Finance

Q&A WITH UBS’ KELVIN TAY

by Executive Editors
written by Executive Editors

From your perspective as a Swiss banker who is based in Singapore, how do Asia and the Middle East correlate?

They are both similar in that they are both export-oriented. The Middle East, however, has actually just one product: oil and gas. The problem is that oil prices over the next 10 to 15 years will no longer be at the level that we are used to. We [at UBS] think oil prices will be flat and there is further downside risk due to shrinking oil imports by the United States. The [other] problem of the Middle East is that political stability is going to be a huge key issue for, I would say, the next three to five years. This is tough to resolve because [the current Middle East conflict] is not a conflict between countries but a conflict along sectarian, religious and tribal lines. These [confrontations] take a long time to play out.

  • One of the countries that you have reviewed extensively as an Asian strategist is India. Do you see new investment prospects because of the new government headed by Narendra Modi?

I think [India] is too expensive right now in terms of valuations. You need at least another two or three quarters before corporate earnings growth can actually kick in. There is a lot of sentiment generated from [Mr. Modi’s] appointment and rightly so because he is the first prime minister to win an outright majority in India. If he can’t get things done, no one in India can. Compared to the previous administration, he has a track record of being decisive and a bit more authoritarian than what Indian politicians would like but I think that is what India needs right now.

  • From your perspective as a private banker, is being authoritarian negative, positive or neutral?

Neutral. I think it depends on the kind of leadership. Decisive, strong, stability — that’s what markets like. Markets don’t like uncertainty. You can have a democracy and [if] there are no decisions made, it is a disaster like what is happening in Europe.

  • In several MENA economies we have seen reassertions of what many observers consider to be authoritarian leadership styles. As far as looking at regional markets from an investment perspective, are you comfortable with Egypt and Turkey?

On the MENA region as a whole, when talking from a global investor’s perspective, I think more people are negative now than they were 12 months ago. At the beginning of this [period] you had the crisis in Turkey sparking up and you had the whole crisis in Egypt; that was the first round of nervousness. The second round of nervousness is now with regard to ISIS. This nervousness is even greater because of the uncertainty of something that is completely unknown. Thus the whole MENA region is not likely to be on the radar screens of a lot of international investors right now. If I have money to invest in only a global emerging markets portfolio, I would probably be more oriented toward Asia ex Japan region than to MENA.

  • There have been views that the heavy weighting of these Asian markets in the MSCI Emerging Markets index creates a bit of imbalance for investors in terms of finding opportunities. The Gulf constituents of the EM Index, Qatar and the two exchanges in the UAE, have small single-digit allocations in the MSCI EM. Does that make these markets more interesting to you and do you pay attention to them?

I do look at them because they are part of emerging markets, but when you look at these countries you have to look also at their earnings growth potentials. It is not terribly exciting. [Compared with Gulf markets] Taiwan and Korea are very leveraged toward the US economy and if there is recovery in the US coming through, these are the two markets that traditionally do well.

  • Doesn’t the MENA region offer some good investment prospects because of factors such as demographics and high rates of household formation?

If you talk in terms of demographics, the Middle East cannot compare with Asia. Indonesia has 250 million [people], Myanmar 65 million and the Philippines is 100 million. [In these countries] your income levels are higher and growing, there are investments, people are more literate, unemployment levels are low and household formations are even faster [than in MENA] and there is political stability compared to Africa and to the Middle East. It is a lot more attractive from that perspective.

  • Global economy and finance have been engulfed for some years in a process that is described as ‘shifting geographies’ toward emerging countries, especially in Asia. What does that mean for your investment strategies?

Asia is undergoing a reform and restructuring process right now in the three biggest countries. China, India and Indonesia, these three countries collectively account for more than half the world’s population. Even if they achieve half of what they have set out to achieve, Asia will be a dramatically different place from what it is today just five years down the road.

  • And in your perception the Middle East cannot measure up to that?

In the whole Middle East the society is very, very divided. How do you unite such a divided society?

  • Then we cannot hope for an Asian recipe to solve all Middle Eastern problems?

[laughs] At the end of this all is a philosophical discussion about what kind of regime is the most suitable. You [have] got to separate the economic system from the political system.

  • Like China?

Exactly. In China, the economic system is completely capitalist. In effect, there is no system in the world that is more capitalist than the Chinese economic system. The political system is completely authoritarian. But without this authoritarianism, the capitalist system and the economy would not have been able to thrive. It is such a big country, and it was developing, [so] you need an authoritarian system.

  •   So we can fairly assume that you do not subscribe to the theory that democracy is the precondition for wealth?

No, certainly not. People think it is but it is not, even in Europe. This is my personal view and I think the irony is that China needs a bit more of the European model, and the Europeans need more of the Chinese model. The Chinese have no social security, no safety network at all; so they are insecure and save a lot, which in turn drains the economy because nobody spends. Europeans don’t save, because they know ‘if I am out of a job I can depend on the state’. That is why I think both have lessons to learn from each other.

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Economics & Policy

Lebanon’s competitiveness: Bottoming out

by Thomas Schellen
written by Thomas Schellen

Lebanon is not in bad company for a peer group. According to the just published World Economic Forum’s Global Competitiveness Report (GCR), we are among those countries that are — and in many cases have been for quite a while — transitioning from a medium stage of development where efficiency gains drive improvements in competitiveness to an advanced one where innovativeness is the key differentiator.

In WEF terminology, this phase is called the transition stage from efficiency driven to innovation driven economies, and it is the second most advanced of the five stages in the GCR. Inconveniently, though, Lebanon is the 2014 bottom scorer in the Global Competitiveness Index (GCI) among the 24 countries in this category, with a score of 3.68 points that translates overall into rank 113 of 144 in the report’s latest edition, which was released on September 3.

This is not a comfortable or even hopeful placement, given that most countries in this group score between 4.04 points and 4.51 points, yielding midfield rankings between positions 40 and 80 in the WEF’s list.

The negative impression of Lebanon’s state of competitiveness from being a downward outlier in this peer group is exacerbated by the fact that the country looks stressed by any GCI measure. When compared with other countries in the Middle East and North Africa, Lebanon this year came in 14th place of 17 ranked Arab MENA countries. Only Yemen, Libya and Egypt were shown as less competitive in the region, noting that Syria and Iraq were not ranked.

Adding to the damage, Lebanon dropped 10 places this year compared with its ranking in the 2013 GCR. But while drawing a lot of attention — news reports on the GCR release in September focused by a huge margin on positions and ranking gains or drops — these relative positions are not ultimate truths. Leading development experts raise big questions regarding the relevancy of rankings as indicators because small changes in a country’s score can cause outsized and potentially misleading leaps up or down in a ranking list.

Lebanon’s drop in this regard thus might be somewhat acceptable if the relative weakening were because nearby ranked countries improved their scores but, alas, the reality is much worse. Year on year, the drop is actually a reflection of a fall in the Lebanese score from 3.8 points in 2013. Moreover, according to both hard facts and perceptions, the 2014 drop represents a continual weakening in the country’s competitiveness.

Over the past three editions of the GCR, Lebanon dropped 200 basis points in its score (3.68 in 2014 vs. 3.88 in 2012) and lost 22 places in the global ranking. Relative to the global leader, Switzerland, Lebanon is now 2,020 basis points behind, compared with a gap of 1,840 in 2012.

Crumbling pillars

The theoretical score range of the GCI spans from 1 (lowest) to 7 (best), or 6,000 basis points, but the actual range of the scores is narrower, extending this year from 2.79 points for Guinea at the bottom to Switzerland’s 5.70 points. A country’s score is determined by a compilation of perception factors based on a proprietary survey of business leaders and hard data taken from sources such as the International Monetary Fund, UNESCO and the World Health Organization.

The overall score combines the scores reached in 12 pillars, which in turn are computed from scores in a number of fields that vary per pillar between 4 and 21. Except for the pillar measuring the macroeconomic environment (based on fiscal and credit rating data), opinion survey results contribute to all pillars and are the primary influencers in determining the scores in eight pillars.

