OverviewReal estate

The lights are on, but no one’s at home

by Matt Nash
written by Matt Nash

Property developers with projects in and immediately around Beirut are in trouble. In late November, Massaad Fares – president of REAL, Lebanon’s syndicate for real estate brokers and consultants – explains that a years-long sales slump at the highest end of the market is having a wider economic impact. Developers with too much exposure to the capital can’t pay their bills, leaving suppliers, contractors and even banks in the lurch. The boom years from 2005 to 2010 saw dozens of projects offering large apartment units launched in Beirut at a time when prices of both land and finished property were skyrocketing. Market appetite for these units began waning in 2011 and was all but gone by the end of 2014.

Pretty facade, ugly interior

With this in mind, Fares says he and Namir Cortas – head of the developer’s syndicate (REDAL) – paid Banque du Liban (BDL) Governor Riad Salameh a visit to wish him happy holidays in December 2014. Fares says the two explained the problem and Salameh promised to do all he could. Not that the central bank wasn’t already doing the sector favors. Developers have been building green with the help of subsidized loans which BDL has been offering for the past few years, Fares said. Since 2013, BDL stimulus packages have targeted the real estate sector, with over 75 percent of stimulus-package-related loans facilitating the purchase of first-time homes, a BDL official confirmed during a World Bank event in early November 2016.

In 2015, BDL issued a circular aimed at helping developers with cashflow problems restructure their debt with commercial banks. However, Fares and other developers Executive spoke with since the circular’s publication confirm it is being underutilized.

These measures have helped keep the market moving in Lebanon as a whole, but have done little to benefit developers with large apartments (read: over $1 million) to sell in Beirut and some of its immediate suburbs, Fares argues. He explains that when he met with Salameh in December 2014, he assumed there were around 1,000 apartments over 300 square meters collecting dust on the market. Once the governor expressed interest in helping move some of these units, Fares says REAL and REDAL conducted in-depth market studies to understand the full extent of the problem. He says that BDL conducted its own study as well.

Fares is light on the details of the study’s results (saying they may be made public in the future), but tells Executive that somewhere between $3 billion and $3.5 billion worth of property simply will not sell. According to RAMCO Real Estate Advisors, the average asking price for a new apartment in municipal Beirut is $1 million (see comment, page 136). Prior to the market stagnation that began in 2011, Fares says developers were able to find buyers for apartments with price tags of $2 million and higher. That’s no longer the case, he argues. Offloading units in the $1 million to $1.5 million price range is becoming increasingly difficult, Fares says.

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Offloading units in the $1 million to $1.5 million price range is becoming increasingly difficult

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Help needed

In June 2016, BDL threw the sector another lifeline with Circular 427, which allows banks to lend to property speculators in certain circumstances. Between 2007 and 2010, property prices in Beirut soared to highs that priced most Lebanese out of the capital. Analysts and developers argued that real demand was the culprit as speculative purchases were minimal. Unlike in other markets, the rules in Lebanon barred bulk apartment sales. Circular 427 opens that door, if only a crack. The circular allows banks to lend to investors keen to buy finished property from a developer in distress. Making use of the circular, a fund can borrow 60 percent of its capital to purchase existing stock on the market, provided that 50 percent of the value of purchased property is already in debt. All purchases under 427 must be re-sold within ten years.   

While they welcomed the circular with open arms, both Fares and Mireille Korab, head of business development at FFA Real Estate, wish it had gone a bit further on the incentives front. Korab notes that lack of language allowing for a preferred lending rate for anyone wishing to raise a real estate fund could suppress appetite for such a thing. She argues that the circular will be equally, if not more, helpful for banks with nonperforming loans held by developers on their books. Pressed on just how large a problem unsold, expensive units are for the sector at large, Korab becomes philosophical. It’s not the actual market impact that matters, she argues. Rather, if one or two well-known developers were to fail, the psychological effect of that news on the market would be more disruptive than the actual bankruptcies.

“I’d be lying if I said we didn’t want subsidies,” Fares offers. “If developers’ money is stuck in these apartments, they can’t do anything else. If the developer has money, they can do more for the market,” he enthuses, pointing specifically to settling arrears and new investments. Asked if he had seen appetite in the market to make use of Circular 427, Fares smiles. In late November “two crazy guys” started work on raising a $1 billion fund. In the short term, the fund’s goal will be “to buy as quickly as possible,” Fares says. When asked if he knows who the “two crazy guys” are, he replies: “Massaad Fares and Namir Cortas.”

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Banking & Finance

Freedom of insurance

by Thomas Schellen
written by Thomas Schellen

The Lebanese insurance industry seems to be in need of new energy. Not only in terms of its objective to participate in the covers of the future oil and gas industry, but also in its fundamental development of company structures and legal infrastructure.

With low growth in insurance premiums – some 4 percent in 2015 according to the annual report by the insurance association and also 4 percent by the end of the third quarter of 2016 in year-to-date terms – insurers are hanging on, some perhaps by the skin of their teeth. It seems that 2015 and 2016 were two of the most difficult years in terms of growth since the old insurance law was updated – but hardly made fit for modern times – in a lengthy process in the 1980s and 1990s.

An updated law, proposed in the early 2000s to replace the old law with a more adequate and modern version, developed and financed by the World-Bank, has not been approved to date. The insurance sector is still populated with an overabundance of small companies that have not been able to develop scale and, more worryingly, still include an unknown share of opaque providers, which can perhaps only exist in this business because they defer meeting their full coverage obligations.

Despite a clear need for collaboration in raising greater insurance awareness, illuminated sharply by the difficult economic environment of the past two years, the sector’s voice is exceedingly falling behind when compared with the voice of the Association of Banks in Lebanon.

Executive asked Walid Genadry, who headed the Lebanese Insurance Control Commission (ICC) from its inception in 2002 until 2015, and is, since last June, a Distinguished Fellow in the International Association of Insurance Supervisors (IAIS), what he recommends in order to take the Lebanese insurance industry forward from this point.

He told Executive that the lack of a new insurance law is to blame for many shortcomings in developing the sector and for hindering better supervision, and the implementation of this new law would boost the productiveness of insurers.

A 2013 World Bank evaluation of the ICC as part of its Financial Sector Assessment Program (FSAP) was positive, he pointed out, describing the regulator as having developed “an admirable capacity to develop approaches for review and analysis, follow-up, market conduct, intermediary registration and fraud investigation.” However, in Genadry’s view, this positive FSAP judgement has limited value today, merely serving as a sort of encouragement and appreciative tap on the back.

He said: “One needs to look at [the evaluation] more as praise for better than expected results rather than as praise for a very good standing. It is more like saying that you reached a grade of B – when your regulation should not have allowed you to go beyond a C – but the real objective is an A. We are not there and we cannot really get there without a solid law.”

Explaining the role of an insurance supervisory authority and differing concepts of its mandate in some continental European countries, where the first aim of such an institution is customer protection versus Anglo-Saxon countries where the focus is on the promotion of fair and stable insurance markets, Genadry said that the two approaches should be seen as complementary to each other. “The two approaches are equivalent in the sense that you cannot protect customers without the establishment of fair and stable markets and vice versa. In a nutshell, a supervisory authority is needed to protect customers as well as serious insurers,” he elaborated.

According to Genadry, a vibrant insurance sector is of even greater value in a situation such as Lebanon’s today, because it provides a lever that boosts development to a healthy economy. This makes the passage of an insurance law even more urgent, he claims, saying: “Today we have one of the weakest insurance legislation frameworks by international standards, even in comparison to other markets in the Arab region.”

He highlights that gaps in the current law are of special concern with regard to insurance supervision. “What is missing represents a permanent threat to the effectiveness, if not the survival, of an efficient supervisory authority. When you have a law (the present one) that does not respect even the basic core principle [as per international standards] of independence from the political powers and from undue lobbying, the insurance supervisory authority is at permanent risk of being jeopardized. So whatever we build, even if it is properly built, is built on sand. The ICC must become independent, either as a standalone, as part of an integrated supervision [body], or even in the vicinity of the central bank.”

Besides its failure to guarantee the ICC’s supervisory independence, the present law also falls short in other key areas. The list of shortcomings, which Genadry had to deal with in his years as insurance commissioner, is long and starts with the fact that the existing law does not even provide a possibility for setting minimum norms on governance for insurance companies. “A supervisor today cannot oblige companies to abide by basic requirements, such as having independent members on the board of directors. It is also not possible to request that insurers establish a risk committee or have a remuneration policy, compliance committee, or even an internal audit department,” he said.

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The ICC must become independent, either as a standalone, as part of an integrated supervision [body], or even in the vicinity of the central bank

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Both hands tied

The current weaknesses in the legal and regulatory framework also include a lack of sufficient means for financial control, as supervisors have no power to establish relevant solvency norms or enforce actuarial design of non-life products, or tools to control conduct, such as being able to determine and penalize unacceptable market practice, nor the ability to enforce transparency or even guidelines on transparency.

The ICC further suffers from weaknesses when it comes to powers of intervention to stop wrongdoing or to penalize companies in ways that are in line with the severity of an infraction. “Today two alternatives are granted:  either totally withdrawing a license – something harsh and very difficult to exercise – or the issuance of a very low fine, a maximum of 25 million LBP – that’s not even $17,000 – in limited situations,” Genadry said.

According to him, these two options represent extreme opposites with nothing in between; the first is equivalent to shutting a company down and the second is an insignificant punishment. The name of the game is deterrence, not catching wrongdoing. As a result, means to deter companies from bad practices are very weak overall.

A modern and up-to-date insurance law would empower the authorities to supervise and, if necessary, set conditions for insurance contracts, enforce standards for the selection of external and internal auditors (or at least remove auditors that have been proven to be incompetent), take steps to intervene in the management of insurance companies if deemed incompetent or irresponsible, or make sure that policyholders’ rights are maintained if an insurance company goes bankrupt or has to be dissolved upon loss of its license.

Finally, the current law on insurance has weak and inflexible licensing requirements, inadequate definitions of insurance lines and low minimum capital requirements ($1.5 million) for insurers. It also misses out when it comes to controlling mutual insurers, due to the fact that they are licensed through the Ministry of Agriculture, without any type of formal and professional control.

