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Hospitality & Tourism

The spud kings

by Nabila Rahhal October 6, 2016
written by Nabila Rahhal

Potatoes are a staple of Lebanese cuisine. When boiled, they are often eaten as a remedy for stomach ache. When fried, they serve as a quick and cheap meal as the filling of a sandwich or as an accompaniment to the traditional Sunday barbeque lunch.

About 20 years ago, serious contenders in locally produced potato chips, known as crisps in the UK, first entered the market. Ever since, they’ve been working hard to habituate Lebanese consumers to this globally popular snack, with positive implications for the country’s agricultural sector.

Chips’ early history

Following the end of the Lebanese Civil War in the early 1990s, 85 percent of chips consumed in Lebanon were imported, according to Hachem El Koussa, president and general director of MALCO Holding, which owns Fantasia chips and Pain D’Or.

While there were 18 local chips producers back then, they were either small or medium sized productions and, according to Koussa, operated below the basic standards of hygiene, quality and after production care. “The local variety of chips back then were very badly produced, in that they were too oily and used poor quality potatoes. They were also treated carelessly in terms of packaging and shelf display,” he says.

It was understandable then that those consumers who could afford it preferred to pay extra for the better tasting, imported chips that also came in a wider variety of flavors.

Eye for opportunity

Koussa saw, in the dismal locally produced chips market, an opportunity to introduce quality chips that would be competitive against the imported variety. “We refused to believe that Lebanon could not produce something as easy as a tasty bag of chips,” he says.

In 1992, MALCO introduced Fantasia to the Lebanese market starting with the pellet and extruded varieties of chips. (Pellet chips are those produced with potato flour,  potato starch or other grains, while extruded chips are similar to pellets but with hollow insides, such as cheese balls). Both were produced under license from General Mill, with imported potato flour and starch.

Being linked to an international company like General Mills, explains Koussa, helped garner initial trust in the locally produced item. MALCO also made sure to differentiate Fantasia from other locally produced chips through its packaging and display on supermarket shelves.

Another factor in Fantasia’s decision to enter the market with pellets and extruded chips, rather than with chips made from whole potatoes (commonly referred to as real or natural potato chips), was that it made it possible for them to break into the market with a quality product, while at the same time developing and researching techniques and potato varieties that allowed them to introduce new potato chips to their line in 1995.

The real deal

Michel Daher, Chairman of Daher Foods, which owns Poppins (breakfast cereal brand) and Master snack foods, says he launched Master chips in the early 1990s as a means of revitalizing potato farming in the Bekaa Valley and creating employment in his hometown Ferzol.

“I left Lebanon when I was 18 to work abroad but it had always been my dream to come back to my hometown Ferzol and start a business there, because I love it. I thought of doing something related to agriculture and that’s how the idea of chips came along. At first, I wanted to create something small that I could enjoy and that would create jobs,” explains Daher, adding that the company quickly grew into a major venture which currently employs 1,500 people (80 of which are farmers).

Made in Lebanon

While it took some time for Lebanese consumers to switch to locally produced chips, Daher and Koussa explain that both Master and Fantasia had two competitive advantages over imported chips. Affordability was the first, with the companies able to sell their chips at a lower price than the imported variety; they were produced in Lebanon and largely from potatoes grown in the country, meaning they saved on import costs.

Even today, locally produced chips are generally cheaper than imported brands of the same variety (compare for example Master Kettle Cooked chips, which are priced at $2 for a 170 gram bag, with the British Kettle Chips brand of the same size that is sold at $4.50).

However, regionally produced international brands, such as Frito-Lay’s Doritos and Lay’s Classic Potato Chips, are the exception, since they are produced by PepsiCo in Saudi Arabia and as part of a multinational company have the advantage of mass production over the Lebanese produced chips.

Not all about the money

The second advantage was quality. History has proven that price alone is not necessarily a decisive factor for Lebanese consumers. But the fact that both domestic companies’ products were arguably at least comparable to the imported variety in terms of quality made them a worthy option.

Both Daher and Koussa claim that locally produced chips have the advantage of freshness over the imported brands, explaining that local chips can be eaten within a week of production, while international brands take at least a few months before making it from their factory to Lebanese supermarket shelves.

Success by numbers

The local chips producers’ strategy looks like it might have paid off, with Koussa estimating that more than 75 percent of the chips (this includes corn, pellet and extruded chip varieties) consumed in Lebanon today are locally produced, while less than 25 percent are international imports.

[pullquote]International brands take at least a few months before making it from their factory to Lebanese supermarket shelves[/pullquote]

Placing a monetary value on the market, Daher says that sales from the Lebanese chips industry, including all types of savory snacks defined as chips, from the ones made with quinoa to those made with potatoes  are close to $75 million, of which $60 million are generated by local snack producers.

Taking into consideration the percentages and dollar values above, it seems that the more expensive, internationally produced chips are finding it hard to remain competitive in the Lebanese chips market.    

Room for growth

Despite this success, both Daher and Koussa say the local market can stand to grow even further. 

Daher explains that when they first introduced potato chips, total national consumption was around 100 tons per year (approximately 4 grams per capita) but has now reached one kilogram per capita per year. Considering that the international consumption level is 2.2 kilograms per capita in Europe and 3.5 in the US, Lebanon has room to grow and Daher hopes consumption will reach 2 kilograms per capita.

Although Master produces a wide variety of snack foods, including pellet and tortilla chips, Daher believes growth opportunities lie in the natural or real potatoes line. “My company Stock Keeping Unit (SKU) shows me that, in the end, potato chips will be the most consumed [product], but I cannot sit around and wait for that. I need to work and have a variety of products, but my push is for the real potato chips,” says Daher.

Chips by market share

Today, Daher explains, potato chips constitute only 40 percent of local consumption while pellet chips make up 50 percent and tortilla chips (produced from maize) account for the remaining 10 percent.

Daher aims to grow the natural potato chips’ share to 70 percent by changing the habits of adult Lebanese consumers. Lebanese adults, explains Daher, are currently more likely to enjoy mixed nuts at a cocktail bar rather than open up a bag of chips. Although Master will be launching their own brand of mixed nuts by March 2017, Daher says he plans to eat slowly into that share.

Daher has already laid the groundwork for this change with the introduction of Kettle Cooked chips – following the spike in international demand for kettle chips, which are made to be less oily and more crunchy than those that are air popped. Both lines have been heavily promoted and been met with a positive consumer response.

Master has also made deals with several local fast food restaurants to serve their Kettle Cooked chips instead of French fries, in a bid to wean consumers off fries and onto chips.

The super potato

If Daher succeeds in growing the potato chips market, both his company and the agricultural sector in Lebanon will benefit. “Potato chips are our market and strength because we are in the Bekaa, the land of potatoes. Therefore we have a clear competitive edge over others in potato chips,” he explains.

Every kilogram of potato chips requires four kilograms of potatoes to produce. Master currently consumes 30,000 tons of potatoes per month to produce 6,250 tons of chips monthly, but Daher aims to eventually double those numbers.

Daher is already putting his money where his mouth is and has invested $40 million into a new 22,000 square meters factory; an assembly line that can produce 15 tons of potato chips per hour and has cold storage equipment (to store potatoes during the winter when they are not in season).

[pullquote]Both producers complain of the increasingly high cost of business, be it the increased cost of labor, electricity, water, land, importation or taxation[/pullquote]

Daher claims Lebanon produces 200,000 tons of potatoes per year and so if he reaches his production goals, the company would be significantly contributing to the betterment of the agricultural sector in the Bekaa Valley, which was his original aim when launching Master.

Woes in potato heaven

However, as in almost every other industry in Lebanon, chip producers have been finding it increasingly hard to operate in light of the regional and local instabilities that have plagued Lebanon for almost five years now.

Both producers complain of the increasingly high cost of business, be it the increased cost of labor, electricity, water, land, importation or taxation.

Daher says they had a turnover of minus six percent last year and blames it on the flat local market. But despite this, Master has managed to break even profits wise – while Koussa says they are still managing to grow “but the expenses are growing as well and it is a race between them.”

For Master, the biggest challenge is the difficulties encountered in the exports market. “The difficulty is in the logistical challenge of continuing to export to these markets and the cost of shipping by sea,” says Daher, who used to export to Syria – a $20 million dollar annual market – before the war. Master continues to export to Iraq and Jordan.

Koussa views international, and sometimes even local, competitors’ flooding of the market – where an excess amount of chips for sale causes a drop in pricing – and under costing – where goods are sold at below production cost – as a major challenge and an unfair competitive practice that harms the entire sector.

Despite these challenges, Lebanon’s chips producers are to be commended for turning the potato into a profitable enterprise that has benefited the many families working within it and given Lebanese consumers something tasty to snack on.

October 6, 2016 0 comments
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Climate changeEconomics & Policy

It’s not easy being green

by Jeremy Arbid October 5, 2016
written by Jeremy Arbid

While the climate change agreement at Kyoto took nearly a decade to achieve binding status for ratifying countries, l’Accord de Paris (nearly) accomplished this feat in a mere 10 months. As Executive goes to print, 61 countries have adopted the Paris Agreement, covering some 48 percent of global carbon dioxide (CO2) emissions, as the one-year anniversary of the agreement nears. The double threshold for the treaty to enter force requires at least 55 signatory countries that produce a combined 55 percent of the world’s emissions – very close but not quite there.

