Executive Magazine

Something to talk about

by Michele Azrak, Zeina Loutfi & Ramsay G. Najjar February 6, 2014

written by Michele Azrak, Zeina Loutfi & Ramsay G. Najjar

The single biggest problem with communication is the illusion that it has taken place.” One could easily argue that in this statement George Bernard Shaw aptly described the affliction of the world of corporate communication for the longest time. Communication is the exchange of information between people. Yet most companies have left out the word exchange by talking at people instead of talking with them. In today’s increasingly connected world, the power lies in the hands of consumers, who are inducing change in the communication landscape by demanding less noise and more value. While this does not necessarily imply a drastic departure from what already exists, the coming years will surely see major improvements in how we use what we already have — knowledge, tools and platforms.
What is certain today is that this intrinsically complex communication landscape is forcing companies to look within and refocus on the value they have to offer for a new generation of consumers and stakeholders. Understanding where the future of communication lies is driving companies to improve experiences and relationships, and to do so it has become obvious that companies need to focus on delivering valuable content.

Content is still king
In the increasingly virtually vocal society in which we live, everyone has a voice and wants to use it. The amount of content being published online is growing exponentially; with so much competing for consumers’ attention, companies need to become more relevant and authentic in order to break through all the noise. For this, companies should favor the creation and distribution of valuable and compelling content over controlled messages and fabricated sales pitches. The primary intent of such a content-driven approach is to engage and build meaningful relationships with consumers, rather than to sell to them.

Whereas this approach has been around for a while, the focus had been on the quantity of content, with companies trying to publish as much content as frequently as possible. However, it has become clear that the future lies in quality-driven content. Companies should start creating content that educates, informs, inspires and entertains. This can be in the form of blog posts, newsletters, white papers, live presentations, podcasts, standard and micro-videos, and the list goes on.

There have been several success stories so far, with top global brands leading the pack. Last year, Coca-Cola made the news when it completely revamped its website and re-introduced it as an online magazine entitled the Coca-Cola Journey. It featured articles on entertainment, environment, health and sports, later adding food and music channels. The difference of course is that the content in that “magazine” is subjective, not objective: it is stories that favor Coca-Cola’s brands, products and interests. HSBC is also showing the way with its Global Connections website, which helps in the positioning of the bank as an authority on international business with in-depth articles and strategies for global businesses — rarely mentioning HSBC.

Coming to our part of the world, we have started to see local and regional companies begin to dabble in content creation and publishing, but these fledgling efforts remain far from really delivering brand-agnostic content that is seeded with inspiration and that covers topics customers deeply care about. Though quality content creation is challenging and time-consuming, it will allow companies to distance themselves from their competition, attract and maintain an audience, and create and sustain business opportunities.

A shift to more dynamic storytelling
It is important to highlight however that it is not enough to simply create interesting content and put it out there. Without a coherent story that brings together the content, one would just end up with more noise and confusion. The goal is to create a unified and coordinated experience for the audience, and to develop deeper emotional connections with them. This can only be done by storytelling, which should be the thread that links the content together across all channels.

Even then, not just any storytelling will do. The new reality we live in also means a shift from one-way storytelling to dynamic storytelling that factors in the consumers’ voice. Moving away from the traditional in-house generated stories, companies need to now focus on stories that spark a conversation with their consumers as well as encourage and make the most of consumer-generated stories. Following through with the Coca-Cola example, the company has established itself as the leader in storytelling, creating a whole stimulating world around the brand, with compelling stories that strongly involve consumers.

While companies in the region have started to listen to what is being said about their brands, there remains a long road ahead: they need to start having a conversation and get the audience involved in it.

Rethinking the landscape
As companies alter the way they communicate with consumers and increase their focus on content, they will need to rethink many of their channels. The most notable one would be their website, which should now adapt to a more consumer-focused philosophy and accentuate the brand’s story flow through design. Instead of being static, websites are starting to look more like magazine portals with greater focus on the content produced with combinations of rich articles, interviews, opinions, interactive functionality, visuals and videos. Soft drinks leaders such as Coca-Cola, Pepsi and Red Bull are setting the trend and their websites are worth checking out.

This does not mean that the main corporate sections such as investor information, executives’ biographies, and press releases are no longer present on the sites; these are just relegated to the sidelines. And this certainly does not imply that all companies should just stop what they are doing and jump on the bandwagon, especially the less established brands that will continue to need a more business-oriented website for some time to come. They could start with enriching their site with more pictures, sounds and videos, and most importantly thoroughly plan and understand the consumer’s journey through their website before diving into any redesign.

Furthermore, simply creating good content on a visually engaging website is not nearly enough as thousands of pieces of great content go unread every day. The challenge will also be for companies to focus on effectively getting their content outside of their website. They should understand how content spreads across the web and find ways to reach new prospects by amplifying great content through multiple channels. For example, Forbes provides a digital platform for sponsored content, but one that is high in quality and that answers to audiences’ needs. Companies like SAP, Merill Lynch and Microsoft have been writing and distributing thought leadership content that is as interesting as pieces written by reporters and knowledgeable contributors, and their content seems to be viewed for the same amount of time as editorial content.

