The long journey of a large retailer

Spinneys keeps expanding in Lebanon

Photo by: Greg Demarque/Executive

Local markets have proven remarkably resilient when it comes to resisting the dominance of large retailers that offer fast-moving consumer goods (FMCG) in hypermarkets and supermarkets—those behemoths of daily shopping that you enter with an empty shopping cart the size of a compact car and leave with said cart overflowing. One operator of mega-sized retail stores, Kuwait-based The Sultan Center (TSC), closed its Lebanon stores in 2017, but at the same time, other operators steered their outlets into major expansions. Majid Al Futtaim’s Carrefour franchise, for example, ventured into Beirut’s Dora City Mall following its very large operation in the Beirut City Centre Mall in Hazmieh. But perhaps no FMCG retailer added more outlets in 2017 than Spinneys. Hitting age 20 in Lebanon in its current incarnation—it entered Lebanon in the 1940s but opened its first post-war store in Dbayeh in 1998—Spinneys opened three new outlets by end of October 2017 and is set to operate 19 stores all across Lebanon by the end of the year. Executive sat down with Spinneys Group chief executive Michael Wright to discuss the FMCG sector in Lebanon and the details behind its ongoing expansion.

E   2017 saw changes in the landscape of large retail in Lebanon, perhaps most visibly in the shuttering of TSC stores. Where is the Lebanese FMCG sector heading, and how do you assess the market for large retailers, such as Spinneys and your direct competitors? 

This market is long overdue to modernize in terms of the segmentation [between large and small operators]. People often will tell you here that the Lebanese market is [unique] because you have a personal relationship with a local small shop and when you buy, you will get credit. However, when I was a child in England, it was exactly the same: There was a little corner shop and you knew the name of the guy and you played with his kids. But all markets end up modernizing because of the benefits of what mass-market retailing can bring to consumers and to everybody.

This process has, for various reasons, been delayed in Lebanon. One important reason is that distributors make more profit when selling to the small stores. Because the small stores have no bargaining power, the distributors purposely support that end of the market for their own benefit. The small retailer has been grazing off his shop: He doesn’t really make money out of it, but his family picks out their dinner for the night off the shelf and they feel that things are going well. I think this segment will come under more pressure in future. Then we look at modern retail and ask: Why did it not take market share? One reason is that the differential in the market has not been supported by what distributors do. So what I see happening now is that there have been too many modern retailers struggling in this one-third of the market that they operate in.

E   Is it still one-third of the FMCG retail market that is in the hands of modern retail?

It is still one-third. Within that, it means the battle is amongst them, and the weaker players eventually lose out. Some players [in modern retail] only exist because of their accounting methods, which don’t count property costs. They think they are in business, but should better employ their capital somewhere else. The result of that has been a slow process of some retailers losing out, which takes a lot of time because of the commercial model, where it takes a long time for the death to happen. You have trade credit, and [even] if your profit and loss (P&L) component falls apart, you still have cash and carry on. TSC has lost out. Monoprix tried to expand and retrenched, Bou Khalil has been in trouble for many years, there is no secret in all of these things. I warned my friends in the distribution business of this slow death of some. TSC were trying to give us their business in exchange for some shares in the combined business and we refused that.

E   Why did you refuse?

I didn’t want to take their business because it was full of debts and losses. It was just a bad setup. Some of their [store locations] were okay, but some of the deals on their sites were horrible.

E   Do you mean in terms of store leasing costs?

Yeah, the leases were unsustainable. When I looked at it, yes, I gained a bit of market share, but their losses were as much as my profitability. I don’t see the benefit of that.

E   There has been talk that the forced exit of TSC has impacted many distributors and smaller suppliers. By your estimate, are these impacts digestible for the distributors, or will they change the retail business in Lebanon?

I think the scale of the debacle in TSC is probably digestible. Of course, nobody likes it, but I think even the least cautious [distributors] had de-leveraged a little with them over the past few years. So I doubt we’re going to see any distributors going under or being in financial difficulties because of their losses to TSC. Of course, the same can’t be said for the poor staff.

E   What is the scenario for the small individual suppliers? Rumors are that TSC also left those people sitting high and dry.

They left everybody. They were taking products from anybody who they could get it from and one of the reasons why we broke off talks with them [was] because of their intentions that they described to us previously. We had turned down taking their entire business because it was just too much work, so they came up with other scenarios where they would carve out their operation and leave behind the rump of their problem and bankrupt it. And we said we did not like that plan because it was going to leave a big mess behind, and we didn’t want to be involved with that. So yes, I’m sure that some small suppliers [are left with unpaid invoices]. The numbers I heard with the large and medium suppliers are that they can absorb [these losses], but I’m not sure about the smaller end [of the market], where I don’t have the information.