More promising – and a demonstration that the climate change deal agreed to at Paris is different, and gaining momentum moving forward – is that the world’s two biggest economies, the United States and China, also the two biggest emitters of greenhouse gases, agreed to ratify the treaty in front of the world’s other leading economies at September’s China-hosted G20 meeting.

That momentum at the global level has arguably already trickled down. In late August, the Lebanese government decree #3987 ratified the Paris Agreement, agreeing to targeted reductions in carbon emissions that it will have to reach once parliament formalizes the decree into local law. To follow through on its Paris promise will require Lebanon to make major structural changes to many of the services offered by the public sector. More immediately, the different stakeholders will need to improve data collection, and the transparency of that data, to measure emission reductions and quantify the costs of those reductions.

A long time coming

It took more than 20 years to get the world’s biggest carbon emitters to agree to a reduction, with schemes for project finance in developing countries being the biggest hurdle to overcome. The Paris Agreement abandoned earlier ideas of a formal carbon market, whereby big emitters could fund projects in far-flung parts of the world to avoid actual emission reductions at home, and instead put forth the notion of collective responsibility.

Part of the reason that Kyoto fell short was when it came time to talk money. In the Paris Agreement there is no longer a stark distinction between richer and poorer nations. Wealthy economies, like the United States and the European Union, have promised to channel at least $100 billion per year to help developing countries mitigate climate change.

[pullquote]In the Paris Agreement there is no longer a stark distinction between richer and poorer nations[/pullquote]

The annual $100 billion pledge will work to narrow the gap between countries’ ability to invest in emission-reducing technology, like renewables and energy efficient projects. Investment will come from the financial community too. More and more financial institutions are recognizing the threats posed to business by climate change and also its commercial opportunities, the United Nations found ahead of Paris. Before last year’s conference, the United Nations reported that “portfolio decarbonization is on track”, and insisted that “measuring assets’ carbon footprint must become common practice.”

The cash pledged and initiatives by private financiers incentivizes countries to reduce emissions and pushes them to kickstart local investment. The price per ton of emission reduced is most salient to the international donors because to them it doesn’t matter where in the world reductions occur as long as it’s done at competitive costs. To donors the impact of their funding will be the same globally whether a ton of carbon is no longer being emitted in Lebanon or elsewhere. So in this sense the importance of data on how money is being spent – it’s efficacy in other words – and accurate reporting of emission reductions, cannot be underemphasized.

Can solar plug the gap?

When it comes to the solar photovoltaic (PV) megawatts that Lebanon says it has or plans to install, we get one number that seems to be inflated, a rosy projection for 2016 and no information on what those megawatts mean in terms of emissions reduced. If that’s the criteria, then Lebanon is doing a poor job.

Pierre Khoury of the Lebanese Center for Energy Conservation, a public institution under the tutelage of the Ministry of Energy and Water, told Executive in August 2015 that Lebanon would install 15 megawatts of solar by the end of 2015, and in December 2015 wrote in an op-ed for Executive that the country had by the end of 2015 already installed “around 20 megawatts (MW) of solar photovoltaic systems”, while promising to install another 50 megawatts in 2016. He didn’t mention the cost, or the carbon offset.

Those figures are exciting but in reality are inflated, according to a report published by the United Nations Development Programme’s (UNDP) Small Decentralized Renewable Energy Power Generation (DREG) Project that was presented at the annual Beirut Energy Forum late last month. By the end of last year Lebanon had actually installed only 9.45 megawatts. With each passing year, solar technology costs have declined. Last year resulted in $2 million in savings for the operators of PV systems off $15 million invested with operating costs falling as low as $0.06 per kilowatt hour, says the UNDP’s Jil Amine. The estimated emissions savings from all solar PV projects in Lebanon, the UNDP report points out, reached 6,000 tons of CO2  in 2015 at a cost of $87 per ton reduced.

Until recent years the technologies to reduce carbon emissions, like photovoltaic, were too expensive for companies to install and operate – it just didn’t make business sense. For solar power generation those costs are now competitive with traditional power sources such as coal or natural gas powered electricity generation and, for Lebanon, are in the long run much cheaper than diesel powered private generators that have filled the gap in electricity demand that Lebanon’s public utility, Electricite du Liban (EdL), has long failed to provide.

[pullquote]For solar power generation, those costs are now competitive with traditional power sources such as coal or natural gas[/pullquote]

But for electricity generation, at the national level, solar is not reducing carbon emissions because of the large gap in EdL-supplied electricity. The electricity grid needs a major fix and since it is not distributing 24-hour electricity anyway, the cleaner electricity generated by renewables cannot displace more expensive and dirtier electricity produced by private generators that many homes and businesses connect to off grid. The electricity sector demands reform, but, as it stands now, there is simply no will. Without a restructuring, foreign donors will have zero appetite for fixing the grid, and private investors see no upside in pouring money into the bankrupt utility.

“Renewables make more sense than anything else. We’ve been developing the benefits of going renewable on the macroeconomic scale, primarily because of the $2 billion in [subsidies to EdL for] fuel costs – so imagine investing that money in renewables in one year. You can’t integrate [renewable-generated electricity] into the grid because it is weak, so you need to invest in the grid first and no one wants to invest in a bankrupt utility. And that’s where we are; a sort of chicken and egg thing,” says the Ministry of Environment’s climate change lead, Vahakn Kabakian. With no net-metering scheme (a billing mechanism crediting renewable energy providers for feeding electricity into the public grid) private financiers will resist funding large-scale renewables.

Encouraging renewables

To kickstart a local market the central bank last year promised up to $1 billion for productive sectors of the Lebanese economy, including sustainable energy: that is, renewables plus energy efficiency features found in green buildings. Khoury had forecasted in last December’s op-ed that between 2011 and 2015 “the overall direct investments in renewable energy, energy efficiency and green buildings in Lebanon exceeded $450 million.” But neither the government nor the central bank has been forthcoming in saying where exactly this money went and what effect, in terms of the reduction price per ton of emission, it’s had toward Lebanon’s climate change targets. 

Lebanese businesses have the option of getting subsidized loans to finance renewables and energy efficiency projects through low interest rate loans distributed by commercial banks – a funding mechanism known as the National Energy Efficiency and Renewable Energy Action (NEEREA). The money comes from a portion of reserves that commercial banks are already required to hold with the central bank for issues of liquidity.

Khoury wrote in the op-ed that “NEEREA alone has financed more than $350 million worth of investments in sustainable energy projects between 2012 and 2015.” The UNDP report also highlighted the important role that the funding mechanism has played in spurring renewable and energy efficiency projects, noting investment’s “exponential growth starting in 2012-2013 and carrying forward.”

Some businesses are finding the cost savings of solar rooftop installations so attractive that they’re willing to forego the subsidized financing to avoid the lengthy application process. The evidence however is anecdotal and the central bank, which presumably compiles data on NEEREA loans, has not agreed to hand over this data to Executive or even grant an interview on the subject. Nevertheless anecdotes that factory-owners are foregoing the subsidized money is both a promising sign for local momentum and an indication that solar, at least, is saving money for some Lebanese businesses in energy intensive sectors, like manufacturing. For those businesses the cost of supplementary electricity supply via pollution belching diesel generators is now more expensive (sometimes as high as $0.30 per kilowatt hour) than solar energy over a 20-year period.

A need for investment data

Of the more than $350 million that NEEREA is said to have channeled into renewables and energy efficiency between 2012 and 2015, solar photovoltaic (the installed megawatts that the government was inflating) reached only $30.5 million cumulatively since 2010, according to the UNDP report. In large part, the small amount of money put toward solar may be due to the legal obstacles blocking its scalability and because of the political and financial risks in reforming the electricity sector. Then again, the limited use of NEEREA funding for solar may suggest that energy efficiency projects are crowding out more worthy emission reduction investments, surely a microeconomic point at this stage but a question worth asking.

The liquidity reserves freed up for commercial banks to use for NEEREA-qualifying projects are loaned at attractive rates, less than one percent interest, so for banks the incentive to fund small solar projects may be less appetizing than for larger-scale energy efficient green buildings. Rather than dealing with a bunch of smaller loans for photovoltaic installations, the banks might eye higher profits by loaning out larger sums of money to real estate developers promising home and office buyers smart features that reduce a building’s carbon footprint.

[pullquote]“Most green buildings are expensive luxury developments, so who is benefiting? In terms of money, the developer.”[/pullquote]

Green buildings they certainly are when meeting standards of construction, but Lebanon has no building code that is environmentally-specific so developers are not really accountable to what they might call “green” benchmarks (The Daily Star reported in September that the government is preparing green building standards). As one conference attendee reasoned to Executive on the sidelines of last month’s energy forum: “Most green buildings are expensive luxury developments, so who is benefiting? In terms of money, the developer. They’re not reducing their costs because they have a low interest loan of $10 million. If you want to throw around money to say you’re supporting green building construction, obviously the banks are doing that. But when it comes to CO2 reduction, who is checking?”

A boom in green building in the short-to-medium term might be too much of a good thing because of the market absorption capacity for those buildings. But with no clear economic indicators on the energy saving potential of green buildings and value potential, it might mean Lebanon has oversupply coupled with uncertain demand. It might also mean that more worthwhile projects are being crowded out from accessing subsidized financing – but this can’t be verified as the data is not available.