Content-driven communication does not yield value solely to already established brands. While some companies may be restricted in terms of means or resources, no company is too small to experiment with this approach as long as it crafts a clear communication strategy, evaluates its performance, and makes changes along the way accordingly. With titles such as content marketing manager, director of content, or even chief content officer popping up more than ever before, companies in the years ahead will have to embrace content-focused communication as part of their overall communication strategy. They simply can’t afford to be content (pun intended) with staying on the sidelines in the content world we live in. You can only toe the water so long before you have to dive in headfirst.

February 6, 2014 0 comments

Comment

Uncoiling Iran

by Gareth Smith February 6, 2014

written by Gareth Smith

Nothing raises the entrepreneurial juices like the smell of a new market. Last month’s implementation of November’s interim Geneva nuclear deal between Iran and the world powers alerted United States and European companies to the prospect that, sooner or later, sanctions will loosen and Iran will open up.
The business potential is immense. Income that could be generated from the world’s largest gas reserves, at 33.6 trillion cubic meters or 18 percent of the global total, and the fourth largest oil reserves, at 157 billion barrels or 9.4 percent of global reserves, would make the Iranians wealthy.

Lifting sanctions would make possible the 8 percent average annual growth rate envisaged in the Five Year Plan of 2010-15. Iran is like a pent-up spring, pushed back by US and European sanctions which in two years have halved oil exports and obstructed access to both insurance and dollar markets, as well as by older sanctions that stymied the development of gas reserves. The economy contracted 5.6 percent in 2012 and 3 percent in 2013, according to the Economist Intelligence Unit.

But the spring is starting to uncoil. Since November, the clearest excitement has been among car manufacturers, specifically mentioned in the interim Geneva agreement. Peugeot and Renault have led the way, with past experience working with Iranian producers Khodro and Saipa, and envision taking Iran’s annual vehicle production back from 2013’s 385,000 to the peak of 1.6 million reached in 2011.

The agreement also included facilitating financial channels for humanitarian trade, including medicines. Pharmaceutical companies are keen to tap into a market that analysts put at $3 billion annually with 30 percent imports. Germany’s Merck is looking for local manufacturers to co-produce two of its medicines. The French Sanofil, which licenses products to an Iranian manufacturer, is planning new product launches to improve last year’s $3.7 million profit on sales of $10.2 million.

The ‘little Satan’ will not be left behind. British exports to Iran plunged 68.2 percent from 2005 to 2011, the largest fall among leading European Union countries, but during last month’s visit of parliamentarians to Tehran, Lord Lamont, chairman of the British-Iranian Chamber of Commerce and former chancellor of the exchequer, said British pharmaceutical companies and vehicle manufacturers were among those very interested in Iran.

Such companies selling in Iran, or investing in joint production, will have consequences for the country. In the longer term a return to high economic growth, coupled with substantial outside investment, may well transform it. Firstly, high growth and ‘opening up’ imply economic liberalization. Thus far, privatization has been muted and often involved transferring shares to quasi-state bodies or pension funds. This reflects the absence of foreign investment and shortage of domestic private-sector capital. But the 2006 decision by the Ayatollah Khamenei to back privatization of most state-owned industry is compatible with vibrant private banking, more effective capital markets and wider foreign investment.

Secondly, high economic growth is likely to increase Iranians’ expectations for material goods and better job opportunities, especially among the 35 percent of the 77 million population aged 15 to 29, the highest proportion recorded worldwide. Growth may also encourage aspirations for greater social or political freedoms. In all cases, managing expectations will pose a challenge for the leaders of the Islamic Republic. After all, economic growth was high, albeit uneven across sectors, under the Shah prior to 1979.

Thirdly are implications for energy markets. Even a short-term, limited increase in oil exports — given a likely lower OPEC output in 2014, projected to drop 500,000 barrels a day by the US’s Energy Information Administration — implies other OPEC members, notably Saudi Arabia, will be cutting back. Fourthly, are political implications, in central and south Asia, and the Middle East. Supplying energy and simply being richer will enhance Iran’s influence — posing a greater challenge for opponents and critics so far unwilling to accept what the Iranian leadership sees as its legitimate role as a regional power.

Should this be seen as a disaster? Greater trade — especially alongside educational exchanges, more travel for businesspeople and simple citizens — may not just break down barriers set by sanctions. It may enmesh Iran more closely in the outside world, giving all parties more incentives to resolve disputes diplomatically. A more open, richer Iran may be more at peace with the world.

February 6, 2014 0 comments

Finance

Private equity 2014: Room for optimism?

by Imad Ghandour February 6, 2014

written by Imad Ghandour

Nouriel Roubini, the famous economist nicknamed Dr. Doom, was predicting the collapse of the world economy in 2013 as he foresaw a perfect “economic storm” for the year. Fortunately, the 2013 storm is turning to an economic spring throughout the globe — the private equity (PE) industry included.

The Gulf Cooperation Council (GCC) and many other countries in the region have maintained positive economic growth since 2009, although such economic track records have received very little credit so far. This economic growth, coupled with political stability, is starting to receive greater recognition from international institutional investors, who are now trickling back to the Middle East and North Africa.

Most PE fundraisers have mentioned significant interest from a selected group of avant garde international institutional investors — up from almost zero a couple of years ago. In light of the Brazilian economic winter and the Indian rupee yoyo, the GCC in particular has sharpened its image as an economically stable region. Even American institutional investors are starting to see the virtue of investing in the faraway lands of Arabia, where petro reserves ensure economic stability and local currencies have been eternally pegged to the all mighty United States dollar.

