfillment centers. Nobody talks about click and collect in-store because it’s boring, but in France, there are already 3000 e-commerce pick-up points. Two thirds of Europeans do it.

Nobody else has the network of fulfillment centers SM has – a network of fully-stocked, accessible warehouses for e-commerce. These warehouses are called SM Malls, and they are 50-strong all over the country. Add a cloud-based inventory optimization layer, and we can rock and roll.

SM needs to overhaul its inventory management if it wants to do omnichannel e-commerce.

SM needs to overhaul its inventory management if it wants to do omnichannel e-commerce.

No other retailer has a BDO, a leading issuer of credit cards, debit cards, and online banking accounts that can subsidize the initial purchases of first-time e-commerce buyers. As far as I know, it’s only BDO that has automated online installments. Not even BPI or Citibank has this.

Nobody else has the power to arm twist the country’s biggest tenants to participate by allocating inventory to an online B2B2C marketplace, lest they suffer unfavorable lease terms.

Lazada and Zalora don’t have the ability to drive down customer acquisition costs the way SM can, by simply adding a “thesmstore.com.ph” to every single mall signage, shopping bag, elevator door, parking entrance, and store receipt.

Robinson’s has a far smaller retail footprint. Ayala’s new business teams are focused on health care, education, and infrastructure. San Miguel is focused on the big PPPs. Smart / Voyager’s local e-commerce operation will never have the omnichannel scale SM has. LBC is still figuring out its IT infrastructure, after its cancelled IPO.

SM can do all this to catalyze e-commerce growth – that is, if SM wants to. And that’s gonna depend on how big SM thinks e-commerce can be.

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So how big can e-commerce be for SM and what will it cost?

Let’s look at current benchmarks. The grapevine says Lazada Philippines is doing a run rate of Php 2 billion a year. That’s too small for Tessie, in my humble opinion. She sells more than Php 3 billion in movie tickets each year.

So let’s say Tessie will only start looking at this seriously when she believes SM can do Php 4 billion in annual e-commerce sales. 40% of SM’s P197 billion retail revenues is non-food, so P4 billion is 5%. That’s reasonable given that global non-food retailers see 8% to 20% of sales in e-commerce.

What will it take to achieve this?

A reasonable assumption is that an average order in non-food e-commerce is worth P1,000. A Php 4 billion business implies 4 million orders each year. Let’s assume that the average customer orders 2x a year, so that’s 2 million customers. There are 34 million internet users in the Philippines, and 4 million with credit cards. Lazada has also shown that the market is willing to buy via COD – 60-70% of orders in fact. So 2 million online customers isn’t smoking pot.

If we assume customer acquisition cost ranges from P300 to P800 per customer, then that’s marketing spend of P600 million to P1.6 billion a year. If we assume that the fully loaded annual labor cost per head is P700,000 and an FTE of 500 people doing e-commerce, then that’s labor cost of P350 million.

The biggest barrier is rebuilding SM’s inventory management system to allow for real-time omni-channel retail. Some of the use cases are:

  • Order online but pick up in-store
  • Order online and get fulfillment from the nearest SM Store
  • Dynamically show products popular and available within a specified area
  • Allow third party merchants to use this platform as a marketplace.

This is a gargantuan task (it took Macy’s three years and counting…) so let’s say it’ll cost P400-P500 million pesos for an IT initiative of this scale (guesses on my end).

The total e-commerce investment (marketing, labor, IT), will thus be P1.35 to P2.45 billion. The combined 2015 capex budget of SM Investments (retail, banking) and SM Prime (property) is P82.8 billion. To dominate local e-commerce, SM just has to spend 3% of capex. A large scale e-commerce program is totally feasible.

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The problem is that SM’s corporate planning people will measure ROI wrongly. The assumption is that e-commerce is just another store format. They’ll do something like this: open a Microsoft excel file, estimate future sales from its online store (which, according to Similarweb, has shockingly less traffic than our niche online boutique AVA), tally up the costs, peg a discount rate, and get a net present value, IRR, and payback period.

But e-commerce isn’t a channel. It’s a business model. Treating it like a channel for ROI analysis neglects:

  • The impact of omnichannel (higher sales per square foot, higher inventory turnover, more optimized inventory, higher customer loyalty),
  • New revenue streams such as search and display ads on an SM-powered marketplace for tenants, and
  • The second-order effects of an e-commerce platform (higher payments volume on BDO, higher property prices on SM condos in areas covered by same-day delivery, the intangible value of creating a strategic deterrent against market entry by Alibaba, Rakuten, or Amazon).

Smart retailers like Walmart and Macy’s have learned to measure ROI not on online sales, but on total sales.

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This brings us back to Semmelweis and hand washing. In my humble opinion, the reason why it’s hard to make this intellectual leap for any local retailer is that the market is simply dominated by unsubstantiated dogma.

Take this misinformed Cushman & Wakefield report for instance that proclaims that Filipinos “still prefer the traditional bricks and mortar stores“.

Filipinos also love their mobile phones and social media. Online and offline aren’t mutually exclusive. They’re just different use cases. At AVA, 40% of our purchases are made outside of mall hours. To say that consumers “prefer” offline is missing the point – both are part of today’s shopping experience that customers expect. In a few years, there will be no such thing as “e-commerce”. It’ll just be “commerce”.

Another blind spot is the belief that e-commerce is just a website with a checkout page. And because it’s a website, it can be outsourced to a web development agency. Of course, that entirely misses the point because e-commerce requires an organization steep in product management, software engineering, digital marketing, data analytics, operations, customer service, and logistics – a very different skill set from a typical retailer’s.

As an illustration, if you search for “SM Store”, you well get these results.

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Any normal user will click on the first link.When you land on the homepage of thesmstore.com, you’ll think you can shop on this site. The nav tabs show “Men”, “Women”, “Kids” and so forth. But when you click on a category, all you’ll see are display ads for existing promos. If you want to actually shop online, you’ll have to do the extra work of either a.) finding the “Shop” button on the upper right (which as any UI person will attest, is less prominent than the upper left side), or b.) go back to search results and click on the second link.

Sorry to be blunt but if the person who designed this UI worked at Rocket Internet, Voyager, or Metrodeal, he’d be fired instantly.

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But that’s a minor point.

The more dangerous, deeply held dogma has something to do with how SM (and all local retailers) view their businesses.

In 1979, at the Royal Perth Hospital in Western Australia, pathologist Robin Warren peered into his microscope and saw bacteria in a person’s stomach.

Since the beginning of bacteriology, the dogma was that bacteria could not survive in the human stomach. It was too acidic and thus sterile.

After much research, Warren and a colleague, Barry Marshall, discovered the bacterium H.pylori,  debunking decades of dogma. H.pylori was found to cause ulcers. In 2004, Warren and Marshall won the Nobel Prize.

