Letting go is never easy

Trim, relocate or close? Lebanese cafes face tough choices

Cafe Younes is feeling the pinch with a 15 percent decrease across the board

We’ve been in business for 17 years, and this is the toughest year we’ve had so far,” says Christine Assouad Sfeir, CEO of Dunkin’ Donuts in Lebanon, which saw its first local closures — lowering its total franchises from 30 to 25. With a slew of landmark closures — both Krispy Kreme and Hard Rock Cafe exited the market last year — the situation is turning bleak for Lebanon’s food and beverage (F&B) industry. Entrepreneurs such as Sfeir have known successes. After bringing Dunkin’ Donuts to Lebanon in 1998 and expanding the franchise, she is still clinging to the Lebanese market. But for the past couple of years, with fierce competition, increasing fixed costs and a smoking ban all compounding a precarious political and security situation, Lebanon’s F&B industry is seeing a serious decline, prompting alarm bells in the upper echelons of management.

Hitting a new low

Lebanon’s economy has a reputation for keeping afloat despite political and security events. But this last year has been one of the roughest, and prospects for it to pick up are grim. “We are asking ourselves: is our economy as resilient as it used to be in this type of situation?” says Charles Arbid, president of the Lebanese Franchise Association. The string of security incidents that have rocked Lebanon over the past year and a half have left businesses in the F&B industry with little time to recuperate. They have taken a toll on consumption, with indexes for both F&B and tourism — an important source of revenue for the F&B industry — down by as much as 30 percent in 2013 according to Arbid.

While revenues dipping into the red prompted many businesses to close over the year, those still remaining are managing the crisis with pains. According to Sami Hochar, CEO of Catertainement, which acquired popular franchise Lina’s Cafe in 2001, the cafe barely broke even in 2013, even after cutting their losses by closing their Byblos and Faraya branches. “Normally we try to keep them and look for better days. But in such a situation we [had to] close them,” says Hochar. Dunkin’ Donuts’ five closures followed an overall decrease in sales of 20 percent. Family-run Cafe Younes, which is now managed by Amin Younes, the grandson of the founder, was able to keep all of their branches intact, but suffered a 15 percent overall decrease in its 2013 sales between its four coffee shops and two roasteries.

The decrease in economic activity has been exacerbated by soaring fixed costs. Rent has become so expensive that managers such as Hochar are actually in the process of lobbying landlords to lower their rent payments while they weather the storm. Particularly in premium locations such as ABC mall — in good times a prime location for business — in bad times the fixed costs can overwhelm a business’ accounts. Though Hochar is not yet ready to relinquish his place in the mall, coveted by a long waiting list of businesses, he says that he can envision a situation where he would have to withdraw out of necessity. High rents are not limited to malls, and impose a great burden particularly on newer branches that have not had time to turn profitable, forcing many closures among recently opened branches. Two of the branches that Dunkin’ Donuts closed within the last year were newer branches that did not yet have a chance to turn profitable. With skyrocketing rents, the fate of nonperforming branches is clear; “you don’t have the possibility to wait,” says Sfeir.

Crisis mode

Companies standing their ground in Lebanon have had to seriously re-think their strategies in order to manage the crisis. A ubiquitous survival tactic has been trimming the costs of operations: decreasing the number of staff working at one time or shrinking the number of items on the menu. But cutting costs needs to be done carefully in order to keep any change in quality minimal. “If you affect the customer experience, this is gonna kill the brand and kill the business,” says Sfeir. Businesses pursuing this tactic need to constantly check the impact of their cuts on their customers, otherwise they may lose what little business they still have.

Large-scale franchises have costs additional to their operational ones that are suffering from the shrinking margin of profits. “The income is not enough to stand a structure like ours,” says Hochar, referring to the behind-the-scenes management teams, with associated costs in marketing, advertising, accounting, and so on. “We tend to, unfortunately, lower the expenses on this management company so we can leave the shops running normally. And this is how we can keep on going,” says Hochar. Cafe Younes too, has cut what its CEO described as “luxurious” expenses such as lowering re-investment, a significant part of expenses vital to remaining competitive in Lebanon’s fast-moving F&B industry. “Hopefully things will get better, otherwise really you won’t do the things that you are doing now. You won’t keep on performing, you won’t keep on changing,” says Younes.

Following the market

On top of coping with waning profits, F&B management have had to devise tactics for keeping up with the tricky Lebanese market. Downtown Beirut is witnessing a significant decrease in customers, particularly in the evenings, as security fears prompt people to remain closer to their own neighborhoods. The tobacco ban further dissuades a clientele fond of smoking in cafes, prompting chains to bank on long-term investments in new locations that they hope will be more attractive to customers. “You have to make a strategy in the long run, and in this strategy you have to rent new shops, open new shops, and struggle,” says Hochar.

Re-positioning the location and design of branches is a tactic pursued by many companies in the Lebanese Franchise Association. “They are re-engineering their business in Lebanon,” says Arbid. To chase these finicky consumers, Lina’s Cafe invested in re-locating and re-designing their shops to be friendlier to those customers who enjoy cigarettes with their morning coffee, and close to those who prefer not to stray from their own neighborhoods. They closed two non-performing branches in Byblos and Faraya in 2013 to open one in Mtayleb, Rabieh and are planning to open two more in Gefinor Center and Badaro in Beirut within the next three months, leaving them, if all goes as planned, with 16 branches in Lebanon. The new branches are more open, making them smoker-friendly. Vigorous innovation is one of the few ways in which Lebanese companies can keep afloat, as they vie to create more incentives for customers amid shrinking budgets.

Positioning abroad

With F&B businesses hanging by a fine thread, it is no surprise that companies are looking to expand abroad. “Franchising abroad for the Lebanese brand and concept is definitely a possible solution,” says Arbid. While Lina’s Cafe’s move to acquire licenses for the United Arab Emirates in late 2013 was mainly prompted by the situation in Lebanon, Sfeir is growing her two other companies Semson and startup Green Falafel exclusively outside of Lebanon. Likewise, Cafe Younes is opening a franchise in Riyadh in 2014. Growth outside of Lebanon certainly comes with less risks than expanding within. While they are eyeing the outside, they are nonetheless determined to stand their ground in Lebanon, hoping that outside expansion is just a means to stay on their feet long enough to ride out the crisis.

 

Livia Murray

Livia covers business, finance and economic policy for Executive.

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