Over the past two years, Lebanon’s score in the macroeconomic environment pillar fell from a weak 3.32 to a disastrous 2.56, making the country rank second worst in the category. Except for a reduction in inflation, the country weakened in every field of the macroeconomic environment pillar in both absolute and relative terms.

The second, survey driven, area where the country’s score dropped precipitously when compared with 2012 was institutions. As far as fields building this pillar, Lebanon is currently the country where business executives see the lowest public trust in politicians and second worst in the assessment of wastefulness in government spending. It is no comfort at all that there are still five countries in the world which scored lower in the institutions pillar.

Lebanon’s best performing pillar in 2014 is health and primary education, with a score of 6.29 and a ranking of 30th in the world, followed by higher education and training with a score of 4.39 and ranking of 67th. Individual fields where Lebanon scored far above its global position were, besides life expectancy and some disease non-prevalence fields, the survey responses on quality of math and science education, where respondents perceived Lebanon at a score that equates to fifth place in the world, quality of primary education (16), quality of management schools (17), control of international distribution (20), which is protectionism to some, and soundness of banks (27).

Notwithstanding the fact that the comparatively high perceptions of Lebanon in areas such as banking sector soundness and quality of business schools will not surprise readers of Executive, the extreme variance of opinions in ranking the quality of government spending and the quality of math education is a reminder that the perceptions of — in the Lebanese case — about 40, albeit presumably highly reputed, business leaders as a survey base calls for a healthy skepticism and scrutinizing for biases.

Addressing biases

The presence of biases is a reasonable assumption in any country, and in the context of Lebanon’s visibly and demonstrably deteriorated economic and security position when comparing the survey timings of spring 2014 and spring 2012, it can also be presumed that changed mood factors could influence survey responses on a factor such as ‘reliance on professional management’, where the assessments dropped from 3.9 in 2012 to 3.3 in 2014. Such a swing seems unlikely to be based in reality — otherwise, Lebanese business or news media would have reported waves of firings of qualified managers.

For Lebanon, questions seem warranted even on hard data. For example, the country’s ratio of female participation in the labor force is reported as one of the lowest in the world (position 138), which seems counterintuitive to statistics on high ratios of female graduates in universities, the known ratio of women to men working in the banking sector (nearly 1 to 1 in 2010), general impressions in the workplace and even voices of outspoken women who decry a perceived counter gap in gender presence.

The challenges of data security and balancing for biases have certainly not escaped the attention of the GCR’s authors. Following audits of its surveying methodology in 2008 and 2012, the WEF has stepped up efforts to counterbalance or exclude heavily biased survey results, which in the past three years meant discounting survey results from three to four countries per year.

One country that was ranked in the top 30 in 2012 and 2013 but not covered in the 2014 GCR was Brunei Darussalam, because according to the WEF the 2014 survey of business executives in this country (and two other countries, Benin and Liberia) was “not completed to minimum requirements.” In several other countries, including Morocco, Saudi Arabia, Qatar, Jordan, the United Arab Emirates and Oman, the data quality of survey responses raised red flags in one year or another because of inexplicable large swings in responses or obvious incongruencies between survey responses and developments on the ground.

Making sense

of positions

As the GCI has now reached its 10th edition, it appears to be ever clearer that the exercise of collecting survey based scores and hard data gives readings whose annual fluctuations provides a mixture of high grade entertainment values and quotable numbers for conference presentations, small talk at business dinners, economic–political debates and magazine articles.

A more important challenge now seems to be to understand how well the GCI readings chart a country’s competitiveness journey and how much the index readings can help a country in improving its competitive positioning.

In the 2014 GCR, the WEF asserts that statistics corroborate the validity of the GCI as a “sound estimate of the level of productivity” in the countries which the index has covered for the past 10 years. To this effect, the GCR cites two equations that measure bivariate relations between GCI and per capita GDP and between GCI and countries’ economic growth rates after netting out the convergence effect. Under the second statistical quest, the GCI scores of the 144 countries could be related to the net growth rates of these countries, because “the growth rate of GDP per capita of country i is a positive function of the GCI score and a negative function of time t,” in the formula used for computing the relationship, the GCR said.

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CommentOil & gas 2014: On hold

Beyond EITI

by Sami Atallah
written by Sami Atallah

This article is part of Executive’s special report on the oil and gas sector. Read more stories as they’re published here, or pick up October’s issue at newsstands in Lebanon.

 

A paradox confronts countries endowed with oil and gas resources. Despite their riches, these countries tend to grow slower in the long term, have higher income inequality, be more corrupt and even become authoritarian. This, of course, is not the fate of all such countries — many have managed to turn the oil curse into a blessing. Those that did had two things going for them: a high level of human capital and good institutions that upheld checks and balances on power.

Although Lebanon is well endowed with human capital, its institutions are generally weak. The Taif Agreement redistributed power more equally across the three key institutions — the presidency, the parliament and the prime ministership — that are associated with the three dominant sects, and in many ways, undermined the political system. For one, the executive authority became diffused to an extent that it is no longer obvious who is in charge. The members of the parliament seem less interested in legislating and holding executive authority accountable and more interested in providing services to constituents. The political parties have mastered the game of electoral survival by crafting election laws through redistricting and vote counting in ways that get them reelected with little to show for. They have resorted to clientelistic strategies of buying votes and providing services in return for political loyalty. Furthermore, the judiciary and the oversight agencies whose job it is to hold the government accountable were at best sidelined but most often intentionally weakened through political interventions or bureaucratic understaffing.

In sum, the political elite govern the country largely by the logic of dividing the spoils among themselves through illegal subcontracting of projects, violating tendering requirements, as well as contracting companies despite conflicts of interest. This has resulted in high levels of corruption, embezzlement, mismanagement and waste benefiting the political elite at the expense of the rest of the population.

It is against this backdrop that the Lebanese Petroleum Administration (LPA), the body entrusted to govern the oil sector, came into being. Between November 2012 and August 2013, the LPA proceeded rather efficiently and with more transparency than most Lebanese institutions in approaching the sector. It held consultative meetings and workshops, and managed to lay the groundwork for the launch of the offshore licensing round. Now it is waiting on the government to pass the last decrees for the process to continue, and has found itself caught up in the Lebanese political mill with no clear way out of the deadlock.

The challenges awaiting Lebanon to transform oil and gas into sustainable development are many and go beyond the work and responsibility of the LPA to include ministries, oversight agencies and the government at large.

In reaction to this challenge, many local and international actors are advocating that Lebanon sign up to the Extractive Industries Transparency Initiative (EITI), which aims to enhance transparency in the sector (see “Safety in numbers“). The EITI is a voluntary coalition of government, oil companies and civil society organizations (CSOs) whose aim is to promote transparency and accountability in revenue management. Countries that express interest in the EITI must pledge to work with the private sector and civil society, appoint an individual to lead the process and produce work agreed upon by all stakeholders. Within a period of 18 months, the multistakeholder group (MSG) must publish a report that discloses the revenues — taxes, royalties and other sources — received by the government. It is argued that once the data becomes transparent, this will lead to accountability.

However, despite the best of its intentions, the EITI will most likely not solve Lebanon’s problems. For one, the output of the MSG, which is the audit report, compares how much oil and gas companies paid with how much the government received. In accounting terms, they are effectively telling us whether the numbers agree — but what it does not tell us is whether the numbers are correct. In other words, there is no way we can know from this exercise whether Lebanon got the optimal government take or whether its royalties are high enough. This is particularly important in Lebanon since the country’s procurement process in other sectors has generally been at best opaque.

Furthermore, other problems arise in regard to the audit report published by the EITI group: the fact that companies work on an accrual basis — which records sales and purchases when commitments are made, regardless of when cash is actually transferred — whereas governments typically work on a cash basis makes audit reports liable to manipulation. Another problem is that reports do not necessarily show how much each company is paying the government.

