Retail highs and lows

Lebanon needs an ‘electric shock’ to stop it from falling into recession in 2015

Executive sat down with the head of the Beirut Traders Association Nicolas Chammas to discuss the performance of the retail sector in 2014 and what can be done to prevent the country from entering into recession in 2015. 

 

How would you assess the retail sector’s performance in 2014 as compared to 2013?

Cumulatively, it was a very frustrating and disappointing year. The first quarter was an extension of 2013 with its negative performance.

To be fair and objective, however, right after the formation of the government in the first quarter of the year, things picked up. This is because the government was a unified one, representing all parties and also because its formation led to the success of the security plan in Tripoli and the Bekaa, all of which gave consumers a sense of confidence. In Lebanon, we have great resilience and whenever the political and security conditions are fine, that immediately translates into improved economic activity.

We started to go downhill again on May 25, 2014, with the presidential vacuum, because psychological factors are extremely important in Lebanon and we felt the tension again. Also, at the beginning of the summer season, we had the explosion [and raids] in hotels of all places, which caused many tourists to cancel their trips to Lebanon.

So the summer started off badly and somewhat improved after the Eid Al Fitr holiday, but the incidents in Arsal at the onset of August, followed by the incidents in Tripoli, were the last nails in the coffin of the commercial and touristic sectors in Lebanon.

All in all, from the end of 2011 until the end of 2013, we were at an average of minus 35 percent and my estimate for the cumulative degradation until the end of October 2014 is another 10 percent compared to last year. 

 

To what do you attribute this drop?

The situation has been dragging on for too long and the political situation has become drastically negative because the repercussions of the war in Syria on Lebanon are becoming stronger, with the onset of extremism in Lebanon and the increasing number of refugees in the country.

 

How does the presence of Syrian refugees in Lebanon affect the retail sector?

The World Bank itself found that the cost of the Syrian refugees coming to Lebanon is $2.5 billion a year, so let’s agree that the net balance is negative. There is a slight positive in basic food staples sales, but most of them are coming from abroad as the humanitarian associations bring most of their food aid from abroad, buying only a little from the local market. So the effect is marginal and you have ‘the tree that cannot cover the forest’.

 

How about the purchasing power of the Syrians who are residing in Lebanon? Is that helping the retail sector?

They are also using the country’s resources such as electricity, water and roads and this is costing us money as most of this is subsidized.

The real problem, however, is in the labor market where, because their wages are much lower than those of Lebanese workers, they are fast replacing the Lebanese. This is happening in many sectors, not only the traditional ones such as construction and agriculture, but also in trade, manufacturing, education and healthcare.

What happens is that existing companies want to decrease their production costs because they have witnessed a drop in their turnover, so the only way to survive is to reduce the cost of manpower and this is why they are resorting to the Syrian labor force. 

This is a terrible thing because you are depriving the Lebanese labor force from working and earning an income, thereby decreasing their purchasing power, while the Syrians generally send their earnings back to Syria so there is leakage in the economic cycle in Lebanon.

This is a vicious cycle — when Lebanese households have less money, they consume less. When they consume less we, as traders, sell less and when our turnover goes down, we have to let go of more people.

At the same time, when you are getting Syrians to replace Lebanese workers, they are not paying for the NSSF [National Social Security Fund] or the government taxes. So we are suffering at the sector level, the economy as a whole is suffering and the treasury is suffering because it is collecting less money.

 

What can be done to deal with this situation, if anything? 

This is a long term trend that will lead us to a terrible decline in economic activity. The government has to control and monitor the Syrian labor force and apply the law. They should take the necessary measures to stop this tsunami.

No country in the world would accept this and if you take a look at Europe, they have a ceiling on how many foreigners they let into their workforce per year, while here we have a parallel workforce of over 500,000 people who are willing to work for lower wages. At a minimum, they should control this situation and at the maximum, they should start sending them back to the secure areas in Syria. 

 

How has this situation affected the retail space market? Were there any closures of retail spaces this year?

There were many closures in the downtown area, but also in the traditional and highly prestigious shopping areas such as Hamra, Verdun and Ashrafieh, according to information from the local trade associations. In normal times, you cannot find a space to rent there because they are prime locations, but today you can find many retail spaces and at reduced prices. 

What happens is when there is one empty venue in a street, it contaminates its surroundings and won’t be filled for a long period with the owner finally settling for half of the original rent price.

 

Were different segments of the economy affected in the same manner by the situation? Or were some sectors more affected than others?

You have three segments of trade. The staples were more or less able to survive the situation, but still you are in the minus 5 percent to 0 percent range during 2014.

The luxury products were severely affected because of the lack of tourists and expats this year, which this segment has come to depend on, and we have a drop of around 20 percent.

Durables, such as furniture and professional electronics, also suffered, around minus 10 percent, but less than the luxury segment which I consider the most affected.

This year, we had a migration of people from the high end to the middle end and from the middle to the low end, and this is why the low end segment is working the most as the others have almost stopped. Our goal in the future is to turn the trend and drive people upward again, but it will be very difficult.

 

Are traders themselves preferring to store their money in bank deposits rather than investing it?

The phenomena of increased deposits in banks is of course a healthy one, but this is because of the lack of any other investment opportunities, causing business people to park their money in safe bank deposits instead of taking risks.

We, as traders, want more investment to happen, especially since the public sector is not investing any money due to the lack of a budget for 10 years, and so this is an engine that has been shut down.

There are two types of investments the private sector can partake in. First are investments in capacity, which traders will certainly not do as there is an oversupply of capacity and a dramatic drop in demand — a great mismatch. Instead of investments in capacity, we are witnessing a shrinkage in sale spaces and venues.

The other type of investment is in technology and development, but we are not doing it because the demand is not there and our money is being kept safely in the banks for now. We are sitting on the sideline waiting for better days to come.

 

How badly has consumption been affected this year?

Consumption is 85 percent of GDP, which is around $35 billion. So if consumption drops 1 percent we lose $350 million. See the effect? We are talking huge amounts here.

I estimate it has decreased by 5 percent this year and we know that by the number of sales we have been forced to do. Discounts are going from 10 to 70 percent in all seasons, and even to the point of clearances at times. Even with those huge discounts, people are not coming.

These sales are done to clear inventory, which we consider the root of all evil, because the seasonality factor means that your stock becomes obsolete. You have to liquidate it in order to buy new products to keep up with fashion and trends. We have to go through sales and things like this in order to monetize our assets because we owe money to the banks and to our suppliers.

 

What is the Beirut Traders Association’s outlook for 2015? 

It all depends on the political situation and we need an electric shock. We need the presidential election to take place. Even though it will not solve all our problems by a long shot, at least it will show that we are able to come together and decide something. It would revitalize the institutional life in Lebanon, as the president is in the driver’s seat both morally and symbolically.

This electric shock could also be regional, say if Saudi Arabia and Iran reach a minimal agreement it would have a positive effect on Lebanon.

If this happens, I will become much more optimistic about 2015 because the wind could turn. If it does not happen, and it is business as usual, we are en route to a deep recession in Lebanon, even in the first trimester of 2015. 

Nabila Rahhal

Nabila is Executive's hospitality, tourism and retail editor. She also covers other topics she's interested in such as education and mental health. Prior to joining Executive, she worked as a teacher for eight years in Beirut. Nabila holds a Masters in Educational Psychology from the American University of Beirut.

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