ON THE UP AND UP
Fortunately for the survivors of these grim years, it seems that the investment cycle is on an upturn. Most of the experienced managers blazing on the fundraising trail have reported good traction. The first to publicly break the good news was NBK Capital, which announced a first closing of $217 million for its second PE fund. Privately, no less than four other funds have disclosed good traction in fundraising and some first-closing of their funds.
The recent string of investments and divestments by the regional PE players have also emphasized to both regional and international investors that the surviving players are the best in class and worthy of their trust. Abraaj Capital, NBK Capital, Gulf Capital, Amwal Khaleej and others do not cease to amaze the investment community by almost monthly exit announcements. The fallacy that there are no exits in the region has been put to rest. The MENA region is a region where you can make money in private equity investments — if you bet on the right manager of course.

Going back to Roubini, his consistent gloomy predictions could not resist the tide of good news. In an interview on CNBC on January 2, Dr Doom was more optimistic: “The advanced economies, benefiting from a half-decade of painful private-sector de-leveraging, a smaller fiscal drag, and maintenance of accommodative monetary policies, will grow.”
Furthermore, should recent political events begin to relieve the accumulated tension in the region, and the war cries be replaced with more peaceful tunes, the good trends will continue. Hopefully, the war in Syria can be contained and move toward a resolution. Whatever the form of the Iranian grand deal or a potential Syrian peace deal, peace with Iran and an end to the in war in Syria are good for business and investment. Stability will bring more prosperity, and more prosperity will bring even further stability.

Happy deal-making in 2014.

February 6, 2014 0 comments

Business

A wellspring of form and function

by Nathalie Rosa Bucher February 6, 2014

written by Nathalie Rosa Bucher

I believed it would be the Soho of Beirut. I was the third or fourth business to open next to the mechanics,” Lina el-Khoury says of the time she scouted around Mar Mkhayel looking for a convenient space to open a design concept store. “I had a vision that this area was going to grow and it did. I took a space, which is not too small, nor too big: I have 135 square meters. I fell in love with the open space,” says Khoury, who personally chose every single element of the store and oversaw its layout and transformation.

After years of living in Paris where she obtained a Masters in marketing and sales, Khoury decided to open a concept store for furniture and home design objects in Beirut named Blak & Co. It opened its doors in December 2010, with the aim of transforming Middle Eastern homes with modern design.

“Our mission is to introduce functional and reachable design furniture with beautiful and useful home objects and accessories from the United States and Europe to the Middle Eastern market,” she explains.

“I wanted my store to feel like home and [having] books, a library, feels like home,” Khoury says. “It’s a concept store for interior decoration. Libraries here have a small section for interior and art, I wanted to have a large selection with many coffee table books,” she says of the bookshelf, which is filled with inspiring and practical books on interior design, home décor, and all the major architects and styles. “Lots of architects come here, who might be on a project to build a school, need a book on club design, event design, or malls. It works very well to have these books.”

Blak & Co’s criteria are funky, fresh, simple and functional objects. “We have all modern materials, including stainless steel, leather, copper, walnut wood, white oak, and metal, and home objects by British designer Nick Munro, whose small tea pot and elegant stainless steel French press stand out both by their functionality and form.” Blak & Co also stocks the American brand Blu Dot, Nuance designs from Denmark and Jule Pansu from France.

Retro revisited
“I [first] discovered Blu Dot in the States about 10 years ago,” Khoury says. “I was attending the International Contemporary Furniture Fair in New York two years ago and looking for new brands at the time and there they were again and it took one email and it was love at first sight.” Khoury is now Blu Dot’s exclusive distributor in the Middle East and Gulf.

The Minneapolis-based company was launched by three young designers in 1997 with the aim to create design products that would be within reach. Their style, retro revisited with an industrial touch, has become a global brand.

Their designs are a crossbreed of modern materials, using copper, wood, brass, stainless steel and other materials to combine elegant abstraction with functionality at reachable prices.

“I didn’t need to have an event — social media and word of mouth did it,” Khoury says in reference to last year’s reception of Blu Dot in Beirut.

Design sensitivity

“The customer feedback to Blu Dot’s collection has been extremely positive. We had a great Christmas and New Year season and I am looking forward to having equally strong seasons during the summer, and Eid el Fitr and Adha,” she continues.

“Our client base ranges from individuals to architects — looking to do something different for the customers’ homes — and to corporate office clients as well as the hospitality industry; lounges, specialty hotels and restaurants,” Khoury says.

“Recently people in Lebanon are starting to get sensitive to the influence of design furniture. Our aim is to have reachable items. We’re in an era where people want design but it can’t be super expensive. Our motto is great design, functionality, and within reach. Our price tag ranges from $50 [for e.g., home objects] to $5,000 for a piece of furniture.”
Khoury has to pay for shipping, customs and transport of all her stock. To deal with the store and logistics, including delivering orders and managing the warehouse in Dbayeh, she currently employs 8 to 10 people.

As of 2014, Khoury is expanding in the Middle East region, targeting the Gulf in particular, where she will be participating in several fairs and exhibitions this year, as well as working with distributors, architects and showrooms.

