Since opening its first store on Martyrs’ Square in 1936, ABC has grown to become a reference point in the Lebanese retail industry. Boasting over 60,000 square meters of shopping space distributed across eight outlets, the group’s malls secure some 7.5 million visits annually, giving ABC an estimated 13% market share of Beirut’s retail industry revenues. Executive spoke to ABC’s director, Karim Fadel, on how the group weathered the storm of 2005, and on lessons learned by the company whilst expanding and evolving to meet the changing needs of customers.
E It’s been two years since ABC Ashrafieh opened. What lessons have been learnt over the course of this period and how, if at all, has the mall been a model for modern Lebanese retail culture?
We’ve learnt a couple of lessons along the way on what constitutes key success factors for a mall. Firstly, a good location is essential. You need to establish yourself in a well-populated and wealthy area in order to create a “catchment zone” of potential. Secondly, the concept of the mall is a key factor: it needs to be well designed. In the case of ABC Ashrafieh, we launched an international design competition and chose a British group, Business Design Partnership, which is specialized in commercial centers to come up with the planning and the design of the mall. Between the design studies and the feasibility studies, this component came up to 7% of the total cost of the project, which was of $120 million. A lot of developers don’t spend enough time and money on the design study, despite the fact that it largely determines the success of the commercial center. ABC Ashrafieh is an innovative mall in many ways. It’s a city mall, which is very much integrated into the neighborhood and respects the surrounding urbanism. It has become an extension of Sassine square: people come to the mall to meet. Furthermore, it takes advantage of the beautiful weather we have in Lebanon by being partly open-air and partly closed. Finally, another important element is to achieve the right balance in the retail mix.
E ABC’s retail mix is one of its noteworthy features: stores range from the exclusive luxury brands to the more mainstream franchise stores. What is the right formula in terms of mixing tenants in malls?
You need to get the performing, competitive retailers, not the ailing ones. We rarely take low-end stores; we go for the most performing, middle to high-end ones, with a good franchise. We are very cautious with our retail mix and consequentially, we might end up turning people down. Also, you need a certain focus: in our case, it is fashion. That’s what we are known for. You won’t find many sports or appliances stores in ABC. Clients come here to buy fashion items and gifts.
E But isn’t the trend in retail the one-stop shop? Don’t customers come to malls to find all that they need under one roof?
I believe that trend is reversing. Today, shops are getting increasingly specialized and the same goes for malls. They are engaging in both horizontal and vertical specialization, that is to say they are offering fewer lines of products and a narrower range of prices. Another trend that is taking place is that of “retailtainment:” mixing retail and entertainment. This is a very important concept for the success of the mall: by adding entertainment services, customers come in more frequently, spend more time on the premises, and thereby more money. At ABC Ashrafieh, we have dedicated 30% of the surface area for entertainment, with some outlets in prime locations and others not.
E What is the occupancy rate of the mall at present?
We have an 85% occupancy rate in terms of surface area. That being said, all our units of 500m2 and less have been rented out. At this point, we only have two large units left. Therefore in terms of units, we have a 99% occupancy rate. We remain a sought-out location for retailers: we’re a niche mall that is well located, with a certain type of clientele and a specialized range of products.
E What is your future strategy? Do you have any new projects in the pipeline?
We’re planning on opening up several cosmetic specialty stores. We also just completed the renovation of our Zahle outlet and our big project for 2006, is the renovation of our mall in Dbayeh.
E What happened to your Dbayeh mall, which used to be your flagship department store? Has it experienced a significant fall in trade due to the numerous shopping centers springing up in Beirut?
It has experienced a drop in activity, by some 10%. That is why we will be investing in renovating it, at an estimated cost of $5 million. The renovation work starts next year and is expected to take two years.
E It has been a challenging year for the retail sector, marred by the political instability, the precarious security situation and the subsequent drop in tourism. How badly was business affected in the end?
It wasn’t as bad of a year as what we expected, taking the political situation into account. Sales were pretty steady. Bear in mind that tourism only dropped by 14%, so the impact of the shock was mitigated. We didn’t feel much of a difference. What was noteworthy this year is that the tourists came later, but then they stayed a bit longer. August and September ended up being good months for retail. During Ramadan, our sales went up by 13% from last year in Ashrafieh and Dbayeh. Essentially, the events that affected the country constituted more of a political shock than an economic shock.