What’s strange is this: Warren wasn’t the first pathologist to see H.pylori in the stomach. Before Warren, samples had to be taken from stomach cadavers where information was already lost.  In the 1970s, the invention of the flexible endoscope allowed doctors to extract live tissue from the stomach. Tens of thousands of stomach biopsies were being made yet no doctor or scientist identified H.pylori.  They had seen it, but it remained invisible. When everyone reviewed their previous biopsies, they clearly saw H.pylori right there staring them straight at the face. One scientist said, “Failing to discover H. pylori was my biggest mistake“.

In the book “How to Fly a Horse“:

“When Robin Warren accepted his Nobel Prize, he quoted Sherlock Holmes: “There is nothing more deceptive than an obvious fact. H.pylori hid in plain sight for more than century because of a problem called “inattentional blindness”. Douglas Addams defined this as “Something that we can’t see or don’t see or our brain doesn’t let us see, because we think that it’s somebody else’s problem. The brain just edits it out; it’s like a blind spot. If you look at it directly you won’t see it unless you know precisely what it is. It relies on preople’s natural predisposition not to see anything they don’t want to, weren’t expecting, or can’t explain.”

The scientists saw what they wanted to see – because of the “obvious facts”.

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The obvious fact that is causing inattentional blindness is how you look at SM’s business. SM is in retail, property, and banking, right? That’s an obvious fact. In every investor relations material, SM sees its business this way. Everyone sees SM this way.

But consider this future possibility.  Let’s start with your BDO credit card. It knew you bought a pair of shoes on Zalora and will thus retarget you with a better offer on the SM Store e-commerce site. When you check-out, you can either have it delivered to your Net Plaza office (geo-tagged, of course – because SM owns Net Plaza – no need to fill out the delivery form), or pick it up at Aura. If you choose the latter, it gives you 50% off a cinema ticket, or a P500 grocery voucher. Oh, by the way, when you order your groceries from the SMCart app (modeled after Instacart, naturally), you get free same day delivery if you live in an SMDC condo. But you still live with your parents, so you search for available units at SMDC’s online marketplace, which also features a mortgage comparison tool powered by BDO. When you do buy your SM condo, it includes a tool to track your power and water consumption. All of this saving and spending can be tracked on your BDO online account, which by the way you can also access on your phone. The app is so smart that it can recommend which items you can save on – and lead you directly where in an SM store you can get the savings.

That’s when you realize that SM is neither in the retail, banking, or property business. It’s in the customer knowledge business.

SM is a big data company masquerading as a conglomerate. And if it can incorporate a software and digital layer on its physical infrastructure, it will be a race ahead of the pack.

The product isn’t a pair of shoes, or a shopping mall, or a credit card. It’s a stack of digital information that can connect separate businesses to generate an unprecedented amount of knowledge about its customers, and power a company that is more responsive to their needs and wants. And imagine if SM’s eco-system of suppliers can tap into this knowledge and customer access via open APIs and marketplaces.

Robin Warren knew that the dogma pre-dated the technology of his time (flexible endoscopes), and this created an opportunity to question the current state of affairs.

For SM, the dogma is the belief that it is merely in the retail business. Its flexible endoscope is the emerging boom in e-commerce, data science, and cloud computing, as well as our new understanding of network effects, winner-take-all dynamics, and platform businesses. This is the underlying philosophy that will guide SM’s digital future.

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I of course realize that all of this are easier said than done and there will be a lot of work ahead for local retailers. The historical predisposition of Filipino companies is to aggressively protect its turf and resist big bets. When the company decided to completely overhaul SM Makati, cannibalize itself, and banish its retail operations to the upper floors in favor of Uniqlo, H&M, and Crate & Barrel, it showed that it can evolve with the times.

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The stories on Semmelweis and Warren came from Kevin Ashton’s book, “How to Fly a Horse“. I enjoyed reading it.

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AVA, Entrepreneurship, Philippines, Startups

How Filipino Women Shop Online: An Inside Look into Consumer Adoption

The e-commerce market in the Philippines is worth $1.1 billion. Yet, nobody really knows how Filipinos shop online. Sure, there are a number of surveys on online habits, but these tend to be flawed because they are based on claimed usage vs actual behavior.

Any serious e-commerce entrepreneur needs to know this stuff.  In my previous life at Procter & Gamble, where I worked on Safeguard, Olay & Whisper (yes, feminine care products. That’s a different story for a different post), this level of in-depth consumer knowledge was par for the course.

We had tons of data sources. AC Nielsen retail panels. TNS household panels. Trade data. Proprietary surveys. Internal databases of concept test results vs in-market results. Media buying data. Market mix models that use multivariate regression. Big corporate machinery stuff.

But when I started AVA, an online retail platform for fashion & design brands, our team didn’t have this luxury.

Now, you do.

For the past few years, we’ve gathered tons of data on the online habits of Filipino consumers. This is based on actual buying behavior. It can’t get any more empirical than this.

So whether you’re a young entrepreneur creating an online brand, or an established retailer getting into e-commerce for the first time, you won’t have to start blind like we did.

Tweetie de Leon and AVA partnered to launch a Kickstarter campaign to save the dying inabel fabric.

Tweetie de Leon and AVA partnered to launch a Kickstarter campaign to save the dying inabel fabric.

Our Methodology

This post primarily uses two sources. First, we analyzed our actual transaction data. Second, we conduct user surveys from time to time.

There are instances where we use multiple sources, of course. For instance, we combined our transaction data with our digital advertising spend to come up with our customer acquisition costs.

No data set will be completely representative, of course. So before you use our data to draw a few conclusions, a few caveats are in order:

  • Positioning. AVA is positioned as a premium brand. Not necessarily luxury, but not mass market either.For instance, AVA will never carry brands like Bench or Penshoppe. Some people in the industry call this segment ‘masstige’ or ‘aspirational’. Our price points reflect this positioning, and therefore this is not representative of all Filipino consumers.
  • Merchandising. We focus on brands that target women. In fact, 95% of our customers are female. Therefore we can’t make the same conclusions for male shoppers.
  • Geography. We have admittedly focused our marketing efforts on Metro Manila. Therefore these observations won’t necessarily hold true for the entire Philippines.

So what are the top things we’ve learned?

40% of purchases happen outside the mall hours of 10am to 9pm. 

I like starting with this data point because it rebuts the general perception that Filipinos love their malls. This is one of those things that people say again and again that everyone has accepted it as conventional truth. Yet, I’ve never seen a cohesive body of data to support it. That close to half of purchases happen outside mall hours means that consumers see the value of shopping online.

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Paypal and credit cards account for almost 80% of orders. 14% of orders are COD. This is of course a result of our target market. I’ve heard that in some sites, COD is up to 70% of orders. Credit cards are preferable in the long run because despite the bank charge, a site no longer has to worry about the logistical challenges of handling, collecting and reconciling cash orders.