The second issue is that the EITI’s work is based on the inaccurate premise that transparency “can only lead to accountability if there is an understanding of what the figures mean and public debate about how the country’s resource wealth should be managed.” Although the disclosure of information and public debate is necessary, it is by no means sufficient to hold the government accountable. The audit report published by the EITI can definitely — if written succinctly and clearly — inform and even enlighten citizens but it will likely not lead to accountability. Lebanon is particularly notorious for this as many violations are reported by oversight agencies in their yearly reports or the media but little or nothing is done about them. In a nutshell, the system has rarely held anyone accountable.

The fact that CSOs are represented in the MSG may be a good thing at first as it shows strong inclinations for an inclusive process. However, it is important to note that generally, CSOs are the weakest link in the group made up of the government and oil companies. To assume that they will be able to stand up to both parties or even that they are independent is a gross assumption. CSOs have no formal enforcement mechanism and may not be representative of the public. Another concern is that CSOs in the MSG may end up being coopted.

However, the major shortcoming of the EITI is that it focuses on one element of the value chain: transparency in revenue. In other words, it ignores the challenges facing the country in upstream activities, especially in awarding contracts, and the downstream activities of revenue distribution. In fact, the source of the oil curse problem is not only about outright corruption per se. It is not necessarily about money disappearing into pockets of officials, but rather about money being spent inefficiently. In fact, cross national studies have shown that the problem of the resource curse is largely of two kinds: it draws people out of the productive sectors and into rent seeking, and it allows politicians to use resource rents to generate support through inefficient allocation of jobs in the public sector. Lebanon is particularly vulnerable to these ills since its democratic system is highly personalized and patronage networks and clientelism are rampant.

Although the EITI is a first step toward accountability, it falls short of what we aspire for. In fact, one major concern is that once Lebanon signs up to the EITI, it gives the impression that we are doing something about transparency or that the government is fulfilling its obligations by meeting the requirements of global initiatives. The EITI would, in this instance, become the end rather than the means. More worryingly, investing in the EITI may divert resources from the real issues that are beyond reconciling the taxes and royalties paid by companies to the government.

We need to go beyond the EITI and adopt a more comprehensive approach that tackles the various phases of the oil and gas value chain, from the preparation phase of awarding contracts all the way to how revenues are spent and their effects on the country. In each phase, we need to think creatively about how to push for transparency and accountability despite the current constraints. I do not believe that there is a textbook case to adopt, and hence we need to think of ways to break the opaqueness of the system and push for an accountability mechanism for the system to be credible. We need to find ways to break free from our poor institutions and establish new ones. The parameters of such an institutional infrastructure could be as follows:

For one, the LPA must have more autonomy vis-à-vis the Ministry of Energy and Water (MoEW) and must have control over its own budget. Its decisions — pending that they do not infringe on the competitiveness of the process — must become public before they are submitted to the ministry so the public can monitor how policies are changing, who is changing them and why. Any decision or policy must be accompanied by explanation and justifications. Furthermore, oil companies must be forced to reveal all relevant material to a public body, or otherwise risk losing their contracts.

The government, with the MoEW, must develop an energy policy so we have a sense of where the sector is going, how oil and gas discoveries factor in and how the government plans to deal with their effects on the economy.

The parliament and particularly the energy parliamentary committee must play a more effective role. To do so, it must develop its technical capacity so it can review, contribute and debate the government’s policy outlook. It must not only be consulted by the LPA and the government, but it must hold regular public hearings on oil and gas policy in addition to the MoEW, LPA, Court of Audit and other relevant oversight agencies to answer questions. These hearings must involve experts and CSOs. The committee’s purpose is primarily to hold the government accountable but also to establish a national consensus on oil and gas policy.

As for CSOs being more informed, they must build their capacity by learning about the sector. They must hold their own debate and discussion on how best to monitor the oil and gas sector. To be more representative, they ought to pool their resources to organize a coalition or a network. In this way, they can more effectively participate in the parliamentary public hearings.

On the policy level, the government and concerned ministries must develop policies to prevent people from leaving their productive sectors in favor of rent seeking, which is very common in resource rich countries. Furthermore, we need to constrain politicians from using oil revenues to generate public jobs in return for political support.

While adopting the EITI may provide a good start toward proper utilization of revenues from oil and gas, alone it would be woefully inadequate. For Lebanon to turn its oil from a curse into a blessing, it must lock in a better institutional architecture than the one we currently have.

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Leaders

Raise your glass

by Executive Editors
written by Executive Editors

Arak is in a bad state. Although it was the drink of choice for many Lebanese up until the Civil War, tough competition from whiskey and other spirits has driven it from all but a few traditional settings. And don’t even mention trying to penetrate the youth market. Indeed, as the eyes of both the country’s private and public sectors are focused on the more glamorous local wine production industry, arak production is sinking deeper into oblivion (see “In Flavor of Arak“).

But this should not be the case. Lebanon is known for its arak production: ask anyone from a Lebanese village about arak and they will spend impassioned hours telling you stories of how they or their neighbors distill it at home — or at least used to. They will also tell you what their favorite brand of commercial arak is, and why, and how many health benefits the drink has. As such, arak is the only spirit the Lebanese can place a national claim on, much as the Mexicans are known for their tequila and the Japanese for their saki. Arak is the only drink that is truly ours. It is an integral part of Lebanon’s traditions and culinary heritage — and if promoted in the right way, it could once again be a source of national pride.

We know the drink has the potential to make a comeback. In the late 1990s, its Greek cousin ouzo — which is also made from distilled grapes and flavored with anis — was facing the same issues of decreasing sales and the perception that is was an old person’s drink. So Greece’s big ouzo producers started marketing campaigns, filled with images of couples and friends drinking ouzo, targeted at young Greeks and the many tourists that visit the country. Essentially, they were trying to make ouzo hip again. It worked, and today ouzo is synonymous with the Greek islands’ way of life: not just popular among the younger generation and a must-drink for tourists, but also a growing export.

This is what should be done with arak. Both Massaya and Arak Brun have attempted individual marketing campaigns for their arak, but a more collective branding effort is needed to make a real impact. Just as Lebanon’s major wine producers gathered to form the Union Vinicole du Liban (UVL) to promote Lebanese wine, arak producers — many of whom are also wine producers and members of UVL — should form a league to promote the story of arak.

This story could capitalize on arak’s traditional roots to maintain its base of older drinkers while appealing to a younger generation. To capitalize on the latter, a wider strategy should involve distribution channels to the country’s nightlife outlets. Bars like Mar Mikhael’s Train Station are already experimenting with arak based cocktails, while pubs like Anise serve a wide variety of arak brands to favorable responses. More such efforts are needed and should be encouraged by arak producers.

Once arak consumption is revitalized in the local market, it will become easier to promote to the global market through tourists who will come to Lebanon and enjoy drinking it so much that they will take a bottle or two with them when they leave. The Lebanese diaspora should also be encouraged to take an active role in promoting arak as their country’s specialty drink.

A glass of icy cold arak is as Lebanese as a plate of tabbouleh or hommos, and it should be just as integrated in our collective repertoire. For all of our sakes, but especially their own, it is a time for the country’s arak producers to lead the effort in doing so.

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Beer, wine & arakBusiness

In flavor of arak

by Nabila Rahhal
written by Nabila Rahhal

This article is part of an Executive special report on beer, wine and arak. Read more stories as they’re published here, or pick up October’s issue at newsstands in Lebanon.

No Lebanese mezze table is complete without a pitcher of milky white arak and its accompanying little glasses. This anise infused drink made from distilled grapes, which turns white when water is added, is part of the Levant’s culinary heritage as a whole, and is an integral part of Lebanon’s, which has the highest number of commercial producers and where villagers take pride in producing their own homemade — or baladeh — arak.

Is homemade the best?

There are no official figures available for the annual production of arak, but in addition to commercially-produced varieties, arak baladeh — or homemade arak — is prevalent. Producing the drink at home is a standing tradition among villagers, possibly due to the relative ease of making it. All that is needed is grapes, anise, a still — known as a karakeh — and the know-how.

