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Reeling in customers in good times and bad

The retail sector weathered the storm of 2005 through a mid-year pick-up in tourism and by launching promotional campaigns. While retail growth depends on sustained calm, Beirut could yet be a regional retail hub

by Marianne Stigset

The Lebanese retail sector got off to a promising start in 2005, boosted by the exceptional results of the previous year, which had witnessed record post-war tourism figures, and a favorable psychological climate for shopping brought about by a robust economy.

January registered an 80% growth in year-on-year tourism retail spending, with visitors from Qatar and the UAE racking up their spending by 159% and 169% respectively. The Association of Car Importers in Lebanon reported a 26% jump in sales of commercial and passenger vehicles over the same period in 2004 (1,522 new passenger vehicles and 123 commercial vehicles were sold in January).

Then came the assassination of former prime minister Rafik Hariri on February 14. Demonstrators aside, the BCD became a ghost town, bringing more than one store to the brink of bankruptcy, until the civil war commemorations brought the area back to life again at the beginning of April. High-end stores, of which 40% of sales on average go to tourists (predominantly Arabs), reported initial drops in sales of up to 70%. The majority of car dealers saw their sales almost halved for the months of February, March and April. The market began experiencing a gradual turn in fortunes as the summer months arrived.

Part of this was linked to the fact that tourists steadily began trickling back. By June, the drop in tourism as compared to 2004’s exceptional figures had been reduced to 10%, whereas August and September surpassed 2004’s tourist spending by 2% and 6% respectively. Ramadan saw overall sales activities pick up for a few days, but activity was shorter than usual.

Leading the pick-up in tourism were the Jordanians, who had benefited from an easing of the visa procedures in June, allowing them to purchase their visas directly upon arrival at Beirut’s airport. This resulted in an 82% increase in Jordanian tourists in the June-September period. Spending by Jordanian tourists in Lebanon increased by 48% in July, compared to the previous year, according to Global Refund figures.

A similar increase is expected to be generated by the government’s easing in November of visa requirements for Iraqis as well.

Yet the hike in Jordanian tourists was not enough to make up for the gaping hole left in the retail market by the drop in visitors from the Gulf, who are responsible for the bulk of foreign retail spending in Lebanon. Between January and October, the number of tourists from Saudi Arabia and the UAE both dropped by 41% compared to 2004, whereas the number of Qataris fell by 24% and the number of Kuwaitis by 23%. The four nationalities represent close to 60% of all foreign retail spending in Lebanon.

Filling the void

In a bid to make up for the loss of the big foreign spenders, Lebanese retailers multiplied their discounts and promotional offers while launching large-scale advertising campaigns, which succeeded in improving sales.

Several car dealers notably initiated aggressive sales campaigns of special discounts and deals in May, which were widely advertised in the local media. As a result, sales in May increased almost 75% over April.
Although the offers to cover VAT and pay the car registration fees undoubtedly impacted the bottom line of participating dealers, May, June and July overall saw 5,284 new vehicles sold compared to 5,993 during the same period in 2004 – a more manageable 11% drop-off in sales a year on. By August, most car dealers had roughly gotten back to their status quo.

Inevitably, the shock dealt to the sector impacted the small retail outlets hardest, most of which have limited financial safety nets to deal with sudden and prolonged drops in sales. Most are heading towards negative growth for the year, yet the drops in overall sales and revenues tend to average no more than 15%.

Despite generally benefiting from greater capital reserves, the luxury segment also struggled, suffering from both the loss of high-end tourists, as well as the drop in sales to locals, who were not in the mood to go on lavish shopping sprees amid the prevailing political uncertainty.

The malls and department stores emerged relatively unscathed from the turbulence, with ABC Ashrafieh expecting a flat growth rate for the year and minimal impact on the group’s revenues brought on by the dozen days the mall was forced to close for security reasons. The resilience displayed by the retail sector can be viewed as a testimony to how far it has come since the war.

A rapidly evolving sector

Lebanon’s retail sector has steadily been building itself up to compete with the region’s reigning shopping destinations since the post-war reconstruction projects took off, rapidly evolving along international retail trends.