Slide04

Almost 80% of orders come from in Metro Manila. That’s not the interesting point for obvious reasons. What’s interesting is the long tail: though Cebu and Davao account for 4% of orders, there are other provinces that each have a share, such as Batangas, Cavite, Rizal, and Iloilo. This is happening even though we haven’t deliberately advertised to the provinces.

Slide05

The implication here is that brands might consider targeted campaigns to tap the long tail of consumers in secondary cities.

Bags (16% of orders), accessories (15%) and apparel (9%) are the top selling categories, accounting for 40% of orders. Eco-friendly is an internal, catchall term we use for products that have a sustainability or health angle, and consist mostly of accessories as well (like environmentally friendly yoga mats and home accessories).

Slide06

On average, customers buy 1.96 items per order. To measure this, we simply divided the total # of individual items sold by the total # of customers for that month. Here, we took the past 6 months to have a broad view of buying behavior.

Slide07

This is a pretty interesting point because it means that customers aren’t buying just one-off items. Online shopping is starting to mirror offline shopping habits in the sense that people are shopping multiple items in one basket. And this is just a discretionary product – fashion. I can imagine this will be higher for sites that sell groceries.

Customers spend on average P3,900 per order. As an average, this masks the range of purchases. For instance, the highest single order on the site was worth P129,000.00 (a luxury bag) and the highest spending customer has spent P306,000.00 over a one year period.

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Yup, you saw that right. P300k on a website. From one customer. Awesomeness.

The averages also mask the importance of segments. For instance, the top quartile of our customers in terms of transaction value spend  P7,300 per order (almost 2x the average) and account for 70% of sales value.

We also did a survey of customers (n=321 respondents).

With that, we found out that the among the most important shopping habits are: looking online to find brands consumers can’t find in the malls and to search for the best prices.

Slide10

Among the other stuff people buy online include discount vouchers (60% bought in the past 6 months), airline tickets (58%), bags and accessories (53%), clothes (48%), and shoes (42%).

Slide09

We also asked people who haven’t purchased why they haven’t. The top two barriers were price (60% of non-buyers. Probably not our market because we are not a mass market site), and sizing (40%).

Slide11

The fascinating point here is that only 1 out of 4 actually want to see and feel the items before they buy it. When most people express their skepticism for online shopping, this is one of the biggest concerns. But in reality, the vast majority don’t have this problem. And the 25% who want to see and feel are probably not our target market anyway. The biggest challenge of marketers is to find which customers to covet and which ones to ignore.

Ok, enough with surveys. Ok let’s go back to actual buying behavior.

Weekends don’t really count. The number of orders are above average during Thursdays and Fridays and below average during Saturdays and Sundays. This echoes what others have noticed about web traffic going down on weekends. Which kinda makes sense: people go out to the malls, meet friends, exercise, etc. In our case, the average age of the AVA shopper is 34, so she is likely a young mom and would thus have a busy weekend with the family.

Slide12

This chart is expressed as an index. How it works: we took the % of actual daily orders that occur on Mondays, Tuesdays, and so on, and divided this by the expected daily orders (in this case, 1/7 or 14%), and rebased that to 100. Therefore an index of 140 means that the actual orders on that day is 40% higher than the expected average.

The implication for e-commerce sites here is that it is probably not a good idea to spend on advertising during weekends when consumer predisposition to shop is low.

The interesting part which requires further investigation is why orders over-index on Thursdays and Fridays. One explanation is that online shopping fulfills a different need – it could be more of a stress reliever after a busy week.

Paydays do not significantly impact sales. One common belief is that consumers tend to shop more during paydays because they feel like they have a little bit more in their wallets.

To test whether this applies to online retail as well, we took 5 distinct payday periods from May to July. Each payday period is three days long because we assume that any ‘payday effect’ could be felt for three days. Then, we hypothesized that any payday effect would result in a 200 over-index vs the daily average # of orders (or twice vs the average).

Slide13

We found no such over-index. In fact, with the exception of June 15-17, our data set showed no significant surge in payday shopping to warrant a conclusion that paydays affect sales.

There could be several reasons for this. One, people could be spending their money first on restaurants or bars with their friends/family. Or they could be shopping offline first before going online.

This of course has real business implications. Some sites run payday promotions when in fact, it could be an unnecessary cost (in terms of margin erosion) as consumers are not predisposed to spend significantly more during paydays.

The average cost to acquire each customer is around P550. This is a pretty straightforward calculation: divide total marketing spend by the number of NEW customers per month (not total customers as this will skew CAC and make it look artificially lower). I believe we can get this lower (to the P200-P300 levels), but because we target a very specific, premium audience, the costs would be higher. Theoretically, that should be okay as long as we attract customers whose gross profitability exceeds P550.

Slide16

Based on our average transaction size (close to P4k) and margins, the average payback is 0.58x. That means each customer we’ve acquired online is already profitable on the 1st purchase. Anything after that is gravy. Which means this model is dependent on the # of repeat buyers.

This has a huge implication for brands. For the first time ever, Filipino fashion brands can target a well-defined segment online (via social or search ads), experiment with the right merchandising mix, and profitably acquire online shoppers that can make e-commerce a sustainable channel that is ROI-positive (vs print ads which you can’t track). No need to spend excessively on branches in the malls to compete with H&M; just be fast and smart in reaching customers online. This is one reason why Globe COO Peter Bithos announced that he will start exiting print and outdoor advertising and focus on digital ads.

Anyway, back to the data. So what’s repeat like?

60% are repeat buyers. We think one reason for this is our focused approach on a particular segment. Another is our rewards program. 85% of our transactions result in consumers getting rewards points.

Slide15

What about loyalty over time? For this analysis, we worked with Ben Rollert, former data scientist at Kickstart Ventures to identify the most profitable channels and devices.

What we did here is to map out the profitability of consumers who were acquired via our email newsletter vs Facebook vs Google, with their device usage (desktops vs tablets vs mobiles). What we found is that Google search on tablets produced the most profitable customers.

Slide17

The implication here is that brands may opt to be more aggressive with their online advertising spend depending on how these numbers look like for their specific online stores. Recall that our customer acquisition cost is P550. And if Google search ads deliver us customers who are worth P1400 in gross profit, that means we can opt to spend (at least in the 1st 15 weeks) an additional P850 in that channel (P1400 minus P550) and still have profitable customers in a year’s time. Again, these numbers will look very different for your brand.

So there you have it! I hope the data above can help you formulate your own e-commerce strategy. This was just a super short overview fit for public consumption. If you’d like more data and help on building your online retail strategy and crafting digital marketing campaigns, feel free to drop me a note.

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AVA, New Products, Philippines, Startups

How to Export Philippine Design

This is part 1 of a 3-part series on how we can grow Philippine design exports. 

Philippine design has a compelling story. How do we share it?

Philippine design has a compelling story. How do we share it?

