Business

Two wheels forward

by Paul Cochrane
written by Paul Cochrane

Executive met with Nicolas Boukather to discuss the newly formed Lebanese Association of Motorcycle Agents (LAMA), of which he is the secretary general, and what is needed to bolster sales. Boukather is also chairman of A.N. Boukather — dealer for Mazda and motorbike brands Piaggio, Aprilia, Motor Guzzi, Vespa, Gilera, Derby, KTM and Bajaj.

 

LAMA was only established in 2014. Why was there a need for such an association? 

LAMA’s role is to regulate the sector and to propagate a culture of bikers who respect the rules, as well as for drivers to respect bikers, and, of course, to organize motorcycle shows. Bikers are like a family, it is really cool to see people be united independent of religion and social class, as one group of bikers. 

 

Will you also lobby the government? 

In case they need consultants to talk to, they now have a reference. In Beirut, and Lebanon in general, there’s a need for motorbikes and scooters as a means of transport, as the city is getting congested and there is no real public transport. The commuting part is half of the story, the other half is the search for freedom, to drive on weekends and visit the country.

 

Are you pushing for the implementation of the new traffic law? 

My main message is that it is criminal to not implement the traffic law immediately. One of LAMA’s objectives is to really push for enforcement as it will save lives, solve traffic problems, reduce the fuel bill of consumers and open the doors for motorbike tourism. There are tons of advantages and no disadvantages. I don’t think anybody in the country who is keen to preserve the safety of their children would oppose this law. 

 

The law prohibits used bikes under 125cc, right? 

Yes, and it prohibits the importation of used bikes over three years old.

 

There were demonstrations against that part of the law.

Yes, by importers that use bikes as a form of forgery, telling customs that new bikes are used ones to pay less tax. If the law was applied, each bike would be $200 more in terms of registration costs. It is unacceptable to use forgery to pay less tax. The state needs more revenues, and this is unhealthy competition and a state of non-law. You know what is needed to implement the used bike law? One letter from the Ministry of Finance regarding customs duty.

 

The law would also better regulate the sector, as the number of bikes doing the annual test must be even less than the car sector, which is just 58 percent. 

I don’t have a figure, but I estimate it at 80 percent.

 

Are attitudes to bikers changing compared to a few years ago? 

They are, big time. You have people riding Vespas to go to the law courts. We have a lot of customers doing that. Things are changing and it is a lifestyle. We are pushing a lot of accessories — helmets, jackets and gloves — for safety reasons. Do you know about the inflatable protection jacket?

 

Yes but it is expensive, at around $500. 

It is, but people are spending hundreds of dollars on helmets and when I came off my bike, it saved my life.

 

What do you estimate sales of new bikes to be in 2014?

Around 1,400 to 1,500 new bikes is reasonable and growing around 20 percent yearly. You could multiply this number by 10 if the traffic law was implemented, as the import of used bikes would stop and people would feel safer on the roads. 

 

So you envision 10,000 new bike sales a year?

Our vision is to get to 30,000 units a year. Next to every car in the garage, a Lebanese needs a motorbike. In the second stage, people will get rid of the car. Imagine the traffic on Sunday everyday — that would be the result of more motorbikes. To develop the road infrastructure costs a lot, but to develop a motorbike culture is less expensive, and it should be an aim of the government. If you aligned the vision of LAMA with the government, you can imagine the impact it would have on economic growth, on pollution. It would be a game changer.

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Finance

Banking in subdued colors

by Thomas Schellen
written by Thomas Schellen

Gray, when not taken as the zone between black and white but as the color of unobtrusiveness and understatement — as well as secretive sway — has long been employed to characterize issues and people related to management in general and finance in particular. This type of gray is the color of power, and it suits Lebanese banking in 2014, just as it has done historically. But the gray of 2014 has been infused again, and even more so than in 2013, with an enormous caveat of politically induced paralysis.

The results of Lebanese banks in 2014 were not terribly surprising at all. Growth in total assets came in at 6.5 percent between December 2013 and September 2014, as per the performance review of the top 14 banks by deposits (the ‘Alpha Group’) which dominate the sector. Alpha banks, currently numbering 14, are defined by Bankdata as banks which hold deposits of over $2 billion.

Interaction with customers has generated growth in terms of deposits and lending. According to Bankdata Financial Services, growth in deposits at Alpha Group banks for the first three quarters of 2014 reached 6.2 percent. However, growth rates were skewed in favor of deposits in foreign units of Lebanese banks, which increased 12.3 percent versus the 5.0 percent growth in deposits in the domestic market. The latter number comprised faster growth in foreign currency deposits than in lira denominated deposits, which translated into a slight downshift of 0.4 percentage points in the dollarization rate of domestic deposits, to 63.8 percent.

[pullquote]Growth in domestic lending was moderate at 5.5 percent, compared to 15.1 percent growth in lending at units abroad[/pullquote]

The same skew in favor of overseas activities, applied to the lending side. Here, the overall nine months growth of Alpha Group portfolios was 8.3 percent. This corresponded to an increase in value to $58.5 billion by September 30, 2014, from $54 billion at the end of December 2013. According to Bankdata, growth in domestic lending was moderate at 5.5 percent, compared to 15.1 percent growth in lending at units abroad. Domestically, foreign currency loans constituted 52 percent of the Alpha Group’s combined portfolio at the end of September.

The profitability picture was less friendly and decidedly grayish in its domestic coloration. In consolidated terms, Alpha Group banks achieved 4.4 percent growth in net profits relative to the first nine months of 2013, Bankdata said. The Lebanese arena awarded 2.7 percent growth in domestic net profits. 

As profit growth lagged behind increases in overall activities, the 14 banks experienced further net contraction in return ratios. The return on average assets fell slightly from 1.06 percent in the first nine months of 2013 to 1.0 percent in the first nine months of 2014, and the return on average equity declined from 11.89 percent to 11.35 percent, according to Bankdata’s analysts, who concluded that “return ratios of Lebanese banks remain weak when compared to their average weighted cost of capital, although justified by the persistent tough operating conditions in their main markets of presence.”

Verbal highlights in Bankdata’s descriptions of the Alpha Group’s outcomes of the first nine months were terms such as “fair growth in major banking aggregates” and a performance “persistently characterized by high liquidity and financial flexibility.” Other analysts and the decisionmakers at leading banks employed similar euphemisms to describe a gray year in the best possible terms. 

[pullquote]Lebanese banks are looking increasingly prolific in their self evaluations[/pullquote]

Evaluation selfies

At a time when the selfie is perceived as the present and future habit of social communication, Lebanese banks are looking increasingly prolific in their self evaluations. No bank contacted by Executive expressed concern in their ability to meet their own targets in 2014. Banks confirmed, however, that they had aligned domestic targets with the subdued expectations at which they had arrived one year earlier after being exposed to a low growth environment in 2013. 

BLOM Bank pointed to outperformance against the banking sector, comparing its 9.8 percent increase in claims on the private sector in the first three quarters against a 6.6 percent increase for the whole banking sector. The bank achieved 5.17 percent year to date growth in total assets to $27.5 billion at the end of September 2014, and net profits increased by 2.5 percent year on year by the end of September, said BLOM Chairman Saad Azhari. 

“Our return on equity was at 15.3 percent, one of the highest in the sector, and compares well with the 11 percent of the banking sector. This was mainly due to the vision the bank has of its own operations focused on a balanced growth in net profit and all balance sheet items, with priority to control banking risks,” Azhari told Executive.