The positive effect may still be considerable because testing the green building proposition helps people understand that green buildings have a benefit, just one that has yet to be quantified. In this sense, there are three elements to the business equation: job creation, capacity building in the future oriented market and actual savings in terms of making energy efficiency translate into business efficiency. For the first two, indications are that this is viable but on the third we still need to get the actual quantification to measure the efficacy of spending on energy efficiency and green buildings to put a dollar figure on emission reduction. The lack of data begs the question: is it really green?

October 5, 2016 0 comments
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EditorialOpinion

Time to fight back

by Yasser Akkaoui October 4, 2016
written by Yasser Akkaoui

It really bothers me when people say things they don’t actually understand. “The economy is dead.” I’ve heard it over and over the past few years. Growth is low, fine, but it’s not completely absent. Let’s remember Economics 101. If a manaoushe shop sells 1,000 manaeesh in September and then sells 1,020 in October, that’s 2 percent growth. Granted, those extra 20 manaeesh won’t buy our shopowner a villa, but that shop owner is still selling more than 1,000 manaeesh. He’s not moving to the poorhouse. 

There was an external shock to our economy when unrest in Syria broke out in 2011, quickly evolving into a full-blown civil war. We needed to adjust. Tourists from the Gulf were no longer coming, nor were they buying 500-square-meter luxury apartments in Beirut. Today, hotels outside the capital are near fully booked with locals discovering their own country, and developers are building housing for people who actually live here year-round. They’re building green, and they’re building architecturally pleasant structures respecting the four elements of life. This month we feature four megaprojects that, for the most part, will target Lebanese buyers. To the public, a large-scale project earns the mega moniker based on the area of land it covers. For developers, it’s probably more accurate to call them megaprofits than megaprojects. A large tract of land appreciates from the time the first road is paved until the last unit is sold (and the truly savvy keep a few plots outside the actual development to sell at a profit once the “neighborhood” created raises prices adjacent to it). A perfect opportunity for anyone with the cash to make it happen – and it certainly beats building in Beirut.

We adapt here in Lebanon, but that’s not always the most useful strategy. Sometimes, we need to be pre-emptive. This month we’re also reminded that accusations leveled by strong enough countries can stick. The Lebanese Canadian Bank is once again in the legal spotlight. Although this time, the motives are purely aimed at defamation, and a lazy press corps is falling for the tricks of a cheeky UK PR house. The newest case will likely not proceed very far. But the spurned minority shareholder behind the suit levelling charges against the central bank remind us how quickly the rug can get pulled out from beneath our feet. The West increasingly views this part of the world with suspicion. Correspondent banking is more problematic for Arab banks than others. We Lebanese will make the only choice we think we have: adapt. As these problems become bigger and bigger, hitting closer and closer to home, it’s time for the honest, hardworking people and corporates in this country to pre-empt. 

It’s time to stop adapting. We need to stand up for our rights. Banking and the free flow of capital are rights we have to fight for. We play by the rules, we should be treated with fairness, dignity and respect. When a father’s attempt to send his son in Canada life support money is thwarted by some clown in New York who doesn’t even give a reason for refusing a transfer, we’re all in trouble. Remittances – inbound or outbound – are the oxygen of our country. We can’t let ourselves be suffocated. 

October 4, 2016 1 comment
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BusinessReal Estate

Meet the megas

by Matt Nash October 3, 2016
written by Matt Nash

The confidence many developers have in the Lebanese real estate market is certainly not inspired by the numbers. On paper 2015 and 2016 look like the two worst years since 2007, yet this year and last have seen the launch of a handful of large-scale residential projects – one of which is the largest development in the country’s history and will easily clear the $1 billion mark.

Missing metrics

The first seven months of 2016 saw slight growth (2.62 percent) in the number of real estate transactions (which include the sale of land and built property as well as inheritances) compared to the same period of 2015, according to BlomInvest Bank. Looking back a bit further, however, the situation looks more dire. Compared to the first seven months of 2014, 2013 and 2012, transactions are down by 13, 11 and 15 percent, respectively, for January-July 2016, BlomInvest reports. Additionally, 2015 ended with transactions down just over 10 percent compared with 2014. Like looking up at stars twinkling in the night sky, however, these numbers provide a hazy glimpse into the past, not a snapshot of the current market reality. Sales transactions for built property only show up in the statistics once the property is registered by its new owner, meaning all of the sales figures cited in the rest of this article are not captured in the numbers (which also means they’re impossible to independently verify).

[pullquote]After blazing growth in the price and sale of both land and property … between 2005 and 2010, things have since cooled off[/pullquote]

After blazing growth in the price and sale of both land and property (or property pledged to be built) in Beirut and its environs between 2005 and 2010, things have since cooled off. Developers have been talking for years about being cautious about new investments and shrinking unit sizes to accommodate local salaries in an effort to boost sales. This hasn’t dramatically changed, especially in the old hot spot of Beirut and its immediate surroundings. Central bank stimulus money is still welcome assistance for both developers with existing stock to move and those pushed to execute construction permits under pressure of hefty extension fees. But not everyone’s in the same boat.

There’s something happening here

Executive tried in vain to get a breakdown of outdoor advertising spending dedicated to residential real estate projects. A drive from Damour to Tripoli, suggest the ad dollars are flowing. Without reliable real estate data on multiple fronts, conclusions can be difficult to draw, but the digital age is changing the world in often unnoticed ways. Unlike ten years ago, developers today disclose the percentage of their projects sold (this could be a marketing ploy and official statistics would always be welcome) and upload photos of construction progress on their websites. Gated villa communities further and further from the capital are trending (there are at least six currently under development), after years when developments tended to be within 20 kilometers of Beirut and consisted of apartment blocks – gated or otherwise. This is not to say the Lebanese residential property market has fundamentally changed. In August, HEC Holding launched Dreamville, 174 apartments dispersed among 19 buildings in a gated community in Metn. And small investors are still ubiquitous. You can find a “Brand New Apartment” in a low-rise building (or at maximum a cluster of three) on any number of websites listing property in Lebanon.

In the past two years, six projects were announced, each with plans for at least 100 units and an estimated value near $500 million or above, based on interviews and project websites. Executive spoke with four of them and found a diverse group. Two projects (Medyar and Mirador, see below) belong to owners new to development in Lebanon. All interviewees Executive met with for this article describe a vision of creating an exclusive community where like-minded people want to live, and each is building that vision in a different way.

The Whopper, with cheese

Robert Mouawad, a Lebanese jeweler who took his family’s business global, built himself a country club in the Chouf mountains with an olympic sized-pool and panoramic views of the coast, including Beirut to the north-east. If he had plans to use it commercially, they remained unfulfilled by the time he sold the land it was built on, according to Firas Abdel Rahman, sales director for the Medyar project in the Chouf district. Attempts to interview the project’s owners – Youssef Tajieddine and his family – were unsuccessful, but Abdel Rahman says the land was purchased from Mouawad and a few other landowners in the area (facts confirmed off-record by other players in the market) in 2010. The purchase was memorable because it was so large – 2.1 million square meters of land (or 2 square kilometers). That’s three times the area of Lebanon’s previous largest megaproject, Beit Misk, which Medyar resembles in terms of housing mix (villas, townhomes and apartments). The under-used but surprisingly new looking country club was part of the land deal, and will eventually be incorporated into the “centerpiece” of Medyar – the “Old City,” according to a project brochure.

[pullquote]“The market needs cheaper units and cheaper land … this is a market need.”[/pullquote]

Abdel Rahman explains the “Old City” will be an open-air retail, food and beverage, and entertainment cluster accessible by the public (and, of course, a selling point for trying to convince potential residents to buy). While infrastructure started back in 2013, the formal project launch was this year at the DREAM exposition in July. The working plan envisions the project fully delivered in 10 years, but Abdel Rahman explains that it’s still too soon to speak of project residents.

“At the moment, we’re focusing on B-to-B sales,” he says, elaborating that project owners are currently courting clients among the well-known developers across Lebanon to build a still undetermined percentage of the project. Medyar will include apartment buildings (to be built by the corporates currently being pitched to), townhomes and private villas. Medyar is selling land in the apartment building and townhome zones for $400 to $600 per square meter, Abdel Rahman says. Villa land prices will presumably be higher. Abdel Rahman expects land value to appreciate 20 to 30 percent per year and anticipates 15 to 20 percent of buyers to do so speculatively. However, he notes “we control” speculation and insists “we want buyers to build.” As for concerns about launching now, he offers: “The market needs cheaper units and cheaper land [than one finds in and immediately surrounding Beirut]. This is a market need.” He says the project has so far reached 12 percent land sales.

The forgotten north

Twelve years ago Ahmad Alameddine made a large investment. He bought over 800,000 square meters of land on both sides of the mountain overlooking Tripoli. He’s finally ready to develop (after a 2009 idea failed to entice buyers). Like a number of smaller projects also in the north – Dream Land by Tom Construction, Deddeh Hills and Happy Lands – Alameddine’s El Mirador is a gated villa community. Like many other developers Executive spoke with for this and previous articles, he says part of his target market are Lebanese expatriates used to living in single-family homes with a yard. Unlike many others, however, he has a laser focus for his marketing campaign: Lebanese in Australia. He claims tens of thousands of people from his native town of Minyeh, north of Tripoli, live Down Under. When including all of the North Lebanon governorate, he says the number reaches hundreds of thousands (it’s worth noting that no accurate data on the size and location of Lebanon’s diaspora exists). He’s investing in space at property expositions in Australia and considering opening an office there.