Even though many of those who produce arak baladeh do so for their own consumption and as gifts for friends, some have taken it to a slightly more commercial level and sell a limited amount to Lebanese restaurants. Elias Fadel, owner of Fadel restaurant in Naas, produces 600 liters of arak annually, which he sells for $66 per bottle. Yet due to high demand, he says he can only satisfy 30 percent of his potential customers before he runs out. “I enjoy making my own arak because I can be sure of what quality grapes I put in it. I follow the best traditional procedures to make the best tasting arak,” says Fadel, insisting that one can tell the difference in taste between his four times distilled arak and other varieties that are distilled three times or fewer.

All arak producers, however, warn against arak baladeh that is distilled incorrectly, without properly removing the methanol which can cause, at the least, a throbbing headache and, at worse, blindness. “Not all arak baladeh is good and some can cause bad headaches. It all depends on the way it is done,” says Fadel. 

Quality control 

Faouzi Issa, co-owner at Domaine Des Tourelles which produces Arak Brun, has no concerns regarding arak baladeh that is meant strictly for at-home enjoyment, but says there is a danger with the lack of control in this sector when such arak is sold commercially with no monitoring or quality assurance. This is because it could develop a bad reputation for the arak sector as a whole when bad quality arak is circulated, he argues. 

This was especially true during the Lebanese Civil War, according to Saïd Touma, owner and general manager at Château Saint Thomas which co-produces Arak Touma. He recalls how anyone was able to produce arak using low quality ingredients and export it, thereby giving a bad reputation to Lebanese arak and causing both local and global consumers to lose confidence in it. 

Commercial arak producers 

Today, with the new modern stills available, commercial arak producers have the means to produce high quality arak and Fadel admits that the commercial arak producers’ equipment is more efficient and can produce better quality arak than the baladeh variety. “Give me their modern equipment and I will produce the best quality arak in Lebanon,” says Fadel. Producing high quality arak then becomes an issue of ingredients used and techniques employed.

Arak producers Executive spoke to agree that making quality arak is an expensive endeavor. “Production of high quality arak is more costly than wine because you need the best quality ingredients,” says Aziz Wardy, general manager of Solifed, which makes Arak Wardy and Arak Gantous et Abou Raad.

Every bottle of arak requires eight kilograms of grapes for distillation, compared to 1.6 kilograms needed to produce wine, explains Issa, and since the average price of grapes is 60 cents per kilogram, some producers might choose to limit costs by distilling alcohol from other sources such as molasses.

Arak producers Executive spoke to say the anise they use for their arak comes from Hina in Syria, which is considered by many distillers to be the best in the region. Due to the war in Syria, anise prices have risen from $3 to $7 per kilogram, according to the arak producers interviewed. “They deliver the anise to our winery at their own risk and so far, although they are sometimes late, delivery has been consistent,” says Touma. Due to the hike in anise prices, explains Wardy, some arak producers cut costs by using lower quality anise or anise substitutes such as anise oil or phenyl oil.

Considering the high cost of production, from the ingredients themselves to the packaging which is generally imported, and the distribution fees involved, both Fadel and Issa raise the point that it would be surprising if arak sold at $5 per bottle would indeed use the best quality grapes or anise available in the market. Here, and for lack of better measurement, price is being used as quality control.

Marketing arak

Despite it being synonymous with leisurely Sunday family lunches and a staple of Lebanese restaurants, arak consumption has been struggling to maintain relevancy outside of these markets, both locally and abroad.

When it comes to the global market, Issa says they export 25 percent of their arak production per year to the UAE, Iraq, Jordan, the US, Australia and Canada, explaining that the international market is mainly driven by Lebanese expatriates although they are trying to change this trend by introducing arak to markets such as the UK.

Wardy believes the arak export market is shrinking because it is easier to market Lebanese wine abroad and “there is more potential” in the latter. In fact, all arak producers Executive spoke to started off with only producing arak before expanding to wine production. “We decided to move into wine because the arak market has dropped recently and so we decided to shift to something else. Wine on the other hand is booming,” adds Wardy. While the arak market may have experienced a general drop in the exports market, some reckon that local consumption may be on the rise. “Fifteen years ago, we used to sell 1,000 bottles of wine per year at our restaurant and only 500 arak bottles. Today, there is a shift and the numbers have been reversed. I attribute this to the rise in arak consumption among young people,” says Fadel, speaking of the trend in his restaurant.

Masaya Arak is generally credited with the rebranding of arak’s image through its modern dark blue bottle, but a more collective effort is needed to truly market this drink. “Young minds should learn to enjoy and appreciate arak more as part of our culture. To achieve this, we need more trendy events and venues to push for this. The problem is that arak producers have a smaller market so it is hard to finance a campaign to promote arak consumption,” says Issa, who has been actively pushing for the repositioning of arak through events at his winery and billboard promotional campaigns.

Arguably Lebanon’s national drink, Arak has weathered many a storm but has remained ever present; it should not be allowed to evaporate.

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BusinessIndustry 2014

Boom times at the Régie

by Paul Cochrane
written by Paul Cochrane

This article is part of an Executive special report on industry. Read more stories as they’re published here, or pick up October’s issue at newsstands in Lebanon.

The cedar tree may be the national symbol, but when it comes to smoking the national cigarette brand Cedars, it is the Syrians that have the strongest affinity.

In fact, a correlation can be drawn between the number of Syrians in the country and sales of Cedars: more Syrians in Lebanon equals more Cedars sold. Back in 2005, in the months after the Syrian military withdrew along with thousands of Syrian non-military personnel, sales of Cedars plunged by 50 percent. Government-owned Régie Libanaise des Tabacs et Tombacs (RLT) attributed the drop directly to the withdrawal, with soldiers and low paid workers the main consumers of what was then — and still is now at LBP 750 ($0.5) per pack — the cheapest smokes on the market.

Several years on, with Syrians back en masse, sales of Cedars have rebounded, surging from 94,744 cases (of 10,000 cigarettes, or ‘sticks’ as they are referred to in the trade) sold in 2011, to 195,060 cases in 2013. With the number of registered Syrian refugees at well over 1 million, 2014’s sales have already surpassed 2011’s totals, with 108,418 cases sold in just the first half of this year.

Yet while sales are recorded, RLT does not know who the cigarettes are sold to, or if they’re consumed locally or exported by wholesalers. “We think [the rise in sales] is mainly due to the Syrian refugees, but also [due to] exports to Syria and elsewhere,” says Pierre Hedari, RLT’s head of import and export.

PrintRolling at full capacity

The turnaround in sales of Cedars is clearly a boon for the manufacturer at its Hadath facilities. “We’ve had very high sales, are at full production capacity, and will buy new machinery to satisfy the demand, having gone from one shift manufacturing Cedars to two shifts,” adds Hedari.

Overall sales of cigarettes have increased since the Syrian crisis, rising from 1.24 million cases in 2011, to 1.55 million in 2012. Sales dipped marginally in 2013, to 1.21 million cases, and in the first half of 2014 reached 539,415 cases, signaling annual sales similar to last year.

Last year’s drop was due to a rise in smuggling into the country, a negative spinoff from the Syrian conflict, estimated by international manufacturer British American Tobacco (BAT) at 800 million sticks, while the legal market is 10.7 billion sticks per year. The rise in smuggling and a downward shift in sales of Class A cigarettes in favor of cheaper Class B smokes — rising from 27 percent of sales in 2012 to 37 percent in 2013 — prompted RLT to introduce a new brand, Maestro and Maestro Light, in May.

“It’s at a low price to combat cheap smuggled cigarettes. Our goal was to sell it at LBP 500 ($0.3) per pack, but you have to give a share to the retailer, so Maestro is selling for LBP 750 ($0.5),” says Hedari. Although in its early days, sales so far have been below expectations, with Maestro accounting for no more than 10 percent of RLT’s sales. Even if the new brand does not boost consuming, RLT’s overall revenues to the state treasury from $565.2 million in 2013 to $1.1 billion are expected to rise.

And if sales of Cedars are anything to go by, RLT is on track to becoming a bigger contributor to the state coffers, with its total market share having grown from 7.6 percent in 2011 to 20.1 percent this year. Ironically, such a boon for the budget may be dependent on Syrians’ continued fondness for the nation’s Cedars.

