Chain reaction

Food franchises are overcoming high costs, competition and bureacratic hurdles in Lebanon by expanding regionally

Given that Lebanon’s restaurant market is notoriously fraught with high costs, cutthroat competition and seemingly inane bureaucratic hurdles, it is of little surprise that some of the country’s best known franchises have struck out across the region, in what they say is an effort to not only grow, but to survive. However, with a much improved restaurant draft law moving forward, and with Lebanon still being seen as a vital area to base operations, the country could just be on the brink of experiencing some homemade growth in a sector that has already seen over $1 billion in investment since the hey-days of 1996.

“If we were not franchising in the region, or elsewhere, I would not see a long-term healthy business for Casper and Gambini’s in Lebanon,” said Anthony Maalouf, the director of franchise operations for Casper & Gambini’s (C&G), who, along with Kabab-Ji and Crepaway, is at the forefront of Lebanese franchises striking out of their home bases and into the more lucrative domains in the Gulf.

In the case of Kabab-Ji, expansion plans are even more far reaching. Toufic Khoueiri, the chairman of the Lebanese fast food eatery who just received the 2004 Lebanese Restaurant Franchise Award at the Horeca trade show in Beirut, recently embarked on a trip to the US to establish a beachhead in the US’ highly competitive, $400 billion restaurant market. “The strength of Kabab-Ji’s brand positioning within Lebanon will translate to similar brand strength within the US market beginning with the opening of its first prototype restaurant (as of now, set for the second quarter of 2005),” said a statement from the company. Of course, Khoueiri has reason to be confident. Kabab-Ji has been a spanking success in Lebanon since its opening in 1993. With nine restaurants in all now operating in Kuwait, Saudi Arabia, Qatar, the United Arab Emirates, and of course, Lebanon – and with an expected 30 to 35 Kabab-Ji restaurants set to operate regionally by 2007, Khoueiri seems well positioned to take his recipe right to the doorstep of his US-based competitors. Khoueiri also has a unique position in the restaurant franchise market, as he sells a wide variety of traditional Lebanese food – something which, in the US, is a haphazard $1.8 billion market dominated by small, family run operations. For this reason, his competitors are eyeing Kabab-Ji’s first forays into the US market closely –his success or failure may represent either an incredible starting point or an unavoidable ceiling of growth for Lebanese restaurant franchises, many of which express their frustration over what they say are diminishing returns in their home market.

“We should be in Europe or in the States. That is the goal, our dream,” said Dory Daccache, Crepaway’s chief international officer, confirming what are the ultimate prizes in the restaurant franchising business globally.


The turn towards markets outside of Lebanon is, of course, an old story. With the familiar litany of complaints – Lebanon’s relatively high-fixed costs, small population, large number of restaurants and treacherous (not to mention, unpredictable) legal and administrative hurdles – all constantly rehashed in the press, it is easy to get the impression that Lebanon’s restaurant market is “saturated” and wholly un-supportive of new ventures. “The same effort you put in opening up in Lebanon, if put somewhere else is more lucrative and more rewarding,” said Khoueiri, who, like other owners, stressed that the real profit centers sustaining the core enterprises are the franchise operations outside of Lebanon.

According to Maalouf, with no corporate tax structure in Saudi Arabia and Kuwait (Lebanon levies a 15% tax on profits) and with a more rational bureaucratic structure, profit margins are between 20% and 40% greater in the region compared to Lebanon – a difficult range to beat. And yet, some observers are openly bullish about Lebanon’s restaurant market and on the potential success of even more homegrown franchises – especially if the country is able to get its administrative house in order.

Indeed, despite the steadfast convictions of some already operating franchises in Lebanon, the country seems to be in the midst of what Paul Ariss, president of the Syndicate of Owners of Restaurants, Cafes, Night-Clubs and Pastry Shops in Lebanon, calls “a boom” – although, formal statistics on the industry are not available.

“The restaurant business in Lebanon has been booming for the last eight years, despite the local economic situation and the limited number of tourists, who, in fact, visit Lebanon not more than 100 days a year,” said Ariss. “I believe that more than one billion dollars has been invested in the restaurant business since 1996. More than 4,000 institutions are operational, 70% permanently and 30% seasonally, creating jobs for more than 60,000 people.”

Ariss’ optimistic attitude is reflected, perhaps more cautiously though, by Sarah Abi Najm, a member of the franchise consulting group Solutions, which operates between the Middle East and Europe. “The current restaurants … are not doing as good a job as they could be to meet the demands of the market,” she said, noting that her consulting company is currently working to introduce more than 10 franchising outfits in Lebanon alone in the near future.

“The emergence of the BCD and Monot restaurants, pubs and discotheques have killed those institutions that are located in Jounieh and Broumana,” admitted Ariss. “But this trend is not a principle, since Aley has witnessed the emergence of more than 35 restaurants of all types. The true miracle is Batroun, which witnessed the birth of more than 30 restaurants and pubs since 2001, thus attracting thousands of local clients eager to discover new places and mainly pay lower prices.”