For the past three years, our company, AVA Online Group, has traversed two worlds: design and technology. I say ‘worlds’ because the people living in them rarely interact with those on the other side.

Put a software developer and a fashion designer in a room together – and I’ve ran several meetings like this – and you’ll see confused looks from the designer when words like APIs, MVPs and javascript are thrown around. The same is true for the developer, courtesy of terms like spec sheets, wovens, knits, or artisanship.

This is, of course, perfectly normal. People default to their comfort zones. But unfortunately, we can no longer be perfectly normal nor confine ourselves to the familiar.

What if merging both worlds holds the key to bringing Philippine design to the world? And what if commerce can bring a revenue model for local tech startups?

What if design and technology spoke to each other? 

We’ll get to this later. By now, you probably have a clue where I’m going: the humble thesis that technology holds the key to exporting Philippine design.

Let’s look at the size of the problem. Any well-informed entrepreneur will observe three things when it comes to our exports.

The first is how small our exports are. This is a crucial point to make because although our domestic economy is growing, no Asian economy has industrialized without a strong export base.

The second is how small our design exports are. This includes categories like apparel, accessories, jewelry, home decor, and furniture. For instance, Philippine exports of apparel and fabric-related are a fraction of those of Vietnam and Indonesia.

The third is that garments are a major export next to electrical components and semi-conductors. Yet, Philippine garment exports have declined by 25%: from $2 billion in 2006 down to $1.5 billion in 2011, driven by smaller orders from big brands and retailers reeling from the global financial crisis (which by the way also fueled the flash sales boom heralded by Gilt and Fab.com).

The good news is that design exports are growing, with furniture (35% vs year ago), fashion accessories (29% VYA) and garments (9% VYA) all making impressive gains in 2013.

So in short, this is a big problem, one that represents an enormous economic opportunity of national importance, and we some momentum on our side.

Kenneth Cobonpue's website is one of the most well-designed sites among local exporters

Kenneth Cobonpue’s website is one of the most well-designed sites among local exporters

The Two Towers

So what’s currently being done? To answer this question, one needs to understand two things that drive the business of local exporters: the trade show and contract manufacturing.

When it comes to trade shows, the first thing that comes to mind is Manila FAME. Twice a year, Philippine design converges at the SMX Convention center for a week-long event to showcase local talent.

The organizers led by CITEM executive director Rosvi Gaetos have done a fantastic job in bringing together designers and manufacturers from all over the country. But admittedly, we’re still a long way from reclaiming the glory years. “Spot sales used to reach as much as $150 million per show until China entered the scene as a major player in the world market,” said an Inquirer report based on remarks from the CITEM director. Last October’s FAME only generated $20m in spot sales.

For decades, Philippine design products have relied on trade shows here and abroad to attract international buyers. The formula is simple. Rent a huge space. Attract exhibitors to set up shop. Ask exhibitors to invest a lot in visual merchandising, sampling and marketing collateral. Hope for the best.

For manufacturers lucky enough to have built a following among international buyers over the decades, getting traction is expected. But unfortunately for most mid-sized and newer companies, local trade show traffic still pales in comparison to those in Singapore, Hong Kong, Paris and Last Vegas. The trade show is a 20th century solution in a 21st century world.

Meanwhile, a vast majority of our garments exports are unbranded. An American brand or retailer comes to the Philippines to source for merchandise several months in advance. The buyer and manufacturer agree on FOB pricing, quantity and delivery terms. The manufacturer produces the goods, ships them out and gets paid, less any defects.

Contract manufacturing is a tough business. You need scale. Scale requires fixed costs, yet orders are not guaranteed every year. You’re dependent on fluctuating material costs. And you’re competing against China, Vietnam, and Indonesia, markets that enjoy some level of government subsidy. Worse, the bulk of the margin accrues to the brand or the retailer. Contract manufacturing is clearly not viable as a long term solution.

But if you go to Manila FAME, you’ll see that there is no reason why our design products can’t compete on the global stage. Philippine design is unique, and we’ve obviously had plenty examples of magazines, celebrities, and TV shows picking up local designers. Yes, it’s still a challenge to manufacture at scale, especially if you’re an independent designer or new label, but by-and-large, the product side is okay.

The problem is the demand-side.  Trade shows obviously fail to reach broader American and European audiences. And if they do, contract manufacturers leave out the Philippine story and our products are marketed as a handbag from Kate Spade or Coach, not Aranaz.

Hence the question is, “How do we generate demand for Philippine design?” 

To significantly grow exports, we can’t rely on business-as-usual. And I’m quite sure fashion designers will need to start working closely with computer engineers. And content marketers. And logistics specialists. And channel development managers. In short, design, technology and business must work together.

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Entrepreneurship, Founders, Philippines, Startups, Uncategorized

Top 10 People to Meet in the Philippines Startup Scene in 2014

On a Sunday morning in early January, I got a text from Manila Angels‘ Christian Besler. Nope, it wasn’t a drunk message sent at 3am. It was about grabbing coffee at the Pen with two Bay Area executives vacationing in Manila. Both got a hold of Christian via Twitter.

"Dirty Kitty" is a fixture at the parking lot of the Peninsula Hotel, a centrally-located meeting spot for intros and deals

“Dirty Kitty” is a fixture at the parking lot of the Peninsula Hotel, a centrally-located meeting spot for intros and deals

Despite the booming local scene, there’ still a lot information asymmetry between what’s going on-the-ground, and what entrepreneurs and investors from Silicon Valley know. After all, the Philippines really isn’t a mainstay on Techcrunch or Mashable. When I met a partner from Kleiner Perkins, her first question was “What’s going on out there? I’ve never visited, but all the social networking and digital media startups we’ve looked at always gets a ton of traffic from the Philippines.”

The country’s startup scene has generous servings of good news: 7.2% GDP growth, double digit internet + mobile user growth, investment grade ratings, and growing cohort of tech entrepreneurs.

So how do we bridge the gap? In a lunch forum hosted by the Harvard Business School Club, Sheila Lirio Marcelo, the Filipino founder of recently IPOed Care.com (which popped 43% on its first day), mentioned that the key is always through PEOPLE.

The goal is to make Manila a social hub for tech startups in the region – an alternative launchpad into Southeast Asia vs expensive, big brother, and tiny Singapore.

So…. for investors and founders who are likely to first discover the Philippines as a.) tourists, and b.) as relatives (a Filipino spouse or in-law), we’d like you to stay a few days, fall in love with the country, and in the process, also discover the vast potential of its nascent innovation economy.