[pullquote]He wants to keep forests unspoiled and plans to build a bio-farm that will help feed chalet owners as well serve as an educational attraction for school kids[/pullquote]

Infrastructure works are nearly complete in phase one, on the east-facing slope of the mountain near the town of Terbol, he says. Alameddine put 41 plots up for sale and 38 were bought up in seven months, he says. Buyers will own the land they purchase, and Alameddine is working with a contractor to build the villas, offering four types to choose from (with sizes ranging between 212 and 800 square meters with an accompanying garden – sizes of which also vary). He’s selling at $1,200 to $1,500 per square meter. Future plans for Mirador are ambitious. He never plans to put townhomes or apartment blocks in the development, but does hope to attract a school, a small hospital, and various retail, food and beverage and entertainment venues, including an “old souk” as a heritage attraction. A brochure touts the project as a future tourist magnet. Like Medyar, he wants Mirador to become a destination for people living in the north. He says the final project will consist of 720 to 730 villas.

Finding a niche

While the projects previously mentioned are suitable for year-round residency, two big projects announced in 2015 are decidedly not. Kye – a resort including more than 700 chalets spread over 200,000 square meters near Tabarja (at the top of Jounieh Bay) – and Red Rock – a project that aims for 500 chalets on 500,000 square meters of land near Faqra – are seasonal retreats for the wealthy. Because they are not primary residences, buyers of chalets in these projects cannot benefit from subsidized loans offered as part of the central bank’s stimulus package. Claude Sakr, VP of sales and marketing with Rise Properties – a partner in Kye – describes the project as “recession proof” given that it targets “a select group of people”. Kye is being sold in phases, although plans are to deliver all at once. Owners are still waiting on final approval for a marina they’d like to build (which requires a presidential decree or – in the absence of a head of state – a unanimous decision from the council of ministers, Sakr explains). Sales phase one (totaling 312 chalets) is 90 percent sold and sales phase two is 50 percent sold, he adds. Like many beachfront developments, Kye will feature attractions for chalet owners, residents and visitors, but will not allow “public or paid access,” he explains. Chalets are 45 to 85 square meters and start at $4,800 per square meter. The land is privately owned by Rise and JV partner Saab Marina, who together self-financed the land purchase in 2014.

Red Rock is similarly targeted at buyers looking for a second or third property, but Alex Demirdjian – CEO of Demco Properties – says he’s not expecting to profit much from it. He says he’d be happy to break even, even as he bounces potential project slogans off of Executive and Demco’s Managing Director Alain Dibo, who sits in on an interview. Demirdjian bought 500,000 square meters of land (relying on a mix of personal and debt finance instead of bringing in outside partners as Demco does with its other projects), but will build on only 20 or so percent of the land (he claims to regularly rebuff offers to buy some of the land he won’t be building on). He wants to keep forests unspoiled and plans to build a bio-farm that will help feed chalet owners as well as serve as an educational attraction for schoolkids. The masterplan calls for two phases with phase one – currently underway – including 212 chalets. Chalets range in size from 40 to 150 square meters and start at $2,800 per square meter with phase one 70 percent sold.

October 3, 2016 1 comment
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Banking & Finance

“To move or not to move?”

by Philip Karam September 28, 2016
written by Philip Karam

This spring there was considerable commotion in Lebanese economic and financial circles as rumors surfaced that the country’s largest bank was engaged in scenario exercises about moving its corporate head office to Abu Dhabi in the United Arab Emirates.

The question of the advantages and disadvantages of such a significant relocation decision motivated Philip Karam, who studies economics at the John Molson School of Business, Concordia University, in Montreal, Canada, to execute research from the viewpoint of what advantages a move could provide to the bank and how the Lebanese government could incentivize the bank to remain in the country.

Executive attained access to the research paper, of which we bring you a shortened version. We note that the paper does not address questions such as employment and job creation. We also acknowledge that Bank Audi, which recently increased its footprint in Lebanon by taking up additional office space in downtown Beirut and also through launching a new SME division at its Lebanon unit on August 25, emphasized already in May that nothing was decided in terms of moving.

“If and when a decision is made, in keeping with its disclosure policy and applicable legal requirements, Bank Audi will make an announcement. Until that time, any discussion is pure speculation,” the group stated in an announcement.

The pros and cons of relocation

The possibility of a headquarters relocation by Bank Audi, the largest bank in Lebanon and a lender with operations in 12 countries, is the subject of our investigation. The analysis will be based on established ideas in the field of organisational theory on headquarters relocation. These ideas contend that HQs move overseas in response to changes in the internal configurations of the firm’s activities and the demands of the product markets in which it operates; or as a response to changes in external factors that have to do with global financial markets and shareholders’ composition and concerns.

Additionally, the HQ move must make sense by involving three sets of gains: efficiency gains arising from being close to the center of gravity of the business; strategic gains that stem from knowledge spillovers and access to better technical and financial resources, especially if the new location is a leading-edge cluster; and symbolic gains that accrue to the firm by demonstrating to stakeholders that the business is global in its location and outlook.

Bank Audi’s presence in the UAE is currently limited to a representative office in the capital Abu Dhabi, which is where it is thinking of moving its HQ. The UAE has of course become the financial and business hub, not just for the Gulf region, but also for the Arab World and probably for South and Central Asia. So as a first impression, it sounds like a good move to relocate Bank Audi’s HQ to the UAE capital. But such a momentous step should not be based on first impressions, but rather be subject to rigorous evaluation of the factors that could be driving it, internal and external.

Of the internal factors, the most plausible is that the bank should move in the direction where its business is increasingly concentrated: the greater the share of business activities located overseas, the greater the possibility of HQ moving there. However, on closer inspection, this factor is not good enough in the case of Bank Audi. Lebanon remains the place where the bulk of the bank’s activities and profits are generated: 52 percent of assets and 49 percent of profits, to be exact. If anything, the bank should be considering moving its HQ to Turkey, as it is its fastest growing and second biggest market, with assets exceeding $10.5 billion. Moving to Abu Dhabi, where the bank has hardly any presence, does not make much sense in this regard and the bank’s chances of reaping any firm-specific advantages are minimal.

Another crucial internal factor is the attraction of a new location characterized by growing possibilities, hub-like economic advantages, and a hospitable investment environment. In this sense, the more attractive the host country’s business climate is perceived to be, the greater the likelihood of the firm moving its HQ overseas. This is surely true of the UAE and its capital city, for their magnetism is multifaceted: an agglomeration of related business activities, a supporting political and regulatory environment, and a high quality of life for the employees. It is also a city with no corporate income taxes on domestic banks and is rated at investment grade AA-.

The bank can thus leverage the UAE’s or Abu Dhabi’s location-specific advantages to enhance its efficiency and strategic benefits. However, it is wise not to grossly exaggerate these benefits in relation to Lebanon. Though the business climate in Lebanon leaves a lot to be desired, its monetary and financial regulation and compliance is considered world class. And, in the final analysis, the UAE is still in the same “neighborhood” as Lebanon, with a fairly notable degree of direct correlation in economic shocks – and perhaps political shocks – between the two countries.

[pullquote]Though the business climate in Lebanon leaves a lot to be desired, its monetary and financial regulation and compliance is considered world class[/pullquote]

Although the internal drivers do not seem to strongly support Bank Audi’s relocation to Abu Dhabi, it is the external factors that could carry more weight in supporting that decision – factors that have gained more prominence with the globalization and opening of the world economy. This means that corporate HQ should give higher priority to managing its interface with external stakeholders, primarily with financial markets and foreign shareholders. And with the rapid developments in information and communication technologies (ICT) making it naturally easy for HQ to be mobile, such mobility is increasingly towards places where these salient and beneficial relationships with external stakeholders can be optimized, and the three expected gains – efficiency, strategic, and symbolic – can be adequately reaped.

For Bank Audi in AA- rated Abu Dhabi, the bottom line is that the bank will shed the disadvantage of being Lebanese with its associated negative and risky perceptions when dealing with international markets. This would translate to more efficient communication with institutional shareholders and analysts and, more importantly, facilitate better access and quality of financial services, in terms of wholesale loans, bond issues and capital infusion. Add to that the strategic and symbolic gains that arise from operating in a growing financial center that is also loaded with a pool of specialized talent; and from being no longer constrained by local norms and markets, but instead becoming a recognized player in regional or global financial markets.

Equally important is the external driver that deals with the composition and concentration of shareholders. Shareholders that are more international and dispersed are not strongly tied to local HQs in the way that domestic and family shareholders are. As a result, one expects that the higher the share of foreign shareholders and the less concentrated the ownership, the greater the chance of HQ moving abroad is. A look at the composition of major owners of Bank Audi could potentially confirm that: 6.9 percent is owned directly by the Audi family (Lebanon); 5.94 percent by Sheikha Suad Al Homaiz (Kuwait); 4.97 percent by Sheikh Dhiab Al Nehyan (Abu Dhabi, UAE); 4.71 percent by Al Sabah family (Kuwait); 2.55 percent by Al Hobayb family (Saudi Arabia); 2.5 percent by the International Finance Corporation (World Bank); and 29.1 percent by Deutsche Bank Trust Company Americas (as a custodian for all GDR holders).