“My aim is to expand Blak & Co and Blu Dot and also to keep an eye out for rising brands to offer our customers. Our target [in the Gulf] is to double the volume of what we turn over here in Beirut, as they have security there and are financially strong and stable, compared to Lebanon.” In addition to launching a website soon, she will be exhibiting in Dubai for the first time in September.

Looking back, Khoury acknowledges that after a certain time, you adjust to the style demands of the Lebanese clients. “There are some products that I thought would rock but they were not moving. I think my biggest success was Blu Dot. It was the right product at the right time!”

February 6, 2014 0 comments

Business

Think like a startup

by Joe Ayoub February 6, 2014

written by Joe Ayoub

There was a time when the bigger and more established a company was, the more assured it felt in terms of staying power in the market. These days what matters more to a company’s relevance and future is to what extent they embrace innovation. What this means for businesses is that, no matter how big they are, if they want to survive they need to think like a startup.

A startup by nature is constantly on its toes, harboring a hunger to wake up each day and perform better than the day before. There’s a flexibility to their way of thinking that means every aspect of the organization’s strategy is open to question and can be easily superseded if a better idea is brought to the table.

Established businesses may still ask themselves why they would need to change things, but the answer is very clear: today’s business landscape is a far cry from that of 50 years ago. Back then, the average age of a company on the Fortune 500 was somewhere around 75 years; today the lifespan is closer to a mere decade before a company goes out of business or gets bought out. What has changed is the pace of consumerism: we are living in an age where consumers are always hungry for more — everything from content to apps to games — and are looking to consume them simultaneously. Technology, the driver of this rampant consumerism, has also brought with it the ability for any innovation, whether patented or not, to be replicated within a short space of time, even months. Ultimately this is what is pushing companies to be innovators — they cannot stop in a world that does not stand still.

But there’s an additional impetus that businesses should be feeling in this call to think like a startup. In the wake of the financial crisis, the world entered an era of zero growth. Companies have to face the reality of this era, of pressures on margins, and of pressure from consumers demanding constant new ideas in the market. Their only way to survive is to stay relevant, and innovation is the engine that will not only do that but keep them ahead of the curve and in front of their competition.

Step back to leap ahead
Once the need to think like a startup has been acknowledged, a business also needs to know how to implement it. This is not about appointing one person in charge of innovation, but rather instilling a holistic culture throughout the organization. This requires commitment from top management who should be heavily engaged and act to unite all employees in this push for creativity. To get there, businesses need to take a comprehensive look at the business, the brand value proposition and the employees — and formulate a clear vision and central strategy. Questions that need to be answered include which products/services to retain and which to divest, and which processes to review to meet objectives quickly.

We are all aware that Lebanon is going through yet another crisis period. But at times like this the situation can be viewed as either a problem or an opportunity. At Brandcell we are advising our clients to look at it as an opportunity to take a small step back and redefine their business for growth. It’s not enough to think that as sales are down the solution is promotions and discounts; these will only send one signal to consumers — that you are in panic mode. Instead, now is the time to benefit from the lull to rethink every element of your business proposition and to discover how many new ideas you can create, and how many new resources you can make available to jumpstart your business when this crisis is over. Having the ability to continuously unlearn and learn again is the thus trademark of successful companies.

February 6, 2014 0 comments

Business

In values we trust

by Thomas Schellen February 6, 2014

written by Thomas Schellen

Even though it was founded 90 years ago in Egypt, is owned by a United Arab Emirates-based investment fund, and is being run by a Brit, much if not most of the DNA in regional retailer Spinneys is entwined with Lebanon. The chain was reborn in Beirut in 1998; of its four countries with direct operations, Lebanon leads in number of stores and sales revenue; it suffered some of its most unwelcome challenges in the local scene; and notably, it puts all its new ideas in front of the Lebanese consumer first, before taking them to the Egyptian, Jordanian and Qatari markets.

According to CEO Michael Wright, Spinneys is a niche player in Qatar and Jordan, while Lebanon and Egypt are the current centers for revenues and profits. The brand’s largest presence is in the UAE, where almost 50 supermarkets and convenience stores carry the Spinneys logo and identity, far more than in the four other countries together. However, the group has no direct stake in the UAE market since the operation there is owned by Emirati businessman Ali Albwardy and run independently from the group under a basic franchise agreement.

Group-wide sales revenues, which do not include the UAE, were in the vicinity of $500 million in the group’s 2012/13 financial year, which ended last June, Wright told Executive in a far-ranging interview. He said Lebanon accounted for 45 to 50 percent of that, which suggests a turnover of somewhere between $200 and $275 million for the operation here, depending on whether the corner values cited by Wright were on the high or low side.
He competes in Lebanon against several domestically owned supermarket chains along with the Kuwaiti-owned Sultan Group and Carrefour, the French chain whose regional partner is the Majid Al Futtaim Group. For market share, Lebanon is Spinney’s main focus but these growth potentials are curtailed by the overall structure of the retail trade.