Despite the seasonal nature of some restaurant markets, tourists are indeed driving growth in the sector in a way that offers increasing revenues, and increasing encouragement to would-be owners. In fact, for the first time in 20 years, Lebanon attracted over one million tourists in 2003.

What’s more, with younger investors coming to the market – Ariss said that he believed most new investors in restaurants are now below the age of thirty – and with C&G predicting an 18 month window for returning an investment on a restaurant franchise, it is not surprising that most universities in Lebanon are turning out more and more hospitality management graduates. According to Ariss, there are now more than 50 hospitality technical schools alone in the country.

Of course, this is not to paper over the systemic problems facing the restaurant sector, or the franchising business more specifically. Indeed, Ariss, together with some sympathetic MPs and owners, are pushing hard for a sweeping overhaul of the 1960s era law governing restaurants and franchises. “The actual laws impose many constraints that represent a real obstacle and a formidable nightmare to investors,” said Ariss. There are two specific examples illustrating the outdated laws, according to Ariss. First every restaurant has to secure a certain number of private parking places for its clients, depending on the restaurant’s service area. If this cannot be done, a fee has to be paid to the municipality. In Beirut, for example, the fee for one parking space is LL30,000,000. Second, every new project has to get a building conformity clearance from the municipality. If the building is subject to a violation on any of its floors, the restaurant cannot obtain clearance unless the violation is cleared and all the fees are paid.

Since 1995, the restaurant sector has witnessed the emergence of more than 2,000 new restaurants, in all regions of Lebanon, but with the main investments done in Achrafieh, BCD, Monot Street and now in Gemaizeh. But as Ariss is quick to point out, many of these ventures have not been able to obtain their operating license from the ministry of tourism because they simply cannot comply with the arcane terms of the relevant laws (Daccache listed five separate ministries and five separate approval processes that are necessary to engage, in order to open a restaurant).

At the end of 2002, more than 50 restaurants and pubs in the BCD and Monot Street, who did have their licenses, were fined. It was after this incident, Ariss said, that movement really began to gather steam to reform the laws. “Our syndicate, with the cooperation of the Syndicate of Hotel Owners, established a legal team that reviewed the old laws and prepared a draft for a new legislation,” he said. “The project was presented to MP Salah Honein who submitted it to the parliament in May 2003. The committee of tourism in the parliament then established a sub-committee to study the law project and in mid-May [of this year], our syndicate, in close cooperation with all the tourism syndicates and Honein, submitted a final draft that will have to be discussed and adopted by the parliament.”

Although a deal has not yet been struck, after almost four decades of working under the same outdated regulatory structure, relief feels closer for Lebanon’s restaurant owners. According to Ariss, the new draft law has deleted what he said were “all constraints,” while simplifying numerous legal and administrative formalities and, significantly, adding many new concepts that are well-established worldwide – including time-sharing leasing and franchising.

“The aim of the proposed law,” said Ariss, “is to protect all tourism investments in order to attract additional investors, whether local, regional or international.” If this can be accomplished, and if demand expands with increased tourism and, hopefully, an improving economy, what can indeed be sometimes characterized as Lebanon’s commercial precipice may just be avoided all together. Just in case though, restaurant franchises like Kabab-Ji, Crepaway and C&G are still hedging their bets, focusing on growth outside of the country. “You know, I think Syria is a virgin market,” said Daccache. “I think Jordan is a virgin market, so there is room for new concepts, new ideas … Syria is now changing the financial rules. I believe that by next year all of these Lebanese chains will begin to open [there].”

With seven C&G franchises located in five countries across the region and a pending deal in the UK, and four Crepaway’s in the Middle East, with another in Qatar set to open next month, Khoueiri’s trip to the US comes at a high-point for Lebanese restaurant franchises – a point which many hope will only be encouraged by the international success of Kabab-Ji and others.

CashUnited

In Lebanon, CashUnited has turned the sometimes lucrative art of transferring money around the world into, well, money. Acting as the US-based MoneyGram’s exclusive agent in the country, CashUnited is now set to expand its franchise operations to other countries in the region.

“MoneyGram allows individuals to transfer money worldwide within minutes without the need of a bank account,” said CashUnited’s general manager, Philippe Dagher. “Our service is available in Lebanon through 130 agent locations in all the country’s regions.” According to Dagher, the “war on terror” and the new procedures which his company has had to comply with “have been implemented … [but] it hasn’t affected our business.”

Nor has the US brand name either. In fact, “business partners and customers usually conceive American companies as reliable and international,” explained Dagher.

As for future growth: “The need for immediate cash transfers is constantly increasing … so we forecast a constant yearly growth of 30%,” he said.

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