There is, however, one external driver that might not support Bank Audi’s relocation to Abu Dhabi. Becoming a regional player with fluid access to regional and international financial markets and with a rising share of foreign ownership also involves dealing with international customers and competitors. Under ideal conditions, this should act as an opportunity for the bank to enlarge its customer base and to improve its product offerings. But in Bank Audi’s case that is going to be more of a challenge. The bank has practically no footing in the country, and it is fair to assume that competition is going to be very tough in a banking market with very big players and close to $675 billion in assets.

Although this external factor might impede Bank Audi’s move, there are at least two external stimuli that could expedite the relocation. First, a merger or acquisition by a UAE bank that would have the added benefit of giving Bank Audi or the new merged entity the crucial established presence in the UAE. Second, a threat in the home country driven by concerns over the regulatory regime, the best example of which is a flare up between the US authorities and the Lebanese banking system in relation to compliance with HIFPA, the law concerning Hezbollah.

On balance, then, our preliminary analysis has shown that external drivers mostly favor Bank Audi’s move to Abu Dhabi, whereas the internal drivers do not. The interesting thing is that there is increasing evidence from around the world that external drivers are more important in determining corporate HQ relocation than internal ones, which does not bode well for Lebanon. Besides the damage to its national financial pride, with Bank Audi’s decision to relocate, the country would stand to lose – as far as its banking sector is concerned – from forgone employment, corporate taxes, profit repatriation, financial innovation and dynamism, and market competition.

[pullquote]On balance, then, our preliminary analysis has shown that external drivers mostly favor Bank Audi’s move to Abu Dhabi, whereas the internal drivers do not[/pullquote]

How can we prevent this from happening? We suggest, tentatively, two possible ways out that are not mutually exclusive. One puts the onus on Bank Audi and the other on the government. It is reasonable to argue, given Bank Audi’s difficulty in realizing its first-best strategy of moving its corporate HQ to the UAE because of the extra-tough competition in the commercial banking market, that the bank pursues a second-best strategy of relocating its business units HQ, especially those of its non-traditional banking services that are currently dormant in Lebanon.

The two business units that could be prime candidates for such HQ relocation are private and investment banking, since moving these units seems to agree the most with the bank’s long-term financial interests. To elaborate, private banking HQ could relocate to Abu Dhabi to take advantage of the millions of high net worth individuals in the Gulf which has become a very fertile region for wealth management services; while investment banking HQ could move to Jeddah, the commercial center of the biggest economy in the Arab world that will be undergoing major financial and real sector reforms under the New Vision 2030 outlined by the second crown prince, Mohammad bin Salman. Such moves would naturally benefit from the synergies across products and countries that the bank can derive from its operations in the region and beyond; and they are undoubtedly feasible given developments in ICT that makes it easier for corporate HQ and business units HQ to exist in separate localities.

As for what the Lebanese government can do to incentivize Bank Audi to retain its headquarters in Beirut, there is really no shortage of proposals to put the country back on track and transform it to a viable host for business. This requires a set of reforms and initiatives such as: public private partnerships, infrastructure development, oil and gas exploration, public sector reorganization, and improvements to doing business and the investment climate. These structural changes will not only provide a sustainable lift to the economy, but they will also create a promising environment for banks to prosper and keep their HQ in the country, and even invite new HQs to settle here.

September 28, 2016 0 comments
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Wine

Of competition and promotion

by Nabila Rahhal September 26, 2016
written by Nabila Rahhal

There are arguably few things more enjoyable than sipping on a good glass of wine after a long day. Selecting a brand of wine for that pleasure is not as simple as it seems though: from the quality to the appearance and the image that a specific wine invokes in your mind as a consumer, a lot goes into the choice of bottle.

Amidst a dynamic wine sector, Lebanese wineries are honing their marketing strategies to make sure their wine is the one that gets picked at the end of the day.     

The more the merrier

Following the end of the Lebanese Civil War in 1990, Lebanon had only eight wineries. Today it boasts approximately 50.

The playing field has certainly expanded, yet older wineries insist that they welcome the addition of boutique wineries, explaining that it has benefited the Lebanese wine industry as a whole.

According to Zafer Chaoui, chairman and CEO of Château Ksara, and Edouard Kosremelli, director general of Château Kefraya, the growing number of wineries is a positive development because it has led to the increase of wine consumption in Lebanon.

Kosremelli explains that the increase in wineries has led to curiosity about wine among Lebanese, which in turn has increased consumption. He therefore doesn’t view the new wineries as competition to Château Kefraya. “Having more wineries in Lebanon is balanced by more demand for wine so this competition is not affecting Kefraya. The market is still growing and we’re not the only ones to have growth,” he says.

[pullquote]The growing number of wineries is a positive development because it has led to the increase of wine consumption in Lebanon[/pullquote]

Still, Chaoui sees that the rate of wine consumption in Lebanon is not on par with other wine producing countries and believes that a further increase would lead to a more dynamic wine sector. “As a country, we should focus on increasing local consumption per capita as this would be the best solution to an increased number of producers and would be a huge potential for the sector to develop in the future. Each winery has contributed to increasing the consumption per capita by pushing, relative to its size and capacity, for its wine to be tried all over,” says Chaoui.

Foreign is not necessarily better

The real competition for Lebanese wine in the local market, according to those interviewed, comes from foreign wines which are being imported into Lebanon at a higher rate than five years ago, fueled by the increased interest in wine and by the growing number of specialized wine retailers in the country (at least three have opened in the last five years alone).

The wineries interviewed explain that many Lebanese still believe foreign wine is better than local wine. “Some [Lebanese wines] are not good while others are great but on average we have really good wine and every single sommelier or wine specialist that has come to Lebanon is really surprised by this,” says Ixsir’s General Manager Hady Kahale.

The power of the vineyard

While each winery Executive spoke to has its unique marketing strategy, a few common themes emerged.

To begin with, all wineries agreed that, for a marketing campaign to succeed, first and foremost the wine has to be of high quality. “Wine is not only about marketing. If you don’t have a high quality product, you will sell well in the first year but then stop,” says Kahale.

Another common theme among the wineries interviewed is their belief in enotourism, or wine tourism, as an effective means of communicating their message. Those interviewed explained that, through visits to wineries, consumers get a feel for the winery’s unique philosophy and understand how wine is made while having a good time. By association, they will be more likely to select it in a store or at a restaurant.

The wineries also have their own marketing and development strategies based on assessments of their individual strengths and selling points.

Word of mouth

For Ixsir, according to Kahale, the most efficient marketing strategy is word of mouth where the consumers themselves talk about Ixsir and essentially promote it among their contacts.

To achieve this, Ixsir made sure it was where their target consumer would be most likely to consume wine. “For me, the best ambassador of Ixsir is Ixsir itself; people need to taste wine. The way we reached people is through having them taste the wine in a good setting – not supermarkets – such as exhibitions or events when they are ready to drink or eat,” says Kahale, citing Ixsir’s presence at bistro style restaurants, private and charity events.

[pullquote]All wineries agreed that, for a marketing campaign to succeed, first and foremostthe wine has to be of high quality[/pullquote]

Ixsir also created an association for itself with the arts, explains Kahale, making sure to be present at exhibition openings and art events across the city and also dedicating a section of their winery to exhibitions.

Ixsir was also among the first wineries to become active on social media, according to Kahale, who says it was a very important step for marketing their wine to younger consumers.

Ixsir’s marketing team is made up two people, including Kahale, who describes himself as a Jack-of-all-trades. While Kahale did not disclose the exact percentage earmarked for marketing from the winery’s budget, he placed it at somewhere between 10 to 20 percent.

A terrior, a soul, a great wine

For Kosremelli, Château Kefraya’s tagline “a terrior, a soul, a great wine” sums up their marketing strategy, which focuses on communicating the fact that Château Kefraya owns their vineyards, meaning it does not buy grapes from contracted farmers. This, according to Kosremelli, allows them to better control their grapes, in turn leading to the production of a higher quality wine.

Kosremelli explains that the idea of producing wine came to the late Michel De Bustros (he passed early August 2016) following the good feedback he received regarding the quality of the grapes he had been growing and selling to wineries since the 1950s. “Until now, we use only our grapes. This is what gave consistency to Château Kefraya and allowed the brand to grow. We have full control over our terrior, we understand them and each year we have a better understanding of what they can give,” says Kosremelli, explaining how the winery invests heavily into studying their soil in order to yield to the best wine possible. “The rest can take care of itself,” he says.

[pullquote]Château Ksara’s history, and consequently its reputation, is its strongest marketing strength, according to [Zafer Chaoui, chairman and CEO of Château Ksara][/pullquote]

Château Kefraya also engages in advertisements and promotions, spending 15 percent of its annual budget on marketing which Kosremelli says is “important for maintaining market share and increasing wine consumption per capita”.

Château Kefraya’s marketing is done through both traditional means – such as newspaper and magazine advertisements and some billboards – and the nontraditional means such as social media, tastings and events.   

Banking on history

Founded in 1881 by the Jesuit monks, Château Ksara’s history, and consequently its reputation, is its strongest marketing strength, according to Chaoui. “We have an excellent quality, reputation and history and this cannot but be taken into consideration,” enthuses Chaoui.