He clarified that foreign subsidiaries were the star performers in 2014. “In particular, the Egyptian market seems to be recovering well as our profits in our entity there jumped by 60 percent year on year at the end of September 2014. Our other foreign subsidiaries’ performances exceeded expectations too. So the increase in our net profit for the first nine months of 2014 came mainly from the increase in activity of our entities abroad, mainly Egypt, Jordan and the Gulf countries, as our domestic profits stagnated.”

Bank Audi focused with Argus eyes on the group’s expansionary markets in Turkey and Egypt, and cast a third eye on its private banking development. Defending their position as domestic market dominator was the fourth goal, one which the bank claims it has met. However, Audi Group chief financial officer Freddie Baz conceded that domestic performance was “in line with what banks have been publishing in terms of domestic assets and earnings growth at about 6 percent nominal growth. We have probably 2 percent real growth in context with a deflator of 3 to 4 percent.”

Bank Audi continues to expand into Turkey under the Odeabank brand


Bank Audi continues to expand into Turkey under the Odeabank brand

The group outperformed its budgets in Egypt and Turkey, he said. “We achieved targeted growth in Egypt and also additional efficiency gains, which translated into bottom line improvements beyond what was expected for the full year of 2014. In Turkey we had another interesting development whereby the outperformance is far more material because we had budgeted another year of negative bottom line as is normal for any greenfield operation.” While the 2014 negative bottom line assumption for the 2012 established subsidiary Odeabank was much lower than the 2013 assumption, the startup turned out to be a welcome surprise reporting a positive bottom line after provisions and taxes as of May 2014, far ahead of expected timeframes. Another growth highlight at Audi Group was the performance of the private banking activity which covers three European and three Gulf countries as well as Lebanon.

 

Read “The success of Odeabank” on how Bank Audi’s Turkish venture is performing beyond expectations

 

For Byblos Bank, the main highlights were its healthy ratios despite local and regional political uncertainties and the persistent domestic economic stagnation. The bank’s “conservative approach has been validated once again in 2014,” said Byblos Bank Chairman Dr. François Bassil. He added, “The bank’s results reaffirmed the confidence of our depositors, borrowers and shareholders, with customer deposits rising by 5.7 percent to reach $15.6 billion, and total assets growing by 2.6 percent to reach $19 billion at the end of September 2014. The results also reflected the bank’s firm support for the private sector, with net customer loans increasing by 5 percent to $4.73 billion at the end of the same period.”

While conceding that net income did contract in the first nine months when compared to the same period in 2013, Bassil qualified the drop as “small”, at 0.7 percent for a net $112.8 million in the first three quarters. “The results of the first 9 months of 2014 show that Byblos Bank has continued to maintain a high level of financial cushions in order to mitigate unexpected risks and to counter economic volatility.” He also pointed out that Byblos Bank’s capital adequacy ratio reached 16.5 percent, one of the highest in Lebanon’s banking sector and that primary liquidity placed with banks and central banks totaled $9.2 billion at the end of the third quarter, representing 48.7 percent of total assets. 

In terms of assets at the end of Q3, BLOM Bank, Bank Audi and Byblos Bank were placed first, second and third respectively in the list of Alpha Banks prepared by Bankdata.

Banque Libano-Française, positioned in the mid tier of the Alpha Group, “expects to finish 2014 with a profitability level that is close to last year’s, noting that 2013 was a record year for our bank, with net profits of $101 million, 15 percent higher than 2012,” said chairman Walid Raphael. “Our loan portfolio has so far grown by more than 9 percent, while our customer deposits have increased by 5 percent,” he added. 

[pullquote]With $11 billion in assets at the end of September 2014, Bankdata ranked BLF in eighth position in the Alpha Group[/pullquote]

Raphael, who was elected as BLF’s chairman of the board in September 2014 after the passing of his father Farid, who was the bank’s founder, told Executive that the bank’s leadership team remained “effectively the same team that has been managing the bank alongside our founding chairman for the past 10 years” and added that the bank “will continue pursuing its conservative and prudent growth strategy and to maintain high levels of liquidity and equity, while providing an excellent service to its clients.”

With $11 billion in assets at the end of September 2014, Bankdata ranked BLF in eighth position in the Alpha Group. 

Representing a growing institution outside the Alpha Group, BML (rebranded from Bank Misr Liban) confirmed that performance at the bank was in line with targets set for the past year. “BML has performed well in 2014 compared to 2013, and this is noted in our dramatic increase in interest income as a result of our efforts to double our corporate portfolio which we were able to achieve,” said Executive General Manager Hadi Naffi.

According to Naffi, BML accomplished all its objectives for 2014 by implementing a consistent strategy. He expressed caution regarding Lebanon’s retail banking environment due to a combination of shrinking purchasing power and increasing costs of living for private households. Under these conditions “it’s very risky if we reach a level where retail lending is financing the consumer’s basic lifestyle or other consumer loans. Banks need to make sure that the consumers have the ability to repay their loans and are requiring loans for the right purpose.”

Attributing the difficult situation of private householders to “the current economic and political situation,” Naffi said the absence of economic growth is hindering the capabilities of the private sector. When asked if the main concerns of the banking sector over the national situation had been in any way solved in 2014, Naffi responded with an emphatic “no”. 

“As for 2015, our main objective is to keep our corporate portfolio growing at the same pace, and to benefit from cross selling opportunities between the corporate and retail portfolio,” he said, adding that BML is working on upgrading its core banking system and will launch several new deposit and loan products during the year. 

Pointing to two BLF achievements in 2014: receiving several awards for its card programs and recording a 100 percent expansion in assets under management, and five percent return in the year’s first 10 months at the LF Total Return Bond Fund, Raphael said of the bank’s plans for 2015, “we will continue to pursue our policy of managed growth in an environment that we expect to continue to be challenging.” This will include further diversification of product offerings and expansion of the domestic branch and ATM networks, but also entail an endeavor to continue to expand internationally in countries where BLF’s Lebanese clients have a presence.

[pullquote]New impulses for activity are thus concentrated outside of the domestic market, at least for the two largest banking groups[/pullquote]

Hunger for opportunities amid waiting games 

Generally, banks’ plans for domestic activity in 2015 appear to be subdued under a prevailing view in the sector that the Lebanese economic slowdown “continues to be broad based, with consumption, trade, tourism, capital flows and investment indicators all pointing to continuing anemic economic activity”, in the words of Byblos Bank’s Bassil. Without a “comprehensive political agreement on all sides” this anemia is not likely to change in the near future, he cautioned.

New impulses for activity are thus concentrated outside of the domestic market, at least for the two largest banking groups. Given that the group’s positive results development in 2014 was driven by its overseas units, and that these units’ contribution to group profits increased year on year by three percentage points to about 24 percent in the first nine months of 2014, BLOM Bank’s Azhari said he expected the same trend for 2015, “meaning that our growth will be brought by our subsidiaries abroad, especially in Egypt, Jordan, and the Gulf.”

Likewise, Bank Audi is not betting on local horses to pull its profits wagon. According to the bank’s Dr. Baz, the group is confident that it will retain its leadership in the domestic market. In line with its strategic concept of four pillars, Audi will keep an eye on maintaining the advantages it has established over its immediate peers in terms of assets and other metrics, Baz said, “but we don’t have a very big [domestic] appetite under the current circumstances.”

When compared with his views on the Lebanese market, Baz was tangibly more enthusiastic about private banking activity, where the group aims to double the size of its franchise over the next three years, and the commercial banking units in Turkey and Egypt. These three business segments, together with preservation of the home advantage, constitute the group’s four strategic pillars.

In other foreign markets, Audi’s chief strategist expects that expansion in Iraq will remain on course as the group is seeking conversion of the seven branch licenses it obtained in the country, before the licenses lose validity in early 2016. Farther away, “we will probably start looking closer at sub-Saharan Africa ahead of preset timing as one single addition to the four pillars,” Baz told Executive. 