With such an array of legal insufficiencies and flaws, Genadry says it is extremely difficult for any supervisory authority in Lebanon to reach its objective of protecting both serious companies and policyholders. Asked how he was able to build a supervisory authority under such weak legislation and lack of independence, plus numerous ministerial changes at the Ministry of Economy and Trade, he said some ministers were a real blessing for his work in the ICC, as they encouraged the commission to move ahead and defended it against detractors.

A crisis of credibility

“But that is not enough,” he added. “The reality is that every time a new minister comes, one has to manage a new transition. We have had nine ministers over thirteen years. Ministers upon appointment have a thorough need to develop an understanding of the insurance supervision business. This is not a criticism of any person, as you cannot expect a minister to be competent in such a highly specialized field as insurance.”

According to Genadry, the present law concentrates a lot of powers in the hands of one specific minister as head of the Ministry of Economy and Trade, stipulating that it is his authority to give and withdraw licenses, penalize wrongdoers, pass new regulations and so on. The resulting pressures are not easy to face effectively and in a timely manner.

“Lack of independence also means depending on government crises, during which the supervision activity cannot be as effective. All this makes it such that, overall, the good periods [during my work as insurance commissioner] were smaller in number than the challenging periods, and even the good periods I experienced during my term were often fragmented,” Genadry summed up in his reflection. 

As to the future outlook of the insurance sector in Lebanon, Genadry is at the same time passionate about its potential and cautious due to the risks the sector will face if the new insurance law is not expedited.

“Credibility is a vital element of proper supervision. For this, a supervisory authority needs stability, continuity, clear definition of duties and powers, and above all, competent supervisors who enjoy a reputation of integrity and possess the right tools to do their work and the ability to remain standing despite the fact that it is a profession which is, by nature, ungrateful.”

A high level of morality and competence for the supervisors is crucial. “Without that, even with a good law you do not go far,” he says, emphasizing that there can be no easy success for the supervisory authority without a good collaboration with the sector’s players, without confusing the roles, as the industry members and the supervisor complement one another.

He concludes: “There will be no real protection for serious insurers and policyholders in Lebanon without a well-established supervisory authority that is capable of applying international norms.”

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Foreign PerspectiveMedia & Advertising

A frank, but hopeful, view

by Thomas Schellen
written by Thomas Schellen

Executive spoke with German Ambassador Martin Huth to follow up on Germany’s aid commitment to Lebanon, the development of bilateral economic relations in 2016 and to chart expectations for 2017.

E   How much of the money pledged in conferences in the beginning of the year did Germany contribute to humanitarian and development needs of refugees and resident populations in Lebanon in 2016?

The figures that we can disclose relate to refugee aid and development aid for Lebanese communities. In terms of the amount pledged at the London Conference [in February 2016], Germany has made more than 300 million euros in assistance available to refugees, as well as to vulnerable populations and host communities in Lebanon. This amount is double the amount that we made available in 2015. If we take only the amounts made available in the past two years, we are nearing a total of half a billion euros.

E   Can you give us details as far as projects that were financed in 2016 and their efficacy?

We are funding numerous programs with this money. I have to highlight the education sector, where you are aware of the program, launched by the [Lebanese] Ministry of Higher Education, called Reaching all Children with Education. We are also assisting with the Lebanon Host Communities Support Program, which is conducted by UNDP (United Nations Development Programme). It mainly consists of small projects in host communities, such as cash for work programs, small building projects of community centers, etc. Next, we took part in the reconstruction of the Nahr al-Bared camp north of Tripoli, making an additional 15 million euros available for this.

We also support the electronic food assistance that is provided by the World Food Programme, which is also covering Lebanese under the National Poverty Targeting Program. The food assistance is quite remarkable, I think, because it started with in-kind distribution and has been transformed into a smart system that uses the Lebanese banking sector and a network of local shops. In this way, refugees are provided with an electronic card that can be used to buy food in these shops. This reduces transaction costs and provides direct stimulus to the local market.

Regarding the Reaching all Children with Education program by the Ministry of Higher Education, Germany and other donors are now covering the school fees of 200,000 Lebanese children and 170,000 Syrian children. The efforts also include school rehabilitation, improving learning environments and possibly further developments of the curriculum. This initiative has led to higher enrollment of Lebanese children, which shows how the national education system is benefiting from this support. I can also mention a number of water projects that we are conducting, notably in the Bekaa.

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Lebanon has increasingly become its own category of a non-performing or non-existing state, contrary to the aspirations of its citizens

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E   The celebration of the German National Day in Lebanon this October was marked by greater and more elaborate participation by the corporate sector. Beyond that, what were highlights of German-Lebanese economic relations in 2016?

Three EU countries are among the five biggest trading partners for Lebanon. Apart from Germany, these are Italy and France. Talking about figures for Germany, we have projected exports to Lebanon of about 850 million euros in 2016, which represents a slight increase from the average figure of the past four years. What is remarkable is that there has been a steady increase in Lebanese exports to Germany. We have a projected figure of 54 million euros for this year. This is relatively meager when compared with imports to Lebanon from Germany, but it compares very favorably to what Lebanon has exported to Germany in previous years. In 2012, the value of exports was 47 million, then 49, 44, 45 and now 54 million, which is a nice increase [of 20 percent] from last year. I don’t have the details yet, but I surmise that the increase is related to the improvement of quality in agro-industry products.   

E   What are your best-case expectations for 2017, if we assume that the new presidency will bring a boost to the Lebanese economy?

First, we hope that a government will be formed quickly. My hope at this time is that there will not only be a government, but a functioning one, with people at the head of ministries who know their files and dossiers and who are able to fulfill the vision of Lebanon not only having institutions, but functioning institutions in service of Lebanese citizens. If we talk about our own areas of interest with the goal of easing the plight of Syrian refugees in Lebanon, it is important that conditions in Lebanon remain conducive to maintaining or even expanding this assistance. Of course, we have to wait and see how the new Lebanese government positions itself in this field, not forgetting that the government which is being formed now will likely be in office [only] until next year’s parliamentary elections.

E   In being an international partner, there is always a delicate balance between giving aid and asking for compliance with your prerogatives in return, such as values and policy objectives. What can you tell us about any expectations for Lebanon to comply with European views regarding human rights or the right to work for Syrian refugees in Lebanon?

This is a wide range of issues. First, let me say that we have not provided budgetary assistance to Lebanon. Instead, and primarily due to the larger absorption capacities involved, we channel our assistance mostly through international organizations. Regarding greater transparency and implementation of good governance in Lebanon, I think the key is to have good governance and to have institutions that work in the interest of the citizens.

Participation is the one thing that groups everything together in a functioning state, including services that are being provided to citizens and to the fulfillment of citizens’ aspirations and human rights. For participation, you need dialogue, freedom of expression, free media and open discourse that is led with a focus on the common good, rather than a particular interest of a confession or other group. The problem in Lebanon has always been how to define this common good and adopting the notion of a common good that is Lebanon, its state and its citizens. A free press is important in this, and there are an enormous number of media institutions in Lebanon, but it seems to me that these media – TV stations, radio and press – are very often mouthpieces of certain political groups. You have a diversity of views if you look at all of them, but you don’t have dialogue and critical exchange. Some improvement in this field would be a good thing. Civil society also has to be included in the dialogue, not just traditional forces or groups. The potential in Lebanon is there.

E   Do you see a risk of Lebanon ending up as a failed state in the long run?

I think the curve of success of the Lebanese state has been going up and down since the 1960s. Over the last two and a half years, with the presidential vacuum and ensuing political blockade, Lebanon has increasingly become its own category of a non-performing or non-existing state, contrary to the aspirations of its citizens. Now, we again have a chance to improve the situation after the presidential elections and the formation of a government.

What is important in the near future is that Lebanon remains protected from the Syrian crisis so that the war does not spillover into Lebanon. Lebanon will continue to require enormous assistance from the international community in order to cope with the plight of refugees on its territory. It will also need internal reforms, starting with essentials like introducing fast internet and making the banking sector more available to Lebanese citizens. Oil and gas is another important field for development. There is plenty of work to do, but in Lebanon you can always say that the potential is there, and the other side of the weak state has always been the remarkable resilience of the people and the presence of a lot of talent and economic savviness. These are all things that can play out in Lebanon’s favor.

E   Does the German government place any expectations on Lebanon as far as integrating refugees into the country or giving them guarantees of work?

Settling refugees in Lebanon is not an option. This is not what Lebanon wants, nor what we want or what the refugees themselves want. At some point, there has to be a return to Syria. Of course, this has to be in line with international standards and human rights, and the return to Syria has to be safe for those refugees. In my view, this will unfortunately not be possible in the near future, and therefore we are all faced with the challenge of easing their situation for the time being. Some improvements could be made in line with Lebanon’s commitments at the London Conference. These relate to access to the legal system and the labor market, as well as the easing of registration and movement. At the same time, Lebanon’s security needs have to be borne in mind. But, refugees in Lebanon, just as the Lebanese themselves, have the right to live free of fear and want.

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AnalysisBanking & Finance

Analysis of banking sector results

by Dany Baz
written by Dany Baz

The profitability of alpha banks – those with deposits above $2 billion – has grown in the third quarter of 2016 when measured by the improved return on average equity (ROAE). The ROAE ratio at end of September was almost two percentage points higher than a year earlier.

This insight from quarterly figures released after the end of the third quarter (for details see the table below) is a hopeful sign for the Lebanese economy which, after a challenging year in 2015, showed signs of an even drearier year in 2016. In the midst of a troubled socio-political context, Lebanese banks stood their ground throughout the first three quarters.

In fact, while activity registered modest growth in the first six months, mostly generated in the second quarter, the third quarter witnessed acceleration in domestic activity. The financial engineering operations initiated by Banque du Liban, Lebanon’s central bank, generated significant growth in financial inflows to Lebanon – estimated at 36 percent year-on-year over the first nine months of 2016 – triggering a higher increase in domestic customer deposits. In addition, Lebanese banks maintained their high financial standing and managed to sustain profitability throughout the first nine months of the year.

The analysis below lays out the half-year performance of the 22 banks that constitute the alpha and beta groups, as well as the third quarter performance of the alpha group. The two groups above include 14 and eight banks, respectively, and represent around 95 percent of the Lebanese banking sector. In 2016, there were 48 banks operating in Lebanon, excluding subsidiaries.

At the consolidated level, total assets of alpha and beta banks equaled $219 billion, growing by a mere 1.5 percent, or $3.3 billion, by the end of June 2016. In parallel, customer deposits registered slow growth of 1.1 percent to reach $181 billion, while loans to customers showed more stamina with 3.1 percent growth to $71 billion for the first half of the year.

