Marwan Ayoub and Rabih Saba—and their hospitality company Venture Group, specialized in developing and operating purpose-built restaurant clusters—have covered a lot of ground in the past seven years. Today, their team is playing in the premier league of regional hospitality.
Geographically and financially, Venture Group’s cluster business started small. In 2011, Ayoub and Saba began operating a traditional cluster in Beirut’s downtown, meaning they developed a master concept plan for a string of pubs on Uruguay Street. Calculating this project to be worth a few million dollars, they took a gamble on the immediate future. They only had sufficient funds for their first contractual payment when they signed their agreement with Solidere, the Lebanese company for the development and reconstruction of Beirut Central District.
Luckily for hospitality culture in Lebanon, and despite the fact that the Uruguay Street pub cluster did not survive, Venture Group was able to spread its wings financially, geographically, and operationally. Today, the group has three operational hospitality clusters in metropolitan Beirut under its belt (The Village Dbayeh, The Backyard Hazmieh, and Restos Saint Nicolas in Ashrafieh) and another five cluster projects under development from Beit Mery to Saida.
Each of their projects costs $5-10 million in direct investment and can accommodate between 12 and 20 tenants, each of whom is expected to invest between $300,000-700,000 to outfit a hospitality outlet in the cluster, with the investment dependant on the size of the outlet.
Venture Group’s ascent from downtown operator of a pub environment to sought-after developer of clusters in Lebanon with a pipeline of million-dollar projects is notable, particularly in a not uncomplicated economic period. However, the real validation of Venture Group’s concepts will emerge in the next expansion stage, which looks to the Arab world. The group has signed agreements for three $50 million plus (in total value) multipurpose entertainment clusters in Egypt—with the first opening in February 2019—and is currently proactively scouting projects in the Gulf. “We are only looking at countries where we can have more than two to three projects and this is why we are not considering Qatar or Bahrain. We were approached to open in Romania, and we will, because it will serve as a base for Eastern Europe,” Ayoub says. Beyond such limitations, however, the entrepreneurs are intensifying their consulting activities.
Ayoub says that each project in Lebanon adds incrementally to the total value of Venture Group. The first two to three projects provided a basis to break even, in terms of covering overheads and staff costs of the group. Each additional project, in his assessment, will generate $500,000 to $1 million in profit contribution to the group.
It seems the duo has struck gold—even before one accounts for the group’s core intangible asset, which is learning from successes and failures in developing hospitality clusters in Lebanon, where managing successful F&B outlets can be a real challenge for even the most seasoned operators (for more on that see F&B overview).
A cluster monopoly?
Uruguay Street was arguably the first model in Lebanon of a single operating entity running a common space that accommodates several F&B outlets. While it was not the perfect example of a hospitality cluster (Venture Group only operated and controlled one portion of the street, while the remaining portions were owned by other investors who were not obliged to abide by the group’s rules), it opened Ayoub and Saba’s eyes—and the eyes of other hospitality operators—to the potential of such a formula in a country like Lebanon, where social life is key.
Following Uruguay Street, Venture Group opened their next three clusters within a period of three years. Other operators also tried their hands at the cluster model, with around a dozen similar hospitality projects opening in Greater Beirut and various mountainous areas in the last three years—some only minutes away from Venture Group projects or from each other (for more on the unhealthy competition this creates, see F&B overview, page 98). However, few of these projects have enjoyed the same success as Venture Group-operated clusters.
As Saba explains, the group created an unintentional monopoly of the cluster model. “We didn’t intend to fully monopolize the market—we were just starting and didn’t know what would happen. What we were sure of was that we wanted to be fast in developing these clusters while learning from our mistakes and avoiding them in the next project,” he says. He goes on to explain that leveraging economies of scale and collective experience to service all of their other clusters is a key advantage they have over other developers, who typically operate only one cluster project.
Indeed, Venture Group utilized their experience in each cluster to optimize their model, with the result that each project cost less and profit ratios looked healthier, according to Ayoub. The most important of these lessons is being cost conscious, according to the two partners. “You have to do a proper financial engineering exercise because having the right equity leverage in the right structure can make the entire difference between losing money and making money and advancing investors’ ratios,” Ayoub says. He offers the example that investors might say they do not want subsidized loans since they have the necessary money, yet the savings from a subsidized loan can reach 30 to 40 percent of the net ratio.
Maintaining a good reputation with tenants, even at the group’s own expense, is another learning curve on which Saba elaborates. He recounts how the canopies they had initially constructed in The Backyard Hazmieh could not adequately withstand the winter rain and were a source of nuisance for tenants and customers alike. The partners decided to construct all new canopies on their own dime.
Designing the project right is also an important factor in a successful cluster; the ratio between indoor and outdoor spaces, and the number of outlets per project, should be taken into consideration. “After the Ashrafieh experience [with six outlets in Restos Saint Nicolas], we wouldn’t do anything with less than 20 ‘keys’ (the term Venture uses for outlets in its clusters),” Ayoub says. “However, we have devised a clever model in seasonal locations, where the project expands during the high season then goes down to the minimum number of units needed to serve the community in the low season, thus offering more value per customer.” He explains that this is achieved through the use of rooftops and gardens in the summer as fully operational outlets, whereas in the winter the same areas are used as landscaping spaces.