Audi had already made known its intent to enter sub-Saharan Africa on the strength of having booked $2 billion on the group’s balance sheets from deposits, assets under management, corporate loans and trade finance facilities via its banking units in Beirut, France and Switzerland. But due to the recent strength of its growth in Turkey and Egypt, Baz said that the board decided to start exploring options for setting up in sub-Saharan Africa in 2015 instead of, as previously intended, after completely fulfilling key growth targets in Turkey and Egypt.

Meanwhile at home, all Lebanese banks are like every economic stakeholder in the position of waiting for that comprehensive political agreement, and a clear economic vision that would provide investors with incentives to take risks in the economy. That wait can’t be called a game anymore.

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Comment

Dormant capital

by Elie Yachoui
written by Elie Yachoui

When it comes to the question of what Lebanese commercial banks should and could do differently in 2015, the short answer is ‘almost everything’. However, as far as what one can realistically expect them to do differently, from the damaging ways they have trodden for more than two decades, the answer is ‘very little’.

As vexing as this is, our banking system’s emergence into the modern economic era would depend on an awakening and adoption of new policies by the central bank. For the past 22 years, since embarking on reconstruction in 1992, Lebanon has been relying on a simplistic currency mechanism of fixity.

In 1972, the countries of the world replaced the post World War II fixity with a system whereby the currency, as a mirror of the economy, moves under the influence of factors such as domestic interest rates, job creation and employment, balance of trade and fiscal balance.

[pullquote]Lebanon’s central bank, however, has been focused on maintaining the Lebanese lira independently of the economy[/pullquote]

Since then, when the previous model of fixity known as Bretton Woods was abandoned, monetary policy has incorporated flexibility, which helps any national economy to position and correct itself. Lebanon’s current currency regime, on the other hand, is still stuck in the era of fixity defined by Bretton Woods and it lacks a real monetary policy — its greatest failing.

By definition, monetary policy aims at supplying enough money to the economy to cover the needs of producers and consumers, to control inflation and to contribute efficiently to better economic growth. Lebanon’s central bank, however, has been focused on maintaining the Lebanese lira independently of the economy. Thus, what we have seen is a contractionary central monetary policy under which money supply in Lebanon since 1993 has never been sufficient to cover the real needs of companies, farmers, individuals and private households.

Underutilized capital

In August 2014, our commercial banks surpassed $150 billion in deposits. How are they utilizing these savings? Of this $150 billion, $60.9 billion was deposited in the central bank as of September 2014, according to data from the Association of Banks in Lebanon. This sum entails the required reserves, which are among the highest in the world in terms of percentages mandated, at 15 percent for deposits in foreign currency and 25 percent for lira denominated deposits.

The required reserves amount to approximately $25–$30 billion, which means that we have $30–$35 billion held at the central bank in excess of the required reserves. These amounts lie dormant, meaning they are paralyzed and inactive when it comes to economic usage.

But, even if we assume for argument’s sake that the $60 billion in the vaults of the central bank is held to support fixity and the lira’s peg to the US dollar, what about the remaining $90 billion in deposits? How is it used? Between $37 and $38 billion are committed to funding the public deficit via subscriptions in treasury bills and eurobonds. The rest amounts to a bit more than $50 billion, out of which $44.2 billion have been granted by commercial banks as loans to the whole resident private sector in Lebanon, to all companies and private households.

[pullquote]We are contradicting the basic equation of macroeconomic equilibrium[/pullquote]

This fashion of managing our financial resources contradicts a basic macroeconomic equilibrium equation, which says that savings in the national economy are supposed to mainly finance domestic investments and foreign trade. Given that less than one third of our savings are dedicated to lending to the private sector, do our savings sufficiently finance our domestic investments and foreign trade? The answer is obviously no. We are thus contradicting the basic equation of macroeconomic equilibrium.

The way out of this violation of macroeconomic fundamentals will open up only if a real monetary policy is established and diligently applied, including flexibility in the management of our currency. If you allow your currency to depreciate when you have a growing deficit in the balance of trade or in your budget, this depreciation will help you export more, and by exporting more, you can correct the anomalies in your domestic economy. Rigidity of the currency regime, on the other hand, will only exacerbate any anomaly in your economic results, as you are not allowing the economy to correct itself. 

Our economy is of a very humble dimension compared to a huge quantity of debt, the result of the contractionary monetary approach of the past 22 years. Also, resulting from this approach of the central bank, our interest rate returns on deposits since 1992 have always been higher than international rates. These high returns have been linked to that approach because in the mind of the central bank, the assumption has been that the higher the return on deposits, the higher the demand for the lira will be, irrespective of the state of the Lebanese economy.

What these high interest rates have neither linkage to, nor influence on, though, is inflation. In the minds of our central bankers, the course of keeping liquidity scarce under a contractionary monetary approach may have aimed at warding off inflation — but that has not been so. Despite a very controlled money supply, inflation has not been controlled or mastered. Reasons for this inability to control inflation stem from huge structural deficiencies, such as the presence of monopolies paired with anarchy and a lack of controls in our markets.

As the high returns on deposits have been linked only to the currency peg and to nothing else, the presence of high interest rates has lowered both domestic investment and consumption, and we all know that you cannot grow an economy without sufficient domestic investments and domestic consumption. For this reason, the entire banking system in Lebanon, including the central bank and the commercial banks, is suffering from anomalies and deficiencies.

The profit trap

Yet nobody can deny that the Lebanese banking sector is flourishing, generating high profits for both owners and shareholders in our commercial banks. There are three reasons for this, despite the financial sector’s violations of a basic macroeconomic equation.

The first is that the majority of the $45 billion in domestic lending is given by the banks to the private sector’s strongest constituents. Only 5 to 10 percent of private sector participants are benefiting from 80 percent of loans, which means that our banks are not playing their role of fairly supporting all stakeholders, sectors and producers. Even with the very moderate amounts of money that are loaned to the private sector, banks are very selective in choosing their debtors.

Lebanon’s economic model is therefore an elitist growth model — only the elite in such a system are supposed to grow and progress, while in Lebanon’s case it is comprised of people from the political class and those in governmental positions, plus the financial oligarchy. Besides being restrictive against the needs of small producers and burdening consumers with excessive costs of credit, the elitist growth model allows banks to reduce their overall lending risk to very low levels — nearly nil — because their borrowers are overwhelmingly very solvent people and have enough assets to cover their loans.

[pullquote]The whole practice is as if the central bank is transforming itself into a commercial bank[/pullquote]

Secondly, the commercial banks benefit from interest payments by the central bank on their excess deposits — those billions sitting in the central bank beyond the required reserves. Even if the banks’ margins are very low on each deposited lira or dollar, they reap these interest incomes on large deposits, risk free and without any input of labor. Apart from awarding banks with unjustifiable interest earnings, the whole practice is as if the central bank is transforming itself into a commercial bank. It accepts deposits and pays interest, which is contrary to the mission of a central bank.

The third reason is, when commercial banks subscribe to public debt instruments, they are assured that they will be paid their interest rates. I think that at least $40 billion of the $65 billion in bank funding of the public debt comes from deposits, meaning that the principal of the lent funds actually belongs to the depositors. But it’s the banks, not the owners of the principal, who obtain high profits from lending to the public sector — and these profits are assured by whom? By all tax payers because the government collects their taxes and pays the interest it owes to the banks through the treasury.

