SM: The Shoe Store That Became the Country’s Town Square

SM is the largest company in the Philippines and it started with shoes. This story covers the retail origins, the mall model and why it works there specifically, the banking acquisitions, the property arm, the succession and the concentration risk — part of the Philippines Company Stories hub.

How did a shoe store become a conglomerate?

By reinvesting relentlessly and moving up the chain. A single shoe store became several, then a shoe department in a general store, then a department store, then a chain of them, each funded largely from the cash the previous format generated.

The critical shift was from selling merchandise to owning the space. A retailer pays rent; a mall owner collects it, and in a rapidly urbanizing market the property appreciates while the rent grows.

Once the group owned malls, it controlled the most valuable commercial real estate in each district, which then made banking, residential development and hospitality natural extensions rather than diversifications.

Why open a mall during a crisis?

Because construction costs, land prices and competition are all lowest exactly when everyone else is retreating, and a project that opens as the economy recovers captures demand with no new supply against it.

Counter-cyclical building requires the balance sheet to survive the interim, which is why it is a strategy available to owners with cash and closed to developers dependent on project finance.

It also sends a signal. A visible commitment during a national crisis builds enormous local standing, and in a market where relationships matter as much as contracts, that standing has commercial value for decades.

What is a Philippine mall actually selling?

Comfort and safety. In a climate that is hot and humid year-round, in a metropolis with limited parks, unreliable pavements and real security concerns, an air-conditioned enclosed space with guards is a genuine public good.

Families spend entire days there. The tenant mix reflects that: supermarkets, cinemas, food courts, chapels, government service counters, medical clinics, schools and banks alongside conventional retail.

The commercial consequence is dwell time. A visitor who stays six hours spends far more than one who stays forty minutes, which is why the format optimizes for reasons to stay rather than for retail density.

How does mall economics work?

Through rent that combines a base amount with a percentage of tenant sales, which means the landlord participates directly in retail performance without carrying inventory or merchandising risk.

Anchor tenants — supermarket, department store, cinema — are frequently owned by the group itself, which guarantees the traffic that smaller tenants pay for and captures the retail margin as well as the rent.

The model scales geographically. Each new provincial city with rising incomes supports a mall, and the group has systematically opened in secondary cities well ahead of competitors, taking the best sites before land prices reflected the opportunity.

Why buy banks?

Because retail generates deposits and requires payment infrastructure, and because Philippine banking was fragmented enough that a determined acquirer could assemble scale from mid-sized institutions.

The malls provided branch locations with guaranteed footfall, which solved the distribution problem that limits how fast any bank can grow its retail base.

The bank also captured the remittance business from overseas Filipino workers, which is one of the largest and most reliable flows in the economy and which naturally lands where recipients already shop.

What made the banking roll-up work?

Buying institutions that were subscale rather than distressed, integrating them onto one platform and using the combined balance sheet to serve corporate customers that none of them could have served alone.

Timing helped. Consolidation followed a period of banking sector stress, which produced willing sellers, and regulators encouraged mergers to strengthen the system.

Integration is where most bank roll-ups fail, and doing it repeatedly requires a standard playbook for systems, credit policy and branch rationalization rather than treating each acquisition as unique.

What is the residential property business?

Development of condominiums, houses and mixed-use estates, frequently adjacent to the group’s own malls, which creates an integrated district where the developer captures retail rent, residential sales and land appreciation together.

Demand comes substantially from overseas workers buying property at home, which is a durable source unrelated to domestic wage growth and highly sensitive to currency and remittance flows.

The risk is oversupply in specific segments, particularly high-rise units in metropolitan Manila, where completions have periodically outrun absorption and vacancy has risen sharply.

How exposed is the group to consumer weakness?

Substantially, since mall rent, retail sales, bank consumer lending and residential demand all depend on the same household income. A squeeze on Philippine consumers hits four businesses simultaneously.

