Storefront banners and text messages announcing extended clearance sales or “70 percent off” all merchandise have been part of Lebanon’s retail landscape since 2012. Executive has been reporting on the dwindling purchasing power among Lebanese and the overall decrease in tourists from wealthy GCC countries as the reasons behind the gradual decline of the retail sector rather consistently for almost eight years now (see articles from 2012, 2014, 2017 and 2019).
While this state of slow decline might have dragged on for a while longer, the intensification of Lebanon’s ongoing economic crisis—in addition to the COVID-19 crisis that has negatively impacted fashion retail worldwide—has exacerbated an already tough situation and has pushed the retail sector to the edge of a cliff.
Retailers Executive spoke to in early July described an almost impossible situation. The increase in the foreign exchange rate has significantly driven up the cost, and hence the price, of their imported merchandise at a time when consumers’ purchasing power and desire to spend on anything beyond necessities is at what they described as an all-time low.
The corona connection
The global retail industry was one of several that has been negatively affected by the coronavirus pandemic. In its late March coronavirus update to its State of Fashion 2020 report, US-based consultancy McKinsey & Company estimated that a two to three month lockdown (which has been the case for many countries) would cause “financial distress for 80 percent of European and North American fashion businesses, as volatility reduces investor confidence in a stock market facing its hardest hit since the global financial crisis of 2008.” The report further estimates that revenues for the global fashion industry will contract by 27 to 30 percent in 2020 when compared to 2019, although it predicts that the industry could regain positive growth of 2 to 4 percent in 2021.
In Lebanon, a nation-wide lockdown commenced on March 15 and imposed the closure of all non-essential services, one of which was fashion retail businesses. Stores located outside of malls were allowed to reopen a little over a month later on April 27, during phase one of the easing down of the lockdown measures, while malls were closed until the final phase of the country’s gradual reopening, which began on May 25.
During the lockdown period, non-essential businesses such as restaurants, hotels, and retail companies did not get any support from the government to sustain their livelihoods and be able to pay their employees, who were essentially left jobless as a result.
For small fashion retail enterprises (the ones with few or no branches that are typically found in Hamra, Bourj Hammoud, or Kaslik) a month-long closure with no revenues was the straw that broke the backs of their already struggling business. While there are no exact figures to examine, a simple drive along these streets reveals an significant increase in vacant stores with “For Sale” or “For Rent” signs displayed on them when compared to earlier in 2020.
Even some more established fashion retailers, those that could afford mall branches, did not reopen following the easing down of lockdown measures. Michel Abchee, CEO of Admic sal, which holds the franchise of department store BHV and which owns and operates City Mall in Dora, says four fashion retail brands and one restaurant out of City Mall’s 140 units remained closed following the re-opening of the mall. This was despite the payment facilities Admic extended to all businesses in the mall during the lockdown and for almost three months after it (paying on a percentage of their sales basis until the end of August).
No money, no confidence
The COVID-19 crisis has aggravated the suffering Lebanese were going through due to the country’s own economic crisis.
Consumers in Lebanon already did not have easy access to their money due to erratic banking restrictions that have been in place since the forth quarter of last year, which at first meant shifting ceilings on dollar withdrawals before preventing those with dollar accounts from withdrawing the currency altogether, and instead imposing a third exchange rate in the country (not the official rate nor the black market rate), at which these dollars are converted into lira. Lebanese whose income is in lira have seen its value against the dollar depreciate by over 80 percent from October last year, and all are faced with the day-to-day realities of a shifting black market exchange rate and hyperinflation on lira prices of goods as the increase in FX rates wreaks havoc on imports and businesses bottom lines.
This dismal situation had an understandably negative impact on consumer confidence, as is measured by the Byblos Bank/AUB Consumer Confidence Index. A May press release by Byblos Bank Group stated that the index, which averaged at 38.7 points in the first quarter 2020, had decreased by 19.1 percent from the fourth quarter in 2019 and by 49 percent when compared to the first quarter in 2019. This decrease in the first quarter of the year was the lowest level the index had reached since the fourth quarter of 2016, with the March result the lowest level since December 2013.