With these three sources of profit — from the wealthy and solvent, from interests paid by the central bank and from the high interest rates on public borrowing — banks are in a very comfortable position and may see no reason to push the government and central bank towards a real monetary policy. But have banks succeeded in meeting their fundamental obligation, which is to guarantee the safety of deposits to the depositors, given that they have granted all these funds to a corrupted government? Likely not.

Managing money right

What the banking sector, led by the central bank, should do in 2015 is take steps to gauge the real state of financial markets in order to at least begin moving toward a monetary approach that supports the macroeconomic equation. The way to do this would be regular weekly meetings with the three parties involved in financial market supply and demand: the central bank governor, the commercial bankers and the economic producers.

In order to invest and consume, the private sector demands money. By viewing this demand on a weekly basis, we can determine how much money the central bank is supposed to supply. The creation of money is warranted, as long as this created money is distributed equitably and fairly between investing and consuming. If all newly created money goes to consumption, it will be inflationary. If it goes to production alone, there will be an excess of supply and a decrease in prices. The money should be supplied based on an understanding of the existing demand and it must be distributed equitably. Both these measures would be within much greater reach if the three parties were to sit down at the same table and review the demand and supply of money on a weekly basis in 2015 and in all other years.

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Finance

Old problems, new restrictions

by Thomas Schellen
written by Thomas Schellen

As 2014 was winding its way from present to past, the Lebanese market’s top banking buzzword was resilience. In interviews throughout the year as well as in year end conversations with Executive, bankers emphasized the resilience of the sector’s financial results in the face of a challenging environment.

The numbers for 2014, as far as they were available for this issue of Facts and Forecasts, have corroborated the sector’s ability to adapt to stress and adversity. But on operational levels, the year for the Lebanese banking industry could also be characterized by another R word: restrictions.

From new compliance issues and reporting requirements under the American tax-cheat-catch invention, FATCA, to various foreign threats of new political hunts after Lebanese financial institutions, the year forced local banks to deal with further restraints and risks that had nothing to do with their business skills and everything to do with behavioral supervision. As a visiting banker said in September, “In general, nowadays it is much less fun to be a banker than it used to be.”

Arab banks, including Lebanese, face other political and reputational risks that have recently all too often morphed into special interest-driven restraints, whether by punitive targeting of Lebanese banks under American political agendas or litigious US activism against Arab banks through civil suits motivated by resentment and greed.

Amid the webs of restraints that Lebanese banks have to deal with, some strands exist which are totally domestic and these are not the least problematic strings. First, there is the easily discernible rope of dependency on the political regime. This is perfectly normal for banking in a state context anywhere, except that under the creeping self incapacitation of the Lebanese political system, 2014 has become a year in which the banking sector’s exposure to dysfunctional political governance no longer looks like just an inconvenience that one can sit out.

The impediments caused by fiscal imbalances and growth in public debt were on the lips of every banker and bank-employed economist who Executive interviewed in 2014, whether for our annual banking report or the year end review. All these concerns tied in, as Byblos Bank chairman Dr. François Bassil put it, “with macroeconomic policies, or the lack thereof.”

The new tax strings that were proposed in spring 2014 in the context of the salary scale debate were perceived in banking circles as totally detrimental ideas. Imposing taxes such as a non deductible 7 percent levy on banks’ interest rate income from treasury bills and certificates of deposit would lead to higher interest rates for loans, Banque Libano-Française chairman Walid Raphael pointed out. This would have “an immediate impact on bank borrowers, whose monthly payments will increase as interest rates go up,” he told Executive, adding that more than 100,000 home loan clients and over 270,000 other small borrowers would be hurt.

Blom Bank chairman Saad Azhari named the fiscal deficit as an outstanding concern as increasing primary surpluses of 2007–2011 fell back into deficits in 2012 and 2013. He emphasized the “need for a fiscal policy that will increase revenues and compress expenditures in order to produce a higher primary surplus and put back the debt to GDP ratio on a sustainable track.”

Finally, in the view of a number of economists there is a macroeconomic ball and chain weighing on the Lebanese economy in the form of the dollar peg. It is a whole set of restraints when it comes to setting monetary policy. But things are not black and white here. A turn away from the peg is conceptually a no brainer, because such measures are meant to be short term, said Bank Audi Group chief financial officer Freddie Baz. “The peg policy has not been really harmful but conceptually it of course should be a transition policy of 18 to 24 months, not something that lasts 16 years,” he conceded. However, Baz argued further that historically deep seated confidence deficiencies in the Lebanese population vis à vis monetary liberalization, as well as current problems, are standing against a rash move away from the peg, especially since associated factors of fixity such as the crowding out effect have been kept under full control.

For Baz, the main frustration is the low capacity utilization rate at financial institutions and in the whole economy. Citing the rate at an estimated 72 percent, meaning full capacity utilization would translate into a GDP of $62–$64 billion instead of the $47 billion expected for 2014, he said, “We are not using our full potential and this applies to the overall economy.”

Unfortunately, the discussion on how to fundamentally improve both Lebanon’s political and economic governance through a more complete democracy, and shift growth drivers from domestic demand to foreign demand, has not happened in 2014, and from the collective sense of the banking sector, the one word answer to whether an effective discussion could be expected for 2015 was ‘no’.

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Business

The slow road

by Nabila Rahhal
written by Nabila Rahhal

Following a global trend and tempted by the wide variety of vintages more available in the country today than in the past 10 years, consumption of wine among Lebanese is on the rise.

Increasing interest

“In spite of the relatively tough economic situation, Lebanese wine consumption has not witnessed any drastic decrease, with wine constantly gaining consumption share over spirits. Wine is appealing to the young generation more and more, and this is a good sign for the sector,” says Emile Majdalani, marketing director of Château Kefraya.

Hady Kahale, general manager at the Ixsir winery, explains that, due to the increased number of wineries in the country and improving wine education, Lebanese are becoming proud of their wine, and are finally shifting their perception that foreign wine is best. “All this change is a launch pad to increased consumption, though it has not increased by much yet due to the bad economic situation. Today, overall consumption has been maintained, and maintaining it in such a situation means it is growing. If the political situation improves and we get the tourists back, it will really take off,” says Kahale.

The role of marketing 

While the local market is small, all the Lebanese wineries Executive spoke to export more than half of what they produce, meaning that the wines remain a source of pride, and help improve Lebanon’s image abroad. 

Marketing in Lebanon plays an important role, as each winery strives to make its latest vintages better known among the country’s wine drinkers. Majdalani sees the role of marketing as “making the wine drinker aware of the infinitely complex work done by the winemaker to express his terroir’s specificity through a bottle of wine.”

[pullquote]While the local market is small, all the Lebanese wineries Executive spoke to export more than half of what they produce[/pullquote]

As wine consumption among young people increases, some wineries choose to market their products directly to this age group. “Recently, we have targeted our marketing towards young consumers because they are the future. Also, Ksara is very well known by older consumers who knew it from the pre-[Civil] War days, whereas young consumers now hear about many other producers. So we have to make sure that our niche with young customers is well protected through targeting at certain events such as tastings, social media communications [and] style of advertising,” says Zafer Chaoui, chairman and CEO of Ksara and current head of the Union Vinicole du Liban (UVL) (read Q&A with Chaoui here).

Other examples of marketing targeting the younger generation of wine drinkers include Château Kefraya teaming up with Lebanese artist Mazen Kerbaj to create a limited edition label for their “Les Bretèches” Vintage 2012, and Ixsir’s sponsorship of art and design events, which are attended by many young people.