Remittances provide a partial offset, because they are denominated in foreign currency and tend to rise when the peso weakens, supporting spending precisely when domestic conditions are difficult.

The pandemic demonstrated the tail risk directly: closed malls generated no rent, retail stopped, and the group carried the fixed costs of enormous property assets with no visitors in them for months.

What happened after the founder’s death?

The transition to the second generation had been prepared over years, with children in operating and board roles and professional executives running the major businesses.

Ownership remained concentrated within the family through a holding structure, and no fragmentation of the kind that has broken other Asian dynasties has occurred.

The strategic question is whether a group built by a single decisive founder retains the same willingness to make large counter-cyclical bets under committee leadership, which is the recurring uncertainty in every post-founder conglomerate.

What are the growth constraints now?

Site availability in metropolitan Manila, where the best locations are taken and land costs are extreme, which pushes expansion toward provincial cities with smaller catchments.

E-commerce is a slower threat than in developed markets, because the mall’s value proposition is partly non-retail and because logistics across an archipelago is genuinely difficult — but online grocery and fashion are growing.

The considered response has been to make malls more experiential and services-oriented, and to build logistics and payment capability so that online sales flow through the group rather than around it.

What is the lesson?

That the product is not always what it appears to be. A mall in a tropical megacity is public infrastructure, and understanding that is what allowed the group to build formats competitors mistook for shopping centres.

The second lesson is about counter-cyclical capital. The most valuable assets in the portfolio were built when others could not build, which requires a balance sheet held deliberately conservative through good years.

The third is that vertical integration compounds. Owning the anchor tenant, the mall, the bank branch and the apartments above them captures margin at every layer of the same customer visit.

What role do remittances play in retail?

A decisive one. Money sent home by Filipinos working abroad supports household consumption across the income spectrum, and it arrives in foreign currency, so its local purchasing power rises when the peso weakens.

Retailers and mall operators feel the effect directly in footfall and basket size, and the seasonal pattern — heavier remittances before Christmas and the school year — shapes the retail calendar.

It also drives property. A significant share of residential demand comes from overseas workers buying homes for families at home, which is why developers market actively in the Gulf, Hong Kong and North America.

How does e-commerce affect Philippine malls?

Less than in developed markets, because archipelagic logistics make delivery slow and expensive outside the main cities, and because a large share of the population prefers cash on delivery over card payment.

The categories most affected are fashion, electronics and beauty; groceries, food service, cinemas and personal services remain firmly physical, and those are the anchors that generate mall traffic.

Operators have responded by leasing more space to food, entertainment and services, and by building the payment and logistics capability to capture online sales rather than lose them entirely.

How do Philippine supermarkets differ from Western ones?

In pack size, payment and product mix. Shoppers buy smaller quantities more frequently because of income patterns and limited home storage, and single-serve sachets of everything from shampoo to coffee dominate volumes.

Cash remains the primary payment method for a large share of transactions, which shapes checkout design, security requirements and the working capital the retailer carries.

The competitive set also includes hundreds of thousands of neighbourhood sari-sari stores, which win on proximity and informal credit, so supermarkets compete on price, range and the trip that combines groceries with everything else in the mall.

Why did the group expand into provincial cities early?

Because land in secondary cities was cheap, competition was absent, and rising provincial incomes meant catchments would eventually support the format even if they did not on the day the site was bought.

First entry also secures the best location permanently. In a city with one viable mall site, the operator who takes it faces no direct competitor for years.

The risk is opening ahead of demand and carrying a half-let asset, which is why the phasing of provincial malls typically starts small with expansion built into the design.

What is the typhoon and disaster exposure?

Significant and recurring. The Philippines is among the most typhoon-exposed countries in the world, and large physical asset portfolios face direct damage, business interruption and rising insurance costs.

Malls are also community shelters during disasters, which is a genuine public role and an operational cost the accounts do not separate out.

The design response has been higher building standards, elevated critical equipment, backup generation and water storage — capital that produces no revenue and prevents losses that would otherwise be catastrophic.

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