With no easy access to their money and with confidence so low, consumers across the board, albeit with a few exceptions (see below), are in no mood to shop for non-necessities.
In an apparent contradiction to this bleak description of consumers’ purchasing power, pictures circulating on social media depicted customers queuing in front of fast fashion brands such as H&M and Zara (in the first few days post-easing down of lockdown measures) and more recently, in early to mid-July, in front of sports brand Adidas and luxury retailer Louis Vuitton (LV), both of whom did not respond to Executive’s emailed request for an interview.
According to a salesperson in a well-known fast fashion brand catering to mid-income customers on Hamra street, the increase in footfall in the first few days after shops reopened was short-lived and did not translate into a major increase in sales. The same salesperson felt that if people bought anything, it was mainly children’s clothes and shoes (likely because children grew in size during the lockdown) or necessities such as underwear and socks.
On the other hand, those who could afford to do so lined up in front of Adidas and LV to take advantage of the difference between the black market exchange rate (averaging LL8,000 at the time) and the exchange rate used by these retailers. One of the women who waited in line to purchase a $3,500 LV handbag (and who works at an international NGO that pays her salary in fresh dollars) later told Executive she considered this purchase “a smart investment.” Since LV was calculating the exchange rate at LL3,000 to the dollar, and she had exchanged her dollars on the black market for LL8,400, she was paying less than half of the sale price of the purse.
Sami Saliba, owner and managing director of sports goods retailer Mike Sports, believes only retailers who plan to exit the Lebanese market can afford to price their merchandise at such a low exchange rate, giving the example of Adidas who he says is calculating the exchange rate an average of LL2,000. Adidas has released a statement saying its own stores will exit the Lebanese market by the end of 2020 “due to the ongoing economic challenges in the country” (the brand will still be available at resellers).
Stuck in an exchange rut
From the fashion retailers’ side, and since their merchandise is imported in cash dollars, the current economic situation has made operating their businesses a steep uphill struggle.
Banking restrictions on local dollar accounts are preventing retailers from transferring dollars to their suppliers abroad to buy new merchandise, which means they have to exchange whatever they are making in Lebanese lira at the black market exchange rate. This can drive cost, and hence pricing, up to the point where it makes more sense for some retailers to simply shut down. “We closed because in one week the exchange rate increased from LL5,000 to LL9,700 at the black market exchange rate,” Saliba says, speaking of the period when Mike Sports announced it would be closing all its stores. “No one wins that way.” Mike Sports reopened almost two weeks later because they were able to secure merchandise “at reasonable exchange rates,” he says, pointing out that the exchange rate had dropped by almost LL2,000 at the time of their decision to reopen.
Because retailers are selling in lira, even with price increases, they will struggle to cover the cost of new merchandise come next season since since they have to import these using fresh dollars. Abchee says the same amount of money in Lebanese lira, which last year would have allowed him to purchase enough merchandise for a whole section of BHV, can barely fill up a shelf or two at today’s rate (speaking at the time when the exchange rate had hit LL9,700 to the dollar).
Given this situation, both Abchee and Saliba believe the real problem will be three months from now when it is time to buy merchandise for the new collection. “You will see branches shut down,” Saliba says. “Instead of having 10 branches of a chain, you will have only one selling at very high prices because nobody will be selling at the old exchange rate anymore since they need to buy a new collection.” He adds that imports in the retail industry have, by his estimate, already dropped by 90 percent.
Both Abchee and Saliba say the retail sector should be given support by the government to weather this period. This support could be either through tax reductions or cancellations, according to Abchee, or by allowing traders to buy a percentage of the dollars they need at the exchange rate of LL3,850 through their banks, according to Saliba.
At the time of writing, Lebanon is in the middle of another partial lockdown (from July 30 to August 3) to combat the recent surge in the number of COVID-19 cases with another one on the way from August 6 until August 10.
Whether the already fragile retail industry will survive another round of lockdowns, which some medical experts call for, is uncertain in the best of circumstances. But when an economic crisis, complete with an increased foreign exchange rate and bank restrictions, is thrown in the mix, the industry’s future appears dreary.