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Beer, wine & arakBusiness

Multiple shades of amber

by Paul Cochrane
written by Paul Cochrane

This article is part of an Executive special report on beer, wine and arak. Read more stories as they’re published here, or pick up October’s issue at newsstands in Lebanon.

To many Lebanese, Almaza has been synonymous with beer. Ask for a beer at a bar or restaurant, and it was a chilled bottle of Almaza that you invariably got. But the Heineken-owned Brasserie Almaza’s monopolistic grip over the beer market is over. The omnipresent Almaza is no longer the only large scale brewer in the country, with Kassatly Chtaura’s Beirut Beer having hit the shelves this summer, while a third commercial brewery is in the works.

The craft beer, or microbrewery, scene that has been dominated by Gravity Brewing’s 961 Beer since 2006, also has a new contender with Colonel Beer launched in July. It is boom times for beer drinkers — provided you like lager. 

A lager market

Kassatly’s new beer is a lager — like Almaza based on Czech Pilsner, a type of lager — as is Colonel’s biggest seller. Pale lager, typically drunk very cold, is the most popular and commercially available beer on the planet, although to beer lovers it pales in taste and complexity compared to ale, bitter and stout.

New kid on the block

New kid on the block

 

Locally, however, beer is equated with being a thirst quencher to be drunk on a hot summer day, with the bulk of beer sales in the summer months. “Most Lebanese have a low beer culture, that it should be cold and drunk from a bottle or a glass that has been in the freezer, which is why people don’t drink beer in the winter,” says Omar Bekdache, head of operations at Gravity Brewing.

Ironically, ale would be more suited to Lebanon’s moderate climate, from the brewing process, which does not require such a cold temperature, to storage and drinking the ale itself, as ales do not have to be consumed super cold. Brewing costs would also be lower, meaning breweries would have better returns.

However, market demand is not there. “Ale costs half the price of lager [to brew] but that is not the point, as you wouldn’t be able to sell it,” says Jamil Haddad, CEO and brewmaster of Colonel Beer in Batroun.

[pullquote]It is only the water that is Lebanese. The hops, barley, malt and yeast are all imported[/pullquote]

Almaza’s domination of the market since the brewery began in 1933 — bought out by multinational Heineken in 2002 — is the prime reason. Knowledge of beer is low, driven by consumers being used to primarily one taste, lager. 

Until earlier this year, Almaza had a 74 percent share of the beer market, according to BLOM Bank data (see chart). Coupled with Heineken having roughly a quarter, or 24 percent, of the 21 percent import segment, Heineken-Almaza has approximately 80 percent of overall market share. As a result, any new brewery entering the market has to take popular taste into account. 

“It is pure marketing reasons why lagers dominate the market, and I can’t blame the new breweries for bringing out lager as they wouldn’t get the same return on investment if they brewed ale, so they went the easy route,” says Elie Haber, head of the biomedical department at St. Joseph Hospital and a nano-brewer.

Creating a taste

Haber started brewing for himself several years ago, after sampling ‘real beer’ in Germany and being frustrated by the lack of choice in the Lebanese market. He has since invested around $10,000 to brew a range of beers in a small room at the top of his building in Mansourieh–Bhamdoun. Haber is one of just a handful of craft brewers who import their own ingredients and sup their home brew with friends. They were invigorated when 961 entered the market several years ago, bringing out craft brew lager as well as red and pale ales.

The underdog

The underdog

 

It was 961 that blazed the way for the new breweries today, single handedly creating a buzz around beer. Being the first to take on Almaza was a challenge, and it has been an uphill battle to change consumer behavior. “When we entered the market, people didn’t know about craft brewing. Our lager was considered completely different from what people were used to; a highly carbonated beverage. Some comments we got were, ‘Is this really beer?’” says Bekdache. “We had four beers and people didn’t know the difference, but today people ask for a porter or red ale.”

961’s foray into the market prompted Almaza to react by bringing out a malt beer, and later a light beer to diversify its offerings. Bekdache’s beer, branded as 961, also launched a separate line, Lebanese Brew, or LB, indicative of the continued demand for lager.

Like all locally brewed beers, it is only the water that is Lebanese. The hops, barley, malt and yeast are all imported. This has raised the cost of production, especially compared to Almaza which is able to leverage the economies of scale of the Dutch mother company. The same applies to bottling.

[pullquote]”Our aim is not to eat the market share of our competitors, but increase Lebanon’s average consumption to 10 liters or more”[/pullquote]

“Shipping costs are a killer. That is why it’s really hard to compare us to a commercial brewery — even the price of buying bottles is totally different,” says Bekdache.

Despite such challenges, 961 was able to corner about 5 percent of the market, according to BLOM Bank data, and go from an initial 400,000 liters per year capacity to 1.8 to 2 million liters at its new Mazraat Yachouh facility. 

Bekdache has welcomed Beirut Beer’s entry to the market, shaking up Almaza’s dominance and the two companies’ aggressive marketing is raising awareness about beer in general. “I am happy Beirut Beer is out, it’s a good thing, as they [and Almaza] can fight each other,” he says. “The market has also grown bigger, and has the potential to grow given the effect of the marketing campaigns both are doing.”

Bekaa brewed

Kassatly Chtaura, which also manufactures juices, energy drinks and wine, opened its $15 million brewery in the Bekaa Valley in July. The facility has an annual capacity of 2 million cases of Beirut Beer. “It is a state-of-the-art German built facility that runs at the push of a button,” says the firm’s export manager Reem Kassatly Ragy.

Chug-a-lug, chug-a-lug

Chug-a-lug, chug-a-lug

 

With Kassatly having the bottling and packaging facilities, half of the brewery was already there, making an annex for the brewing and fermentation of Beirut Beer a relatively limited investment, while the firm has an extensive distribution network already in place to market its beer alongside its other brands. The company was not daunted by going head to head with Almaza, believing the market is growing while having learned from the success of its winery, Château Ka, about taking on the giants.

“We believe there is demand and it is company philosophy to expand into new beverage production endeavors, so beer was a natural expansion,” says Kassatly Ragy. “Average consumption in Lebanon amounts to some five liters of beer per capita per year, whereas average consumption in the US and Europe varies from 80 to 120 liters of beer per capita per year. Our aim is not to eat the market share of our competitors, but increase Lebanon’s average consumption to 10 liters or more.”

That said, Beirut Beer is retailing for LBP 250 less than Almaza, at LBP 1,250 for a 330ml bottle, and has 220 ml and 500 ml bottles, and a 250 ml can on offer to bolster its market presence. Its entry has reinforced the penchant for lager as a beverage to be drunk cold in the summer months, reflected in its ad campaign for the small 220 ml bottle: “Cool till the last drop.”

With Beirut Beer coming out, Almaza introduced a Radler (a shandy mix of lemonade and beer) and Rayes Beer. The company also re-labeled its lager for the FIFA World Cup in different national flags, and in August launched specially-packaged bottles for Iris, a Beirut nightclub, as a way of product diversification (Almaza were contacted by Executive but were not available for an interview).

More competition is in the offing, with Interbrand, which manufacturers juices and soda under license as well as its own brands, planning to follow in Kassatly’s steps by investing $10 million to open a brewery next year.

Craft brews

While Kassatly and Interbrand are using foreign expertise to develop their beer, 961 helped the nascent craft brewing scene to take off. Bekdache and his partner Mazen Hajjar provided guidance and imported ingredients to Haber, in addition to offering support to the country’s smallest brewery, Schtrunz, run by Emile Strunc, as well as to newcomer Colonel. “We’ve worked with Emile and Colonel, they are good friends,” says Bekdache.

See you soon

See you soon

 

Strunc, who is Czech–Lebanese, is a consultant by trade and in his spare time a beer enthusiast with a master brewer diploma. His father had brewed beer at home in the 1970s, and Strunc decided to brew his own in a small room at his home north of Jounieh. Producing under 600 liters a month, Strunc brews different beers throughout the year, ranging from black ale, India Pale Ale (IPA) and summer ale, to Munchen, Vienna, Kolsch and two wheat beers, Weiss and Dunkelweiss.