Evolution of ownership
In the first years after players like Spinneys rolled out super- and hypermarkets, there were strong expectations that these big stores would wipe out local stores but this has not happened in Lebanon. Large retailers with centralized buying and modern management control only around 30 percent of the Lebanese market and this number has been rather stable, Wright said. The retailer plans to increase the total number of stores from the current eight to 13 and also venture into the convenience store business in a repeat attempt at the local diversification plans that Wright first disclosed to Executive almost ten years ago.
Part of the retail brand’s story is a complicated ownership evolution whose recent chapters center on one of the region’s leading private equity players, Arif Naqvi, who is best known today as chairman of Abraaj Group. His older company, Cupola Investment acquired Spinneys in 1999 along with other assets for $116 million, in Naqvi’s first major deal from the United Kingdom-based automotive distributor and retailer Inchcape. It spun off the minority interest it held in the UAE operation of Spinneys — presumably the group’s filet piece in operational terms at the time — by selling it to the local majority partner Albwardy Group and embarked on expanding the brand’s presence in Lebanon and from there into Egypt, Qatar and Jordan.

Describing the company as a regional pace setter and innovator in major retail, Wright — who has been with the company for 26 years, beginning in Dubai after a training scheme with a British retailer —said that competitors copied the retail environment and work and training structures of Spinneys since the current operational mold was implemented in Lebanon in 1998. Retail managers with experience at Spinneys are sought after in the market and can often achieve a career leap when hiring on with other retail chains.

In 2004, Spinneys was acquired by the first Abraaj Buyout Fund (ABOF) based on diligence from which Naqvi excused himself to avert conflict of interest issues, according to Wright who was for two years a direct employee of Abraaj. According to a Middle East Economic Digest research document reproduced on the Abraaj website, Cupola retained 35 percent ownership of Spinneys Group while 46 percent was taken on by ABOF for a cash consideration of $27.1 million. Ten years on, the group is still owned by the Abraaj Fund as controlling shareholder and is actually the oldest participation among 146 portfolio companies shown on the Abraaj Group website.

The future ownership of Spinneys has been rife with expectations that Abraaj would seek an exit from the investment. This is in no way surprising given the nature of the private equity business but the current indications are that an optimum exit opportunity will come after the group realizes further expansions and when its main asset bases in Egypt and Lebanon allow for better valuations on virtue of improved macroeconomic and political realities.

Spinneys’ expansion plans over the past 15 years are a story in themselves, reflecting the vagaries of an environment where many international retailers have paid with high losses for ventures that got trapped in culture conflicts or misunderstandings of different commercial languages. Over the years, the management has been liberally trumpeting plans to penetrate a bewildering number of markets from Kazakhstan to Morocco and sub-Saharan Africa. Plans for several countries, such as Morocco, could not be realized at the times that they were envisioned for but current projects for various equity and franchising formulas are in place for Libya, Kuwait, Nigeria, and under negotiations for Pakistan, Iran, Tunisia, Algeria and elsewhere.

According to Wright, Spinneys would be valued in the ballpark of a quarter billion dollars if the investors sought to exit today but could represent a much higher value if an exit comes at an optimal time. The current restraints are the higher risk perception of the Lebanese and Egyptian markets while the future potential would be due to its brand and management experience with creating and operating modern retail stores in multiple markets that are not easy to tackle from the outside.

On the operational side, the group banks on a wildly successful loyalty program as a core marketing engine. The points-based scheme offers rewards to loyal spenders and stores are visibly busier on “double point days” when the company entices customers with the prospect of extra progress in earning these rewards, which in the base loyalty program range from household items to small consumer electronics. These rewards are moreover so popular and customer preferences for them so unpredictable that stores often run out of them near the end of a rewards campaign, to the effect of Wright acknowledging that “the loyalty scheme’s success has created its own problems.”

Rewarding loyalty
“We are very happy with the way the program is going. Almost everybody [among large retail groups] has a loyalty scheme but very few loyalty schemes will deliver to consumers the gratification where multiple products are very much in reach,” Wright said. Not at all bashful about the need for retailers to be aggressive, he conceded that Spinneys uses the program to incentivize customers to buy products where the group can achieve higher margins than the razor-thin ones that generally characterize the retail trade in fast moving consumer goods.
Spinneys has transported the concept to Egypt and Jordan and will soon launch it in Qatar. However, the loyalty program here remains the most advanced and the retailer is currently working to develop it further to tailor its suggestive power to customer behaviors on specific product types, by for example offering extra points to wine lovers to make them do more of their shopping for this margin-rich palate pleaser at the chain.

In other customer-facing matters, Spinneys has a policy to charge customers only the lower price if a product’s shelf price differs from the price shown at the cash register, a problem that is all too frequent in their stores. However, this policy is often not adhered to by store personnel, Wright admitted, saying that the company would do more to engrain policy-compliant behavior in staff members’ actual retail practices.

Courting controversy
But while notes from customers on flawed pricing or quality of products, along with service complaints, are parts of Wright’s daily diet delivered to him from all customer communication logged at the chain’s call center, these were nothing compared to the accusations leveled against the Lebanese operation and Wright personally in 2012 of paying below the minimum wage, of bullying dissenting employees and disrespecting employee rights.

In his interview with Executive, Wright refuted the accusations as baseless and originating from a handful of activists and political players with partisan support from one or two media outlets. Wright claimed that the company was complying with all its tax and social obligations and was audited regularly by the authorities. “We may have been the only company that absolutely paid everything although it has a big workforce. We pay all the minimum wages, all the social security contributions, we pay additional medical care. We have always been and always wanted to be the preferred employer,” he said.

