The cluster men

An in depth look at Venture Group’s business model

Rabih Abou Saba (L) and Marwan Ayoub, founders of Venture Group. (Greg Demarque | Executive)

It all began in 2005, when Rabih Saba and Marwan Ayoub, who were at the time employed by multinational companies, decided to make some extra money on the side through freelance consulting work for hospitality companies in Lebanon.

They have since come a long way. Today, they are the managing partners of Venture Group, a hospitality development company which counts Uruguay Street, the only pedestrian pub street in Beirut Central District, as its first development project. Currently, just four years after signing the Uruguay Street contracts, they are in the final phases of construction for two other similar hospitality cluster areas (The Village, Dbayeh, to be launched by early November 2015 and Backyard Hazmieh to follow a few months later).

Executive met with Saba and Ayoub near their Hazmieh project to find out more about how they are growing from a “two man” show to a structured organization with enough prowess to attract a $4.5 million investment participation in Backyard Hazmieh. Executive also discussed Venture Group’s business model of clustering hospitality outlets under one project which relies on the economics of proximity.

The early years

In 2008, Saba and Ayoub, who until then had only been dabbling with hospitality consultation, decided to quit their jobs and become full time consultants for the hospitality sector. “We started doing consulting work in the hospitality sector as a side job to make extra money. When we saw that we were bringing value to our clients, we thought of doing it full time,” explains Saba.

In 2011, recalls Saba, the two partners launched their first cluster development project on Downtown Beirut’s Uruguay Street, named so because the boats arriving to Beirut Port from Uruguay used to dock there. “We always had the idea of a hospitality cluster project in mind but we needed the capital,” recalls Ayoub, explaining how they took a major risk in that investment as they only had enough capital for the first payment which they used to book the street.

Ayoub and Saba recount with a certain twinge of pride how, in their first contract on Uruguay Street, their exposure was for a few million dollars and today they are developing projects with a value of $5 to $10 million each, multiplying their appetite for risk by 20 percent.

The rise and fall of Uruguay Street

What Venture Group, then known as Venture DT, did with Uruguay Street was enter into a master lead contract with Solidere, which owns the former Municipality Building along Uruguay Street. They had a fixed lease for the building’s dozen or so ground floor outlets and then sub-rented them to selected pub operators in return for a percentage on sales and a minimum guarantee.

Saba and Ayoub saw the makings of a sustainable pub area in the location judging by factors such as it being one of the few pedestrian streets in Beirut, it being in a non-residential area with solid infrastructure and the availability of several parking lots in proximity and a valet parking service which they introduced.

The partners explain that they had initially agreed with Solidere on both economic and social targets related to developing the street’s culture and positioning it as a pubs and nightlife destination which included creating desirability and order by selection of tenants, restriction of expansion, competition analysis and so forth.

“We always had the idea of a hospitality cluster project in mind but we needed the capital.”

However, with the initial success of Uruguay Street, other building owners in the area got inspired to lease their properties to bar operators. Almost two years later, Venture Group were no longer the main players on the block. Numerous new outlets cropped up on the same street, with some spilling onto Argentina Street, perpendicular to Uruguay.

This over saturation of pub offerings, according to Ayoub, created a chaos which decreased the street’s attractiveness for its primary target clientele, the trendy Lebanese and the so-called “in crowd”. This, coupled with the transient nature of Lebanese nightlife whereby people were already abandoning Uruguay Street in favor of new destinations such as Mar Mikhael and Badaro, led to a decrease in footfall for Uruguay Street which began almost six months ago.

To combat this effect, Venture Group had planned, in collaboration with Solidere, a series of marketing events and activities aimed for fall and winter 2015 to relaunch Uruguay Street and the surrounding areas while also working, again with Solidere, on returning some structure to the street by controlling the music volume and the number of chairs per outlet. However, with the protests triggered by the waste management crisis which began in late July 2015 taking place mostly on the development’s doorstep, these plans have been postponed. “So for now, [we’re in] survival mode and we need to do everything in our capabilities to make these tenants survive the crisis,” says Ayoub.

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Uruguay Street in Downtown Beirut

Uruguay Street’s tenants are currently struggling to pay the rent. A few outlets in the building where the Phoenicia Bank used to be have been forced to close down in the past month alone. Saba explains that, working with Solidere, they were able to help their tenants by giving them a three month grace period from rent, subject to renewal if the situation stays as is. “We had to take part of the hit but we would live with that because we are a group with many other projects and can balance our profits here and there. The main issue is just to keep the project surviving but it all boils down to the macro-political situation,” explains Saba, adding that, on a more positive note, most of their tenants operate several other venues as well and should be able to survive a few months of low footfall.

Lessons learned

Venture Group’s first experience with cluster projects through Uruguay Street has taught them what to replicate and avoid in their upcoming projects in Dbayeh, Hazmieh and Ashrafieh.

According to Ayoub, they learned to diversify the location risk by constructing projects in varied regions rather than relying on Beirut alone.  Such regions, explains Saba, have the added advantage of allowing Venture Group to bring known food and beverage (F&B) brands in proximity to residential areas where such brands may not already be within walking distance.

Saba adds that diversification also applies to bringing a variety of tenants, from casual dining and bars to  gyms and beauty salons, into the project, depending on the targeted area’s needs which Venture Group identifies with thorough market research.

“So for now [we’re in] survival mode and we need to do everything in our capabilities to make these tenants survive the crisis.”