Despite being a relatively expensive country with high income disparities resulting in low discretional spending power, the retail sector has benefited from the economic growth and rising living standards that have occurred over the past decade. Lebanon’s gross domestic product grew from $9.1 billion in 1994, to $21.8 billion in 2004, the equivalent of $4,700 per capita, which is the highest among the region’s non-oil-producing countries.

Adding to a relatively strong domestic retail market is Lebanon’s long-standing position as the commercial platform between Europe and the Middle East and the growing tourism industry. Lebanon generates the largest share of tourist spending in the region, having secured the bulk of Arab tourists reluctant to vacation in Western countries following 9/11. This explains why the retail sector represents a major component of the local economy, according to some assessments, as much as 30% of domestic GDP.

Household consumption expenditure has been gradually declining as a percentage of GDP, from 110.5% in 1994, to 82.2% in 2004, indicating the diminishing weight retail will have in the economy. However this is more due to the natural progression of a developing economy rebuilding its sectors after the war, rather than a shrinking retail market. The Beirut retail market today is estimated at $1.5 billion, giving developers a solid incentive to invest in the sector.

Characterized by a high degree of fragmentation, the retail sector of the greater Beirut area has so far been dominated by a large number of small family businesses occupying property that is either owner occupied or held on an uneconomic tenancy. However, as the post-war infrastructure reconstruction projects advance, the sector is gradually becoming more concentrated, with the tendency going towards fewer retail enterprises and larger shopping center areas. Following international retail trends, the one-stop shop phenomenon is rapidly gaining currency, with new malls offering a range of different retail stores, as well as food outlets and entertainment.

Developers tend to focus on three categories of retail venues: large shopping malls or retail areas, such as the upcoming Souks of Beirut; smaller-scale malls, such as the 40,000m2 ABC in Ashrafieh; and the revival of buzzing retail areas, such as Hamra street.

The turbulences of 2005 appear to have had little effect on most retail developers, who are charging full steam ahead with their new projects. Gross leasable area in Beirut increased from 217,200m2 in 2003, to 350,000m2 in 2005, and is expected to reach 600,000m2 by 2010, according to Retail International.

Among the developments which will have the largest impact on the retail landscape is the long-awaited opening of the Souks, expected towards the beginning of 2007. The $100 million shopping area of 100,000m2, will notably include some 200 shops, food outlets, a 15,000m2 department store, a 7,000m2 supermarket and an entertainment complex. It is expected to become the hub of the greater Beirut retail sector, bringing more people and of greater diversity to the hitherto sterile and underemployed city center.

Other major projects in the pipeline which will significantly expand the city’s shopping space area are the 50,000m2 Beirut Mall in Chiyah, scheduled to open its doors in 2006, and the V5 mall, a 52,000m2 shopping area in Verdun expected to be ready by 2008.

Lebanon’s potential as a retail hub

With its modern multi-million dollar malls and souks, and vibrant shopping streets, the Lebanese retail industry has established an infrastructure that meets international standards. Added to this is the presence of most major international distributors and franchises, with new retailers and luxury brands venturing in to the market on an annual basis, such as Salvatore Ferragamo, launched in Lebanon in 2005, through a $150,000 advertising campaign. Lebanon can offer most international brands available in Western markets, and products not found in Gulf markets.

Should the country succeed in regaining a stable political and security environment, the tourism industry would take off again, and pull the retail sector along with it.

However attention needs to be paid to how to improve the annual shopping festival, which witnessed a 69% decrease in tourist attendance between 2002 and 2004. As shown by Dubai, a successful shopping festival can be the source of major retail revenues, as well as contribute to putting the city on the retail map.

Economist Marwan Iskandar has calculated that Lebanon will have the capacity to host two million visitors by the year 2008, who could contribute up to $3 billion to the economy. Such a growth would impact the retail sector tremendously. Furthermore, a revision of the current taxation policy pertaining to cars would greatly assist the car industry – one of the most important retail businesses, with car imports accounting for nearly 10% of all goods coming into the country in 2003. Presently hampered by high import duties, VAT and a car registration, industry insiders estimate that an elimination of the latter would lead to a 30% boost in sales.

With the right political backing and a stable security situation, the odds of Lebanon’s retail sector emerging among the region’s top retail destinations will be worth betting on.

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Marianne Stigset


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