February 6, 2014 0 comments

Leaders

Time for a government

by Executive Editors February 5, 2014

written by Executive Editors

For the past 10 months, Lebanon has been without a government. The caretaker cabinet has proved completely incapable of responding to the country’s two major ongoing challenges — the influx of 900,000 Syrian refugees fleeing their country’s civil war and a striking downturn in security conditions. Since Christmas alone, Lebanon has seen four car bombs. The political void has also fed into wider inactivity; parliamentary elections have been missed, natural gas tenders repeatedly postponed.
The coming months will see challenges just as daunting. President Michel Sleiman is due to step down in May, while parliamentary elections are scheduled for November. Tenders for natural gas must move forward lest Lebanon risk losing the interest of international oil companies and any hope for energy independence or a balanced budget. Syrian refugees will continue to arrive in Lebanon, putting further strains on state infrastructure. And the rapidly deteriorating security situation demands a strong response by the army and Internal Security Forces, backed up by political consensus.

It is good that leaders seem close to announcing a new government with broad participation. Sleiman and prime minister-designate Tammam Salam have been doggedly pushing for a cabinet. The Future Movement and Hezbollah, protagonists in Lebanon’s most fraught political dispute, have signaled their willingness to share power. As Executive went to press, it appeared that only one card had yet to fall into place: Michel Aoun’s Free Patriotic Movement (FPM).

The party’s major demand is to keep its current portfolios of telecoms and energy. There is some merit in keeping ministries under the same management: often new ministers bring coteries of advisors and erase the painstaking work of their predecessors.
Similarly both Nicholas Sehnaoui and Gebran Bassil, respectively the caretaker ministers of telecoms and of energy and water, have been effective in their roles. The two are among the only ministers that can point to real accomplishments under the last government, the former improving the country’s (still slow) internet networks and the latter pushing forward the oil and gas bids.

But these are hardly good enough reasons to sign over entire ministries to specific political parties in perpetuity. Lebanon has a long history of building political fiefdoms, rather than functioning ministries. Indeed, Bassil’s comments in late January that it was important to keep the energy ministry under the control of Christians smacks of just the kind of self-serving feudalism that has long held the country back.

This thinking must not be tolerated. Sleiman and Salam should not let the FPM get in the way of the formation of new government. Hezbollah and Amal, the FPM’s major coalition partners, shouldn’t either. With weekly car bombs at home and a devastating war still raging next door, the stakes are simply too high.

There are more pressing issues in Lebanon than telecoms or even energy. It is time for the FPM to apply its competence in these areas as well.

February 5, 2014 0 comments

Finance

Investment banking: Small sector in search of big deals

by Livia Murray February 5, 2014

written by Livia Murray

The investment banking sector in Lebanon is staggeringly small. With Lebanon’s history of maintaining a strong financial sector despite periods of crisis, one would expect its finance professionals to be well-versed in the notoriously lucrative industry, which registered revenues of $76 billion globally in 2013. But as the Lebanese market shows, not all financial systems are endowed with the same opportunities. Revenues from investment banking in Lebanon are so marginal that an operation could not even sustain itself if it were to rely solely on investment banking income.

Identity crisis
To compensate for low revenues, institutions that do investment banking are forced to diversify their products. What are referred to as investment banks in Lebanon commonly delve into brokerage, wealth management, long and medium term deposits and lending, alongside their advisory and capital raising services. Though it borders on an identity crisis, this combination of services is feasible and even encouraged by the specialized banking license under which these banks operate.

“This is the model that works,” says Samir Taleb, founder and partner of financial institution Lucid Investment. “It’s the central bank license which allows both together and actually encourages both together.” This specialized bank license issued by Banque du Liban (BDL) gives a wide mandate to the banks for services in corporate finance and private banking. A total of 17 banks are registered under this license.

Investment banking is still relatively new to Lebanon. As the newest pillar of FFA Private bank, it accounted for only 10 percent of their total revenues in 2013 according to its senior manager and head of investment banking Julien Khabbaz. Their investment banking division carries out corporate finance advisory to regional companies who want to sell, restructure, or carry out a merger or an acquisition, and provides fundraising on a project-by-project basis. With the bulk of their revenues stemming from brokerage and asset management, the money they raise mostly comes from a pool of investors who are clients of the private bank. FFA acquired the specialized banking license in 2007 and has a shareholder equity of $30 million.
Cedrus Invest Bank’s founder and CEO Raed Khoury estimates that a similar 10 percent of the bank’s total revenues stem from investment banking. Out of a total net income of $3 million for 2013, investment banking profits would stand at $300,000, with the lion’s share of the bank’s revenues coming from private banking and wealth management. Established in 2011, the bank has a total paid-up capital of $52 million.