“The lessons learned from Uruguay Street are mainly the lessons learned in every destination that grew organically such as Monot, Gemmayzeh or Mar Mikhael. This always brings us back to the main issues affecting the industry, such as licensing, the number of outlets allowed per capita, the infrastructure, flow and organization,” says Ayoub, explaining that since they and their partners are the sole owners of their new developments, they will have full control over the number of outlets and the layout, thus ensuring complementing venues are next to each other and desirability is maintained.

Putting in the money

Venture Group, explain Ayoub and Saba, typically enters into long term property lease contracts with the landowners but emphasize that the cost for leasing the land represents a lesser risk whereas their biggest risk is the cost of development itself. It would take them an average of six years to return their investment.

Should the location fail as a hospitality project, Venture Group would be left with outlets which are only usable as F&B outlets, Saba said. To mitigate this threat, explains Saba, they ask for three years of rental commitments from their tenants, thereby somewhat sharing the risk with them.

Of partners and funds

For each project they develop, Venture Group has different strategic partners who play an active role in the development, working hand in hand with Venture Group, marketing the project and sharing the investment risks, explain Ayoub and Saba.

For example, for their planned hospitality cluster in Ashrafieh on Saint Nicholas Street, their partner is Emile Sabbagha, while Emerging Investment Partners (EIP) invested 51 percent into the Special Purpose Vehicle that is holding Backyard Hazmieh, marking EIP’s first investment in a hospitality project and in Lebanon. Ayoub says they agreed with EIP on a minimum expectation of 20 percent internal return on investment over the nine year lifetime of the project.

“We have learned the power of clustering which could apply to hospitality or any other sector in similar industries.”

However, Venture Group’s expectations for the partnership are more on the strategic side and not limited to this one project. Ayoub says that “The concept of this partnership goes beyond Backyard Hazmieh. It’s not an exclusive partnership as we each have our separate projects, but now we are confident that we have a strong financial partner at our side when we look at future opportunities.” These opportunities could see Venture and EIP collaborate in projects outside of Lebanon or in an F&B Fund that would seek to invest in promising startup concepts or in “baby brands” which have achieved proof of concept in a small number of locations but lack the financing power to grow into chains.

Raking in the profits

In terms of operating their upcoming clusters, Venture Group runs on a business model of turnover participation with their lessees. Ayoub and Saba enter into agreements with their tenants that call for a 10 to 14 percent share in sales revenue depending on the value of the products the outlets are selling. This means they would take a bigger percentage from a sushi place than they would from a coffee shop, for instance. “We sit with potential tenants and look at their feasibility study together to see what they can pay as a rental price and we manage around these prices,” explains Saba, adding that since their background is in hospitality, they understand how the sector works.

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Work in progress on Backyard Hazmieh

They also charge a minimum guarantee which approximately represents 70 to 80 percent of the projected rent they expect to have, explain the two partners. “This way, when the economic cycle in the country is down, we will not lose our tenants and at the same time when the market is high, someone will have to pay back and we will have a good margin,” says Saba. According to Ayoub, the company’s rewards include the value of the infrastructure they contribute to each cluster as well as financial benefits from increases in traffic which Venture Group can influence because they are in charge of marketing each destination.

What Venture Group offers

The value that the model provides to tenants is anchored in giving them developed infrastructure at a lower cost than a tenant would incur by having to set it up themselves which they would be forced to do in other projects or in standalone operations.

Secondly, Venture Group brings to its tenants a solution that mitigates the inflation in land rental costs. Years ago, hospitality operators would buy land in non-central regions for a low price, Ayoub explains, and the cost would be low enough that they could construct one restaurant on it and still have ample space for parking, children’s playground and landscaping.

Venture Group currently retains 90 F&B tenants across their three projects, making it one of the largest portfolios for a hospitality cluster developer in Lebanon

However, with the high inflation of land rental prices starting 2010, it became more economically feasible for these operators to rent an outlet instead of leasing a piece of land for any single restaurant projects. “We used economy of scale and cluster cost effectiveness in our business model where we would rent land big enough to host several outlets and would then divide the cost of the land among these outlets. We also handle the buildup and construction so the restaurant operator would end up renting a place with full infrastructure and full landscaping at a fraction of the cost he would have paid for the land itself,” says Ayoub explaining that through their landscaping, they somehow address the need for public green spaces among Lebanese which is an added value of their projects.

“We are into leisure business by the base of our business culture and so the angle on which we approached the project is different from real estate developers as we approached it with leisure in mind,” says Saba.

Company growth and future plans

Acquiring the partnership of an investment fund such as EIP and also the growth that Venture Group experienced over the last four years necessitated that the company goes through the process of structuring their business model, explains Ayoub.

“Being a young company, we have been doing things right in that we have good lawyers and auditors and everything is done with a high level of transparency because our partners in other companies are reputable and structured. However, due to the fact that it’s a fund which is regulated, we went that extra step with governance which has upgraded our way of doing things. We are happy with the way things are going and are becoming more of an organization,” says Saba.

Today, Venture Group has ten employees in their main office with a complete and separate team for each project ranging from engineers and designers to the cleaning crew and on the ground facilities management.

Venture Group currently retains 90 F&B tenants across their three projects, making it one of the largest portfolios for a hospitality cluster developer in Lebanon.

In term of hospitality cluster projects, the company is still looking at areas outside of Beirut with a year-round seasonality, such as Byblos, which will appeal to their target clientele. They are also hoping to diversify their scope of operations by starting a fund, in partnership with EIP, which would financially back startup F&B operators looking to launch a brand or those with two or three branches in their name wanting to further expand but lacking the capital.

“We have learned the power of clustering which could apply to hospitality or any other sector in similar industries, and we would like to look into opportunities to use our expertise in developing clusters in different industries,” concludes Ayoub.

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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