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The 7-Eleven liberalization law?

How did the Taiwanese conglomerate President Chain Stores get into the Philippines’ convenience-store industry to dominate it through its 7-Eleven stores?

The credit goes to Philippine Seven’s top two Filipino major stockholders, both former trade and industry secretaries: Jose Pardo, who served under President Joseph Estrada and Vicente Paterno, one of Marcos’ top technocrats from 1972 to 1979.

7ElevenForeigners had been banned from engaging in retail trade since 1954 under the Retail Trade Nationalization Act, actually intended to push out immigrant Chinese who had been dominating the industry in the post-war period.

As soon as Estrada appointed Pardo trade and industry secretary, he lobbied intensely for its repeal, getting his boss to use his immense popularity at that time to push for the Retail Trade Liberalization Law. It wasn’t an uphill climb as there was a growing sentiment for overall economic liberalization since the Ramos administration.

7-Eleven owes them: Estrada with his former trade and industry Secretary Jose Pardo

7-Eleven owes them: Estrada with his former trade and industry Secretary Jose Pardo

Bills were passed both in the Senate and the lower house a month after Estrada assumed office. Apparently expecting the bill to be quickly passed, Paterno went to Taipei late 1999 to invite President Chain

Stores to buy into Philippine Seven. Three months later in February, President Chain Stores more than agreed to the invitation, and proposed that it get the controlling 50.4 percent of shares.

A month later, on March 7, 2000, Estrada signed into law the Retail Trade Liberalization Act, which allowed the foreign firm President Chain Stores to have equity in a retail-trade business. Among other provisions, the Act lifted the 1954 ban, and allowed foreign participation in retail firms to a maximum of 60 percent ownership, under certain conditions such as a minimum amount of capital ($2.5 million at least) for three types of retail firms.

Mission accomplished apparently for Pardo, and he moved on to Finance on January 2000 after it was certain that Congress would enact the law.

His efforts of course could not have personally benefited him, as his and his wife’s 14.4 percent stake in Philippine Seven Corp. were sold to a firm called Asian Holdings when he assumed the trade and industry post in July 1998. However, in all of Pardo’s publicly available curriculum vitae, Asian Holdings Corp. is listed as one of the many companies he has been chairman of. His wife Marilyn is currently the firm’s chairman and chief executive officer.

In October 2000, the two firms announced President Chain Stores’ purchase of the 50.4 percent of equity of Philippine Seven for P1 billion, a boon for its stockholders. It was the first foreign company—of just six to this day—to take advantage of the Estrada’s liberalization of the retail industry. The law was not unchallenged though: members of Congress asked the Supreme Court to rule it unconstitutional, which it however dismissed in March 2010.

What is controversial for Philippine Seven is the law’s provision—intended to protect small Filipino groceries—that the retail branches of the mother company with foreign ownership must have investments of at least $830,000 or P35 million.

Other retail firms with foreign equity have strictly complied with this requirement as obvious in the size of their branches, as in the case of the American S & R “Membership Shopping” (which last year though was sold to Lucio Co) and the Dutch Makro Warehouse Club (which had also divested to the SM group). Thus they don’t compete with less-capitalized mom-and-pop groceries. Each of the huge stores of the clothes-retailers the Japanese Uniqlo and the American Forever 21 in the Mall of Asia and SM North, which came into the country only recently, are worth at least P35 million.

In contrast, even the biggest 7-Eleven store is unlikely to have P35 million investments. Philippine Seven chairman Paterno himself said in 2000 that the stores cost P4 million to P5 million, while the company’s website says that a franchisee’s investments would be in the P1 million to P5 million range, and includes everything including the initial inventory, but excludes the property cost.

In April 2000, Paterno strangely claimed that the French supermarket giant Carrefour would be buying into Rustan’s supermarket, while the Dutch Rohyal Ahold NV would be setting up supermarkets. “But the government has to come up with the implementing rules for the retail trade liberalization law as soon as possible or none of these ventures will materialize,” he said.

“Strangely,” as Paterno did not mention, obviously so he would not seem to be self-serving, that he has been convincing the Taiwanese firm to buy into his company. Trade and Industry officials under Pardo at that time reported that Walmart, Seiyu of Japan, Hong Kong’s Wellcome are planning to go into retail trade to take advantage of the new law.

Thirteen years after though, none of these foreign retail firms have entered the country, which means that the Retail Trade Liberalization Law could be defective.

Obviously not for Philippine Seven though, and the Retail Trade Liberalization law has turned out to be merely a “7-Eleven” liberalization law. The Taiwanese conglomerate President Chain Stores’ huge resources, as critics of the law had warned, have been brought to bear on the Philippine convenience-store industry t to dominate it. What critics could not have foreseen is that the Taiwanese-controlled firm is even starting to compete with mom-and-pop carinderias, since 7-Elevens are not just retail stores but have also become even fast-food outlets, complete with dining chairs.

The firm is now 75.6 percent foreign-owned after Arisaig Asia Consumer Fund—whose nationality Philippine Seven reported as Singaporean—last September bought for P2.2 billion a 10.5 percent stake, from the shares of Paterno, Pardo, and the Araneta clan, for windfall price of P70 per share. (Foreign investors through the stock market hold another 13.5 percent.) It is possible though that it is the Taiwanese firm which used Arisaig Asia Consumer Fund as its venue for increasing its hold over Philippine Seven.

Paterno, Pardo, and the Aranetas—all with strong connections with all administrations starting with Marcos—have certainly made fortunes as a consequence of the trade liberalization law. The saga of 7-Eleven here could be a classic case of the how the Philippine elite operates.

In ruling the law constitutional in 2011, the Supreme Court said that it “is not convinced that it would eventually lead to alien control of the retail trade business.” Maybe so, but it has certainly led to Taiwanese control of the convenience-store industry—the most modern and lucrative of the retail trade business.

The main rationale for the Retail Trade Liberalization Law was, in its words, “to bring down prices for the Filipino consumer.” Other than those in 7-Eleven, and recently in the Philippine operations of Uniqlo, Muji, and Forever 21 whose products are geared for the upper-class market, there are no other foreign investments the retail industry.

Do you think 7-Eleven has brought down prices for the Filipino consumer?