Initially drinking the beer just with friends, Strunc started to sell to friends of friends, and its popularity spread. This year he has moved into a 75 square meter facility in the Ghazir industrial zone (a government requirement for commercial beer brewing), and plans to double output. “I have a commercial license and am working on the industrial license,” says Strunc. “I’ll soon have one selling point in Beirut, a high quality alcohol store that I can’t name yet.”

Haber, Bekdache and Strunc were all at the opening of the Colonel brewery in Batroun in July, reflecting the camaraderie between the microbrewers. Haddad’s main brew is Colonel Lager, at around 80 percent of production, followed by German Light (a Pilsner), Irish Red and Irish Black, which is sold in 750 ml bottles provided by Strunc. “I did a deal with Jamil [Haddad], I provide the large bottles and he provides the 330ml bottles. There is fantastic cooperation between us,” says Strunc. Haddad invested $2 million to set up the microbrewery, an eco-friendly structure made of recycled plastic bags and eco-board, that is a brewery, bar and restaurant. “What I’ve done is bring the concept of the microbrewery, with transparency between the bar and the brewery,” he says. “Basically, a microbrew is craft beer as it is limited quantity, whereas industrial beer adds corn or sugar and is pasteurized. We only filter. These three ingredients change the whole product, as otherwise you get a full belly from the sugar and corn, and a headache.”

[pullquote]”The world is changing to craft breweries and there is a new trend for microbreweries”[/pullquote]

While bringing out four beers, Haddad was careful not to hit the market with too many brews, knowing that while the sector has improved in recent years, it is still predominantly a lager market. “I learned from 961 and their mistakes, which went to the market with several flavors which confused people. You need to build on it,” says Haddad.

Colonel, which is named after a popular windsurfing spot that Haddad and his friends would frequent, has already exceeded expectations. Haddad did no advertising, relying purely on word of mouth, and its success was pushed by his hometown. “People in Batroun are treating it as their product, it is at all the beach resorts and restaurants, and now in Beirut bars. It is getting bigger and bigger,” he says.

The beer has proved so popular that Haddad has already had to change his business model. “The plan was to be on half capacity for three years and then have full capacity. But from the first day, we are at full capacity and selling out, which we didn’t expect in such a short time.”

Haddad has also sent four orders to Syria, and had demand from Iraq, but lacks capacity. “People want craft beer from Lebanon, with many dealers asking me to sell abroad but I’m not ready yet,” says Haddad.

Beer market share Exports

While beer consumption is increasing domestically, exports are a further boon. BLOM Bank estimates Almaza exports roughly 10 percent, or 2.33 million liters annually, to various destinations such as Syria, the United States, Turkey and the United Arab Emirates. 

Kassatly has export plans and is configuring excess capacity, which can be exported to the rest of the Middle East as well as Africa, a factor in the beer’s name. “Beirut is a city with a rich culture, history and heritage, and is the center of Lebanese lifestyle,” said Kassatly. “What’s more, we are really thinking internationally, so we needed a name that refers to our Lebanese origins, yet has global appeal.”

961 is also exporting, to Europe and Hong Kong, while 60 percent of LB is exported. “We sell in the US, not just to Lebanese expatriates, and have a distributor in Britain, so an English distributor for our pale ale; that is outstanding for me,” says Bekdache. Domestically, Bekdache sees craft beer becoming a sizable niche market, and with a price tag to match. “If we go into a price war, we can’t win. Our strategy from last year onwards is to sell premium beer at a premium price so the quality doesn’t go down,” he says. 

Buoyed by his success, Haddad foresees many more breweries in the future and with more types of beer on offer as the market matures. “The world is changing to craft breweries and there is a new trend for microbreweries. I think there will be 100 microbreweries here in say 10 years time.”

Correction: A previous version of this article misidentified nano-brewer and head of the biomedical department at St. Joseph Hospital Elie Haber as Emile Haber. Apologies.

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Beer, wine & arakBusiness

When size doesn’t matter

by Nabila Rahhal
written by Nabila Rahhal

This article is part of an Executive special report on beer, wine and arak. Read more stories as they’re published here, or pick up October’s issue at newsstands in Lebanon.

Lebanon produces about 9 million bottles of wine annually, almost half of which are produced by two wineries alone — Château Ksara and Château Kefraya. The remaining amount is produced by well established wineries making an average of 350,000 bottles each — and boutique wineries, which produce less than 100,000 bottles, contributing altogether less than 700,000 bottles yearly.

Being a boutique winery in a country where the production is already scarce creates a unique set of challenges but also has its own rewards for the wine producers.

Quantity versus quality

Some of these smaller wineries were only recently established and plan to increase their production in the near future. “For wineries to develop, they need land to grow their grapes and these wineries have limited land. They are now buying land, albeit slowly. Also, they are relatively new and it requires time for their vineyards to mature before they can increase production,” says Neda Farah, organizer of Vinifest, the annual wine festival, which takes place at the Beirut Hippodrome in October.

Boutique 2For such wineries, Joe Assad Touma, co-owner at Château Saint Thomas, which produces 300,000 bottles and is considered more established, advises patience and discourages those looking for a quick buck or with no know-how in winemaking from pursuing such a venture. “Wineries need a lot of perseverance and patience and revenues do not come until almost 10 years into production,” he says, adding that many of the smaller wineries produce high quality wines that he would personally recommend.

Still, many have chosen this boutique niche for their wineries and aim to keep their production figures low. “I lived in Bordeaux for 17 years and many of the famous châteaux and wineries there produce 10,000 to 50,000 bottles, so I’m used to small wineries. High quality wines mean limited quantities, and since I want to produce only high end wines, my yearly production will not exceed 50,000 bottles. That’s my philosophy,” says Sebastien Khoury, owner at Domaine de Baal, a boutique winery.

[pullquote]”You can have the best products in the world but, without the right distribution channels, who is going to find you?”[/pullquote]

Although Château Marsyas has 60 hectares of vineyards, their model is not geared toward mass production, explain its co-owners Karim and Sandro Saadé. They choose to have a low yield of one to three kilograms per vine to ensure high quality wine. Jill Boutros from Château Belle-Vue emphasizes the importance of careful attention to detail at each step of production and making sure that the fermentation process is done separately in small lots to show the kind of work that goes into producing ‘artisanal’ wine.

Challenging misconceptions 

With such dedication to craftsmanship and quality in wine production, often at the expense of quantity, many vintages from these boutique wineries have a heftier price tag than the entry level wine of larger Lebanese producers. This price tag, combined with a usually small marketing budget or a ‘discovery’ approach to marketing — i.e. letting consumers discover the wine themselves as opposed to aggressive marketing — makes it hard for the smaller wineries to build a name for themselves or make a profit rapidly. “Artisanal winery is a choice, obviously, and it reflects the team’s goals but doesn’t necessarily mean quick return on investment,” says Boutros.

Khoury laments the perception of smaller wineries among some consumers in Lebanon, saying that people respect and choose bigger companies with names they know. “Here, many people think that huge budgets spent on advertising and communication is a guarantee of quality,” says Khoury.

Global and regional distribution channels

“It’s hard for the smaller wineries to find their road to market because they don’t have the proper distribution channels. You can have the best products in the world but, without the right distribution channels, who is going to find you?” says Wadih Riachi, manager at Vintage Wine Cellar. He also explains that, without a distributor, the winemakers have to visit hundreds of places by themselves to sell their wine and have to put up with some places having exclusivity contracts with certain wineries.

[pullquote]“Smaller wineries are very important as they provide diversity to the sector and help get rid of this idea that foreign wine is better than Lebanese”[/pullquote]

Because of this, on a local level, most boutique winemakers have chosen to narrow down their distribution channels and focus instead on the higher end on-trade sector. This means restaurants, bars and wine retailers as opposed to mass retailers such as supermarkets. “Eighty percent of our local market is on-trade, through specialized wine shops and around 100 restaurants. When you have a wine with a price tag like ours, it is surely a wine with a specific clientele,” says Sandro Saadé, explaining that they focus on events, such as tastings, which help people discover their wine and increase their chance of ordering it at restaurants or wine shops. Khoury says he focuses on the quality of his product and works only with restaurants and shops that understand his wines and have the same approach in their business.