The weak appetite for investment banking in Lebanon has caused investment bank subsidiaries of larger groups to derive a bulk of their investment banking activities from divisions of their parent companies. According to Credit Libanais Investment Bank’s head of corporate finance and economic research Fadlo Choueiri, a great part of the bank’s investment banking activities come from advisory work for the Credit Libanais Group, particularly as it added a number of branches in the Middle East and West Africa.
Blominvest Bank uses a similar model. With parent Blom Bank having branches across Qatar, Saudi Arabia and Jordan, whenever one of these branches identifies a company that needs investment banking services, they outsouce these services them to Blominvest where the manpower is. “Our role will be really to provide services for our subsidiaries outside of Lebanon because this is where the deals are,” Fadi Osseiran, general manager at Blominvest, says.

slim pickings
Investment bankers in Lebanon are forced to diversify their services or outsource because of the barren landscape for such activities in Lebanon. “You might wait two years and have no transactions,” says Lucid’s Taleb. The lack of companies willing to seek investment banking services explains the meager profits of investment banking, and the need for a backup plan. “Because when it dries up, it dries up,” says Khaled Zeidan, who works on the buy-side of deals as general manager of MedSecurities.

Those in the financial sector blame the family ownership structure of Lebanese companies as hampering investment banking activities. “They want to preserve their control and going public or opening up their capital is a much lengthier and difficult process,” says Osseiran. Business owners in Lebanon will opt for taking bank loans when they need capital over selling shares, which would dilute ownership.

Though scepticism is not undue for a sector that does not have the cleanest reputation, those in the industry point to the merits of financial services and advising for a company. “You have shareholders and partners to report to,” says Taleb. In juxtaposition with the family business structure which has a reputation for being shadowy and inefficient in their finances, opening up capital can lead to fiscal transparency and institutionalized management. “Investment funds will be fighting to get a meeting with you as a company to support you, possibly partnering with you, financing the company to expedite growth,” says George Azar, managing director at financial advisory firm GA consult.

Sourcing deals
If Lebanese investment bankers are having trouble sourcing their deals locally, the appetite for Lebanese investment banking services is only slightly better in the region. But sourcing deals from the outside is more difficult than keeping active on the local market because of competition from large regional and international banks. Those who have managed have had to find space in the market. “I believe we sit in a nice niche,” says FFA’s Khabbaz. “We’re kind of in the niche of deal size where you don’t have many investment banks working on that same field,” going for deals in the $5-$50 million range.

Nonetheless, Lebanese investment bankers are forced to look abroad. “In order to be financially solid, if you want to work only in investment banking, [you need] to have deals in the region,” says Khoury. Many of the mandates currently under control of Lebanese investment banks are from Lebanese companies abroad, as regional expansion is the preferred method of scaling for these companies. In 2013, Cedrus worked on acquisitions in the UAE’s insurance sector, Saudi Arabia’s healthcare sector, and Lebanon’s food and beverage sector, with tickets ranging from $5 million to $10 million per deal, as well as smaller advisory deals within Lebanon. They could not disclose the names of the companies because of non-disclosure agreements.

Lebanese investment banks can look at bigger deals by getting work from their parent bank’s regional subsidiaries. Blominvest is currently working on two advisory mandates for a Saudi plastics company at a size of $70-80 million and a Qatari construction company at a size of $300 million, thanks to Blom Bank’s branches in those countries. They raised $100 million in 2013 for investments abroad, $50-60 million of which went to Saudi Arabia, mostly in real estate.

The future
In spite of the current limitations, investment bankers are hopeful that the next couple of decades will see an increase in investment banking activities in Lebanon. “We’re going to see exits in the next few years, people that inherited that business and they don’t want it, or people who inherited and want to grow it or need new partners or cash injection or people that need restructuring or advisory on corporate governance,” says Khabbaz. New management opting to open their capital would give investment bankers the opportunity to structure and plan these exits.

Capitalization would also allow investment bankers to sink their teeth into larger deals. “As the Lebanese companies want to grow and become competitive in the region, they need to re-capitalize. So they might ask for investment banks to advise them how to increase their capital, and find them companies for acquisitions, etc,” says Khoury. “There are a lot of things that need to happen as naturally family businesses grow and become a size where they can be more institutionalized and have a future. Maybe someday we can see some of these companies be publicly listed,” says Khabbaz.

Besides the capitalization of family businesses, some of the major sectors of the economy are still public. Privatization of major sectors of the economy such as telecoms and a major airline would drive demand for investment banking services. “You couldn’t really kick off investment banking in a place where there the sectors of importance are not privatized,” says Osseiran. Investment bankers also see potential in sectors of the economy on the verge of being developed, such as oil and gas.

Capital markets:
no exit in sight
Though investment bankers see prospects in the future for investment banking deals, one of the lingering problems they will face are the underdeveloped capital markets. Very few companies are listed on the Beirut Stock Exchange. With real estate giant Solidere and a handful of banks taking up the majority of the market, it has not seen any new equity listings since the turn of the century.

Weak capital markets provide little exit strategy — dubbed by Zeidan as the “holy grail” of the industry — for investors to sell their shares in a company and capitalize on their gains. But the current political situation has lead to an undervaluation in the price of shares that dissuades investors from buying and companies from selling. “Investors are not willing to pay a premium over and above the book value of the share,” said Choueiri, who claimed that the price of listed shares fell from roughly three times the book value in 2008 to barely over parity today.

Political deadlock limits both investments in companies and the desire for companies to list, take capital injections, and expand, as today’s climate is far from ideal for initial public offerings (IPOs). Khabbaz admitted that some of their mandates for mergers and acquisitions ground to a halt in 2013 because of insecurities relating to the political situation. “They kind of stalled and froze just because people were reluctant to do deals, to execute, to invest, to buy each other out,”he says.