Being in operation for almost 160 years, Château Ksara’s challenge, according to Chaoui, is maintaining their position in the market. He explains that, “We maintained [market position] through investment and continuity. We invest wherever needed in a very good marketing strategy, a committed sales team, good quality and reputation,” says Chaoui.

Château Ksara spends 8 percent of its annual turnover on marketing, a percentage which Chaoui describes as “healthy”. The winery has a marketing manager with a team of three employees who all work closely with the sales team. Château Ksara does its own distribution which has the advantage of allowing them to be closer to their consumer base compared to those employing a third party distributor, according to Chaoui. “This costs more than if we had a distributor but it allows for a closer relationship between the customer and Ksara, which wouldn’t be the case if we had a third party distributing,” explains Chaoui.

Château Ksara also invests heavily in traditional advertisements such as billboards, newspapers, TV and radio ads and magazines, but doesn’t ignore the non-traditional ones such as social media, explains Chaoui.

September 26, 2016 0 comments
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Wine

Keeping it small

by Nabila Rahhal September 23, 2016
written by Nabila Rahhal

There’s a popular joke in the wine industry which goes: “Do you know how to make a million dollars out of a small winery? Start out with five million!”

The joke illustrates why owning a small winery is perceived more as an expensive hobby or an act of passion than a money making venture. At the end of the day, however, a winery of any size is a business, albeit one that might not be easy to manage or profit from, especially in a country like Lebanon.

Small wineries by definition

The past 10 years has seen the number of wineries in Lebanon grow from around seven to almost 50. Many of these wineries, according to wine shop Les Caves De Taillevent’s General Manager Paul Choueiry, are considered small or boutique.

Although there isn’t one absolute definition for small or boutique wineries, the wine specialists Executive spoke to believe a small winery is defined by a low production (around 20,000 bottles or less per year) often with only one or two labels (or wines). They also tend to be family run.

Karim El Ghazzi, general manager of Zawya, a wine shop in Mar Mikhael selling only Lebanese wines, believes small or “independent wineries”, as he calls them, are also characterized by the winemaker being involved in the whole process from harvest to distribution. “There is something beautiful about the winemaker coming to distribute their wine to us with their finger stained red from having personally pressed the wine earlier that morning,” muses Ghazzi.

Good things come in small packages

Producing only a small quantity of wine usually translates to being able to better control the production process and wine quality. “Boutique wineries are interesting because producing 10,000 liters is different than producing 10 million liters. Micro-wineries work on a small scale so they can control every single kilo, every single bottle, the whole process,” explains Choueiry, adding, however, that without government regulated appellations on wine, the only way one can evaluate the vintage is through tasting it, comparing it to “Russian roulette”.

Micro-wineries have the benefit of working at an artisanal level in contrast to the large wineries, explains El Ghazzi. “When the winery grows with a production of over 50,000 they find themselves at a position of a corporation or company and then might have to take decisions at that level, such as sourcing the grapes from a cheaper source. The winery then becomes detached from the agricultural side of its production,” elaborates El Ghazzi, adding that it’s not wrong for a winery to function like that, but that it would not fit into the criteria Zawya has set for its selection of independent wineries.

While still considered a small crowd, Lebanon’s wine drinkers are showing an increasing interest in these boutique wineries, influenced by the global trend for the artisanal and independent wine producers. “There is a worldwide trend towards this small artisanal way of production, even in beer or food; there’s a different spirit and style of making or producing,” says Choueiry.

Najib Moutran, owner of the Wine Teller, features 35 boutique and medium-sized Lebanese winery brands in his shop and says he has seen demand for them increase in the past five years. “There is a great interest among the Lebanese for micro-wineries, though at the beginning they were a little afraid to try something new. But now these wineries have proven themselves in quality and consistency so people are trying them more,” explains Moutran.

Money woes

Owning a small winery, however, is not a smooth sailing course.

To begin with, there is the issue of expenses. Starting up a winery in Lebanon requires an investment of between $500,000 and a million dollars, according to the winery owners Executive spoke to.

[pullquote]While still considered a small crowd, Lebanon’s wine drinkers are showing an increasing interest in these boutique wineries[/pullquote]

Aside from owning the land, securing the grapes and contracting winemakers or specialists, which requires a sizable amount by itself,  this budget is spent on winemaking equipment, from the tanks to the bottling machine to the barrels themselves, all of which have to be imported, according to Moutran.

The cost of winemaking machinery does not change depending on the quantity of wine made, meaning that a small winery has to divide that cost among the limited amounts of bottles it produces annually, explains Choueiry.

Micro-winery owners face another problem when importing bottles, corks and barrels in that they only need small amounts of them, which makes the costs much higher in comparison to that of larger wineries which order these products en masse. “Costs for small wineries are [relatively] much higher than the big ones because we acquire small quantities. Everything is imported here,” laments Sebastian El Khoury, winemaker and owner at Domaine de Baal.

Managing finances

All the small winery owners Executive spoke to say they have discussed coming together to cooperate on reducing costs by investing in a mobile bottling truck (a common service for small wineries in countries such as France) and splitting the cost or even ordering materials together in bulk and dividing the shipping expenses.

However, according to Iris Domain’s Sarmad Salibi, this talk has not been followed up by action. “I’ve been looking at ways to collaborate together with some small wineries to cut down on expenses related to bottling and corking and collaborate on marketing issues. The intent is there, but when it comes to taking action, things are slow simply because everyone is busy with their own work and they each have their own financial capabilities,” says Salibi.

Although Kafalat offers start up loans to small wineries, which several of the wineries Executive spoke to have benefited from, other payment facilities or government support for this agroindustry sector is not available. Also, with Kafalat, loan beneficiaries are given up to six years to pay back the amount, a time period which, according to El Khoury, is too tight for wineries. He compares this with wine producing countries abroad where wineries are given up to 20 years to repay their loans.

Spreading the wine

Distribution is another area where small wineries face difficulties, again financially related. “As a small winery, you don’t have the same budget as the big wineries. We cannot afford the same marketing campaign, and distribution and marketing pose the main financial challenges,” explains El Khoury, adding that for wine, not only is the Lebanese market saturated, but the international one is also highly competitive.

One of the main problems with distribution of micro-wineries is that, because of their high cost of production, their prices are also high when compared to the bigger Lebanese wineries. “The high production cost is a big challenge in that it puts you in a price bracket which is sometimes a disadvantage. Some Lebanese consumers think that Lebanese wines are not synonymous with quality. So when they see a bottle at our price, they think it is too expensive and opt for foreign wine at a slightly more expensive price tag thinking it is of better quality, which is not necessarily the case,” explains Jennifer Massoud, communications and productions manager at Atibaia.

Moutran explains that alcohol distribution in Lebanon is typically done through big companies, which is a problem for small wineries. “The way distribution is being done in Lebanon is that you have this link between big distributors and brands of wine; if you don’t have this big distribution company, you don’t have penetration power in the market especially with the Syrian border closed and with a minimal export market for small wineries,” says Moutran.

Although some of the small wineries Executive spoke to have distributors, they say it is not enough to be competitive with the bigger wineries in the country. “While we have a distributor, we have an issue with how wine sales happen in Lebanon. The majority of wine sales happen in supermarkets and supermarkets want a product with a high turnover in order to maximize the dollar profit per square meter; so they want to have tastings, promotions…a boutique winery will not provide them with those things so they don’t list it or give you a small space with no visibility,” explains Massoud, adding that in the on trade sector (namely restaurants) the issue is mainly with restaurant owners pushing imported wine over the local wines because they can make higher margins.

Some of the wineries interviewed do have an export market abroad, but all wineries say they prefer selling in the local market as they make higher profits. “To us, we benefit more when we sell here because we can sell them at a higher price; outside we have to lower our prices because we have customs and transportation expenses,” explains El Khoury.

Some support, please

Again, the government offers no support for small Lebanese wineries. Boutique wineries that have paid the fees to be part of the Union Vinicole du Liban (UVL) (fees are proportional to the size of the winery) benefit from attending the international wine exhibitions with them under the Lebanese wines pavilions, explain El Khoury and Massoud.

Fees for these exhibitions are often subsidized by the Chamber of Commerce or the Ministry of Agriculture (the subsidies exclude airfare and accommodation) and so could be the only chance for small wineries to attend such events.

Locally, small wineries can market their wines through consumer festivals such as Vinifest or others which take place before Christmas and have a focus on wine, suggests Choueiry.

A different playing field

Small winery owners describe their venture as something they started out of passion, giving the impression that their wineries might not be all about the bottom line, and that they are content to stay at the size they are at.

Others assess the market as they go along, evaluating whether or not they will take the leap to become a medium sized winery. “This is why I started with only 5,000 bottles,” says El Khoury. “I started small so as not to have any left and increased the product number as the demand increased.” He now produces 15,000 bottles annually.

Regardless of their personal benefit, small and medium-sized wineries have brought dynamism into the Lebanese wine industry. “Before boutique wineries, all wine production in Lebanon was in Bekaa, but the nice thing was that with the new wineries mushrooming across the country, wine now has different microclimates and soils which lead to different profiles and tastes of Lebanese wine,” says Choueiry.

Now that is something we can all raise a glass to.

Atibaia

Production: 16,000 bottles per year

Region: Batroun

atibaia2

Jean Massoud’s family already owned a house in the mountains of Batroun but “fell in love” with a 17th century house in the vicinity and decided to buy it.