When looking at domestic activity, the overall trend observed in the past two years remains unchanged; customer deposits represented 84 percent of total deposits, while domestic loans represented 71 percent of total loans. It is worth mentioning that while the activity of foreign entities might be satisfactory, the depreciation of the Egyptian Pound and Turkish Lira have impacted consolidated balance sheet aggregates since Egypt and Turkey remain important foreign markets for some large Lebanese banks in terms of assets.

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Banks undertook significant efforts in the summer to sell Lebanese Eurobonds out of their portfolio holdings to foreign institutional investors

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Maintaining stability

Domestic deposits stood at $151 billion at the end of June, up by around $3.2 billion since December 2015, compared to an increase of $7.3 billion over the full year 2015. Domestic loans, on the other hand, passed the $50 billion threshold at mid-year, registering an increase of $1.4 billion since December 2015, bearing witness to the sluggish domestic environment. Overall, foreign activity represented 18 percent of assets, 16 percent of deposits, 29 percent of loans and 20 percent of net profits at the end of June.

At the currency level, dollarization of deposits was stable at 63 percent, while dollarization of loans went down to 73 percent at the end of June 2016. In terms of growth, there was a notable 6.2 percent increase in loans denominated in Lebanese Pounds (LBP), reaching around $13.7 billion at mid-year.

Alpha and beta banks operate 1,397 branches and employ 34,011 staff as of June 2016, 70 percent of which are based in Lebanon and 30 percent abroad. In line with the trend observed since December 2014, alpha and beta banks opened 17 new branches and recruited 620 employees during the semester, of which ten branches and 418 employees fell into foreign markets.

The financial performance of alpha and beta banks has maintained its good standards. Compared to an estimated MENA benchmark of 22 percent, overall liquidity remains high at 30 percent, broken down into 20 percent in LBP and 35 percent in foreign currencies at the end of June. The corollary loans to deposits ratio, which stands at 39 percent overall –  25 percent in LBP and 46 percent in foreign currencies – remains lower than regional and world benchmarks (respectively 77 and 87 percent in 2015), indicating more lending flexibility for Lebanese banks once the economic environment improves.

Despite persistent challenges in Lebanon and main regional markets, asset quality reported a slight improvement over the past year. Doubtful loans to gross loans dropped from 5.9 percent to 5.7 percent year-on-year in June 2016, a ratio lower than emerging markets and global benchmarks of 6.8 and 7.1 percent, respectively, in 2015. The prudent provisioning policies of Lebanese banks prompted them to take all needed measures to maintain their good asset quality, which translated into an adequate coverage of doubtful loans of 73.7 percent, compared to a world average of 68 percent in 2015. In addition, alpha and beta banks increased their collective provisions to 1.18 percent of net loans by the end of June 2016.

Modest returns

Last but not least, the first half of 2016 reported a growth in net profits of 8.2 percent to reach $1.1 billion, outperforming the growth in other aggregates such as assets, deposits and loans. Return ratios remained modest as both return on average assets (ROAA) and ROAE edged up slightly compared to June 2015, registering 1.03 and 11.63 percent, respectively. In comparison, the MENA average ratios stood at 1.6 and 12.1 percent, respectively, in 2015.

The major developments of the alpha group of 14 banks as of the end of September 2016 are as follows:

Growth of major aggregates was reinvigorated as assets, deposits and loans witnessed respective increases of 5.1 percent, 3.2 percent and 4.7 percent. The most notable growth was registered in loans in LBP, which reached 9.4 percent, further contracting the loan dollarization ratio and foretelling a gradual restoration of the role of the Lebanese Pound as a borrowing currency. In parallel, loans of foreign entities increased by 6.5 percent.

Growth in lending activity was complemented by stability in asset quality, with gross doubtful loans as a percentage of total loans maintaining its level a year ago at 5.72 percent. Coverage of doubtful loans improved since December 2015 to 74.43 percent, and most importantly, collective provisions as a percentage of net loans reached a record high of 1.27 percent.

Alpha banks remain highly liquid at 33.58 percent and continue to foster economic growth by increasing their loans to deposits ratio to 38.48 percent, broken down into 24.14 percent in LBP and 44.66 percent in foreign currencies. In parallel, banks undertook significant efforts in the summer to sell Lebanese Eurobonds out of their portfolio holdings to foreign institutional investors. Their foreign currency sovereign exposure fell to 13.24 percent of foreign currency deposits and 83.22 percent of shareholders’ equity. At the profitability level, net profits grew by 9.7 percent, reinforcing return ratios at large. The return on average assets rose from one percent in September 2015 to 1.17% in September 2016, while the return on average equity rose from 11.33 percent to 13.05 percent over the same period. In detail, interest margins and spreads remained stable at 2.01 percent and 1.94 percent, respectively, with a notable impact brought by the increase of non-interest income that rose from 0.88 percent of average assets to 1.32 percent year-on-year, which translated into higher asset utilization of 3.26 percent. Coupled with stabilized net operating margins and leverage, return ratios went back to their 2011 levels.

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Banking OutlookBusiness

What to expect from Lebanese banks in 2017

by Thomas Schellen
written by Thomas Schellen

On the banking sector’s consolidation front, 2016 saw some action. The already conjoined lenders BIT and NECB rebranded as Saradar Bank, and the acquisition of Bank Pharaon and Chiha by Byblos Bank and BLOM Bank’s acquisition of HSBC Lebanon had not only been long in the making, but should also not be put at the doorstep of the local economy. HSBC’s decision to pull out of Beirut was just one more link in a long chain of strategic decisions in its boardroom that was triggered by global regulatory and capitalization requirements with their costs.

BLOM Chairman Saad Azhari confirmed to Executive on the sidelines of the bank’s media lunch in November that “it took some time” to reach the acquisition deal. BLOM Bank and HSBC had entered negotiations for the acquisition at the end of 2015, he said. He specified that “for the last few months, the focus of negotiations was between [HSBC] and their employees,” adding that the acquisition process should be completed in the middle of 2017. 

As for the banks’ plans and outlooks, decision makers at four banks present a wide range of perspectives. Bank Audi’s Freddie Baz politely but firmly sees Lebanon on the backburner in terms of Bank Audi’s internal profits growth. “We will not see an increase in its share of profits growth in 2017, because the trend is for our foreign entities to gain in share”, he explains. He adds that in his opinion, Lebanon’s contribution to the group’s consolidated assets and earnings, which stands at 50 percent today, should go down to one-third four or five years down the road.

“That is not because we have less appetite [for Lebanon], we will still be the largest bank and the leaders, but because we are operating in markets with much higher prospects of growth [such as Egypt and Turkey],” he goes on to say, clarifying that Bank Audi maintains its strategic outlook for the coming year based on the plan that it has pursued for several years now.

Creditbank, which has prioritized lending activity throughout its existence, will continue to be guided by the philosophy of giving credit. Chairman Tarek Khalife notes that the will of banks to extend credit to the private sector has been established over time and is proven by several years of expansion in private sector lending portfolios, but adds that the economic situation today makes it more difficult for lenders, who cannot find asset classes where they have good lending opportunities. “The slowdown of the economy is eating into the credit market. Our loan portfolios are growing, but we see that the rate of increase in lending is slowing and we have to make extreme efforts to find projects or companies to which we can lend with a good conscience,” he says.

Part of this slowing is, in the case of Creditbank, related to the effects of becoming a larger bank, he explains. A slowing of percentage growth over time is only to be expected in a bank that is  growing in real terms, but while six or seven years ago Creditbank was growing its loan portfolios by 20 percent or more from year to year, this growth is now lower. However, the main culprit behind slower lending is the lackluster economy of the past few years, he says: “It has not been competition from other banks that is slowing us down. It is the economy that is slowing us down”.

Banque Libano-Française (BLF) will keep utilizing its existing and tested strategy going forward. “We continue to be a commercial and corporate bank. Seventy percent of our portfolio is in lending to corporate clients. What we are trying to grow, even though this period is very difficult for growth, is business with SMEs (small and medium-sized enterprises). By this, noting that all Lebanese companies by international definition are SMEs, I mean that we are trying to have more and more small businesses as clients and borrowers,” says Chairman and General Manager Walid Raphael.

According to him, the bank has substantially expanded the retail banking side of its business and reached a retail lending share of over 20 percent in its total loan portfolio. However, the composition of retail lending at BLF is still tilted towards housing and car loans, and comprises much less in terms of consumer loans or revolving loans. “We [provide such loans to] our client base where we already have the history with our clients and can be at ease with extending consumer loans. [The process of] acquiring new clients and expanding our client base is through housing loans,” Raphael elaborates.

Banks in the course of 2016 increasingly courted the SME sector, seeing with help from the International Finance Corporation that micro, small and medium enterprise markets have been underserved by their business and corporate banking departments. They continued to invest in the renewal of their ageing IT systems, expanded their digital banking channels, did the customary innovations of launching new cards and marketing assaults on specific target groups, and worked on enlarging their physical presence through new branches and some eye-catching head office projects. A notable example is BLF, which according to Raphael can’t wait to move its head office into the building with an architectural design that was determined earlier this year in a competition.

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Banks in the course of 2016 increasingly courted the SME sector, seeing that micro, small and medium enterprise markets have been underserved by their business and corporate banking departments

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Spotting cows

A very unconventional ambition in the banking sector comes from Banque Misr Liban (BML). As Executive General Manager Fadi Daoud explains, the bank wants to be perceived as a community bank. To this end, it has positioned a number of products in the course of 2016, most notably a “cow loan.” Used to finance milk producing cows, this extraordinary loan is tailored to demand for economic activity by rural women, but potentially also could target urbanites who want to connect in new ways to the Lebanese countryside and rural economy.

“We wanted people to stay in their villages by giving them the means to earn money, that’s why we have gone with the cow loan as a microfinance initiative,” Daoud says. The ultimate aim of this initiative is for BML to collaborate with municipalities, funds established by municipalities, and the Kafalat loan guarantee corporation in setting up complete agro-industry production chains in certain rural areas. Under this business model, which was launched in 2016 as a pilot project, BML will finance a string of farms and interconnected factories (for agro-industrial production, packaging, logistics, etc.) together with a fund operated by municipalities. According to Daoud, the initiative will also include knowledge transfer, branding and quality assurance, seeking to create Grade-A brands of products from specific rural areas of origin.