Many wineries favor a subtle approach to marketing that allows the consumer to discover their wine instead of having it pushed down their throats. “Our marketing is very in house, within our family, and we make sure it is built on a good story that we let people discover. We prefer the word of mouth strategy, building brand awareness slowly and staying in our clients’ minds long term,” says Faouzi Issa, winemaker and co-owner of Domaine des Tourelles, adding that 10 to 15 percent of their budget is allocated to marketing, and it is mainly spent on traveling to exhibitions and trade shows. 

“We are not in traditional advertising mediums because they don’t work for wine: wine is a status item, not a fashion one and it takes years to successfully build a wine brand,” says Kahale, explaining that Ixsir is more active on social media and in public relations than in billboard or TV advertisements.

Time is on the wineries' side

Time is on the wineries’ side

 

On trade vs. off trade

As with all other spirits, wine can be bought on trade in restaurants or bars, or off trade in specialized wine shops or supermarkets, with both having their unique benefits and challenges according to the wine makers interviewed. 

[pullquote]With the country’s instability continuing, wine consumption at home now accounts for almost 70 percent of wine sales[/pullquote]

With the country’s instability continuing, wine consumption at home now accounts for almost 70 percent of wine sales, according to Kahale, who explains that Lebanon’s situation in the off trade sector is unique because supermarkets here tend to have a good wine selection. “Wines in chain supermarkets abroad are usually low priced and not very good, while the good wines are on trade and in specialized wine shops. In Lebanon, people go to specialized wine shops for foreign wines while chain supermarkets are very important and have a wide range of local wines,” says Kahale. He adds that for Ixsir, on trade is important for image building and that their distribution is 40 percent on trade and 60 percent off trade. 

Domaine des Tourelles’ presence is almost equally divided between on and off trade, though Issa says on trade is better for their wines and that their presence is strong in restaurants. “You have to have credibility and a solid background with demand for your wines to be in the restaurant business. If a restaurant selects you to be on its wine list, it means you have made an impact and so it gives the consumer more confidence,” says Issa, adding that in retail there is no interaction with the clients to help the sales of your wines.

Other wineries, such as Château St. Thomas, perceive a similar challenge when it comes to consultations as Issa does, but with the on trade sector there are fears that, without prior exposure to the wine itself through visits to the winery or tastings in supermarkets, a consumer would not think of selecting it from a restaurant’s wine list.

Majdalani asserts that both the on trade and off trade sectors are equally important to Château Kefraya, explaining that despite the issues facing the hospitality sector, the number of establishments serving Kefraya has not decreased, while the off trade — perhaps reflective of the country’s unstable situation — has an almost “stagnating consumption flow.”

Some wineries find it difficult to enter the on trade sector, especially since many distributors sign exclusive deals with venues where they sell them their entire portfolio of spirit brands, including the wine, making it difficult for independently distributed wine to enter that market. “While on trade presence is an ego boost as it feels good to enter a restaurant that serves your wine, it is a lot harder to penetrate that market alone. Also, many Lebanese restaurateurs would tell you they don’t sell Lebanese wine as everything imported is better,” says Aziz Wardy, general manager of Solifed, the company that produces Domaine Wardy. By contrast, explains Wardy, if one achieves a certain shelf sale in the off trade sector then distribution will run smoothly.

Whether in a restaurant or at home, and whether one hears about a certain wine through a TV commercial or through visiting the winery, it is clear that the Lebanese love of wine is not about to end anytime soon, although it can be further supported with a national campaign that would actively promote its consumption. “I think the basis of what should be done to increase consumption in Lebanon was done and is being done. We would love to have a national campaign explaining to Lebanese that they should drink Lebanese wine and that it’s good,” sums up Kahale.

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J2 vodka hits the ground running

by Nabila Rahhal
written by Nabila Rahhal

Just a year and half since it was first developed and a few months after its launch, J2 vodka has already received a positive response among young Lebanese, who are drawn to its smooth taste as well as the brand’s marketing. 

Yet Adam Aboulhosn, general manager and CEO of the Middle East Beverage Company, which is behind the vodka, is not satisfied with J2 as a passing trend. Instead, he sees it developing both locally and regionally in the next few years. 

J2 vodka is available both in on trade (clubs, bars, restaurants, etc.) and off trade (supermarkets, liquor stores, etc.) divisions, and the company handles its own distribution. They work with Abdelnour, a distribution company, for logistics to avoid a conflict of interest that would arise if J2 were to be distributed by one of the big distribution companies in the country, since they all have at least one major imported vodka in their portfolio.

Off trade, J2 is available in Aziz and Enoteca, both considered specialist wine and spirit shops that cater to a niche market, and while Aboulhosn is happy that J2 is found in such outlets, he is excited about its recent venture into Spinneys. “In Spinneys, we can reach a wider client base because they have many outlets and are the number one, among grocery stores, in alcohol sales,” he says. J2 will be available in all Spinneys outlets, and will have two stands in the Hazmieh and Dbayeh branches, where alcohol sales are the highest. 

Aboulhosn explains that although most alcohol sales are made in the off trade division, this is usually not the case with premium vodkas in supermarkets. “Premium and super premium vodkas usually make limited sales on the off trade division because when you go to a supermarket and all the prices are listed, you feel how huge the gap is in price between the normal and the super premium category, and psychologically you are more inclined to go for the medium range,” says Aboulhosn. 

[pullquote]“People enjoy taking it to a party or bringing it home because it’s a Lebanese company”[/pullquote]

Local over premium

J2, which is considered premium, has the advantage of being a Lebanese product, making customers more inclined to buy it over other premium vodkas, explains Aboulhosn. “People enjoy taking it to a party or bringing it home because it’s a Lebanese company with a Lebanese vodka. We want them to feel proud just like they feel proud when they drink Lebanese beer or wine,” he says.

On trade wise, J2 is available in about 40 bars and pubs in Beirut, mainly around Uruguay Street, Hamra and Mar Mikhael. Aboulhosn says they are considering expanding into the north, to cities such as Batroun or Byblos, where there are interesting opportunities.

Explaining why J2 is not available in Lebanon’s big clubs, Aboulhosn says that these often have exclusivity deals with big distributors. He also says that bars and lounges are more popular these days as people cannot afford to go clubbing as much as before. 

“We would like to grow faster, obviously, but considering the situation and considering the tourism numbers, and the fact that the sales in bars are low, I think we are doing very well. Off trade we are doing very well. Our operations manager is working very hard and we are hiring new people to work on the on trade side,” says Aboulhosn speaking of J2’s market in Lebanon. 

Although the brand has generated positive responses since its launch, with interested clients in countries as far away as Chile, Lithuania and the United States, Aboulhosn explains that since Lebanon is home, they need it to sell successfully here for at least a year before they can approach distributors abroad. “We already talked to distributors in Dubai and Iraq — before the ISIS issue — and they were very eager to work with us but said they need to see some sales in our home market first,” says Aboulhosn. 

While it is too soon to speak of actual sales figures, Aboulhosn is counting on the Christmas season to truly assess J2’s performance, as long as it is a stable period for the country. “That is the nature of doing business in Lebanon: you have the ability to do so well but then, in five minutes, something happens and it’s not in your hands. However, the rewards are very high if you are lucky enough to be in the upwards cycle of the country at that time. Lebanese have gotten used to living in this cycle of ups and downs and this is what we try to capture in our theme behind J2. That is why we chose the Phoenix [as our logo], the bird that comes out of the ashes of destruction: Lebanese will still live their lives no matter what.”

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Fine wining

by Michael Karam
written by Michael Karam

May 2013 was a decisive moment for the Lebanese wine industry. For the first time, the state put its hand in its pocket to support the burgeoning sector by hosting a Lebanese wine day at the George V Hotel in Paris. In 2014, the ministry stumped up again by hosting another bumper event, this time in Berlin. In 2015, it plans to take Lebanon’s road show to New York. Meanwhile, there have also been mini tastings at various Lebanese embassies and legations.