E   What is the rationale for Happy, your new brand?

We recognize that part of the market is entirely price-focused and perhaps not driven at all by any quality development, neither range nor service. This is why we developed Happy as a discount brand, which is doing very well and is our strongest-growing format. The discount model just means a different way of working. Consumers have to adapt to the offering, and [discount markets have internationally] taken a big chunk of mass market purchasing. Some of the market has moved up to shop at the higher-end of quality supermarkets, and some people mix and match; they do some shopping here, and some shopping there. This market is changing. The advantage that Spinneys has over the rest of the mass-market people is that they can’t offer the quality elements that Spinneys offers, and neither can they compete with the pricing of Happy. Because Happy is not about cutting prices of products that you find in every supermarket; the main products are there, but a big part of the range [consists of] different, but comparative products [offered at lower price].

E   Where are you in market share today?

A year ago, which is the latest figures we have from Nielsen Data, we were at 4.5 percent of the total [FMCG retail] market and 12-point-something percent of the modern trade. Since then, we’ve opened three new stores, and we have two more to open; thus, I’d like to think that [in future market assessments] we’ll be in the 10 percent range of the total mass market, and the 15 to 20 percent range of modern trade. When I speak to some of the larger international brand [owners who distribute their products in Lebanon], I never hear anyone saying that we’re less than 7 percent of the total market.

E   By rolling out new stores, are you trying to dominate the market in the modern retail segment?

Dominate is not at all the word I like to use for what we’re doing. I like to say that we want to serve the consumers who ask in all surveys to have a Spinneys near their house. That is what we’re doing. With anything we do, we don’t aim at attacking our competitors; we aim everything we do at being customer-centric.

E   What is your total network size in 2017, including markets, hypermarkets, discount markets, delivery centers, warehouses, and fleets?

If we include the two stores that we’re about to open, this takes us to 19 stores, including Happy. If we split it down by sizes, we have five large stores, four small stores, and 10 medium-size stores, of which three are Happy stores. The new stores haven’t yet broken even because they are in the first few months of operation, but they are growing nicely; all our middle-aged and older stores are doing very well. Some regions go up, while others go down, but the general trend of the overall business is going up. One thing to note is that price deflation has been an interesting factor over the last few years, in the sense that consumers react violently to any inflation and seem to not notice deflation at all.

E   Does price deflation occur in Lebanon because of varied movements of currencies that you could use to advantage in your purchasing strategies, or are other factors in play?

The deflation, which was substantial—many large categories had 30 percent deflation—was driven by two factors. One is parallel imports: Currency fluctuations in Egypt and Turkey [where the Egyptian pound and Turkish lira moved lower against the dollar in recent years] allowed a big arbitrage on price differential [for parallel importers]. These were mainly unscrupulous third parties who not only brought in parallel products but also did a lot of under-invoicing to avoid taxation. All modern retail chains steered clear of [such deals]. Instead, we all worked with the distributors on achieving more promotions to counter the effect [of cut-price parallel imports] on consumers. But inevitably, the distributors weren’t able to stop the political influences that allowed people to cheat, and so they cut their prices.

The other driving factor is that the economy is stagnant, and all distributors are under pressure from their principals to increase their volumes every year. They, therefore, lower their prices, expecting sales to go up. It doesn’t work, because everybody is doing the same thing [in the context of the currency movements of the euro against the dollar, which were enabling this deflation]. As a result, you can look through many categories and see prices that are much lower than they were a few years ago. Coffee, milk powder, detergents, and whisky have seen 30 percent [downward] price moves, which is an enormous transition in [an FMCG] market.

E   Isn’t it true that you’ve had increased prices in the consumer goods basket—for example, in dairy products such as butter and imported yogurts—some imported goods, or in meat? And how much of an impact do we have to expect from new, or increased taxes for future prices in the FMCG sector?

I don’t see that there has been much commodity inflation expected for butter, which has gone up recently because consumers in China developed a taste for it. Some of this [consumer-price] inflation you mentioned has been driven by government decisions, like the move from loose white cheese to pre-packed white cheese, which is much more expensive. The decision is driven by protecting local industry, but at the cost of not allowing consumers to have the choice between pre-packed and loose.

E   Do you expect inflation from higher Value Added Tax? There was one concern voiced by critics of trade and commerce in general, saying that retailers will use the impending VAT increase to hike prices in advance.

That’s the theory of consumer groups and ministries of economy in all countries. The first reaction [from consumer advocates] when taxes are slated to go up—or when Ramadan or Christmas is coming—is to cry out that retailers will exploit this opportunity and prices will go up. I’ve never seen [such price gouging] to be the case in any multi-chain modern retailer, but it’s a good story [for] people saying that we will protect you against these horrible retailers. But it doesn’t happen because in a market where you have multiple FMCG competitors, we do a much better job of competing with each other than any regulator could ever do.