Going even further “out of the box” of conventional bank thinking, the cow loan could appeal to city dwellers as an eco-compatible, almost patriotic investment opportunity whereby loans to buy (livestock-insured) bovines could be combined with contracts to have the animals placed at farms under revenue-sharing agreements for the net income produced from milk. Plus, the project could involve emotional bonding options by the creation of an app which enables the cow investor to view her or his animal on their smartphone by way of a farm-mounted camera. “We believe this initiative is good for the villages [and for the bank] as we really have a role to play for our community and we are being paid for that,” Daoud says and enthuses further, “The idea also is to provide city kids with an incentive to watch their cow online and get young people interested to visit the farm and care for the cow.”

Convergence of fortunes

As far as the improved convergence of fortunes between the Lebanese banking sector and the national economy, bankers are convinced that the central bank’s financial engineering will move the country closer to this goal.

Creditbank’s Khalife hopes that the current optimistic sentiment will create the dynamic for a self-fulfilling expectation for positive change.

“We have to have our eyes on structural reforms which will trigger everything else,” Khalife says, pointing out that there is enough potential for foreign direct investment or investments from savings present in Lebanon to warrant a future of unprecedented opportunities. He argues, however, that Lebanon needs to learn how to pull itself up, saying that a Paris 4 donor meeting would be “absurd,” in the sense that one should not expect outcomes to differ when repeating the exact same action.

In this context, he sees a new attitude and approach of self-dependency and seeking to solve the country’s problems without reliance on external help as the best way forward. An increase in lending will be needed for this, and while all alpha banks are effective lenders, not all are efficient in this activity, Khalife notes, saying with a view to Creditbank’s leadership in lending growth, “the market considers Creditbank to be efficient.”

For Bank Audi’s Baz, lending to the private sector is key and has new prospects thanks to Banque du Liban’s measures of 2016. “We look at the banking industry in Lebanon as almost saturated, which is not exactly the case. First, the capacity utilization rate in the private sector is at 75 percent – which means that we have a 25 percent output gap. Closing this gap is only possible through new waves of loans to the domestic private sector, [meaning] corporate and commercial loans and even SME and retail loans. We have started a national campaign this fall on our SME banking services,” he emphasizes.

According to Baz, the second thing to consider is the ratio of retail lending to per-capita income in Lebanon, which is lower than in countries with comparable per-capita incomes. “If we [analyze] loans in Lebanon with a breakdown between corporate, commercial, SME and retail loans, comparing Lebanon to countries like Turkey and Mexico, which are similar in per capita income, the ratio between SME/retail and corporate/commercial loans is over 50 percent of loans extended on the side of SME/retail,” Baz says, whereas the split between corporate/commercial lending and retail lending in Lebanon is still 60:40 or more in favor of corporate/commercial. He concludes, “This means there are many persisting gaps to be filled in SME lending and retail lending. You also have a need to launch new waves of loans to the corporate sector in order to close the output gap.” In short, from the banking perspective, there is potential in Lebanon.

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Journalism

Excursion into Lebanese journalistic futures

by Thomas Schellen
written by Thomas Schellen

Lebanon has a tradition of freedom of speech. This tradition finds expression in media freedom, intellectual discourse, academic debate and a general atmosphere or spirit that makes Beirut a regional capital of thought and center of attraction for far more people than just journalists and academics. This status is intangible; it cannot be expressed as a contribution to GDP or in terms of capital utilization. Nonetheless, through concentration of intellectual capital, it has bearing on the country’s budding creative and design industries. Moreover, this environment is crucial for Lebanon’s future as an origination point of human capital, which, if one reflects on it, is by definition only productive if it is nurtured in freedom.

Media – and, more specifically, qualified opinion makers, journalists and commentators – are essential in maintaining and keeping up this freedom-of-speech environment. This function of the media has sometimes been undervalued (especially when it comes to remuneration of Arabic-language journalists), and sometimes been impaired by tendencies to convert organs of the Lebanese press into mouth pieces for various – even external – interests and by journalists who sold their skill of opinion making to the highest bidder, and with this sold their conscience.    

In 2016, the chicken of this non-journalism came home to roost and Lebanon’s newspapers were beset by severe money problems and existential crises. It was debated if the print media had to be propped up by state subsidies, or if the funeral announcements and obituaries for the old media should be written in preparation for their impending deaths.

In this time of concern over the future of serious media in Lebanon, however, it seems advisable to widen the scope of debate: it is not just a question of whether print media and political newspapers are endangered, but also a broader consideration about freedom of speech and its new and old incarnations.

First of all, it must be noted in this wider context that the rise of digital communication has resulted in both: attention-grabbing vehicles of communication that are based on the lowest possible common denominators – of animalistic instincts (like exhibition of body parts) or of intellectual non-demand (such as “like” buttons or tweets limited to 140 characters) – and a long tail of online repositories filled with high-value-added material and demanding discourses. In Lebanon, this means the birth of new online media with original thinking and thought-provoking visualizations.

Heritage of martyrdom

One should also not forget that since the beginning of Lebanon’s reconstruction, the country has seen the creation of professional media outlets with commitments to transparency (Executive, we like to believe, is among these) and that critical journalism has therefore found new “conventional” as well as “new media” outlets. Finally, there are the seeds of media freedom and quality improvements that were sown in the very attempts to violently destroy journalistic voices that some powerful entities felt disturbed by in the mid-2000s. These seeds have developed and for five or six years have increasingly produced fruits in the work of institutions like the Samir Kassir Foundation (SKeyes) and the May Chidiac Foundation (MCF). No one can deny that the strongest hopes for the development of better journalism in Lebanon and for the region have been nurtured by the heritage or the legacy of journalists who put their lives on the line and, by being murdered or maimed, paid the ultimate price for their commitment. 

This notwithstanding, the question remains if there is a future for serious journalists. Answers to this question must be sought in universal terms and in a global context, because, as is well known, print media in national markets around the world have experienced one challenge to their economic viability after the other. Two or three years ago, print journalism became one of the professions associated with the least career opportunities in surveys in the United States.

One answer to this existential question may be connected to recent developments toward a new form of global investigative teams of journalists. The background for these developments is actually perhaps a painful realization: the globalization of the economy is going hand in hand with the globalization of wrongdoings. This must be seen as an inevitable development, save for a total ethical and moral upgrading of the human being, which sadly is not currently in sight.

From everyday crimes, especially tax and financial crimes, to violations of nature’s integrity, to classic transnational crimes from simple smuggling of goods to trade in drugs, piracy, selling of illicit weapons, human trafficking and outright slavery, there is a gruesome catalog of evil human deeds. This catalog of crimes has further recent entries through cybercrimes, adding another whole dimension of evil doings that take place in virtual space, but affect real people.

Next, there is the whole realm of governmental intelligence, with its various intrusions into civic rights that also seem inevitable when some people have an abundance of power that affects others. That realm has also been expanding, owing in part to dangers of terrorism, but mostly to the technical evolution that transformed average citizens into “people of glass” whose every action could be traced.

Examples for media on the job

News and investigative media have the dual responsibility of keeping watch over governmental behavior, exposing abuses of power and helping to protect members of society from falling victim to criminals and evils. Within the breathtaking expansion of media, especially when taking into account the proliferation of entertainment and digital gaming, it seems there is a greater need now than ever for investigative and analytical media, seeing as the increasing amounts of information and relevant data on crime and politics have to be reviewed, understood and condensed.

Instead of the news organizations that were providing feeds through centralized filters in the 20th century – the big commercial or state-aligned wire organizations with their networks of correspondents and stringers – a new form of investigative collaborations among media seems to be emerging. At the MCF’s annual conference in Beirut in November 2016, two versions of these emerging journalistic forces were present: the notorious Wikileaks and the International Consortium of Investigative Journalists (ICIJ). Both deal with data and scenarios of global dimensions that were not imaginable even 30 or 40 years ago. And these investigative organization are still in their early days, on rising trajectories with implications for much more work.

Wikileaks, founded just 10 years ago, has not only gained an increasing prominence despite its founder’s troubles with American and Swedish prosecutors, but in 2016 it made new waves by spreading pertinent information during the run-up to the US presidential election (the Podesta emails) and also by uploading 2420 leaked documents from a German government investigative commission on, curiously, leaked information. The Bundestag (the lower house of the German parliament) commission was convened in 2014 on the so-called NSA (National Security Agency) affair, discussing the methods of intelligence agencies and the case of whistleblower Edward Snowden, who was working as a NSA contractor at the time of his disclosures.

Furthermore, in a similar thread of investigation as the one of Panamanian law firm Mossack Fonseca that led to the revelation of the so-called Panama Papers on tax evasion by people all over the world, a Europe-wide journalistic effort was published in December 2016. Its source was an online site called Football Leaks, created a few years ago by a Portuguese whistleblower under the assumed name “John.” Leading German news magazine Der Spiegel and eight other media organizations in Europe established an investigative consortium titled the European Investigative Collaborations (EIC) to cover the leaked documents. The story kept 60 journalists on their toes for seven months, was guarded by tightly secured IT and produced stories that uncovered the dirt in the world’s most popular spectator sports. Based on shifting through 1.9 terabytes of documents and electronic papers, or 18.6 million documents, this investigation showed tax violations of the highest magnitude – by top football celebrities such as Cristiano Ronaldo, the world footballer of the year. 

This project speaks to a pattern. What is emerging is a tendency for whistleblowers to emerge in environments of organized corruption. These whistleblowers provide millions of documents to support their claims. In the case of the Panama Papers, it was an anonymous source who approached two reporters at the largest and most reputed German daily newspaper with 11.5 million documents of varying relevance. The newspaper in 2014 joined hands with a global alliance of similar, reputable media under the auspices of ICIJ, a global network formed in 1997 of more than 190 investigative journalists in more than 65 countries. ICIJ, with a liberal bent and a mission to reveal abuses of power, corruption and dereliction of duty by powerful public and private institutions, had its largest break ever through this investigation. The team took months to analyze the papers, with the process involved sophisticated information technology, high-grade security, vows of secrecy before publication and a big-bang day of revelation.

