Building a fashion empire

Acquiring clothing franchises with a high turnover has been the secret to the Azal Group’s success

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Wassim Daher would have never imagined when he opened a small multi-brand clothing retail outlet in Hamra in 1978 that over the next 27 years it would grow into a holding group, controlling more than 60 companies spanning the retail, leisure and food and beverage sectors, active in seven different countries on two continents, employing 1,800 people, and turning over more than $250 million a year. Among the franchises held by the azal GROUP are those for the globally ubiquitous retail brands Zara, Massimo Dutti and Mango, as well as the Virgin Megastore franchise in Kuwait, the UAE and Egypt.

Expanding its reach

Not content to sit on its laurels, today the azal GROUP has its sights squarely set on expansion, both locally and internationally. It intends to breach the billion dollar sales mark in four to five years by increasing outlet numbers from 67 to more than 270 over the next two years. In Lebanon, the group is opening another 16 outlets, 11 of them in Beirut. It plans to open a further 20 stores in the UAE by the end of the year, including another Virgin Megastore. It intends to establish its fashion retail business in Egypt by October or November as well as a Virgin Megastore in September. In Qatar it aims to open another 18 stores by 2006, while in Jordan a further 12 or 13 outlets are set to open by the end of 2006. As if that were not enough, more shops will open in Bahrain by 2007, while in Romania, the group envisages 18 more outlets by 2007, and is considering further branching into Eastern Europe. It also plans to enter markets in Saudi Arabia and Turkey by the end of 2006. Meanwhile, it is also on the lookout for new brands. In its sights are the US-based Gap, Old Navy, Banana Republic and Victoria’s Secret. Overall, the azal GROUP’s fashion retail portfolio now comprises over 30 brands.

The azal GROUP broke into the Dubai market in 1990 and into Kuwait in 1994, but the real milestone was reached in 1998. That was the year DGroup, as it was then known, acquired the Zara and Massimo Dutti franchises – owned by the Spain-based Inditex fashion retail clothing giant, as well as the franchise for fashion retail group Mango, also from Spain. Today, Zara is the azal GROUP’s top seller.

“That was when we moved from the traditional retail concept involving high-end fashion brands, to the new, fast-moving retail concepts in the market,” said azal GROUP CEO Said Daher. “What distinguishes these brands from others is that stock replenishment is very quick. It’s the ‘just-in-time’ inventory model. You can order and receive merchandise within a week. This way you can react to market conditions much faster than many [other] retailers. If the market is favorable you can replenish your inventory in no time. If the conditions are not favorable you can limit your exposure to inventory. With the traditional retail concepts, you’re buying way ahead of time, your replenishment time is about four to six months, and you can’t react as fast as you need to.”

But the azal GROUP has headaches too. “If you compare Lebanon to the Gulf, there are many challenges,” said Daher. In Lebanon, his group has to contend with excessive bureaucracy, high electricity and IT infrastructure costs, a host of high direct and indirect taxes, low spending power, restrictive labor laws and general economic malaise. “You have to bear a huge burden to be able to compete with neighboring markets,” complained Daher. “Beirut was recently rated as the second most expensive city in the Middle East. Combine that with low GDP and you get very low discretional spending power. That affects the fashion and luxury retail business.”

An unstable market

Azal’s biggest headache in Lebanon, though, is the market instability caused by continuing political and economic turmoil combined with a sustained spate of assassinations and bombings. “Expanding the operation in Lebanon is much more challenging than in other markets,” Daher said. “The unfortunate incidents of the last few months crippled the market here.” His outlets closed for a total of six or seven days in February and March, causing a loss in revenue of 15%. “We are now more conservative regarding our expansion strategy in Lebanon than before,” Daher said. Since the February 14 assassination of former prime minister Rafik Hariri, the azal GROUP has not committed itself to any new stores in Lebanon.

The group’s frustrations in Lebanon, where it employs 500 staff, are compounded by the country’s brain drain problem: Many of Lebanon’s brightest young professionals are fleeing the country’s stifling labor climate to seek success elsewhere. As a consequence, the azal GROUP has had to headhunt many of its star employees from outside Lebanon, from the Gulf and the United States.