It seems everyone wants a bit of our wines. But that was not always the case. For years, successive governments, presumably because they didn’t want to offend religious sensibilities, were reluctant to either promote wine or offer significant financial assistance to Lebanon’s wine producers. But the ever increasing quality of Lebanese wine and the game changing moment that saw members of the Union Vinicole du Liban (UVL), Lebanon’s association of wine producers, decide to work together and self finance a generic campaign in the UK and Germany, meant the state could no longer ignore what is without doubt our most high profile export.

But wine is not hummus or olive oil and the idea of selling Lebanon the country before its wine was a long time coming. As far back as 2002, the UVL floated the idea of a generic campaign, but it was only at the end of 2009 that Madeleine Waters, a British PR executive who had previously done similar campaigns for other regions, especially Napa Valley in California, was appointed to sell Lebanon to British traders, media and consumers. Five years is not a long time, considering that Californians, Chileans and others have been at it for decades, but the fact that it happened at all was nothing short of a miracle.

[pullquote]Lebanon’s reputation has been lovingly polished through increased and more focused tastings[/pullquote]

And what a difference five years has made. ‘Wines of Lebanon,’ Waters’ campaign, won Generic Campaign of the Year at the 2012 International Wine Challenge, while Lebanon’s reputation has been lovingly polished through increased and more focused tastings, proper press coverage and strategic social media activity. Wine heavyweights such as Oz Clarke, Tim Atkin, Sarah Jane Evans, Natasha Hughes, Tom Cannavan, Victoria Moore and Joe Wadsack have all visited Lebanon and, apparently, loved the place.

Lebanon’s unique appeal

But at the risk of biting the hand that feeds it, the sector must insist that it has more of a say in how to spend future money allocated to promoting Lebanese wine abroad. No one is saying the funds are being mismanaged, but marketing wine is a specialist’s trade. The days when it was enough to simply roll up at a trade fair and show your wines are long gone. This does still happen, of course, but it is an activity that is part of a bigger package offering diversified activities that highlight the whole gamut of wine culture.

Consumers want to know the history of a region; they want to know about terroir and how certain grapes perform from country to country. They will ask about harvest yields, about native grapes and about who uses oak and who doesn’t, and who makes organic wines and who doesn’t. They want to know about personalities and where a particular winemaker studied. The list is endless. To capture all this requires an understanding of what makes consumers, journalists and the sommeliers tick. Each wants to know something different and so each message must talk to a specific segment. If we can get it right, the rewards could be endless.

Lebanon really should be the sexiest wine producing country in the world. This isn’t a moment of misty eyed sentimentality to which we Lebanese are often prone. Lebanese wine can be a genuine contender to other more well known wines. Some 3,000 years ago, the Phoenicians were the first people to sell wine. So our wine comes from a region where wine was first made, which is as good a backstory as you can get. The good news is that the current vintage is also very good, in most cases excellent, and is getting even better, especially the white wine. Our terroir is impressive and becoming more diverse by the day, while the Bekaa Valley is mystical and magical and a great headquarter for branding Lebanon.

But most importantly, we don’t produce that much wine; only about 8 million bottles per year. It’s nothing really, not even by regional standards. Cyprus makes around 33 million bottles, Israel 50 million and Turkey 70 million annually, which means we can play on scarcity, sell at a premium and market Lebanon as the ultimate boutique nation.

But if we don’t catch what Shakespeare’s Brutus called the “tide in the affairs of men,” then somewhere like Macedonia or Croatia might come along and sail off with our glory. And then, to once again quote the great Roman — who probably drank a lot of Lebanese wine back in the day — we’ll be “bound in shallows and miseries.” Lebanon already has enough problems without its modest $50 million wine industry missing the boat.

[pullquote]Our wine comes from a region where wine was first made, which is as good a backstory as you can get[/pullquote]

A bright future

When it comes to the domestic market there is more exciting work that can be done. Because, while Lebanon is a grape and wine country, it’s not yet a fully fledged wine drinking country. The grape plays a huge role in our agricultural heritage. It goes into arak, our powerful aniseed based national drink, and it was out of that arak culture that today’s wine industry grew, first as a byproduct of arak and then as the modest sector we have today. But the Lebanese consumer is still in love with whiskey, vodka and beer and has been slow to catch on to the idea of wine. And many of those who do drink wine assume foreign is automatically better. The obvious next step therefore is to launch a national generic campaign to instill a sense of national pride through wine.

Lebanon has come a long way since the 1979 Bristol Wine Fair when the venerable British wine critic Michael Broadbent, writing in Decanter, declared Château Musar “one of the eye openers of the year.” Since then, Marsyas, Domaine des Tourelles, Château St Thomas, Domaine Wardy, Massaya, Ixsir, Châteaux Ka, Kefraya and Ksara, to name a few, have taken Lebanese wine from being an ethnic curiosity into the mainstream.

They all punch well above their weight and, contrary to the popular perception that Lebanese wine is pricey, can genuinely compete in the international market place. Its entry level wines, scandalously dismissed at home as headache inducing gut-rot, have wowed foreign wine critics with their easy to drink style and complex flavors. It is with these wines that Lebanon can build a mighty reputation.

There is no reason why Lebanon can’t have its day in the sun. It’s up to us now.

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On the right track

by Nabila Rahhal
written by Nabila Rahhal

In Lebanon, 2014 has been an exciting year for wine and spirits, with three new brands of beer entering the market, the launch of the country’s first vodka and the continuing growth of our wineries.

With all this activity, it is no wonder that Lebanon’s alcohol consumption is also on the rise. Wine drinking has increased by 6 percent since 2011, catalyzed by the rising number of specialized wine and fine spirits stores, as well as wine education opportunities. However, beer remains the most consumed alcoholic beverage in Lebanon, a fact the country’s new breweries have bet on.

But this does not mean that Lebanon can rest on its laurels just yet. There is a lot of work left to be done. Lebanese wine consumption is still minuscule when compared to other wine producing countries and there are calls for a national campaign to instill pride in the drink and its level of production, thereby increasing local consumption.

On the exportation and distribution side, a lot of work is being done to both increase exportation numbers and identify new international markets. Members of the Union Vinicole du Liban, a private organization of Lebanese winemakers, have been working together to promote Lebanese wine under one banner in the global market and regularly participate in major wine exhibitions, primarily in Europe. Meanwhile the government, represented by the Ministry of Agriculture, is finally showing some financial and moral support for this sector in terms of organizing an annual “Lebanese Wine Day” each year in a different global city. Yet more work, and perhaps more time, is needed to ensure that Lebanon becomes synonymous with wine, as well as spirits and beer production.

In this section:

– Michael Karam argues that Lebanese wine has a bright — and global — future in “Fine wining”

– Nabila Rahhal interviews Zafer Chaoui, head of the Union Vinicole du Liban in “In the spirit of Lebanon”

– “The slow road” examines the growth in demand for Lebanese wines, and how local wineries are taking advantage of it

– “J2 vodka hits the ground running” profiles the country’s newest vodka

– “Glass half full” takes a look at how distributors are catering to the country’s changing palate

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In the spirit of Lebanon

by Nabila Rahhal
written by Nabila Rahhal

Ahead of his trip to Brazil aimed at promoting Lebanese wine, Executive sat down with the head of the Union Vinicole du Liban (UVL) and chair of the board of Château Ksara, Zafer Chaoui, to discuss the sale of Lebanese wine both domestically and abroad.

 

Over the past few years, we have seen an increase in wine production in Lebanon. Is this trend healthy, and do you see it continuing?