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It was debated if the print media had to be propped up by state subsidies, or if the funeral announcements and obituaries for the old media should be written in preparation for their impending deaths

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Space for professional journalism

In sum, the way that journalistic work is heading in these two examples is a tip-off on a scandal (not unusual for classic press work), combined with a truckload of evidence that needs to be sorted, evaluated and transformed into a chain of stories. In this process, it is not enough to dump information and unorganized files into the public arena for all to see – even with corroboration of their authenticity. Tremendous work and hundreds of hours need to be invested to make sense of the material and make it transparent to the public.

Only professional journalists and highly credible media organizations can handle this task. Apparently the effort was so rewarding that the editor-in-chief of Der Spiegel broke out into praise of the profession: no work was as exciting as that of a professional journalist who is engaged in “project enlightenment,” he enthused in a column on the occasion of the start of the Football Leaks story.

Such emanations of professional pride have not recently been frequent among editors. They speak to a renewed sense of purpose in journalism and at the same time to a great societal need for a new type of investigative teamwork by journalists. Instead of the centralized model with a focus on first-world clients and audiences, where raw news was channeled through the filters of editing bureaus with a preoccupation to serve specific audiences and agendas, the future seems to call for large investigative collaborations that involve diverse teams.

Grade A reputation capital, expert journalistic knowledge of niche markets and local conditions, and collaboration in project-centric networks appear to be the three operational necessities for future journalism in those extensive investigations that require teamwork for weeks and months to uncover a series of interconnected secrets or crimes, yielding stories that are of relevance in any number of countries and to distributed audiences.

Serving the purposes of investigations into globalized issues and revealing their findings without being totally vulnerable to pressures by powers that be seems to be far outside the scope and reach of citizen journalists and other new traditions of internet-age journalism. This implies that professional media should focus much more on developing tools for future investigative skills, reputation, relevance and cooperation in multi-anchored networks, rather than worry only about developing new avenues for monetization of their content.

Monetization tools, important as they are, will follow from the creation of relevance, quality assurance, and, on the practical side, better measurement tools to understand their reach and audience. This is not a debate over how many people prefer videos or images over the written word, how may tick the opposite way, if paper is going to coexist with digital or if reading is a dying habit. One can be relaxed about all these issues. What may be on the extinction list is not large media organizations or independent journalism, but inflexible media dinosaurs of all sizes which are failing to innovate and develop new franchises in smaller niches because they are weeping after the newspapers’ past role in (national scale) opinion domination.       

Enhancing relevancy

It is urgent that Lebanese media and Beirut as a regional hub for quality journalism embark on an investigation into themselves with the goal of establishing future relevancy and take immediate steps in toning their skills to meet the objective of relevancy. The good news for Lebanese journalism is that some steps are already being taken.

One example is a new training facility related to journalism. Called the Academy of Leadership and Applied Communications (ALAC), it is an initiative by MCF that will commence operations at the start of 2017. Planned initially are four majors and an intake of between 80 to 200 students, according to a spokesperson for the academy. The programs include online journalism and other media-related offerings organized under a principle of hands-on learning. Perhaps sadly, the academy does have a program dedicated to investigative journalism or classical skills of the profession, at least not yet. It is nonetheless encouraging that future media skills are given a new base in the eastern suburbs of Beirut.

Other new impulses originate in a place that in the past has been associated primarily with the political press and extremely traditional thinking. At the press syndicate, one of two long-existing media-related associations in the country, 2016 marks the arrival of a new initiative and a new spirit. The driving force behind this spirit are a handful of future-minded members of the syndicate’s board, including Yasser Akkaoui, manager of NewsMedia, the parent organization of Executive, and the editor-in-chief of this magazine.

According to Akkaoui, NewsMedia has been pushing for innovation at the press syndicate since NewsMedia took a board seat two years ago. One of these projects calls for the syndicate to embrace entrepreneurship and content development concepts that are related to journalism. “The Syndicate of the Press, as we know it today, represents mainly political dailies published in Arabic. [These media makers] in the syndicate today are aware that what they represent is minuscule when compared with electronic content, bloggers and social media. It took a shock like what happened in spring 2016 for the old dailies to realize that they will be left behind from media developments if they don’t embrace the future of journalism and absorb bloggers, etc.,” Akkaoui says.

Based on the shock of financial troubles in the large news organizations, it was possible for NewsMedia to gain the press syndicate’s board approval for a conversion of the syndicate’s headquarters building into a co-working space for journalists and online media ventures. “We have several options in front of us. Ideally, we would transform the 2,700 square meter (sqm) building of the press syndicate in Ramlet al-Baida into a mega co-working space for journalists, content developers and entrepreneurial media outlets. That space would provide all the offerings of a co-working space, plus an accelerator for media entrepreneurship, and all the equipment that will allow journalists and content developers to do their job, whether this is a cooking channel or one that is dedicated to war reporting and investigative journalism. The purpose is to promote the highest ethical standards in any field of journalism,” Akkaoui says.    

Obstacles to this version of the project exist through the building’s age and location in proximity to a politically exposed area with intense security controls nearby. Therefore, an alternative version of the co-working development project at the press syndicate would be to start out with the creation of a 500 sqm space on the building’s first or second floor, have it rehabilitated, equipped and managed by a company that is specialized in co-working operations, e.g. Antwork, and enter an agreement with this company under which press syndicate members would be entitled to use other facilities that this company maintains in Lebanon. 

This initiative to create a 500 sqm co-working space for media in the short term would aim to create incentives for journalists to use the facilities and would, in a second step, be accompanied by further press syndicate initiatives to organize trainings and talks on both media management and journalism, while also making financing (including financing under central bank Circular 331) accessible to media entrepreneurs. The press syndicate’s board members have accepted this initiative and are trying to understand the entrepreneurship concept and business model. According to Akkaoui, there might be attempts to resist innovation, but the current situation the media finds itself in compels press syndicate board members not to resist because daily newspapers have exhausted all business models, by which until now they have attempted to achieve sustainability.

Other innovation projects that Akkaoui and a few like-minded board members are promoting at the press syndicate are the development of better governance in the organization, with a focus on advocacy of transparency and accountability, and proposing an update to the legal framework that will be fit for the digital age.

Obstacles to create a 21st century culture of investigative journalism in Lebanon similar to that promoted by networks such as ICIJ and EIC exist on several levels, Akkaoui says. Investigative journalism was not possible for several decades in Lebanon because most news organizations practiced self-censorship. As organizations with political sponsors, they had no interest to stir up any mud in the political landscape or investigate their sources of revenue. “While we would be interested to be involved in large investigations and see it as our mandate to provide independent journalism in Lebanon, Executive cannot do it alone. We cannot afford to hire three, four or 10 journalists and have them on our payroll as dedicated to investigative collaborations. But creating this co-working space at the press syndicate will help us identify candidates who practice journalism out of a sense of vocation and who will be interested to give their time and dedication to investigations that could be as big as the Panama Papers,” says Akkaoui. 

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Media & Advertising

The eternal crisis

by Thomas Schellen
written by Thomas Schellen

Make no mistake about it, it is not a new idea that media types are today’s variant of preachers. Whether they work in advertising or in news media, the profession features a whole gamut of prophets, proselytizers and missionaries. The message about this land according to Amos (the prophet, not the communications satellites) was that its previous inhabitants were “as tall as cedars and as strong as oaks,” promising inbound migrants a fruitful environment (after overcoming various obstacles).

Given the Middle East’s known propensity for starting religions – just think of the “land of milk and honey” that a bunch of tribal nomads were promised millennia ago – it cannot come as a surprise that even within the battered Lebanese economy, the media crisis of spring 2016 caused an uproar of concern. Several newspaper companies announced that they were running out of money and were threatened in their survival.

According to reports, the organizations faced with closure or forced to downsize were the venerable An-Nahar and As-Safir newspapers as well as the Al-Akhbar and Future media organizations. Unconfirmed numbers from the Syndicate of Lebanese Journalists later said that of the 2,600 journalists with membership in the organization, 70 percent were already affected by media closures or at risk to be so in the near term. 

The crisis was exacerbated by the broad failures of media owners to exhibit concerns for their journalists and employees – omitting what AA President Georges Jabbour called a “CSR spirit” (see interview) – and by ham-fisted publisher appeals of the give-us-money-or-death variety. 

The 2016 media crisis occupied the minds of professionals and people interested in the sector throughout 2016, as was shown in November during a media conference when a panel was tasked with discussing if the death or the rebirth of print media was in the Lebanese future.

Putting the topic on agenda was beneficial to move the discussion to open ground and compare the situation in the Lebanese media with that of foreign print media markets, especially the UK and France, according to Bachir Khoury, the Lebanese journalist who moderated the panel. (The two markets were represented on the panel through an editor of Le Figaro and a former Middle East correspondent of The Guardian.)

“I don’t know if the panel brought a lot [in terms of results], but at least the issue was raised publicly. This is important in Lebanon, where it is somewhat taboo to talk about media and their financial difficulties. Media here are very polarized in political and confessional terms and this leads to a situation where [media employees] talk about financial issues only in secret, because they don’t want to hurt the image of their leader,” Khoury told Executive.

This code of silence according to Khoury is adhered to even by media employees who have not received salaries for months or years and are not able to provide for their families. “I liked that panelist Nayla Tueni [the publisher of An-Nahar] said that the paper’s people have not been paid for a year. My personal point of view on this is that the Lebanese media is facing a lot of changes, like in other countries where media have to deal with limitations. But in Lebanon people are still reading newspapers and the problem is more a [demise] of political sponsorship,” he said. 

The lack of local newspapers’ financial means, in Khoury’s view, has some similarities with cases of cash-strapped media elsewhere, but in the case of Lebanon the lack of funds is due to known people who stopped paying for media operations under their wing.

Data on real circulation of different categories in print media – dailies as well as magazines – was sought by Executive but was not available when going to press for 2016 and also questionable in terms of general accuracy.

Zulficar Kobeissi, print media veteran and chairman of Business Journal, which publishes three magazines from Beirut (the Alam Al-Massaref banking magazine, the Al-Khaleej magazine for the Gulf region, and the partly bi-lingual English and Arabic Business Journal magazine) estimates that the daily circulation of all Arabic-language newspapers in Lebanon is as low as 50,000 copies, with return rates of 20 to 30 percent. This means that only about 30,000 daily copies would be absorbed by paying readers.