The goal of this post is to make it easy for you to get seamlessly plugged-in into the local scene. So, on this Sunday afternoon, I sat down for 20 minutes and scribbled the top 10 people you should meet based on:

  • Execution: A track record of getting things done. No talking heads on this list!
  • Immersed in the local community: Understands local dynamics and gives back through their time and resources
  • Well-connected: Has a quality network across different stacks.
  • Accessible: Responsive, and generous with their time

There are players, of course, like ICCP Ventures, but none of them have demonstrated serious interest in high-risk, early-stage startups and preferred to stick with more mature plays. There are a ton of successful entrepreneurs, of course, more than this list can handle, but 99% of them are either focused on brick-and-mortar or may not be as accessible.

So if you’re new to the scene, these are the top 10 people to meet in the Philippines tech scene, in alphabetical order:

1. Amazon Web Services: The ASEAN team led by Anne Salada-Chauffaille and Franco Eisma has been quite active in evangelizing across the technology spectrum, providing not just cloud computing infrastructure but educational events for local conglomerates and seed-funded startups. Check out the next AWSome Day this February.

2. Ayannah: Mikko Perez and Dicky Alikpala. Ayannah is a digital platform play focusing on the unbanked in emerging markets. Mikko and Dicky are the funniest couple-preneur in the country. They’ll probably kill me for saying that. But I’m sure they secretly enjoy it. Times with these guys are never boring. Lose the serious face and prepare for a one-hour meeting to turn into a four-hour laugh fest.

3. Hatchd: Manny Ayala & Nix Nolledo. Hatchd is a startup studio that builds companies “from ideation to operation.” Its portfolio includes Rappler, the leading social news network in the country, and Purple Click, a digital advertising firm. (Disclosure: Hatchd is an investor in my company). Manny is an experienced media and tech executive, while Nix founded Xurpas, a leading mobile content provider. Both are pretty active in Entrepreneurs’ Organization.

4. Ideaspace: Earl Valencia. The incubator of the Metro-Pacific / PLDT Group is led by former Silicon Valley executive Earl Valencia and has invested in a number of small, mostly pre-revenue ventures. Shucks, you just missed the application for the 2014 cohort so stay tuned for the next one.

5. Kickstart Ventures: Minette Navarrete. Structured as a 100% subsidiary of Globe Telecom, Kickstart is a seed capital fund that “enables startups to achieve a faster launch and a better business trajectory through a combination of funding, infrastructure and facilities, mentoring, and market access.” Though launched less than two years ago, Kickstart now has the biggest portfolio (close to 20?) among local startup investors.  Minette and her team are experienced investors, operators and community builders, and are plugged in to the broader Singtel Regional Seed Network. (Disclosure: Kickstart is the lead investor in my company)

6. Manila Angels: Christian Besler & Paul Rivera. Launched just this January, the country’s first angel network now boasts of close to 50 angels and is currently screening its first cohort of 25 pitches. If you’re popping by Kickstart, make sure to check in with Christian (who is also VP Community at Kickstart) and Paul (Co-founder of Y-Combinator backed Kalibrr), whose company is co-located at Kickstart HQ. .

7. New Leaf Ventures: David Bonifacio. NLV regularly hosts Better Business Brunches in the Bonifacio Global City and is positioning itself as a hub for B2B investments and technologies. David is an energetic entrepreneur and storyteller who handles multiple roles for CBTL Holdings – the local franchise owner of the Coffee Bean and Tea Leaf. And no, BGC wasn’t named after him.

8. PhilDev:  Phildev is a foundation of US-based Filipinos who are passionate about creating linkages between local entrepreneurs and the world. Chaired by Tallwood’s Dado Banatao, some of its trustees include Eric Manlunas of Siemer Ventures (who has invested in a few local companies) and Sheila Lirio Marcelo.

9. SGV: Winston Chan. Winnie runs the advisory group for SGV, the country’s largest professional services firm. Winnie’s been key to helping several multinational clients establish BPO operations in the country. There are valuable synergies between tech startups in the BPO space – from US-based companies setting up outsourced operations (TripAdvisor, Amazon, etc) to well-funded startups staffed with local, talented engineers (Bright.com, Lenddo, etc) to startups focusing on BPO clients (Kalibrr).

10. Sulit.com.ph: RJ & Ariane David. The biggest classifieds player is run by the friendly husband+wife team of RJ and Ariane. RJ’s a wonderful supporter and mentor to younger founders throughout the country, and maintains a regular presence in local entrepreneurship and tech conferences. Make sure you’re updated with your gadgets and gaming news for a fun chat.

The good news with these groups? Eight are mainly present in the Makati-Fort Innovation Strip. Ayannah and Sulit.com.ph are pretty close by in the Ortigas district – a quick twenty minute drive from Makati.

Who else should be on this list? Which events should visiting founders look out for? Let me know below.

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Philippines

I Can Buy You, You, and This Economic Bubble

Actress Anne Curtis

“Bubbly” (Photo credit: Wikipedia)

As Ms Curtis’ hand was making its way through three cheeks last week, Forbes columnist Jesse Colombo succeeded in getting everyone’s attention with a piece on how we’re all smoking mushrooms and are unknowingly fueling the next big bubble.

Bubble forecasters have it easy. Pick a popular topic. Issue a gloomy forecast. Throw in a couple of charts that trend upward (often out of context).  Sit back a few years, watch the market correct (or the bubbles popping), and get to say “I told you so.”  If he’s right, then he can claim street cred for that call. If he’s wrong, he can claim that his timely warnings prevented a bubble. He doesn’t really lose anything either way.

We do: in misinformation and getting lumped together with frothier emerging markets like Singapore or Hong Kong, and thus the foregone foreign direct investment.

So, I feel I have a responsibility to put my views out there. Not just on this so-called bubble, but on a social media-obsessed media culture that incentivizes content like this.

What is a Bubble?

I can “boldly predict” that Facebook’s stock price will come down – and it obviously will at some point. That’s the nature of the market.

Loosely throwing around the word “bubble” is irresponsible. It’s a catchall term – like “sustainable growth”, “competitive advantage” and “efficient markets.”  Rising prices don’t mean we’re in bubble territory.  Rising consumer spending, FDI, government spending, and low interest rates on their own don’t lead to bubbles.

The distinction matters. Bubbles require very different policy responses from regulators. Premature bubble talk misrepresents the economic prospects of the country to foreign investors – something the country desperately needs.

So for the purpose of this note, here’s what I mean when I refer to “bubbles”. Three things characterize one, and here I borrow from the work of Charles Kindleberger:

1. Rapid increases in prices that don’t reflect the intrinsic, fundamental value of an asset. The mismatch between market vs intrinsic values is a crucial point. So let’s repeat that again: in a bubble, prices do not reflect fundamentals. So when a friend claims that an asset seems to be growing more and more expensive, the first question one should ask is, “relative to what?” (ie should you really P10,000.00 for that juice cleanse?)

2. Speculative, short-term investments in assets with unknowable risks. In the run-up to the 2008 global crisis, investors who took on collateralized mortgage obligations (repackaged and re-rated derivatives from pools of questionable mortgages) were speculating because these were securities that were hard to understand.