Daughter and communications manager Jennifer Massoud recounts that, because the family was passionate about wine, they decided to transform the house into a winery named Atibaia. They sent soil samples to France to see what grape varieties would work in the Batroun climate as there were few wineries in the areas back then.

atibaia1

“It was 2005 so there were still very few wineries if any in Batroun. It was quite a challenge for us, but at the same time we wanted to do a wine that we enjoy drinking and are passionate about,” recalls Massoud, stressing that their family’s interest in the winery was not commercial.

Indeed, Jean Massoud, who is in the distribution business, saw Atibaia as more of a chance for him to work in agriculture, a subject he is passionate about and had studied at university, and as a retirement project of sorts.

atibaia3

Today, Atibaia has three vintages under one red wine label, produced by winemaker Diana Salameh, and plans to release a white wine by next year. Sixty percent of Atibaia’s production is exported while 40 percent is distributed locally through their distribution company.

Atibaia can be found in the major wine retailers, select restaurants and a few upscale supermarkets. Massoud explains their presence in supermarkets with the following: “We are in high end supermarkets because it is a one stop shop for many clients who don’t go to wine retailers or cavists and just buy their wine from there. We are also in supermarkets in areas where you cannot find cavists.”

Domaine de Baal

Production: 15,000 bottles per year

Region: Zahleh, Bekaa Valley

baal1

Sebastian El Khoury says his family has always been fans of wine, having lived in Bordeaux, France for many years.

 In Lebanon, starting from 1994, his father had vineyards and used to sell grapes to wineries such as Château Ksara which furthered El Khoury’s fascination with wine.

As he recounts, he had studied business in university and thought of entering the wine export/import business, but decided to focus on winemaking instead. He went to back to Bordeaux for seven years where he worked in a winery out of the belief that hands-on experience would be the most useful.

baal2

In 2005, El Khoury returned and prepared his first vintage of 5,000 bottles. “Today, we produce 15,000, but we started out with only 5,000 and grew slowly. I plan to reach a maximum of 25,000 bottles because for me small is better: risk wise it’s more manageable that way as I have to think of distribution,” says El Khoury explaining that many wineries make the mistake of producing as many bottles as they can afford-sometimes up to a 100,000 from the first vintage without securing a market for them first.

Domaine de Baal is close to an organic wine although El Khoury prefers the term natural wine, meaning there are barely any additives to the wine (low in sulfur, no yeast or additives) and has both red and white vintages.

Forty percent of the wine is distributed locally by Fawaz Holding through their wine shop La Cave de Joël Robuchon and the remaining is exported.

Domaine Iris

Production: 6,000 bottles per year

Region: Bhamdoun

Being around vineyards has always relaxed Sarmad Salibi. Growing up, he would hang out with his father while he tended to his vineyards and while living in South California, USA, he would always head to Napa Valley and stroll around the vineyards whenever he wanted a relaxing taste of home.

It is no wonder then that Salibi loved wine. Upon his return to Bhamdoun, he would often visit a friend who was producing wine and enjoy the smells and sights of wine making. That friend gifted him several hundred grape vines and this is what began pushing Salibi into starting Domain Iris.

iris

The final shove, says Salibi, was that he had land and a house in Bhamdoun that were abandoned during the Lebanese civil war, but that he wanted to revive, lest they be bought by investors.

So, in 2003, planting for Domain Iris started, and soon after Salibi was able to enjoy the first vintages of his hard work. Today Salibi produces 6,000 bottles which he distributes locally at the major wine shops, a few premium restaurants and what he calls the five major hotels in Beirut.

Salibi handles market and distribution himself and says that times have been hard, in line with the economic situation in Lebanon, since, at the end of the day, he is selling a luxury item and not a basic necessity.

Salibi admits that the winery is taking up most of his time “because I love it” but says he has another line of business which helps make ends meet. “Small winery owners can be called passionate fools. If the project is self-sufficient and financed then it is enough for me; it is something for the soul,” concludes Salibi.

September 23, 2016 1 comment
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Wine

Grapes of change

by Nabila Rahhal September 22, 2016
written by Nabila Rahhal

Deir El Ahmar, a Christian village in the northern Bekaa valley’s Hermel-Baalbek region, is more notorious for its marijuana plantations than it is for great wines. But winemaking is precisely what the Coteaux d’Heliopolis Cooperative now wants their village to become known for.

The birth of the Cooperative

Having never really felt the government’s support or presence, planting hemp was just “the way things have always been done in Deir El Ahmar”, explains Charbel El Fakhri, the legal representative of the Cooperative and the son of its current president. It was also among the few choices of livelihood in the region: “Before it was either planting tobacco or weed or you leave the village because there is nothing else to do, and if you didn’t find a seller [for the weed], it would be a disaster,” recounts Fakhri.

Since marijuana is illegal in Lebanon, profits from its sales were inconsistent and fraught with risk; for a period of time, for instance, police would destroy the growers’ crop on an annual basis. So, in 1999, four hemp growers thought of substituting their plantations for wine producing grapes which they could sell to wineries. They formed the Coteaux d’Heliopolis Cooperative which was supported technically and through grants by the French region of Oise and encouraged by Zahle’s Chamber of Commerce and Agriculture.

Grape statistics

From the start, Deir El Ahmar’s hemp growers were intrigued by the Cooperative which grew more or less steadily each year reaching a total of 207 grape farmers in 2016. Among them, they farm approximately 240 hectares of land and produce 700 tons of grapes.

While the Cooperative first started distributing grapes only to the wineries in their immediate vicinity, demand quickly grew and they began to provide grapes to wineries in Zahleh, Qanafar and Bhamdoun. Today, 80 percent of their production is sold to wineries across Lebanon.

According to Fakhri, the Cooperative’s grapes are in high demand because of their superior quality due to the region’s altitude (which varies from 1,050 meters to 1,600 meters), its climate and its lack of pollution, compared to areas such as Zahle and the West Bekaa where vineyards are often adjacent to the street.

This quality comes with a high price tag with prices ranging from $1.05 per kilogram to $1.45 per kilogram, depending on the grape variety and style of planting. “Lots of wineries complain about the prices and not all of them buy from our cooperative, but what we stand for is quality and this is what we tell them,” insists Fakhri.

Change of guards

For this high quality to be consistently maintained, an organized management team was needed, something that was lacking in the early days of the Cooperative. While Fakhri is appreciative of the Cooperative’s first board of directors’ success in starting it up and recruiting growers, he says more organization is now needed for further development.

[pullquote]“It’s good to sell grapes but it’s more interesting to have your own wine as a cooperative and be able to export it around the world.”[/pullquote]

In 2013, the current board of directors was elected and immediately set to work restructuring the Cooperative. They hired a full-time financial auditor to keep track of their accounts and a six-person management team to handle quality control, distribution and marketing. They also set in place standards that differentiated the selling price of grape varieties according to which produced better wine and which were grown in a more efficient manner (instead of having all grapes at the same price, regardless of their quality or varietal significance). “These may be small details but they are very important for the Cooperative to keep on growing correctly,” says Fakhri.

The need for wine

As Fakhri puts it, it is almost a must for a wine grape growing cooperative to have its own wine and winery. “It’s good to sell grapes but it’s more interesting to have your own wine as a cooperative and be able to export it around the world,” enthuses Fakhri.

A more practical reason for having a cooperative wine is having a ready and reliable market for the grapes produced. “At a certain point in 2012, a ton of grapes were thrown away because there weren’t enough deals with wineries to sell them and the growers were not paid; it was almost a disaster. So we saw it as a necessity to have a winery that would ensure that the grapes produced would actually be used,” explains Fakhri.

The cooperative dabbled with wine in early 2009, producing it in wineries whose space they rented, but there was at first some inconsistency in production (with several years being skipped) and the wine was rebranded Coteaux des Cedres in 2013.

Having a winery in the region is also important, according to Fakhri, in order to conduct the tests needed on the grapes to assess alcohol levels and determine prime harvest time. While they used to send the grapes to Zahle for this, having a winery on the premises would definitely make the process both faster and smoother, says Fakhri.

Deir El Ahmar’s winery

However, the Cooperative’s budget was too tight and its time too stretched with its existing duties (such as managing the vineyards and maintaining standards) to add starting and running a winery to its agenda – Coteaux Des Cedres continued being produced in rented wineries at that time.

Fakhri and his partner Walid Hobchy (one of the original members of the Cooperative) needed a winery for their own private label, Couvent Rouge (which translates to Deir El Ahmar) which they started producing in 2010 – in a Zahle winery called Coteaux du Liban that they had rented – following Fakhri’s return from studying winemaking in Bordeaux. Their idea for this private label was borne out of curiosity for what could be done with the grapes they were already planting as part of the Cooperative.

So, in 2014, they decided to set up a winery in Deir El Ahmar which could also be used by the Cooperative. They secured the $1 million needed for the construction and equipment by taking loans from Kafalat and a private bank, selling shares (5 percent were sold to the Cooperative) and contributing some of their personal funds.

The winery, which is in its final stages of construction and will be ready to welcome guests in 2017, has been producing Coteaux Cedres and Couvent Rouges since 2014.   

Wines of Deir El Ahmar

Couvent Rouge produces 20,000 bottles per year and are mainly distributed locally in restaurants. Fakhri says they still want to enter the local wine shops and delicatessen market, as well as the export market through their website and online commerce.