E   Still, the impending tax changes in Lebanon have created some commotion and feelings of concern.

I remember when the VAT in Lebanon was first introduced in 2002. In most cases, except for cars, it was a re-regulation of taxation policy and a trade-off between implementation of VAT and a reduction of import duty, which in most cases ended up in a [price-] neutral position. Despite the neutrality of the price change, the consumers reacted terribly. [Sales] volumes dropped by 20 percent and never recovered, even though there was no change in prices. So I hope the Lebanese consumer won’t panic when these VAT increases are implemented [from the start of 2018] because it will probably be absorbed into the system.

E   Also for alcohol?

It’s a bit different for alcohol. Alcohol prices have been very depressed and whisky for example has been very cheap. I think everybody has hit the bottom in pricing alcoholic beverages and the currency exchange rate on the euro is moving against everybody, so there is no room on that side. I think that any increase in alcohol taxes will have to be reflected in price increases.

E   How important is alcohol for Spinneys in terms of turnover and profits?

In turnover it’s below 5 percent of total business, and in profits it is on par with the rest, neither more, nor less profitable than other products.

E   When it comes to digital, will big data and retail analytics change your game, where you can track consumer habits through their cell phone and such?

We aren’t at that level yet, but we will be. I already have more information about my consumer shopping habits through our loyalty points program than I’m able to use today. We’re still working our way through using that kind of information.

E   But the trends in digital retail have reached the FMCG business globally. How do you deal with that?

We look at what trends are hyped and what are ready to be tried or implemented. Home delivery is one aspect—home delivery is the dream of many app creators who want to design an app for supermarket deliveries and make money from it, but it doesn’t work. [British FMCG retailer] Tesco, for example, was waxing lyrical about how much money they were making from home delivery under the previous management, but when the new management came in they said they were losing money.

E   So how does home delivery work for you, since you have been at it for a few years even without the digital aspect?

I was very specific about my aims in home delivery. I wanted to gain expertise in it, to try and find what the possibilities are, and to do it in such a way that doesn’t commit me to never-ending losses of pursuing it full-scope. Therefore, I allocated certain [capital expenditure] and marketing expenditure to it, I set up a specific model that I believe would be profitable, and let it run with those and see where it naturally goes. Where it took us was into profitability, but not very high profitability.

E   You haven’t mentioned yet how many warehouses the group has and how large your fleet is. What are these numbers?

We operate from three warehouses: One is a third-party logistics warehouse and two are in-house satellite warehouses. We mix and match products between these locations according to type, volume, and value mix. Our delivery fleet for consumers is, I think, three vehicles. The fleet serving the stores is 15 plus, I believe, but I’m not sure of this.

E   So delivery of goods from your warehouses to your stores is mostly outsourced to the various logistic providers?

Exactly. However, we’re going to bring logistics in-house because we believe we can flex what we’re doing better in the future if we take ownership of the logistics side of our business. Our role is being more than just a retailer. This year, we brought around 300 containers through direct relationships with exporters and our company, which puts us as a mid-range distributor in terms of volume, and I would hope by the end of next year we should have at least added 50 percent to that. By a year’s time, we will hopefully be almost in the high tier as a distributor.

E   Does that mean you will be growing the portfolio of stores branded as Spinneys and Happy?

Yes. Between already-signed stores, stores that are agreed and about to be signed, and stores which we’re still working on, we have a plan to reach 30 stores within two and a half years. That’s not assuming any expansion of Happy, which we will [also pursue], acquisitions of existing stores from somebody, or moving into any smaller store format. 

E   Do you plan to grow Spinneys’ own label?

Spinneys’ own label brand has its positioning and is becoming stronger and stronger. But I have a belief that it’s very important to avoid overemphasis on Spinneys’ own label, and I prevent it becoming over-expanded for the sake of over-expanding it, because that actually reduces some of our quality aspects to consumers.

E   Finally, congratulations on your 30 years at Spinneys. Did working in the Middle Eastern food market fulfill your expectations?

Yes. I joined the company on Dec 14, 1987, and I remember wondering at the time how long this job will last. I was not lacking a career in the UK, but left the UK because the retail market was being de-skilled in [that] they didn’t want management taking the decisions. So I wanted to come to a market where I could think about things, and then implement them and make changes. I have to say that [was] one of the gratifying paths of my career, and I’m glad that I came.

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.

Thomas Schellen

Thomas Schellen is Executive's editor-at-large. He has been reporting on Middle Eastern business and economy for over 20 years.

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