3. Herd behavior. The dot-com crash saw masses of would-be entrepreneurs and investors mindlessly jumping into the internet bandwagon.

Looking back, I’ve been a victim of all three, so I’ve learned a thing or two. I eagerly jumped the bandwagon of 1990s comic books: multiple X-Men #1 covers, Gen 13 #1, Brigade #1, and Rob Liefeld. All in the hopes that these would be worth gold one day. These weren’t fancy collateralized debt obligations or pre-series A participating preferred stocks, but for a 12-year old in the 90’s, P10,000.00 lost to comic books were a lot. And over the years, I’ve repeatedly dodged (that pretty, popular girl in college who turned out to be… never mind) and fallen prey to speculative manias (the mini-bubble of a Management Engineering degree). The underlying principles are similar: a a huge mismatch between market and intrinsic values, speculation, and stampedes.

Mr Colombo’s main point is that this period of economic expansion is driven by cheap credit, and that’s a bad thing, because this in turn is driving a.) a bubble in real estate prices, and b.) unsustainable, debt-driven consumer spending. There were a number of other arguments (which have been effectively tackled here, and here), so I’ll focus on these two.

It’s almost impossible to predict bubbles using the traditional economic models – these tend to be lagging, not leading indicators. Maybe the Nate Silvers and the Nassim Taleb’s of the world can sift through all the statistical gobbledygook. I’m not smart enough to do this.

I can, however, look at people. As an entrepreneur, I’m lucky not to be stuck in a desk and be in a position to constantly meet people outside my company. My view involves asking three questions about the underlying behavior of our economic models:

First: Are people buying property like crazy? Nope. My basis of comparison is my time in Singapore: when new condos are launched, thousands of buyers flock to showrooms, with many projects selling out in hours. We definitely don’t see that kind of mania here. If this were the case, they we wouldn’t see all those spam texts and pesky real estate salespeople handing out flyers in the malls.

Oh, and look here. The number of license-to-sell permits from the HLURB for high end condos has actually decreased this year. Note that a license-to-sell doesn’t mean an actual sale – this is the permit given to developers to allow them to start selling a housing unit. It’s a measure of upcoming supply. If this were a bubble, this number would be up this year – not down. And as you can notice, the number of licenses are down across the board. (This is actually not good because the country has a housing gap of up to 4 million units. But only 22,270 socialized housing units were licensed from January to July this year.)

Next, let’s look at real estate prices. Yes, prices have risen. But is there a huge mismatch from its intrinsic value?  One way is to look at rents in relation to property prices, which is how The Economist tracks global property prices. Looking at CBD prices (since this the data Mr Colombo quoted), the average monthly residential rent is P800.00 per sqm vs an average property value of P132,000.00 per sqm. This is an asset yield of 7.3%. Asian property buyers will recognize that this is actually a decent deal. In the peak of Singapore’s housing booms, yields can fall as low as 1-2%. For a so-called economic analyst, it’s annoying how he didn’t take the time to dig into this.

Plus, these properties were purchased by Filipino households who are significantly less leveraged than their US counterparts – so even if property prices “burst”, there will likely be no widespread sell off that can further deflate prices.

Second: Are people maxing out credit cards for conspicuous consumption like, say, handbags and a trip to London? Nope. My basis for comparison: my time in Boston, where it is common to take on additional student debt just to go to that weekend trip to Iceland.

Lets dig deeper into Mr Colombo’s contention that easy credit will make consumers spend beyond their means. If this is the case, then we should see numbers like this: massive credit card growth, increasing credit card balances, and increasing consumer defaults.

What he fails to see is that the Philippines has one of the lowest credit card penetration rates in Asia. So even if the vast majority want to splurge on a Louis Vuitton bag, they simply can’t. The vast majority still pays in cash.

This is data from the BSP showing the balance of credit card loans. Credit card balances grew 10% vs last year – quite reasonable in an emerging market and coming from a small base. If we assume 4 million cardholders, then we have around P39,000 in average card balance per card holder: hardly reminiscent of the US.

The problem with with Mr Colombo’s argument on cheap credit is this – it’s cheap relative to what? After all, short term interest rates are still 4-7%, and long term rates at 7-12%. Debt may be cheap by historical standards, but not by any means too cheap that it makes everyone take on debt.

Oh, and look here. Mr Colombo likes to post charts that trend up, such as this one, which he uses to assert that consumer spending is growing unsustainably. But if you look at closely at the scale (don’t be deceived by the sizes of the bars, look at the numbers) and the time period (from Jan 2008 to the present), you’ll see that consumer spending grew 6% year-on-year in 2013 and 7% the year before. An emerging economy whose consumer spending growing 6-7% a year? Hardly sounds excessive to me.

Third: Are tech companies getting unjustified investments? Companies that play in tech + emerging markets are a good bellwether for observing bubbles, simply because of the perceived high growth opportunities. As an entrepreneur in this space, am I seeing frothy behavior among investors? Absolutely not. Domestic investors still tend to be cautious with valuations. And foreign investors are wary about things like user acquisition, regulation, and logistics.

So, based on purely man-on-the-street, daily observations – no, we’re likely not experiencing an overheating economy.  What will make my answer change? When people rush to scoop new condos a la Singapore showroom launches, when my friends start complaining about credit card debt, and when we see pre-product, idea-stage startups getting $5 million pre-money valuations.

What’s Behind the Scenes? Fear Mongering and Content Marketing

I always love a good debate, but with a bold pronouncement such as Mr Colombo’s, the bigger question to ask is this:  Does one have an incentive to, at best exaggerate the context, or worse – distort the facts? It seems he does. Worryingly, Mr Colombo proclaims to be an investor – without disclosing if any of his investments may benefit from his writing (for instance, shorting an emerging market stock). Mr Colombo is a self-proclaimed bubble watcher – his entire career is dependent on making dire warnings, and his strategy is to attract online traffic via bold proclamations of various sectors that are heating up.

And Mr Colombo is definitely concerned about traffic, as he proudly states in a previous post,I published a report that went viral, and was read over 145,000 times and shared over 6,700 times via social media.” This is part of the worrying side of journalism in the digital age – when writers optimize for views and shares, they under-optimize for quality and integrity. It’ll be great to see him in a local conference (and debate him on stage).

And this leads us back to Ms Curtis. Celebrity culture thrives in manias and herd behavior – popularity snowballs and leads to more fame. Ms Curtis’ bubble might have temporarily popped last week, though she was quick to apologize. In trying to be a celebrity bubble-spotter himself, Mr Colombo may have unknowingly burst his own.

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Philippines

Relief Goons

Janet_Lim-Napoles_mugshot

At Escolta, the restaurant at the ground floor of the Manila Peninsula Hotel, there’s a private dining room in the far side corner, just beside the hotel’s pedestrian entrance by the Makati Avenue side.  It’s 9pm and the restaurant’s patrons are slowly exiting. Inside the private room, five men were assembled, enjoying sips of their Johnny Walker.