Kobeissi confirms the entanglements of Lebanese media with various funders and compares local newspapers with diabetics who depend on insulin. “Perhaps one paper or the other today is still getting ‘insulin’ from time to time, but until when? Whether subsidies from Saudi Arabia or the Gulf are based on conviction or blackmail – there are both cases – they are reducing payments by 60 or 70 percent; I have inside information that newspapers face this large a reduction so if a paper got one million dollar[s] per year, they are now down to $300,000 – that is why they get rid of employees and have financial troubles,” he told Executive.

Having worked in banking and journalism his whole life, Kobeissi says he could list 50 reasons why Lebanese media have trouble – practically one reason for every year he has been in the profession, and moreover all homegrown problems that have existed since before the days of the internet.

The root of the problem

He rattles off reasons that include overspending by media owners; too much jealousy and personal pride in paper ownership; overly high street prices for newspapers when compared with people’s purchasing power; failure to rationalize production processes; incompetence of owners who are neither media managers nor journalists; lack of personal impact and relevancy of newspaper stories to readers; inaccuracy, lack of journalistic quality and lack of ethics in newspapers; and general failure to separate publisher positions and editor-in-chief positions.

He is able to maintain his operation based on working on strict budgetary discipline and filling the shoes of editor-in-chief and media manager instead of bringing in paid people, but he is not cheerful about the outlook for print media. “The situation, as it is today, looks as if this business in dying. It is not easy to make dailies survive, because they face a very difficult situation with the economy, journalistically, financially, and in terms of competition. I don’t see that there would be enough light at the end of the tunnel,” Kobeissi says.

But it seems warranted to also look at the Lebanese media crisis in the context of the global business models that have sustained media – from newspapers over audiovisual channels to online and social media today – for nearly two centuries. This model, according to Columbia University Professor and writer Tim Wu, is based on attention arbitration and the principal actors in it are “attention merchants”.

In a nutshell, the business model of the attention merchant is to provide something of lesser value and harvest something in return that can be sold with a profit to someone who recognizes its potential. In terms of trade offs it is the same as giving inexpensive glass beads to tribes in an isolated realm in exchange for metals or ivory that fetch a much higher price in the developed world. In practical terms, the attention merchant offers goods like content (low or high in quality and cost of production), fame, appreciation, or a sense of pride – of belonging, in the case of propaganda – in exchange for attention or, if heightened, loyalty to an idea, state or brand.

Media and the advertising industry have often been in collusion in endeavors to harvest attention and exploit it, often, even without any awareness of their prey. People, according to Wu, give up privacy, data and personal attention without getting much value in return. For Wu, who authored a book that was published under the title “The Attention Merchants” in 2016, the practice of attention arbitrage by media and advertising industry represented a long, dark night in which people’s very awareness was bought cheap and sold at a markup.

This process unfolded in stages that involved technological tools from print media – over radio, television, home computers, portable digital devices to smartphones – and in the future other wearable devices. It was overall, undeterred, although the process saw the pendulum swing between excesses in attention exploitation, using junk as bait, and the emphasizing of privacy and content quality. Because the process is continuing with new tools and is a growing challenge, Wu recommends, “If we desire a future that avoids the enslavement of the propaganda state as well as the narcosis of the consumer and the celebrity culture, we must first acknowledge the preciousness of our attention…”

Within the struggle of Lebanese media to clean out their own blind spots in areas of corruption and dependence on political ‘sponsors,’ with the only perceived alternatives in co-dependence of content media and advertising, it seems high time to be honest about their chosen art. They must engineer and test new business models that cover the whole lifecycle of media, and of preaching truth as best as perceived. 

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Advertising OverviewMedia & Advertising

From the other side of the mirror

by Thomas Schellen
written by Thomas Schellen

One could argue that the word media is a misnomer. Media, whether on the side of advertising or content production, functions not so much as a channel for communication, or medium, between two parties but as a vexing mirror of society. The images that we receive in all media are a reflection of who we are. And what we consider to be products by creative talent could just be modifications of the images we emanate.

Seeing themselves in this mirror and through the advertising lens is important for journalists and content creators, because from the advertising industry’s experience, audience engagement and demand can be measured and understood in ways that editors and program directors have only very little access to.

To understand how the media industry, the ongoing print media crisis, and the advertising and media forecasts for 2017 look from the professional advertising angle, Executive sat down with George Jabbour, president of the Lebanese Advertising Association (AA) and chief executive officer, Lebanon, of regional communications group Middle East Communications Network (MCN), an affiliate of global marketing communications conglomerate, Interpublic.

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In analyzing the performance of advertising, Jabbour says one must look at every media sector separately

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Adjusting to change

The first thing to note about the Lebanese marketing communications industry in 2016 is the existence of opposing trends, whereby falling revenues of local communications companies are juxtaposed with stable expenditures by advertising clients. The clients targeting the Lebanese consumer may not have spent substantially less money on advertising this year than they did in 2015, although the advertising industry in Lebanon has been talking about 2016 as a year of falling revenues. Jabbour says: “Something is not really clear when you talk about the advertising industry or market and advertising investments. This is because you have two layers, one layer being what the advertiser is spending and the other layer consisting of what the media gets.

“My opinion, based on my position as president of the Advertising Association and in terms of a communications group, is that advertising investments in Lebanon are not going down. Nobody [in the advertising industry] today has the interest to admit to this, but so many alternatives in advertising have been created throughout the past five years. The advertiser today has many alternatives to going through an agency, the media rep or the classical media. It is no longer a closed market where a Lebanese advertiser should go through a Lebanese agency and a Lebanese media rep to Lebanese media,” Jabbour continues.

In his assessment, the fact that the advertising game may in one scenario involve several intermediaries and in another scenario see direct interaction between advertising clients and media means huge margins of error in estimates of advertising investments. “We are talking that the market in Lebanon is between $150 and $200 million [per year]; this margin is very high and it cannot be considered as [normal] error margin,” he says.

The industry’s performance numbers are not yet available for this year (and advertising numbers in Lebanon are not generally considered to be reliable), but Jabbour estimates that out of the total market of $150 to $200 million, digital platforms such as Google and Facebook account for possibly as much as $20 to $25 million dollars in 2016, and at the very least $15 million. This digital slice is taken out of local advertising investments mainly by the two foreign online heavyweights and their subsidiaries, like YouTube, with only the small change going to Lebanese websites. Moreover, while digital represents a form of advertising expenditure that is fairly recent in Lebanon when compared with first-world markets, it is now growing rapidly – at a rate of 30 to 40 percent from 2015 to 2016 alone, says Jabbour.

Adopting strategies

The thing is that these amounts are spent by local advertisers but directed to outside markets. “While these expenditures are coming out of the pockets of advertising budgets [in or for the Lebanese market], they are not being tracked in Lebanon. So if we take the situation from the side of the Lebanese media, [revenues] are dropping, but if we take it from the advertisers’ side, the budgets are not dropping. The trend [of migration to external media] is dangerous from the perspective of Lebanese media but something that cannot be changed,” Jabbour explains, adding that globalization of the media does not only apply to digital media, but also to local television stations that have to compete with international ones in their programming and shows.

In analyzing the performance of advertising, Jabbour says one must look at every media sector separately. In television, which is still the main conduit through which to attract advertising investment, he sees the market as today divided between three stations: LBC, MTV and Al Jadeed. In earlier times, the distribution of TV advertising income was mostly oriented toward one station or at most two. With three stations that more or less successfully compete and each get a slice in the TV advertising pie, Jabbour says he cannot see how this sector could have gone down overall: “Maybe yes, LBC lost part of their market share but TV as a whole stopped going down,” he says.

Also in the second largest segment, outdoor advertising, he sees indications of a healthy sector. Given that the number of providers seems to be rising ad infinitum, investments in LED advertising screens are increasing, and municipality incomes from establishment of Unipoles and LED screens are going up, he says that the outdoor advertising industry is not in a crisis, but, on the contrary, is estimated to account for $40 to $50 million in ad spending.

Conceding that the next media category, radio, has seen some income shift as outright advertising revenue from spots may have dropped, he says that stations could compensate for this. Radio has succeeded in tapping into other sources of advertising, such as income from collecting money from singers for featuring and promoting their songs. “There are more and more radio stations and when you see that something is increasing in numbers, one can conclude that this sector is making money,” he explains.

Cinemas, he adds, which represent another category in terms of advertising, are not only challenged on the side of getting advertising but also when it comes to attracting paying visitors, as movie watchers have increasing options for home viewing. As a way forward, cinemas can reposition themselves as destinations for dinners or outings, and they are currently working on this process.   

According to Jabbour, that leaves print media. He agrees that print media is facing problems today, but magazines are faring better than daily newspapers. “I believe there is a drop in the advertising revenue made from magazines, but not in business magazines. Business magazines are the last advertising vehicle to be dropped, according to worldwide trends. Women’s and lifestyle magazines are a Lebanese tradition that will not fade easily; they are there and also have other sources of income [like income from covering social events for the initiators or hosts]. The drop in income is in political newspapers and magazines,” he observes.

Political newspapers by his explanation cannot compete in the provision of fresh news and already have a disadvantage in the Lebanese market versus audiovisual channels, as the Lebanese prefer to watch news more than read the papers. Furthermore, Jabbour alleges, Lebanese dailies were resting too much on their laurels and did not pay enough attention to drops in their advertising.

“We saw the storm coming and talked about the drop of print across the world, but papers in Lebanon behaved as if they were vaccinated against this development. When the storm reached them, they were only asking for help to avoid closure, so that ministers at one point said they would initiate legislation to back up the press. This is like protectionism and not the right solution,” Jabbour says.

In his perspective, freedom of speech – which he agrees is vital to a democratic society – is not tied to print media. As evidence, he cites the appearances of print editors on TV shows and their postings on social media. At the same time, he considers advertising and a free press to be mutually dependent on one another, arguing that advertisers need media which is in line with standards for a free press and that such media cannot be sustained without advertising revenue. “The issue is not about freedom of media but about having the right media in order to invest in this media venture. We are in a very scientific business where you need to get your return on investment. It is as simple as can be,” he opines.

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“We saw the storm coming and talked about the drop of print across the world, but papers in Lebanon behaved as if they were vaccinated against this development”

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Tentative steps forward

As far as the advertising outlook for the full year in 2016 and going forward into 2017, Jabbour regards prospects cautiously and cites that advertising is always the first industry to feel an economic downturn and the last industry to feel the impact of an economic upswing. He agrees that the election of a president was a positive signal and potentially a kickoff for the whole economy, but notes that activation still has to be achieved across the government, cabinet and all political institutions after the country had been in a virtual coma for several years.