E How many days were you forced to close this year and what loss in revenue did this represent? To what extent have ABC’s sales and revenues been affected by the unstable situation?
We only closed for seven to 10 days in the end, which didn’t represent a significant loss in revenue. We had budgeted for a 15% increase at the beginning of this year, as we were expecting more tourists, and at this point, it looks like growth will be flat. By the end of this year, we expect our sales figures to be the same as last years.
E Are a greater chunk of your profits now being lost to increasing security costs?
We are indeed dedicating a larger budget for security purposes. We have increased our security team, with guards now searching people and cars coming into the mall. But this hasn’t represented a major hike in our security spending. We were the first to purchase an advanced mechanism that detects explosives, which was brought in from England, and we also set up a CCTV system. What was the most expensive was the terrorism insurance we got, which is costing us more than $100,000 a year.
E How was the retail industry as a whole affected? Were any sectors hit harder than others?
Retailers working with limited capital and in more of an old-fashioned manner are the ones who are suffering most from this year’s turbulence. You need significant financial strengths to go through these types of shocks. Much of the retail sector is highly indebted, most of which are small “Mom and Pop” shops located in areas with no proper infrastructure for retail. They are the ones who were the worst hit.
E What are your expectations for next year? What is the Lebanese retail industry estimated to be worth presently and what do you believe its potential to be?
Our expectations are that we should not have any expectations, or if we were to have any, to expect the worse. Essentially, we are bullish on trade and conservative on finance. We need to be prepared to go through any storm. As for the Lebanese retail industry as a whole, our studies estimate it to represent approximately 30% of domestic GDP. In comparison to other industrial countries, this is a very high percentage of the economy. Therefore, if Lebanon is to develop economically in the same way as other industrial countries, the weight of the retail sector in the economy might diminish in the long run. But in the short run, if tourism goes up, then the retail sector ought to grow as well. The Lebanese government is working on bringing the country into the WTO. Should they succeed, it will open up the economy and in turn open up the retail market, which could have far-reaching consequences. At present, the Lebanese economy is not that free. Joining the WTO will force the authorities to abolish all distribution laws and exclusivity laws. It will create a greater level playing field, in which the retail sector can develop its potential more freely.
E ABC gets a lot of foreign customers during the holiday seasons. How realistic a claim can Lebanon make to be a regional retail hub? What elements are in place to lend itself as a retail destination?
Everything is in place for us to be a retail hub, the only thing lacking is the vision. Our tourism sector should be booming: the weather is nice, we have beautiful mountains … people from the Gulf like coming here – they can notably buy products from brands here that aren’t available in their country, such as sexy clothes for example. What is lacking is a vision that will stabilize this country and promote investment. But for that, you need to combat the ineffective administrative and judicial systems. All these issues discourage investors from coming here.
E How do you see the retail landscape of the greater Beirut area developing over the next couple of years, especially if the souks open up downtown?
The souks will become Lebanon’s retail hub, both for the tourists as well as for the Lebanese people. It’s a huge project, which is very well designed. It’s what is going to make Solidere live. The souks are destined to be shopping streets which will bring more mainstream people back to the city center.
E Does your group have any plans of taking up space in the souks or in the BCD?
We are studying the possibility of taking the 15,000m2 department store area that has been included in the souks. It would be a perfect place for ABC, not to mention the fact that it would be legitimate for us to be there, as the oldest department store in Lebanon.
E Do you fear that current ABC tenants will desert you for the souks?
No, I don’t. We already have tenants that are also present downtown, and who are planning on taking up space in the souks, and so far there hasn’t been any decrease in sales. We don’t view Solidere as competition at all. At present there is an undersupply in retail space in Beirut, so they are not taking away potential tenants from us.
E What gives ABC a competitive edge in terms of attracting the type of tenants you wish to have? Which retail areas will become less sought after and subsequently have to lower their rents?
As long as you have a good location with a modern infrastructure, tenants will seek you out and rents will continue to go up. It is the areas with old infrastructure that will experience a loss in tenants and falling rent prices. The Dunes center, which is very well located, will continue to do well, as will the city center, which remains one of the most lucrative areas. As for ABC, we will continue to be competitive. We charge $800m2 per year, which is less than downtown, where the rents average at $1000. For what we are offering and considering all the costs we are bearing, this is a very cheap price.