“May bagong release. Mga isang-daang milton. Sabi ng mga contact natin sa DOF at NDRRMC,” proclaims the man at the head of the table.

“Pagawan mo na ng dokumenta sa brod natin sa Leyte. Sabihin mo isulat niya na para sa food and medical para sa mga barangay na hawk niya,” says the man to his right, signaling the younger man in front of him who appears to be part of his staff.

“Magkano ang SOP natin, brod?” says the man at the far end.

“Pare naman, dahan dahan tayo rito. Maraming nasalanta eh. Baka magalit. Mainit pa. Lalo na nakadetain pa si ma’am Janet”

“Pero brod, kailangan din talaga eh. Sampung truck ko yung natangin sa bagyo. Sira negosyo natin. Baka mahirap maka pondo para sa 2016.” 

“Sige pare, ibaba nation at SOP from 50% to 30%.  Alam kong kailangan din natin. Thirty million parin yun. Hindi naman siguro mapapansin.” 

“Salamat, brod.” 

 “Pare, okay na ba yung pinsan mo? Natangin daw yung bahay diba?”

“Oo, pare. Sirang-sira. Pero nakatulong daw naman si Mayor. Kaso lang kulang pa rin.” 

“Sige, bigyan mo rin isang milyon. Sabihin mo galing sa ‘kin. Bilisan natin ‘tong operation na ‘to. Bago makilatis ng DOJ.” 

This is a fictional story, of course, a product of my cynical imagination. But it’s not really hard to believe that clandestine conversations like this will take place in the months ahead.

The worst effects of Typhoon Haiyan are yet to come. And these will be man-made disasters rather than natural ones. With the economic loss estimated to be $12 billion – $15 billion, or roughly 5% of GDP, rebuilding will take many years and a substantial amount of public funds disbursed, which we all know will be a seen as a bonanza for a rotten minority.

For the foreseeable future, preventing the hundreds of millions of international aid from falling into the hands of corrupt officials will be a major public interest battle. As of November 16, the Philippines has received over $124 million in aid from the international community, and the UN kicking off a $300 million pledge drive. Once the immediate relief gets into full swing, it’s time to start thinking about the next disaster, and getting the right policies in place to manage the deluge of funding into the system.

If there’s anything that the international aid community  has learned from the Aceh tsunami and Haiti earthquake, it’s that the resulting corruption after a disaster can be more be damaging than the catastrophe itself.

But if Facebook users, civil society and overseas Filipinos can show the same level of engagement and empowerment that they did with this week’s relief efforts, then I’m confident future would-be-Janets would think twice before dipping their hands in the aid jar.

Some possible immediate steps are: 

1. Publicly disclose the flow of funds.  While the government is right in announcing the launch of a website that will track the flow of foreign aid. Granularity will be the name of the game. Although public databases like the FTS can track the global flow of aid, we need tracking on a barangay level – with each barangay council showing in a very transparent way how much funds are coming in, where they’re being spent, and metrics for progress.

2. Time to pass the Freedom of Information bill. Local officials will of course use multiple layers of legalese to prevent 100% transparency on disbursements. That’s why it’s time to prioritize the FOI bill, as it allows citizens to accelerate requests for government records. This, combined with technologies to speed up transparency (Think of Google’s People Finder, but instead, use it as an open data platform showing a network map of corruption risk areas) will maximize its impact.

3. Make any crime related to the theft of Yolanda relief funds punishable by death. Tough one to pass into law – but a crime of this kind is essentially treason of the worst kind.

4. Enact whistleblower mechanisms on a barangay level. Think of a easy-to-use whistleblower hotline (via text, a board at the barangay hall, or phone) that can empower citizens with an immediate feedback loop to report instances of local corruption. This means also expanding the definition of corruption beyond fraudulent financial practices, such as cronyism, nepotism, and the using one’s control of resources in exchange for sexual favors, as we’ve seen in various embassies in the Middle East. Seeing a widely-shared Pinterest board for Epal practices like politicians’ names on food packs would be welcome.

5. Celebrate the success stories. When Mayor Arquillano of San Francisco, Cebu, evacuated an entire island prior to the storm, he ended up saving 1,000 lives. When all the island’s houses were discovered to have been destroyed, it became evident that years of disaster preparedness and adoption of best practices can indeed substantially stem the loss of life.

There are longer-term fixes, of course, such as rethinking the division of labor between the NDRRMC and local governments, expanding disaster insurance coverage, and accelerating housing finance for low-cost, typhoon-resistant housing, but these require navigating through immense legal and political quagmires. In the meantime, the above can be immediate fixes.

As for me, we’re trying to contribute as best we can. I help run AVA, an e-commerce website for design brands. Though no single company can make a dent on a number this large, all of our efforts combined can make a difference. To this end, AVA will be highlighting homegrown brands and social enterprises this Christmas. Homegrown and social enterprise brands will also play a more active role in our merchandising strategy next year. Your support for their products helps grow local businesses, sustains raw material suppliers, and creates new jobs. As a result, every peso you spend in supporting these jobs has a multiplier effect on the local economy.

I’ve also been having a number of conversations with friends in the startup community. A common problem we face as entrepreneurs is building the skill set and capabilities of the local tech industry in areas such as product management, agile development, lean startups, growth hacking, and performance analytics. One of these areas is using technology for disaster preparedness in the short term, and prevention in the long term. Hence, one our passion projects is in education – helping improve local talent by matching them with proven entrepreneurs and experts who have actually built businesses.  If you’re interested to learn more about our efforts, feel free to reach me here.

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Entrepreneurship, Philippines, Startups

Can the Philippines be the Silicon Valley of Social Enterprise?

Browse through Vogue and you might notice these colorful clutches.

Thoughtfully-designed and beautifully-handcrafted, they marry form and function. The brand itself has grown a loyal following the past several years. It’s worked with some of the most established designers. And its story has garnered wide appeal across different segments – adored by celebrities, supported by moms, trusted by twenty-somethings, and studied by policymakers. That’s an incredibly hard thing to do in the finicky world of fashion.

This might sound like a label straight out of the fashion houses of Milan or Paris, but these clutches come from a humble social enterprise based out of San Juan in the Philippines.

Rags2Riches-2-MaineManalansan-Vogue-10Jul13-PR_b

 (Photo credit:  R2R and Maine Manalansan)

Rags2Riches is just one of the many social enterprises scaling up all over the country. It’s a great example of what the Philippines can offer the world. The Maia clutch, designed by Rajo Laurel, has been a consistent bestseller and it’s now making waves abroad, thanks to a partnership with the retail chain Anthropologie. Co-founded by Reese Fernandez-Ruiz, R2R works with artisans from poor communities to produce wonderfully designed products and improve their livelihood.