But the duo is not in a hurry and want to play their cards right with their wine. “We want to finish the winery and so [we] are taking it slow. We want to be able to receive people [at the winery] and teach them about the wine; we don’t want to be present in the market just for the sake of being present,” says Fakhri, explaining that working with wine has taught them to be patient.

Fairtrade

Meanwhile, Couteaux Des Cedres has been going strong with 100,000 to 140,000 bottles produced annually. The Cooperative’s wine is Fairtrade certified and Fakhri himself has been appointed chairman of Fairtrade Africa and is a member of Fairtrade International.

According to Fakhri, Fairtrade provides an eager international market which he prefers to the saturated Lebanese market-centered in Greater Beirut. “Beirut is an interesting but challenging market since there is a wine culture, but it’s a small city with low consumption, even when compared to another small city abroad. We are aiming for more than that because we have a village behind us; we have many advantages. If we have the demand for it, we can go up to 600,000 bottles from one year to another because we have the village vineyards, so instead of selling the grapes to a winery that year we keep them for the Cooperative and produce more wine,” explains Fakhri, adding that it is currently distributing to the UK, Japan and Sweden.

The village’s label

While Deir El Ahmar’s growers may have embraced wine grape production, their alcoholic beverage of choice remains whisky.

In order to promote a culture of wine drinking and show the growers that there is more to their vineyards than just a source of income, the Cooperative introduced in 2015 an Arabic wine label El Day’a, fully labelled in Arabic, and made it available only in their region. “We wanted the villagers to have pride in their product and be aware of what they are doing in the process,” explains Fakhri, adding that the locals are enjoying that wine and consuming it on an almost daily basis, not just on special occasions.

With the satisfied farmers working with the Cooperative, the winery and the three wine labels, the Cooperative and its board can sleep well knowing that their initial dream of transforming Deir El Ahmar into a wine producing village instead of a hash producing one is well on its way to being realized.

September 22, 2016 0 comments
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Economics & PolicyWildlife trafficking

Confined to misery

by Greg Demarque & Jeremy Arbid September 21, 2016
written by Greg Demarque & Jeremy Arbid

Executive visited ZaZoo City in Hazmieh disguised as tourists in order to collect photographic evidence of the conditions of the animals held captive there. What we found was appaling: ducks lying in a waterless pool, a tiger trapped in a shade-less cage and a fox asleep next to litter and a pile of its own feces. Several of the animals were suffering from untreated wounds, the cages were dirty, no information was provided about the animals present and no one was available to tour us around. Interview requests by Executive went unanswered.

One of several neglected monkeys kept in one of ZaZoo City’s cages. The cage does not come close to simulating the monkey’s natural habitat; the cage flooring is concrete and lacks branches and plants.
A ZaZoo City tiger is held in a small cage with a cement floor, unable to play, run or freely move around. It faces the risk of dehydration with no water or shelter from the sun.
Two lions, one male and one female, share a cement-floored cage, with no greenery and barely enough room for either to move around freely.
A fox shares its barren cage with only litter and its own feces. It has severe, untreated wounds covering both its ears.
Their wings clipped, two breeds of ducks and two pelicans inhabit a squalid, drained pool, strewn with their feces.
A theme park-style kiosk provides visitors with meager food offerings to distribute to the animals.
A badger with untreated wounds on its back shares its cage with a well of stagnant water.
September 21, 2016 2 comments
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Economics & PolicyWaste Management

Trash and the towns

by Matt Nash September 15, 2016
written by Matt Nash

Lebanon’s garbage crisis predates independence. Case in point, the country’s first sanitary landfill was built in the 1990s even though the technology emerged around the 1920s. Despite repeated policy failures by successive governments, however, the situation could be turning around.

Their own devices

By law, municipalities in Lebanon have the authority to handle their own garbage. Beginning in the mid-1990s, the central government contracted waste management in the country’s most populous areas (Beirut and the coastal districts from Jounieh in the north down to the Chouf) to the Averda companies Sukleen and Sukomi. This service area accounts for around 50 percent of the waste Lebanon generates. The rest of the country has mostly been managing its own trash (which means relying on foreign grants or – as is the case in Saida – a mix of grants with foreign and local private investment). Waste collection in Lebanon has long been reported to be 99 percent, according to the Ministry of Environment. Picking it up is relatively cheap. In areas outside of the Sukleen/Sukomi service zone, disposal has been the big problem. There are hundreds of open dumps in the country and uncontrolled garbage fires are still a part of waste management strategy in some places. Sorting facilities to recover recyclables, composting facilities for organic waste and sanitary landfills for what’s left are expensive to build and often don’t make sense if they are servicing too small a population (meaning municipalities can most efficiently manage their trash by sending it to facilities that serve more than one locale).

waste-jbeil

Because of financing troubles, donors and non-governmental organizations have largely filled Lebanon’s waste management gaps. Following the 2015 waste crisis in the Sukleen/Sukomi service area, more of the country’s municipalities have been exploring their options.

Inefficiency in Jbeil

Ayoub Bark smiles at the question. “We’re rich,” the vice president of the Jbeil Municipality tells Executive when asked about the city’s finances. He then quickly clarifies that development projects are budget breakers beyond the city’s means. Bark says local banks with corporate social responsibility (CSR) dollars to burn as well as Mexican-Lebanese billionaire Carlos Slim have helped co-finance big-ticket projects. When it came to waste management in the city outside of the Sukleen/Sukomi service zone, however, private sector donors were impossible to find, he says. So the city turned to the European Union via the Med 3-R Project, a sustainable waste management initiative focused on the Mediterranean region.

[pullquote]Because of financial troubles, donors and non-governmental organizations have largely filled Lebanon’s waste management gaps[/pullquote]

While the wider Jbeil district was hailed in the local news as a model waste manager during the stinkiest days of the summer 2015 waste crisis in Beirut and its five environs, the truth is not so clean cut. Bark confirms the district sends most of its waste to an open dump, not a sanitary landfill, in Hbaline, some 550 meters above sea level. He also confirms that sorting and composting facilities near the dump has not been operating for over a year.

chouf-1

Bark says that in early September, the city will break ground on its own sorting and composting facilities, intended for use by four neighboring municipalities. Jbeil is on the hook for 20 percent of the cost, and the 400,000 or so euros coming from Med 3-R is separate from the nearly 78 million euros in EU grants for waste management in Lebanon. Bark explains the city secured other funding for more bins and will soon begin demanding city residents sort at source. As Executive spoke to him in late August, an awareness raising campaign was about to kick off, with maps of the city’s neighborhoods for door-to-door message delivery brought to Bark’s office during the interview. He explains that six months after recycling bins are distributed to each household in the city, fines will be issued for those not sorting (the amount of fine had yet to be determined, he says). Should the plan for fining residents who shun sorting actually be implemented, it will be the first time in Lebanon such a fine is levied. (The 1977 law governing municipalities lists fines as a potential source of revenue, but does not detail what municipalities can and cannot impose monetary penalties for).

Higher ambitions

If imitation is the highest form of flattery, Sukleen should be blushing. The waste management company’s name is a hybrid of the family name of the firm’s founder (Sukkar) and a misspelling of the world “clean.” When Sukleen stopped collecting waste because the government closed the country’s largest sanitary landfill in July 2015, some customers decided they’d finally had enough and chose to sort their own garbage. Literally. Three months into the waste crisis, up in the Chouf, the “Chou-clean” project was in full swing.

With donations of an undisclosed sum from Chouf MPs Walid Jumblatt and Nehme Tohme, the Union of Municipalities of the Higher Chouf bought 5,000 square meters of land and built a trash sorting facility as well as a hangar for composting organic waste, Union President Roger Ashi tells Executive. The union comprises 15 villages (including Moukhtara) with a total population of around 25,000 and a waste stream of between 22 and 25 tons per day, Ashi explains.

waste-chouf-2

Ashi also aims for sorting at source in the union’s villages, but says no fines are planned for violators. He envisions the villages soon sending no waste to a landfill. The union is currently not handing any of its waste to Sukleen, he says, recycling and composting as much as possible and storing the rest until the union can purchase a baler (or a machine to compress the “reject” waste, which would end up in a landfill in many other jurisdictions). While he insists the rejects won’t be landfilled, he only smiles when asked where the trash will end up (remember: there are potential commercial uses for this garbage).

For now, the Union of Municipalities of the Higher Chouf “is not accepting waste from any outside area” and the success of the project has the union thinking of scaling up. He says they may buy more land to build new facilities to service other cities and villages nearby. Given the right scale, waste management can be a very lucrative business.

Correction:

This article has been amended. Orignally, Executive incorrectly wrote that the Union of Municipalities of the Higher Chouf sued Sukleen, resulting in a third party weighing the waste Sukleen collects from the union. In fact, the company says, weighing the union’s waste separately resulted from a 2013 decision by the Ministry of Interior and Municipalites, not a court case. Executive regrets the error.

September 15, 2016 0 comments
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Since its first edition emerged on the newsstands in 1999, Executive Magazine has been dedicated to providing its readers with the most up-to-date local and regional business news. Executive is a monthly business magazine that offers readers in-depth analyses on the Lebanese world of commerce, covering all the major sectors – from banking, finance, and insurance to technology, tourism, hospitality, media, and retail.

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