Despite the willingness of fashion-conscious Lebanese to spend on affordably chic clothing brands, the difficulties associated with operating in Lebanon translate into reduced profit margins. In Lebanon, azal’s profits run at 7% to 8% of net sales, compared to 12% to 13% in other markets. “In the UAE, Kuwait or Qatar, you’re looking at almost zero taxes, favorable conditions, and extremely high spending power,” noted Daher.

The group also anticipates challenges in Saudi Arabia, where a restrictive legal environment makes investing by foreign companies perplexing. And in Turkey, a mature market, the scarcity of prime real estate locations and the fact that the azal GROUP’s flagship franchisers, the Inditex Group and Mango, are already operating their own branches, are further obstacles that will have to be overcome. Daher insisted, though, that Turkey was a “promising” market.

Going East

Romania, too, had immense potential, he went on. “We were positively surprised by Romania,” he said. “The market is extremely similar to Lebanon but competition is not as fierce.” The move into Romania was in part prompted by the country’s planned accession to the EU within the next few years, a development that will facilitate trade and boost the country’s economy.

Daher claimed it was difficult to say what share of Lebanon’s fashion retail market the azal GROUP accounted for. “But we are definitely the leading franchise retailer in the market,” he said. “Although anyone who sells clothes is a competitor, and there are many, none of the other groups have as many outlets, or our presence, or the size of our outlets and there is no distinct competitor who can compete on all levels.”

The azal GROUP’s success – revenues are growing by 25% a year according to Daher – highlights the quick rewards offered by well-run franchises, he said. “You can grow much faster as a franchise than if you’re operating your own brand,” he explained. “With a franchise, you’re implementing already-successful business models. It’s very hard to grow when you’re operating your own brand. Why bother establishing a vertically-integrated business model which will take you years and years to perfect when you can get involved at the end of the supply chain and start opening outlets in promising markets in a matter of months?” Of course, he noted, you have to make sure that you’re always observing the rules laid down by the franchise owner.

This year, the Daher family holding company changed its name from DGroup [D for Daher] to azal GROUP, in a move designed to reflect its evolution from a “mom-and-pop operation” into a corporation and to unify its international holdings under one umbrella. “We don’t think of ourselves as a family business anymore,” Daher said. “Most family businesses barely survive the second generation. We want to expand the business and ensure continuity. That’s why most of our senior managers are from outside the family. We see ourselves as a new business, which really got off the ground when we acquired the key franchises in 1998.” The company, though, is still wholly owned by the five Daher brothers, of whom Said is the youngest and founder Wassim the eldest. In some of its ventures, though, the azal GROUP has taken on partners to mitigate risk. Azal Management, a management company run by the azal GROUP, helps manage the group’s different companies.

Diversified business

Over the years, the azal GROUP has branched out into the leisure and food and beverage industries. It runs four Virgin Megastores in the UAE and two in Kuwait. Asked why the Beirut-based azal GROUP had not acquired the Lebanon Virgin Megastore franchise, Daher said that the possibility had been examined but the group had decided that Lebanese copyright law offered insufficient protection.

The azal GROUP also represents French coffee shop chain Columbus Coffee and bakery chain Paul in the UAE. And it is in the process of opening its first outlet in Bahrain for Australian juice company Pulp Juice. However, 85% of the azal GROUP’s business interests remain anchored in fashion retail. Although Daher sees the azal GROUP as a general retail franchisee, he plans to continue focusing on fashion. “We would like to expand all lines of business,” he said, “but no matter what we do, our core line of business is fashion retail.”

How did the azal GROUP acquire its position of market pre-eminence? “I think number one we were very lucky,” acknowledged Daher. “And plus we have a great team.”

Getting locations right

The group also appears to have an eye for prime real estate. A number of its stores are located in the upscale Verdun district of Beirut, an area Daher said is Lebanon’s prime retail location. “Sales in Verdun are up to par with those in the UAE, Qatar and even Europe,” he stated.

The azal GROUP has no stores in the downtown area because the kind of surface area it needs for its stores isn’t available. “Our requirements are greater than anyone can accommodate. We’re talking 2,000 square meters,” said Daher.

But when the recently kick-started Souks project is completed – possibly by 2006 or 2007 –the azal Group will have its fingers in the pie. It intends to open a number of stores in the Souks unveiling new brands.

“Real estate is the driving force of our business,” said Daher. “Today, in Verdun, you can’t find an empty slot. There are plenty of real estate projects, such as malls, throughout the area. They will help us expand.”

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