The [wine] sector is directly related to the economic situation of the country, and it is only one sector among many. It is true that from the end of the Lebanese Civil War in 1990 until 2010, we have seen a very positive development in the Lebanese wine sector. 

[pullquote]The sales of wine from Lebanon to Syria dropped by 80 percent, according to the figures we have from the UVL[/pullquote]

This development is related to three factors, one of them being that Lebanese people now consume more wine than before. Another factor is the number of tourists, which increased in the country from 1995 until 2010; the third one is that Syria opened up its economy and there was an agreement between Syria and Lebanon which allowed us to send a lot of our wines there.

These three factors have changed and this is a fact. First, the purchasing power of the Lebanese people has not increased during the last few years, and this — combined with a very small decrease in GDP, inflation and a lot of other problems faced by Lebanese citizens — led them to decrease the amount of wine they are purchasing. 

Second, the number of tourists has decreased, particularly after the Syrian war started, causing people to fear coming to the region. And a number of Gulf states instituted a travel ban on Lebanon, while [some] European countries advised their citizens to avoid coming to the country. 

Finally, the sales of wine from Lebanon to Syria dropped by 80 percent, according to the figures we have from the UVL. To add to this, after Lebanon and the EU signed the Association Agreement [a trade agreement that came into force in 2006], there has been a tremendous increase in the import of European wine to Lebanon. These factors together have brought a reduction in the total wine turnover in Lebanon, and figures from the UVL show that we are now producing less than in 2011. 

 

What can be done to protect Lebanese wines from competition from imported European ones?

It is a question of civics. When you have a very good product in your country, you should be proud of it and promote it. 

The Association Agreement between Lebanon and the EU is a necessity. We cannot ask the government to repeal it when we are deeply convinced that a free economy is the key to success. 

At the beginning of 2014, the minister of tourism back then, Fadi Abboud, sent a circular to all restaurants asking them to include Lebanese wines on their wine lists, but not all of them complied.

Restaurant owners could also be asked to stop recommending French wines to their customers over Lebanese ones, and allow them to make the choice for themselves. 

Also, we have wine sellers in the city that sell foreign wines, which is acceptable, but all these factors together have brought about an increase in the quantity of imported wines in Lebanon. In 2013, according to statistics from Lebanese Customs, wine imports were $12 million and almost exclusively from France … while we exported $14 million [worth of wine] to 40 countries, and not just France. We have to live with this, but we must also be aware that there is a problem. 

 

[pullquote]All wine producers are working hard to play their part in export[/pullquote]

How about the export market? Has it been affected as well over the past few years?

All wine producers are working hard to play their part in exports. However, it is very important to know that you gain more in your own country because your own wine is known there, and you are proud of it. When you export, meanwhile, you have to face competition from all over the world and no one has this special attachment to Lebanon except for the Lebanese diaspora. So then you have to fight more and market your wine to a specific country, which requires much more effort than marketing it in Lebanon. 

Also, exports are not easy, and the 2008 financial crisis affected the purchasing power in many developed countries.

 

What is the UVL doing to overcome these obstacles?

We try to work as a team and participate together in exhibitions which take place all over Europe, in order for people to know more about Lebanese wine as a country specific brand. We are very proud of our products, and I always say that the quality to price ratio of Lebanese wine is the best in the world. 

 

How do you, as UVL, position Lebanese wine to the global market?

First, we try to have all wineries be part of the UVL stand, instead of each winery talking about its wine alone. We are trying to promote Lebanese wine as a whole. We are supported by many Lebanese embassies abroad, which is a new thing I would like to mention. 

The minister of foreign affairs had a conference at the Phoenicia Hotel a couple of months ago, in collaboration with Lebanese Franchise Association president Charles Arbid, which was attended by [many] ambassadors and heads of missions. During the conference, the minister told them that we have to develop our exports; the political role of Lebanese ambassadors is not sufficient, and Lebanon no longer has that big [of a political] role to play. Diplomats are becoming economic agents of their country. I can tell you proudly that we hosted an event at the Lebanese Embassy in Paris where Lebanese wine was offered and promoted. On December 5, [2014], we have something similar in New York, where the consulate general has invited journalists and influencers to an event at the consulate aimed at promoting Lebanese wine. We are also hosting Lebanese wine days in São Paulo on November 27, [2014], and in Rio de Janeiro on December 7, [2014]. All of these events are organized by the ambassadors and the consulates of these countries and, as the head of UVL, I would like to convey my sincere thanks to these diplomats for their efforts. 

These events are a part of the series of efforts to promote Lebanese wine with a good push from the heads of missions and their embassies, which is unprecedented and makes me proud.

Of course, the UVL has a part in this, and without the UVL it would not be possible. We are acting as a team and speaking the same language and this is what makes it possible. It is a very successful development which I hope will continue in several other places. 

This is different from Lebanese Wine Day, which is under the auspices of the Ministry of Agriculture and largely sponsored by them. It is a day held in a different city each year, which started in Paris in 2013 and then Berlin in 2014, and we are aiming, with the close collaboration of the director general of the Ministry of Agriculture, for it to be held in New York in May 2015.

Other events include the international wine exhibitions which we attend under the Lebanese flag: ProWein in Dusseldorf in March, a big event which we go to hand in hand; Vinifest in Paris; and the London Wine Fair. We try to respect all parties and support small producers, who may need [the UVL] more than the big producers who can manage on their own. 

The UVL organized and participated in a remarkable number of events [in 2014]. It was a year of great efforts to counterbalance the effect of the slowdown in the economy and the reduction in sales. 

 

Lebanon remains a micro-producer of wine, even relative to some neighboring countries. What can be done to increase this number?

We need security and stability, especially in the wine sector. I can give as an example Château Ksara: in the golden years we received 75,000 tourists per year who would visit our natural caves and winery. Today, that number has dropped to 25,000. This shows the importance of security and stability. 

 

I assume this is especially true for wine tourism in the Bekaa valley.

Here, I would like to ask the media to remember that the Bekaa Valley represents 40 percent of Lebanon. So we can’t talk about bad security in the Bekaa as a whole. The part of the Bekaa that is affected by the security situation is a small part of the valley, so the media should stop frightening people from going to the Bekaa [in general]. 

 

[pullquote]It was a year of great efforts to counterbalance the effect of the slowdown in the economy and the reduction in sales [/pullquote]

What more can the government do to support this sector in 2015?

Each year, the director general of the Ministry of Agriculture allocates a slightly higher budget [for the wine sector] than the previous year. He is targeting LBP 200 million [$132,000] this year compared to LBP 160 million [$105,000] last year. The event we are going to for sure is the New York one, and, if we can, we are trying to go to other cities in the US. 

We will certainly try ProWein in March because it has become the largest European wine event of the year. [We will go to] France at the beginning of the year, then São Paulo and New York. We hope to find some other countries where we can also participate in events. Also, costs differ from one country to the other. For example, in New York the initiative was from the consular general, who just asked us to send the wine and he is taking care of all the rest. In São Paulo, it has been our initiative.

The success of such events depends on the people who attend: if they are strong in the sector and we manage to have a dialogue with them, the impact will be significant. 

We have talked a lot about Brazil today, and I think the situation there is good. We are trying to sign a bilateral agreement with Mercosur, a customs union of five South American countries. Lebanon currently has no agreement with Mercosur, but the ministries of agriculture, foreign affairs, and economy are now pushing hard for this. If we sign it, wines shipped from Lebanon to Brazil will be taxed less than they are today, and this will push the market forward. For the moment, many colleagues do not want to [export to] Brazil because of the large taxes [levied there] on Lebanese wine.