Being able to reinforce rules and regulations, especially when it comes to music volume, is another important factor and a lesson the partners learned from Uruguay Street. Keeping the project alive with ongoing animations—such as weekly live performances or seasonal popup markets—is also important for the success of a cluster, as is having the right client mix.
These learning curves born of experience do not come cheap, and the two men admit that it continues to cost them, even if they have made lemonade out of past lemons. As Ayoub explains, they have utilized lessons learned to design a business model whereby they sell their services to people who have idle assets and want to turn them into income-producing ones, or those who have cash and want to invest in the hospitality industry.
In what Ayoub describes as a turning point in their company’s short history, they decided to become an asset-light company. “The first drive of expansion was that we need to let go of the idea of owning the project and begin servicing other investors,” he says. “So we became an asset-light company that owns the concept in the sense of developing the concept, which includes concept design, architecture, leasing it on behalf of owners, and running it for 10 years—typically like hotel chains would do with hotel owners.” Since their investment in each project is now lower than before, they are able to see faster ROI and thus maintain momentum in launching projects, with five projects currently in the pipeline.
This idea of selling their service and expertise resonated well with would-be investors across all of Lebanon, but Venture Group decided to focus its energies on areas outside of Greater Beirut. “We are being offered new projects by the minute in Greater Beirut, some of which are in proximity to our existing clusters,” Saba says. “But we took the decision that if we use our efforts, while making the same money, to upgrade other communities, we will bring more value in the sense of job creation in the outskirts of Beirut and would not cannibalize [our existing projects].”
The partners estimate that every project they open in areas outside of Beirut (such as Saida or Zahle) directly creates 500 jobs along with another 500 jobs. Venture Group also directly invests $10-15 million, which (by their own assessment) makes the company the biggest driver of investment in the Lebanese tourism industry for the last four to five years.
Hospitality clusters for all
When they are approached with a new project in an area outside of Beirut, Ayoub and Saba consult the usual suspects—otherwise known as their regular tenants—in an initial phase they call concept testing. “When developing clusters, there’s a phase we go through, which is testing whether renowned brands are willing to go into such an area, to start with, and second of all, in such a cluster,” Saba explains. “This phase gives us a lot of insight because these brands are in better touch with the end users. This is because these operators know where their delivery market is and the profiles and spending power of their customers vis-a-vis the project that we’re developing.” He explains that this exercise gives them confidence regarding the project’s potential success, and this is backed by a letter of intent from the operators.
Venture Group then approaches the community’s local authorities to ensure their cooperation. Ayoub and Saba say they are usually welcomed and supported by the local authorities because of the added revenues they will inject into the local economies through their ventures. They then meet with the local business community to assure them that they are not there to compete with them, but rather to offer them a better deal than all other tenants—including subsidizing their inclusion in the project—should they choose to join the cluster. Having well-known local outlets join the cluster is strategic, given the traffic their names would bring into the project, Ayoub explains.
While being in a cluster would benefit a tenant through the brand exposure to around 900,000 visitors a year, some operators choose to remain outside of a cluster due to considerations such as rent, Saba says. Those who remain outside the cluster still benefit from increased footfall in the community as a result of the cluster, which may offset decreased footfall due to competition.
As with all Venture Group projects, these clusters are designed for the local population primarily, but stand to benefit from both local and foreign tourism. “We are very keen on introducing elements which would make the project a one-stop destination for tourism,” Ayoub says. “For example, in Saida, we will go to the producers of local crafts and give them small points of sale, which would allow tourists to make just one stop and buy everything the area is known for. In Zahle we are doing the same thing with the wineries and dairy producers. We will also have one landscaping element which makes the project very visible and so somehow a tourist destination.” He notes that their projects would provide a safe environment for school trip lunches and local tourists looking for a clean meal.
Umm El Dunya
Venture Group has taken its asset-light business model and its expertise to Egypt and is benefiting from the lack of lifestyle service providers there. Ayoub explains that those who have the know-how develop their own projects rather than sell their expertise as Venture Group does, thus their first project in Egypt has a retail element. “The market there allows for ambitions in taking on larger projects because there aren’t any service providers there yet, so we’re taking on supermarkets, retail, cinemas, and we are operating a restaurant park with 50 restaurants and a mall behind it,” Ayoub says. He notes the difference in scale between Egypt and Lebanon, with one project in Egypt comprising the same number of outlets as all of their projects in Lebanon to date.
Indeed, they seem to have penetrated the Egyptian market at the right time. “If you went to Cairo 10 years ago it was totally different from what you see now in terms of the taste, the exposure, the lifestyle … and they are developing by the minute, so maybe in a few years we will not be competitive anymore because they have more money than us, and they are fast learners,” Ayoub says. “We need to be positioned among the first service providers in a very short period of time, otherwise they will catch up with us.”
Venture Group is not worried that Egypt will fall from grace in the same manner as Iraq’s Erbil, but even if that did happen, Ayoub says that since they are an asset-light company they would not lose much in terms of investment.
Saba sums it all up by saying: “The idea of grouping a number of lifestyle facilities including restaurants and bars within the same address has been successful. We managed to master the learning curve of the details in our investment model, the structuring of finances, servicing the clients, renting the shops … you name it. But at the end of the day, four years ago, we were all wondering if this model would work and survive in the Lebanese market. And it did.”
It did, indeed. And with the velocity that Venture Group is moving at, this Lebanese-grown hospitality model could prove a success in multiple markets soon.