Fashion presents a fascinating opportunity for local social enterprises to reach a global market – we have lots of talented designers, a cluster of manufacturing zones in Manila and Cebu, underserved artisan communities, amazing brand managers, and a growing cohort of e-commerce entrepreneurs. There are thousands of social entrepreneurs like Reese, and now is their time.

Business for the Next Billion

The bigger story is that the Philippines has been incubating social enterprises long before the word became fashionable.

CARD is a pioneer in micro finance. Hapinoy has been creating innovative supply chain solutions to the quintessential feature of Filipino retail – the sari-sari store. Sari has been developing interesting point-of-sale technology for this space too. Gawad Kalinga, a leader in the space, launched the GK Enchanted Farm with an interesting go-to-market model that links producers and consumers of agricultural products. A seminal moment came last year when Jim Ayala became the first social entrepreneur to win the prestigious Ernst & Young Entrepreneur of the Year award for his work to deliver solar powered products to marginalized communities.

These are ventures with the dual objective of addressing a social problem and becoming financial sustainable – not tasteless propaganda-in-the-guise-of-charity we’ve come to expect from most big corporations and local politicians. And the space has now reached a tipping point.

If this generation of entrepreneurs sees social enterprise as a rewarding career path, impact investing scales locally, linkages with international institutions increase, and enlightened leaders get into government,  then there’s no reason the Philippines can’t be known as the Silicon Valley of social enterprise.

We have the raw ingredients: hard-to-solve social problems that require the convergence of skills from the private and public sector, a passionate post-Marcos generation of founders tired of institutional corruption and rent-seeking capitalists, and early pioneers who have proven the model in various sectors, and supporters in government.

What defines Silicon Valley is a hard-to-replicate mix of universities, companies, government support, and maybe even good weather. But what ties the eco-system together is the incredible willingness of people to come together and collaborate. I believe we can create that mix for social enterprises in the Philippines today, and in 10-15 years, see a vibrant industry of social enterprises making as large an impact as huge infrastructure projects to the economy. We need more PEOPLE, diving into well-defined PROBLEMS, and sensible POLICIES from universities and the public sector. And this kind of PPP can arguably make a bigger impact than this administration’s long delayed programs of the same acronym.

There’s value in being recognized as a mecca for social enterprises. It allows the country to attract even more talent from around the world, not only because the Philippines has immense social problems, but because this can be a testing ground for solutions that scale across the developing world. It helps attract the much needed capital to scale up these enterprises. It increases overall career satisfaction and fulfillment, something we’re starting to see becoming a real problem in the high-turnover BPO industry. And as people have seen in the growth of innovation clusters, these effects are self-reinforcing and create a virtuous cycle.

So how can we the scale social enterprise sector? I have four suggestions, most of which will be admittedly hard to pull off:

Teach Business History. It’s a shameful tragedy that our business and economic history is not a widely shared narrative among students. I took up business in university, and not a single class tackled in detail how the Coco Levy Fund single-handedly raped a whole industry, how the Binondo Central Bank prospered, or how government-protected concessions given to cronies and relatives suppressed competition in the guise of economic nationalism (allow Walmart and Amazon to compete in the Philippines, and I can guarantee SM will be obliterated). After World War 2, there were generally only two ways to create vast amounts of wealth for one’s self: collude with the government or avoid it. Collude in order to get a government-protected extractive monopoly, or go underground to avoid taxes and state appropriation.

If the story of Philippine business is widely told, what won’t be remembered are stories of entrepreneurship-against-all-odds (though there are many), but how the wealth of a few was generated from monopolistic rent-seeking companies that extracted from the many.  Business history affect us until today – and the numbers show it. The top 40 families control up to 76% of GDP.  When I read the about the story of Philippine capitalism, I can’t help but feel anger and a profound sense of social injustice. And I guarantee that when more people read about these stories, the less attractive that nice-sounding job in Large Company Inc. will sound and the more compelling social entrepreneurship will be.

English: Manuel V. Pangilinan Center at the At...

Wanted: An Ambeth Ocampo for Philippine Business History. Enemies from Local Elite Guaranteed. (Photo credit: Wikipedia)

Include Social Enterprises in the Investment Priorities Plan. The DTI each year lists priority sectors that can qualify for a cocktail of government benefits in order to boost investments. Though traditional industries such as housing and agriculture are included, it’s perhaps time to recognize the social enterprise sector by explicitly extending benefits such as tax breaks and investment grants. Of course, any business can stake a claim to be working for the social good, so a measurement & verification mechanism will be needed in the same way impact investors use various metrics to measure the impact of a social enterprise.

Redo our Social Contract. Has there been a single Filipino tycoon who’s signed the Giving Pledge, the effort led by Bill Gates and Warren Buffet that encourages the world’s billionaires to commit half their wealth to charity? I honestly can’t think of any. So correct me if I’m wrong. I really wish I’m wrong. Because if I’m not, it would be really sad.

The country’s top richest 50 families have a combined wealth of $66 billion. That’s more than a fourth of GDP. Imagine half of this wealth donated to various charitable trusts, endowments, social venture funds, and the like. That’s $33 billion in resources. If you assume that 3% can be drawn down each year, that’s close to $1 billion that can be reinvested back into the economy. For this happen, we need to celebrate real giving and not the superficial ones. The local press seems to joyfully celebrate the donation of $7 million for a school building, but that really is a drop in the bucket and will barely make a dent in the pocket. It also means making it comfortable for tycoons to spread their wealth without fear of appropriation. Most importantly, it takes believing Warren Buffett’s philosophy of rejecting intergenerational wealth – a truly hard thing to do in this country.

Make it Less Risky to Be a Social Entrepreneur. If we can design programs that help social entrepreneurs forget about the downside so they can focus on the upside, then we’ve come a long way.  For instance, policymakers can offer state-sponsored schemes that provide healthcare and education plans to social entrepreneurs. Companies can create secondment programs for executives who want to try out a social enterprise for a year. Education helps aspiring founders to be prepared. The good news is that there is a wealth of accessible knowledge on social enterprises from all over the world.  And I hate to rant about Ateneo again, but if it can channel as much resources to a large-scale fund similar to the University of Michigan’s Social Venture Fund, then we won’t be just winning basketball games, but also the war against poverty.

Today on the Stanford Social Innovation Review...

Stanford is a pioneer in social innovation. How much did we spend on the Blue Eagles again? (Photo credit: techsoupglobal)

Our ASEAN neighbors have come a long way in establishing great brand names for themselves. Singapore is the region’s finance and entertainment hub. Thailand is known for its tourism. Vietnam and Indonesia are fast-growing manufacturing countries. If our generation of entrepreneurs can build this country as the Silicon Valley of social enterprise, then we would have made a great leap forward from the sordid past of Philippine business.

What else can we do? I’ll be happy to hear your thoughts.

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