Taking into account that summer 2016 was dry for the advertising industry, he expects the Christmas and year-end holiday season to perhaps improve the full-year picture on advertising revenues but not exactly turn 2016 into a year of great performance and success. “We can feel that people are feeling positive about the year to come. If the last two months in 2016 are very positive, they will adjust the number of bookings [for this year] a little bit, because we are evaluating the whole year and this summer was very bad,” Jabbour says.

For 2017, he expects that revenue and performance improvements of ad agencies and communications groups will be driven by campaigns related to parliamentary elections. He points out that previous election years – such as 2009 with parliamentary elections and 2010 with municipal races – were “golden years” for the advertising industry in Lebanon.

In another advertising industry-specific development, the AA should generate a running cash flow from a three percent levy on media bookings. This syndicate fee is, according to Jabbour, a global first in the advertising industry and will be collected from the start of January 2017 and is expected to begin filling the AA coffers from mid-year. After having been successfully established, revenues from this cash flow will be directed into studies of different media with the aim of creating media reports that will be done in conjunction with international auditors and enhance the advertising industry’s transparency. This will be a ‘big project,” most likely to start toward the end of 2017. Jabbour concludes: “Transparency cannot come without credibility and what we are trying to start implementing is this type of credibility in order to achieve the greatest possible transparency in our industry.”

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Interview

Kings of the cluster

by Nabila Rahhal
written by Nabila Rahhal

Rabih Saba and Marwan Ayoub, the co-founders of Venture Group, certainly have a lot to be proud of. Through leveraging their years of experience in hospitality consultation, the duo developed their first hospitality cluster on Uruguay Street in 2011.

Fast forward to 2016 and they have developed two more clusters in Lebanon: The Village Dbayeh in late 2015 and The Backyard Hazmieh in mid 2016. They are currently completing a cluster in Ashrafieh and have plans for two more clusters in Jounieh and Byblos.

At a regional level, Venture Group has signed a strategic partnership for cluster development and management in Egypt, and is finalizing a similar agreement with a leading hospitality group in Saudi Arabia.

They are also looking to develop Food and Beverage (F&B) private equity funds that would invest in new concepts in Lebanon, where new F&B ideas are road tested before they are taken regionally.

Meanwhile, the landscape for hospitality clusters has also changed, with several other F&B operators looking to develop such projects in Lebanon. While these operators cite motivations such as improving the positioning and footfall of their brand expansion by developing a destination around it, others are wary. They warn that the sector is in danger of becoming saturated. Ironically, the main purpose of such projects is to serve a community that previously had few F&B options.

Executive met with Ayoub and Saba at their offices at The Backyard Hazmieh to get their insight on this competition and the details of their growth into the region.

E   What would you say is one important skill you have gained from your experience with hospitality clusters development?

Ayoub: I think that besides perfecting our knowledge in F&B clusters, we’ve learned the dynamics of real estate development for commercial purposes and we intend to leverage that knowledge.

E   From your experience, how does one sustain a hospitality cluster and keep the momentum going at a stable level of footfall?

Saba: There are two aspects here. One is in always creating value for the consumer for coming in that cluster as footfall. That is usually done through proper positioning and a proper calendar of events to animate the experience of these visitors.

The second part is how to keep a healthy relationship with the tenants by providing them with full support to perform better along the way. Given the fact that we have several clusters, this allows us to have some economy of scale and of scope, so we can create a lot of value to specific tenants across these clusters if we are providing them with proper exposure and location across all clusters.

Most of our tenants go across our clusters. The value that we are bringing in really differentiates us from any other cluster developer in town, given the fact that there isn’t any company in Lebanon that operates the number of clusters that we have.

Ayoub: I would add that the brand mix we choose is dynamic and [they are] always reinventing and upgrading their brands. On one side, we as developers are upgrading our clusters, and on the other side the tenants themselves are upgrading their brands. Our major strength is that we choose the right mix and the right tenants.

E   But in each of your clusters, you have one or two operators who are relatively new to the market.

Ayoub: Yes, we always give one or two newcomers the chance to benefit from the footfall we generate and the market that we set up. It’s Venture’s way of doing things, because if they succeed, we succeed with them and it gives a sense of novelty to the hospitality scene.

E   Several hospitality clusters have been launched in 2016, and it seems there are more in the pipeline for 2017. How do you view this increased number of hospitality clusters in Lebanon?

Ayoub: The business model looks very attractive from the outside, but along the way there’s a lot of traps. It’s not as sexy as it looks from the outside.

The capacity in Lebanon is limited. Just like you see several restaurants opening right next to each other and few of them making money, we have a real concern that this might happen in the cluster industry.

The hospitality cluster model is based on 100 percent occupancy [of tenants] and performance. If this drops down to 60 or 70 percent, developers will no longer make money. Those companies that are developing clusters now are ignoring the fact that this might happen.

Our goal is to have one cluster per region, not one per city or town. We are trying to locate them as far away from each other as possible, so that cannibalization will not be dramatic and not affect profitability. And I say again, when considering a cluster, choose a virgin area with no competition, rather than trying to open one adjacent to another cluster.

We always preach that there should be more regulation in the sector, in that there should be a set number of licenses in each geographical area, taking into consideration the population in each area as well.

E   Tell us more about your expansion into Egypt. How did it happen? And which areas will you be in?

Saba: We chose to develop a presence in Egypt a year and a half ago. We are servicing some clients there in the line of cluster management as part of our management company, and it is progressing well.

We will be developing five clusters across Egypt, the first of which will have 50 outlets and will open its doors in June 2017.

E   Why did you choose to be in Egypt and Saudi Arabia?

Saba: We chose Egypt and Saudi Arabia because they are the two biggest markets in the Middle East in terms of consumption and population.

These two markets provide us with the opportunity to develop destinations where the masses will go, rather than going to Dubai and developing a nightlife venue that would only work for two to three years. It’s not that kind of business in Egypt and Saudi Arabia, but more of a solid model which can be sustained for years.

Surprisingly, the market of franchises in both Egypt and Saudi Arabia is mature enough that you can basically find all the international names. So the tenants are there and they want to expand domestically.

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The business model looks very attractive from the outside, but along the way there’s a lot of traps

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E   So you are not taking tenants from Lebanon with you?

Saba: We are, but to a lesser extent because a brand that goes from here will need a franchise and an operator. It’s a job they have to do by themselves.

In the same way that we counted on the local players here, we will count on the local players there, but the local players there are international brands.

E   What added value does Venture Group bring to the sector in these countries?

Saba: I think it’s the knowhow that comes in terms of conceptualization, architecture, flow of operations, positioning, tenant mix and management. While they do have this, there is an added value we have in bringing all these elements together. We are better coordinators and managers of this process, so that is where I think we bring value.

E   What is the main difference between the Lebanese and Egyptian market so far?

Saba: The scale! For the same effort, our company will be rewarded more, but it is also important that the value of our platform as a company will be increasing across several markets. The aim is to diversify our exposure to risk and balance that risk, so that if things happen in Lebanon, we will have another revenue source. Our company will always be solid when it comes to operating across the region.

E   What are your expectations for the Lebanese hospitality sector for 2017, specifically in cluster development?

Saba: When it comes to clusters, I think that we will face more challenges from other projects, particularly those targeting the same clientele without studying the proper trends of the market.

Ayoub: Restaurateurs and cluster developers need to really think as businesspeople and calculate the risk, profit and loss in each venture they undertake well. There is room for a lot of work, and we have proved that regional expansion is doing well, so let them think out of the box, assess where the gap is and fill it rather than compete with each other or even themselves.

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F&B OverviewHospitality & Tourism

Too many plates on the table?

by Nabila Rahhal
written by Nabila Rahhal

In a letter to his son’s teacher, Abraham Lincoln wrote that “only the test of fire makes fine steel”. Lebanon’s food and beverage (F&B) operators have been through several tough tests of fire over the past five years, including a decrease in tourism and dwindling local purchasing power. Nevertheless, they have emerged more seasoned and creative, albeit more cautious than they were in 2010 when Lebanon was experiencing its last boom.

This resilience is reflected in the recognition of Lebanon as a culinary destination in 2016, including being named the number one “International City for Food” by Travel + Leisure magazine and being featured as a top food destination by the international publication Monocle.

Despite this, the local market itself has remained largely unchanged for F&B operators.

Pack your bags and move

Predicting what street or area in Lebanon will be the new “it” nightlife and dining destination has become a game of sorts. From Monot Street in Achrafieh, to Hamra’s revival, to Gemmayze, to Mar Mikhael, to Badaro and this year to Dbayeh and Broummana, it seems that every few years a new area gets its turn in the sun.

The logic behind these frequent relocations is easy enough to understand, as Charles Frem, co-owner and founder of Central Management – which manages five bars including Central Station, Garcia’s and Propaganda Gin Room, as well as Caramel, a boutique hotel in Hamra – explains. “Operators move to new areas because eventually rent in trendy areas goes up and becomes too high. So, for example, in late 2015, an outlet of the same size with a rent of $100,000 in booming Mar Mikhael had a rent cost of $70,000 in Dbayeh – so you are saving 30 percent, which is attractive.”

Pioneering restaurateurs and nightlife operators thus move around the country, chasing lower rents and creating new destinations that, once successful, draw in other operators who also invest in the location to remain competitive and relevant.

“We are still expanding because you have to expand to survive,” says Donald Batal, founder of the restaurant management company Ministry of Food, which operates Classic Burger Joint (CBJ) and Tomatomatic, and which has opened more than four branches of CBJ in Lebanon this year.

A share of the pie

Had Lebanon’s economy been thriving, the popularity of a new area would be a welcome addition to a lively hospitality scene. But with the unstable situation in the country over the past five years – in terms of a dwindling purchasing power and fewer tourists who will go out and spend – the rise of one area often means the death of another.

According to George Achkar, the developer of F&B clusters Printania Villa and Printania Garden in Broummana, and operator of three restaurants within Printania Garden, the problem in Lebanon is that the market has trends, but no sustained growth.

“Whenever an area becomes trendy, everyone moves there and the previously trendy area withers away. Then rent in the trendy area becomes expensive, so they move to another area and so on, but that is because the market is small and there is no growth. This has been the trend for the past five years. If you had growth they would all work, but we don’t have enough people.”