Boutique 3Riachi explains that a lot of the smaller wineries bet on exports because it is easier to find a market for higher end wines abroad. He adds that this is even true for fine French wine, the majority of which is sold outside of France. “It is a bit easier to export because you do two to three shipments a year to one address with one bill and the wholesaler or buyer will be responsible for the distribution,” he says.

With regard to export markets, Boutros says they need to make an extra effort to identify distributors in various markets around the world who would be eager to represent a winery from a “unique and unknown” terroir like Bhamdoun. “Our wine is what they call a ‘hand sell’ wine, which demands special attention from those representing it. For that reason, our wines may not be interesting to a large, corporate distributor looking for a wide range of inexpensive bottles from a single producer. Our distributors typically seek out family run vineyards that grow grapes responsibly and make unique wines that are not available in wines shops everywhere,” she explains.

Small is beautiful

In a sector that is growing rapidly, and with increased consumer interest in wine, Lebanon’s smaller wineries have a major role to play. “Smaller wineries are very important as they provide diversity to the sector and help get rid of this idea that foreign wine is better than Lebanese,” says Faouzi Issa, co-owner and winemaker at Domaine Des Tourelles. He added that, given 10 years, most of these wineries will become more mature and have a bigger impact.

To Zafer Chaoui, head of the Union Vinicole du Liban (UVL) and CEO of Château Ksara, quality winemaking is in the professionalism and not the size. “The smaller wineries exert more effort than bigger wineries in order to be able to sell their products, and for their efforts to pay off, they have to have good quality wine,” he says.

Boutros sums it all up: “We’re happy where we are, farming organically and making wonderful wines. Our customers are happy, too, so… what more could we want? Small is beautiful!”

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Beer, wine & arakBusiness

It’s all in the grape

by Nabila Rahhal
written by Nabila Rahhal

This article is part of an Executive special report on beer, wine and arak. Read more stories as they’re published here, or pick up October’s issue at newsstands in Lebanon.

September was a busy month for Lebanon. From the Bekaa Valley to the hills of Batroun, from the mountains of the Chouf to Jezzine in the South, vineyards were abuzz with those harvesting grapes for this year’s wine vintages.

Wine making in Lebanon is enjoying a steady growth, with over 30 new wineries launched since 2000. This rapid growth and recognition at both the local and international levels — as many wineries export more than they distribute locally — has not been struggle-free for Lebanon’s wine producers and while this expansion is certainly welcome, it also presents risks.

A brief background

Wine production is part of Lebanon’s history, with many believing that Qana in South Lebanon is the setting of Jesus’ first miracle when he is said to have turned water into wine. Before the time of Christ, the Phoenicians traded wine across the Mediterranean and some parts of Europe. When the region fell under Ottoman rule, however, winemaking was forbidden except for religious purposes in monasteries. The sector was revived to some extent with the French Mandate over Lebanon, which brought with it the French’s demand for wine and their eye for quality land which could produce it, only to have the sector decline again with the onset of the Civil War in 1975.

Chateau St. Thomas

Chateau St. Thomas

Emerging from the war and with local production at a near standstill, the five existing wineries (Château Ksara, Domaine des Tourelles, Château Musar, Château Kefraya and Château Nakad) began putting back together the pieces of their businesses. Zafer Chaoui, chairman and CEO of Ksara and current head of the Union Vinicole du Liban (UVL), recounts how Château Ksara struggled in the first few years after the war as it was in a location in the Bekaa which was still considered dangerous, and because the new board had not had the time to properly invest in the winery itself after having bought it from Jesuit priests shortly before the war. The first order of business, recalls Chaoui, was to invest in new modern equipment and high quality grapes imported from France.

The Birth of the UVL and its role in selling Lebanese wine abroad 

The structure of the wine sector improved in the 1990s with the establishment of seven new wineries and the creation of the UVL in 1997. “The idea for the UVL was to concentrate our efforts and cooperate with each other. Actually, at the beginning of the UVL’s life, we had the mission to negotiate with the government to protect our common interests but we didn’t have any common view on marketing,” notes Chaoui.

Some wine producers see the benefits of UVL membership as providing a platform for them to meet with fellow wine producers and raise issues of common interests, such as taxation, so that they don’t operate in isolation. This aside, common marketing rapidly became a main goal for the UVL after their experiences at international wine exhibitions convinced them that wines branded and unified in one pavilion under one country, such as Spanish wine or Argentine wine, had more impact than individual wineries.

“We were looking at this through a long term lens. We are there to market Lebanon’s name as a wine producing country. Once this is achieved, it becomes up to each individual winery to sell, depending on its quality. Many consumers abroad had not even heard of Lebanon so first we needed to take care of that in order to create a snowball effect,” says Faouzi Issa, co-owner and winemaker at Domaine des Tourelles, explaining the idea behind “Wines of Lebanon,” the brand name the UVL gave to their Lebanese wine promotional campaigns in the global market.

[pullquote]The younger generation, says Touma, is slowly becoming more aware and adventurous in selecting wine from the different Lebanese wineries[/pullquote]

Today, despite Lebanon producing only about 9 million bottles of wine annually in total — a drop in the ocean when compared with countries such as Greece, at more than 350 million bottles annually — it is becoming globally known. All the wineries Executive interviewed cited export markets in Europe, the United States or even Asia. “When we first started, people thought that there were only one or two wineries in Lebanon producing a certain type of wine. Now, they are more aware of the varieties of Lebanese wine,” says Joe Assad Touma, winemaker and co-owner at Château St. Thomas.

The challenge for Lebanese wine in the export market is to make the transition from Lebanese restaurants abroad into international venues and retailers. “Your export market starts with Lebanese restaurants, but the challenge is to get out of this niche market. The Lebanese expats are your first supporters,” says Aziz Wardy, general manager of Solifed, the company that produces Domaine Wardy.

The Lebanese wine boom captures the government’s interest 

The Lebanese wine sector has only truly blossomed in the last 10 years, with 23 new wineries marking their first vintage amid a growing local interest in wine. Wadih Riachi, manager of Vintage Wine Cellar, a well known wine retailer in Saifi Village, Beirut, says that, from his experience at Vintage, interest in wine in Lebanon has been growing at an annual rate of 5 percent for the past five years. Eventions, the company which organizes the annual wine festival Vinifest, recounts how when they first started in 2004 they had only nine participating wineries and attracted mainly the older generation, while today they have 30 participating wineries and 25,000 visitors of different age groups. 

Wineries have also noticed this growing local interest in wine, especially among the younger generation, which Touma says is slowly becoming more aware and adventurous in selecting wine from the different Lebanese wineries. However, more effort is still needed to discourage them from “sticking to only one wine which they know,” he notes.

Wardy agrees with Touma’s view and believes that tastings, wine tours, winery luncheons and local festivals such as Vinifest all help market Lebanese wine locally in an indirect way.

Chaoui attributes this growth in the local wine market to the competition among the now large number of wineries, which has encouraged the consumer to switch from heavy alcohol like arak or whiskey to wine. “Now we have a substantial increase in consumption per capita in Lebanon though we are still extremely far from the consumption in Europe and the US,” says Chaoui placing it at 5.6 million bottles annually between local and imported wine, i.e. less than 1.5 bottles per person.

Fueled by the efforts of the private sector, the wine industry gradually became one of the few that was performing well both locally and internationally and thus captured the interest and attention of the public sector, instead of the other way around. “We are supporting the winemaking sector because it is a highly qualified sector at the global level and because Lebanese winemakers have put in a lot of personal effort and investment to reach the required standards of quality,” says Louis Lahoud, the director general of the Ministry of Agriculture, adding that the governmental support is provided through the ministries of industry, economy and foreign affairs, each within its capacity, with “a main dynamo for action” which is the Ministry of Agriculture.