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Glass half full

by Nabila Rahhal
written by Nabila Rahhal

They say few things are more enjoyable than a glass of fine wine or a single malt whiskey at the end of a long day — and it seems Lebanese drinkers agree. There has been a notable increase in specialized wine and spirits sellers across the country.

[pullquote]“When we started, there were only four to five wineries and now there are around 40″[/pullquote]

As Enoteca, a wine shop with branches in Zalka and Beirut, celebrates its 20th anniversary this year, its commercial manager Henri Debbane recounts that when they first opened, Lebanese consumed mainly whiskey and arak with their meals and there was little interest in wine, whether local or imported. “When we started, there were only four to five wineries and now there are around 40 so the number has increased. The consumption of both local and imported wine has increased a lot, and competitors in wine distribution have too,” says Debbane. 

Importing wine 

The signing of a major trade agreement with the European Union almost five years ago dropped custom taxes on imported wines to 35 percent, making drinking such wine more accessible to a wide range of consumers, explains Paul Choueiry, winemaker at Les Caves de Taillevent, a French franchise wine and spirits specialist store in Tabaris. “At the beginning, imported wines in Lebanon were only for wealthy people, because the taxes on them were 70 percent to protect local production,” he says.

Today, according to the wine sellers Executive spoke to, French wine remains by far the most consumed imported wine in Lebanon followed by Italian wine, while new world wines account for barely 5 percent of the total foreign consumption in Lebanon. “Globally, there is more interest in new world wines, but in Lebanon we still pay 70 percent custom duties on wines imported from outside Europe, which means that if we import a $5 bottle of Chilean or South African wine we would have to sell it at $40 to still make a profit, which is absurd,” says Choueiry, explaining that Les Caves de Taillevent does have around 25 bottles covering all the smaller wine production regions, but they are more complementary to their cellar and are seen as accessories.

Local wine in wine shops

The wine sellers Executive spoke to all have at least one Lebanese wine in their portfolio, with Les Caves de Taillevent and Vintage promoting local artisanal wines, whose marketing budgets do not allow them to reach a wider distribution channel. 

 

Read Executive’s special report on Lebanese beer, wine and arak of October 2014

 

Yet, these are wine sellers usually frequented for their imported wine selection, and local wines find little footfall there. “We cater to an elite group in the sense that they have the time to pass by and select a special bottle of wine. When a customer is looking for local wine, he is more likely to visit a one stop shop such as a supermarket,” says Wadih Riachi, manager at Vintage Wine Cellar, a wine and fine spirits shop in Downtown Beirut, adding that this a good way to encourage local production.

Changing consumption habits 

Riachi also talks of a global trend towards “drinking better,” explaining that Lebanese consumers’ palettes are becoming more refined as they are offered more variety, growing to more fully appreciate good quality wines and spirits.

[pullquote]Wine consumption is still growing at an annual rate of 5 percent in Lebanon[/pullquote]

According to Debbane, wine consumption habits are changing: “Following the global trend, wine in Lebanon is becoming a more accessible consumption product and is reaching a younger crowd. This shift happened gradually. Ten years ago, wine was only for celebrations, but now it has become an almost everyday drink,” he says. Debbane added that wine consumption in night clubs is virtually nonexistent, although it is increasingly popular in bars, lounges and restaurants, where wine lists have become more extensive compared to a few years back. 

From Enoteca’s experience as both a distributor and wine retailer, Debbane has noticed that people tend to drink less expensive wines at restaurants while consuming the higher end vintages at home, attributing this to the economic situation in Lebanon. “It was mainly the tourists that spent on high end wines in restaurants and hotels, and since their number has decreased drastically, the industry has been hit on the on trade sector,” explains Debbane. 

Yet wine consumption is still growing at an annual rate of 5 percent in Lebanon, according to Riachi — though he admits that consumption is still low when compared to the global market. Debbane agrees, saying that while consumption is progressing at a slow rate, it could be faster had the industry not relied solely on the local market, as is the case now due to the unstable situation in the country.

The wine sellers 

With wine and spirits consumption on the rise, wine retailers are vying for their share of the bottle. Last winter saw the opening of Les Caves De Taillevent and this year the oldest French chain of wine specialist stores, Nicolas, also entered the Lebanese wine and spirits market, through the Etienne Nicolas wine seller in Monot, Ashrafieh. 

[pullquote]With wine and spirits consumption on the rise, wine retailers are vying for their share of the bottle[/pullquote]

While it would be understandable for one to assume that competition is high among these sellers, with more than five specialized wine shops in Beirut alone, the retailers interviewed by Executive insist that they each have their own niche. Etienne Nicolas benefits from the large Nicolas network, meaning that they can offer more than 600 wines, spirits and champagnes, while Enoteca say they can provide a fine bottle of wine for as little as $10. Les Caves De Taillevent Lebanon, meanwhile, benefits from the Les Caves De Taillevent France’s network, thus offering artisanal imported wines in addition to their usual range. All wine sellers interviewed offer wine courses, such as ‘wine and food pairings’ or tastings, aiming to wider disseminate a wine culture in Lebanon, and hoping the attendees would buy a few bottles on their way out.

Perhaps the biggest threat to these wine sellers is the supermarket chains which usually, in Lebanon, keep a wide selection of mainly local wine, but some imported products as well. Yet, here again, wine sellers believe they have something extra to offer. “Our wine shops offer consultations with our wine store managers who have all undergone intensive wine training, an asset supermarkets do not have. Also, we have a wide range of imported wines which is again something supermarkets do not offer,” says Eudes Morgan, director of Les Etablissements NICOLAS S.A.

And in other spirits

While wine and spirits retailers in Lebanon generally have a stronger focus on wine, which is considered a ‘finer’ alcohol, those interviewed also have a vibrant fine spirits section, seeing a positive growth in the single malt whiskey category.

Although vodka is the fastest growing category of spirit globally, Ziad Karam, corporate relations director of Diageo, says that the whiskey category in Lebanon is the largest. “Even globally whiskey is leading because vodka, considered the biggest competitor from a category perspective, was not really famous until recently and has been driven by the emerging youth [18–24] markets where it is consumed as a clubbing drink,” says Karam.

Choueiry explains that prior to and during the civil war, there were only a few brands of whiskey that everyone drank and enjoyed. “Today, even in blended whiskey, we have a wider selection. We have also joined the global trend of [increased] malt whiskey consumption,” says Choueiry. 

The rise of single malt whiskey consumption in Lebanon can be partly credited to Beirut airport’s duty free. Its manager Ramzi Nader recounts how, almost five years ago, they focused their efforts on marketing this whiskey through promotions, tasting booths and gifts upon purchase. “Single malt whiskey was becoming a global trend and we wanted to educate the Lebanese consumer on that especially since those who pass by the Beirut Duty Free are considered high end clients and would appreciate this effort,” says Nader.

[pullquote]Sales of whiskey had dropped in the last few years but are once again picking up[/pullquote]

Today, Diageo has introduced 10 brands of its malt portfolio into Lebanon and says it can see a response among connoisseurs and young people. Choueiry believes the single malts category has been embraced by the “in between generation, which has more purchasing power than the recent graduates, and is more willing to discover new brands of whiskey, while the older generation is emotionally attached to their brand of whiskey.”

According to Choueiry, sales of whiskey had dropped in the last few years, but with the introduction of new whiskey brands, and with the single malt, it is once again picking up and turning some of the new generation vodka drinkers to whiskey. 

Whether single malt whiskey or wine is your drink of choice, it is certain that you will find what satisfies your taste at either the city’s wine retailers or simply at your local supermarket.

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