Bye Bye Birdie

As such, the last quarter of 2016 saw downtown Beirut’s Uruguay Street say goodbye to Main Street, the last remaining pub on the street. What had once been a flourishing nightlife destination with around 30 bars crammed into one pedestrian ally now has only one CBJ outlet left standing.

Operators of outlets on Uruguay Street cited the anti-government protests that took place in Downtown in mid-2015, along with the subsequent closure of certain areas by security forces, as reasons for the decline of the street. But others admit that clients simply moved to the more “happening” Mar Mikhael and even Dbayeh, which emerged as a destination in early 2016.

Hamra’s Makdessi Street also witnessed a continued decline in nightlife traffic. This prompted Frem to relocate the Latin themed bar/restaurant Garcia’s to Dbayeh, and Rabih Fakhreddine, CEO of 7 Management, which manages lounge bars including Seven Sisters, Black and Feb 30, to relocate Feb 30 as well (to an as yet undisclosed location in Beirut).

Despite the bar cluster at the beginning of Makdessi Street still doing well on weekends and during happy hour after work, Frem explains that, at the macro level, the street’s nightlife activity has declined over the past couple of years. It now survives on the business of Hamra’s residents and those who work in the vicinity.

Dbayeh, darling

Hospitality streets in Beirut such as Mar Mikhael and Badaro continued a slow expansion in 2016, but it was Dbayeh that witnessed the most dynamic growth.

Talks of F&B operators launching new concepts in Dbayeh had been circulating for three years, but they finally materialized in late 2015 with the opening of The Village, a hospitality cluster project spearheaded by Venture Group.

Following that, a slew of standalone restaurants and clubs launched in the area. The long-standing Blueberry Square hospitality cluster on Dbayeh’s highway reinvented itself and introduced six bars on its ground floor, while the culmination of the year was the opening of Gardens in October 2016, a restaurant cluster concept close to ABC Dbayeh’s exterior entrance.

Putting aside the lower rents that made it an attractive region for investment, a Dbayeh expansion made sense given that the region was previously underserved in terms of bars and restaurants.

“When we decided to invest in Dbayeh, the area did not have many nightlife venues and people living there had to come to Beirut for a night out. So we saw it as a good opportunity, since it is also the midpoint between Keserwan and Beirut and attracts those in Metn and the surrounding areas,” says Toni Rizk, CEO of TRI Concepts, which manages gastro bars such as The Bohemian and Trumpet – which has two branches, one in The Village Dbayeh and the other in The Backyard Hazmieh.

This move to Dbayeh has opened up new markets for Beirut’s F&B operators. “We wanted to diversify our portfolio because previously all our venues were in Hamra or Downtown. We developed a new client base through Antika Bar, as its main customers are from Metn, Keserwan and even Byblos,” says Fakhreddine, speaking of the vintage Lebanese bar his company launched in Blueberry Square in mid-2016.

In comparing Dbayeh’s Gardens experience to his Mar Mikhael venue, Michel Yazbeck, the owner of Mar Mikhael’s Sud restaurant – which recently opened a branch in Gardens, along with two other concepts, La Petite Table café restaurant and Heights bar – says Dbayeh has proven to be a stronger market for their restaurants for a number of reasons.

“Accessibility is better here in that there is no traffic to reach us. Also, the project itself is an attraction in the area and gets a lot of visitors. Finally, the average age [of customers] at Gardens is higher than that of Mar Mikhael, which means they can and do spend more,” he says, citing an average bill per person for Sud Mar Mikhael at $35, compared to $41 at Gardens.

Betting on Dbayeh also proved to be a success for Zahi Rizkallah, owner of Lebanese restaurant Enab and the developer of Gardens, who says they received 30,000 visitors to Gardens in the month following its opening.

Keep it close

Such expansions into areas outside Beirut became the norm in 2016, starting with Dbayeh’s two clusters and numerous standalone venues, and moving on to the F&B cluster The Backyard, also by Venture Group, which launched in Hazmieh in June 2016 and to Printania Villa in Broummana, which opened in July 2016.

Restaurants and bars also opened in substantial numbers in Byblos and Jounieh, not just as the usual seasonal outlets for the beach crowd, but as year-round options for those living in and around the area. This growth out of Beirut is mainly meant to serve the communities in those areas, not those residing in Beirut and looking for a change, according to Batal, who has recently opened CBJ outlets in The Backyard Hazmieh, Byblos and even Ehden and Rayfoun in north Lebanon.

The success of these outlets is attributed to their convenience, both for those who don’t want to drive all the way to Beirut for a drink and for those who feel safer staying close to home when there are security incidents in Lebanon. “The political instability in the country led to a decentralization of outings, where people preferred to go out closer to home rather than coming to Beirut, and now they have a wide variety [of options] close to them, which is comfortable for people,” explains Frem.

Seasons in the Sun

Also successful this summer were the seasonal outlets such as the rooftop bars, beach bars and hospitality clusters that recently opened in the mountains. Fakhreddine says Seven Sisters, his seasonal lounge bar in Beirut’s Waterfront, experienced record sales and boasted 1,200 customers on a busy night. Meanwhile, Achkar cites valet parking figures of 900 cars per day at Printania Villa and Printania Garden, which also operate exclusively during the summer.

The appeal of summer venues lies in their seasonality, which creates a sense of urgency to visit, and also in the overall positive ambiance of the summer season. “Summer is different than winter; people are happy and want to go out every day. Plus, in our clusters, we have a mix of all types of cuisines and vibes so there’s something for all tastes,” says Achkar, adding that tenants in Printania Villa have already experienced a return on their investments because of the high turnover and the relatively low investment figure, since outdoor venues don’t require as much in terms of décor.

Once summer is over, many of these operators open a winter venue, the logic being that they retain their staff and maintain their client base for the winter, according to Fakhreddine, who opens Black in Beirut Souks the weekend after he closes down Seven Sisters. Here again, the short time that these outlets are operational encourages people to visit while they can.

Dog eat dog

Whether in or out of Beirut, and whether seasonal or yearlong, it seemed that every two weeks a new F&B outlet was opening somewhere in Lebanon in 2016, and even more are planned for 2017.

Restaurateurs and nightlife venue owners interviewed all say that would-be investors are attracted to what seems to be easy profits and don’t realize that it takes a lot of back office work and experience to operate a successful restaurant or bar. “Everybody is entering F&B because they think it makes a lot of money, but they don’t know how high the costs are. It is more than just selling food, it’s an industry by itself and a financial drain,” says Yazbeck, adding that the market will eventually self-regulate, but in the meantime, their businesses will be affected by a temporary loss of sales as clients go discover these new places.

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Would-be investors are attracted to what seems to be easy profits and don’t realize that it takes a lot of back office work and experience to operate a successful restaurant or bar

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F&B woes

This increased competition comes at a time when Lebanon’s F&B operators are working to satisfy a local market with an ever-decreasing purchasing power and an ever-widening scope of options to choose from.

A minimal flow from tourists over the past five years has meant that this local market has become the sector’s bread and butter, and so operators have become experts at providing Lebanese and residents with a good time at an affordable price, while still being cost efficient and at minimum breaking even.

The main problem with serving the local market lies in its relatively low purchasing power. “The issue is that while the volume is there, meaning there are still people who go out and we are all fighting over them, you don’t feel they are going out and spending comfortably anymore. The average bill is decreasing every year,” says Rizkallah, explaining that clients now prefer to go out several times a week and spend less each time rather than spend all their money on one big outing a week.

Changing habits

Not only is the average bill decreasing, but customers are also reconsidering where and how they spend their money. As such, cafés, with their variety of small dishes and an average bill of $30 or less, grew more popular in 2016. Rizkallah, who describes Enab as more of a café than a restaurant, says he has experienced 20 percent growth in Enab Mar Mikhael from last year, while Yazbeck says his café concept La Petite Table has been almost always full since its opening in October.

Clients who used to visit multiple outlets in one evening (having a drink somewhere and dinner somewhere else) are preferring to stay in one place, causing operators to try and provide the complete experience. “We are strengthening our food menu because people are eating more in pubs than before. They see that the vibe is nicer, with music and cocktails, and since they want to go out to only one outlet which has a bit of everything, we are providing them with that,” says Rizk.

Out of Lebanon

Another effect of Lebanon’s narrow market over the past five years is that F&B operators with successful concepts in the country are choosing to take them regionally, and even internationally.

This has been a growing trend for the past three years with success stories like Addmind’s expansion into Dubai with Iris, WHITE and their other nightlife and F&B venues, Burger Co.’s success in London and Semsom’s growth in New York. They have proven to Lebanese operators that they can succeed abroad with the right concept and strategy.   

According to those interviewed, a regional expansion secures a market for their brand that is not only larger than the Lebanese market, but also more stable. While the GCC countries are still the most cited destinations for growth, Egypt is also an area where some operators are looking to expand to. “Our reputation here helped us succeed abroad, especially in the last few years when the majority of tourists in Lebanon came from Egypt, so they know us well,” says Rizkallah, explaining that the Egyptians who visited appreciated the Lebanese food and unique ambiance at Enab, which they plan to replicate in their venues there.

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We survived and did well at the hardest times and learned a lot about managing our business efficiently

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A bright future

It has been almost five years of fierce competition and adaptation for the country’s restaurateurs and nightlife operators and, as 2017 looms on the horizon, there is a sense that it is finally time to reap the rewards of all the tests of fire they have been through.

“We survived and did well at the hardest times and learned a lot about managing our business efficiently. Now we are ready to benefit from the good times and can’t wait to take advantage of the lessons we have learned over the past few years,” says Fakhreddine, adding that his company 7 Management’s huge investments in Lebanon are a sign that they still believe in Beirut and Lebanon.

As such, many see the increase in the number of outlets in 2016 as preparation for cementing Lebanon’s name as a food destination in the future. “It’s healthy to see more restaurants open, you just need traffic and we are looking forward to that in 2017. We have been recognized on many platforms as an exciting city to visit, and I think the restrictions on coming to Lebanon will be lifted so all these restaurants and pubs will be great to attract people. And we are very well known for our amazing hospitality, concepts and service. I think we have an edge over other areas,” says Batal.

“In my 16 years in the sector, I can say that we have passed through harder times than this, although this is probably the longest stretch of economic instability. But the point is that the hospitality sector in Lebanon always bounces back. We were positive before and we remain positive now,” concludes Rizk. For the sake of all the investments made in this sector, let’s hope they pay off.

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