Domaine Wardy

Domaine Wardy

Lebanese wine days

The first act of support by the government was the organization of the “Lebanese Wine Day” event which took place at the George V Hotel in Paris in 2013, at the Ritz Carlton in Berlin this year and with plans for New York in 2015.

Chaoui explains that this event typically involves 300 to 400 key people — journalists, restaurant owners and distributors — who are selected from the ministries and the wine producers’ contacts because they have an interest in Lebanese wine and could help with marketing and distribution.

Aside from seeing his winery’s participation in the event as a duty to Lebanon, Sandro Saade, co-owner at Château Marsyas along with his brother Karim, sees the benefit of Lebanese Wine Day as creating a long term positive image for the country and also as a venue to target clients interested specifically in the Lebanese market. This differs from international wine exhibitions, where visitors are there for all wineries and may happen across a stand for Lebanese wine.

While all wine producers Executive interviewed agreed that government support for their sector, however limited, is appreciated and that all exposure to international markets is good, many feel Lebanese Wine Day has got off to a slow start. Some say that the event’s allocated budget could have been spent more efficiently to produce a more successful event, and others feel that the international exhibitions they attend have a more direct impact on their business in terms of marketing and sales. “If the budget was bigger, we could attract more media to promote the event, we could invite more people or have more than one event per year,” says Chaoui. Lahoud says that the ministry, through its consultations with the private sector, is working on improving the event each time.

The National Wine Institute

Perhaps the government’s most important backing for the wine sector will be through its role in the National Wine Institute (NWI), a regulatory body whose main duties include researching the Lebanese territories and national grape varieties in order to set quality standards, modelled after the French appellation d’origine contrôlée, a certification which indicates the origin, quality and general style of wine.

[pullquote]The NWI is off to a slow start and so far, says Lahoud, “Nothing tangible has been achieved”[/pullquote]

Without such an appellation, explains Saade, all Lebanese wine is currently placed at the same level regardless of its quality or origin which is unfair to those who are investing more time and money to produce a distinguished drink.

In order to designate these appellations, the NWI’s first step would be to identify the different terroirs, or vinicultural landscapes, in Lebanon and create a geographic certification database. “Where does wine of Lebanon come from? Does it come from the Bekaa, Batroun or Jezzine? It is important to identify all of this, as it gives Lebanese wine more credibility,” says Riachi. 

Saade explains that some winemakers produce wine in one region but bring grapes from another. “This is not wrong at all but the consumer has the right to know where the grapes they are drinking come from. The most important thing for us is that the consumer is informed,” he says. 

Because of the extremely high price of land, many of the bigger Lebanese wineries own the majority of their vineyards but acquire more land through long term rental contracts with farmers who work under the wineries’ conditions and also sometimes buy grapes, especially for their arak production, explains Domaine des Tourelles’ Issa. “The disadvantages of owning the vineyard are that there are more responsibilities, and more work which would require a bigger team, hence more expenses. The advantage is that you have more control over the vine’s yield as a lighter yield produces better quality wine but independent farmers would tend to add to a vine’s capacity to make more money selling more grapes,” says Nathalie Touma, co-owner at Château St. Thomas.

Although some like the Saade brothers feel that setting geographic certifications and appellations should be solely the government’s job — with limited consultation from the private sector, as “control should come from above and not within” — the NWI, which was formed last year, has four representatives from the various Lebanese wineries and four from the related ministries.

As is, the institute is off to a slow start and so far, says Lahoud: “Nothing tangible has been achieved.”

“We were slow starting off because there was no government at the time [the NWI was created] and so there were needed signatures missing and no approved budget, but hopefully we’re slowly moving forward now,” says Joe Assad Touma, who is also a member of the institute.

Domaine Wardy

Domaine Wardy

The future of Lebanese wine

Lebanese wineries have overcome many challenges, including marketing the country’s name abroad and continuing to produce wine in an unstable political climate where roads to the vineyards can sometimes close arbitrarily due to the political tension in the Bekaa region, home to many of the vineyards.

They have also put in major investments — the most commonly cited by the winemakers interviewed being land, electricity, marketing and imported items, essentially everything that goes into the bottle aside from the grapes — in a sector where returns are known to be slow due to the years it takes for the vines to mature and produce quality wine. 

Taking all this into consideration, it is no wonder Lebanese wine is expensive when compared to some other wines. “Already, the cheapest Lebanese wine bottle is more expensive than the Chilean or Argentine version,” says Wardy, explaining that land in these countries is cheaper and the equipment is available.

This is why what distinguishes Lebanese wine should be its quality and not the quantity produced, as quantity will not increase as long as land is limited and international markets are still relatively narrow. “All of Lebanon is a boutique winery and that should be our focus,” says Wardy.

Whatever the future focus of Lebanese wine, the fact is interest in this sector is rising considerably both locally and internationally and at the public and private level. After all, as Chaoui concludes, “Lebanese wine may be small in quantity, but it is one of the few products we have in this country which could be compared to the international level and you know, what could be more enjoyable than a good glass of wine?”

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Beer, wine & arakBusiness

Rising spirits

by Paul Cochrane
written by Paul Cochrane

This article is part of an Executive special report on beer, wine and arak. Read more stories as they’re published here, or pick up October’s issue at newsstands in Lebanon.

There is general doom and gloom in the economy in Lebanon, consumer confidence is down and polls indicate general pessimism about the future. But one sector is doing surprisingly well given the current situation, or perhaps because of it: alcohol. Across the alcohol spectrum it is more, more and more. More importation choice, more wines, more breweries and more places to drink. As with many other consumer trends, this reflects global trends: drinking better and with greater variety.

A decade ago, there were three primary choices on the drinks table: blended whisky, Almaza beer, and red or white wine. Today, a good spread may feature in addition to the above: vodka, single malt whisky, rosé wine and locally produced craft beer. In many respects, the changes today reflect what the market went through in the 1960s, when arak — that beloved drink accompanying mezze on a lazy weekend — declined in popularity in favor of Scotch as taste buds started to change.

But the alcohol scene today is unlike anything the country has seen before. It has matured, and fast. While only three rosé wines were on offer at Vintage Wine Cellar several years ago, today there are 25. The same goes for single malt whiskies and the selection of international wines. Beer has equally diversified, with Brasserie Almaza offering five different beers, and two new local beers entering the market this year. Decadence has also become more muted as tastes have become more discerning. 

“The opulence of the last 10 years has ended, when people were popping Salmanazar (nine liter) and Jeroboam (three liter) bottles of champagne at nightclubs; people are showing off less,” says Nagi Morkos, managing partner at Hodema, a consultancy service. 

Instead, consumer behavior has diversified and moved upmarket. It has become about drinking a specific vodka in a cocktail, going for a single malt instead of a blended whisky and asking what local wines are on the menu. Consumer trends have also become associated with perceived calorie intake: less in vodka, more in whisky, which partly explains the spirit’s popularity in the nightlife scene.

Yet the ostentatious nightlife the capital has become renowned for has not disappeared. A distributor will still spend hundreds of thousands of dollars to have one of their vodka brands advertised at a leading rooftop club to gain attention locally, also knowing the broader impact of Beirut’s jet setting circles. 

The country’s certain global cache is reflected in its alcohol’s popularity abroad. With the domestic market as limited as the land for growing grapes, the country’s 40 vineyards are choosing to produce quality over quantity — which means export. Lebanese wine is now gracing the menus of Michelin starred restaurants in France, is being imbibed in New York and London and has been the vin de table for the Queen of England. 

When it comes to beer, Kassatly Chtaura named its new lager Beirut with the export market in mind, and 961 — named after the country’s calling code — exports to the US, Europe and Hong Kong. New craft beer brewery Colonel, just two months after opening, has already had inquiries from European importers. 

With another major commercial beer brewery planned, the craft brewing scene starting to flourish, awards being won at international wine festivals and more quality arak being distilled, Lebanon is truly going through an alcohol renaissance, despite what is happening in the immediate neighborhood.

Here’s to a glass of local wine, beer or arak. Kesak!

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