But political deadlock is not the only culprit for lack of deals and IPOs. A regulatory framework has been slow in implementation, despite the establishment of capital markets as early as the 1920s.

These regulations would establish minimum requirements for companies to list and be traded on the stock market that would increase the transparency and accountability to their shareholders.

With the relatively recent formation of the Capital Markets Authority, a regulatory body to oversee Lebanon’s capital markets in 2011, investment bankers are still dubious this will lead to real change any time soon. “We’ve been waiting 10-15 years on the making of it,” says Osseiran. A high priority in every country that wants to develop serious capital markets, a regulatory agency is a must for a highly functioning and reliable trading environment. Though Lebanese investment bankers may see more deals in the next couple of years, it is important that this is paired with a regulatory framework to limit the potential risks in this industry.

February 5, 2014 0 comments

Leaders

A frontal assault?

by Executive Editors February 5, 2014

written by Executive Editors

Saudi Arabia’s pledge to support the Lebanese Armed Forces (LAF) to the tune of $3 billion over the next five years should be cautiously welcomed.

The army is one of the few genuinely cross-sectarian bodies in this divided country and enjoys widespread support. In 2013 a study by the Norwegian research company FAFO found that the LAF was by far the most trusted institution in the country, with over 80 percent support compared with averages of around 50 percent for the parliament and the government. Most significantly, the backing was roughly consistent across all age groups and sects (it was lower among Sunnis, but still the most trusted body).

Despite its reputation, the LAF suffers from chronic underfunding (see main article). Tasked in its mandate with juggling the daunting duties of defending the country against foreign aggressors, reclaiming Lebanese land under Israeli occupation and maintaining internal security; it is clearly incapable of keeping all the balls in the air.

This is partly about technology; while the LAF has plenty of manpower much of its hardware, such as dozens of Soviet-made tanks, are relics from previous eras. The need for investment is clear.

Thus the $3 billion could be a major moment for the country, allowing the military to significantly improve its capabilities. It will not become a regional superpower and will remain incapable of providing a realistic military threat to Israel, but it could get a much firmer grip over internal security and stop the country sliding into further strife. This best-case scenario would be welcome.

But then we return to politics. No one with knowledge of the Middle East will accept that Saudi’s motives are purely philanthropic. Indeed, the deal appears to have as much to do with boosting Riyadh’s relations with France as with concerns about Lebanon’s security.
Those that have cried foul have accused Saudi Arabia of seeking to politicize the army, or to use the funding to create a counterweight to Hezbollah. Indeed, the Hezbollah-leaning Lebanese newspaper Al Akhbar alleged that the deal was contingent on the Shi’ite group being excluded from the next government.

If the Saudis want to be seen as honest brokers — supporting the most beloved of Lebanese institutions out of concern for the country’s stability, rather than sectarian preference — then assurances are needed. Foremost among these would be a guarantee that the leaders of the LAF alone will choose what areas they wish to strengthen and what they wish to buy. Any Saudi interference, whether direct or indirect, will only pour fuel on political fires.

So far transparency has been severely lacking — as yet there are few indications of where the money might end up. To avoid perceptions of favoritism, more clarity is needed from both the Saudis and the LAF.

The widespread support for the military is to be cherished. While the need for new funding is great, it cannot be traded in exchange for independence.

February 5, 2014 0 comments

Leaders

Corporate responsibility is everyone’s duty

by Executive Editors February 5, 2014

written by Executive Editors

It is not easy these days to find companies that are expanding in Lebanon. Uncertainty rules the economic climate and the only thing safely said about this year’s business prospects is that there are so many variables that macroeconomic forecasts are even shakier than in ‘normal’ times. But there are corporate examples for optimism — even if some can be described as hoping against probability. There also are companies that tell Executive of investments and expansions that will mean the creation of new jobs in areas such as hospitality and trade.

One company to talk new business last month was Beirut Waterfront Development, which is set to open the Beirut Yacht Club this spring (see story). Another was Spinneys, the retail chain that has more stores and new concepts in the pipeline for Lebanon (see story and interview). The two represent very different corporate narratives. With the Yacht Club, Waterfront Development is invested in a segment of the real estate and hospitality market where exclusivity is the aim and targeted profit margins in the sale of a few super-pricy apartments are a function of scarcity. Spinneys is a mass retailer of fast-moving consumer goods whose daily bread is beating the competition on price and whose mantra is winning on razor-thin margins.

But besides professing corporate optimism, both have another factor in common: they have been targets of huge criticism. Waterfront Development was accused by one media outlet of building a “boardwalk of corruption” in the St. Georges Bay — arguing that the company was part of a scheme to abuse public property for private gain. In 2012 activists attacked the Spinneys chief executive as ‘CEO against freedoms’, with allegations over their working conditions.

Media and activists are important parts of society and as Lebanon matures toward a more open and inclusive society their contributions are important. Similarly, criticism and exposure of corporate ills are an essential feature of their watchdog functions. And when it comes to Lebanon’s huge need for more social equity, the protection of the country from disgraceful private use of public property and the preservation of labor rights are absolute priorities.
However, the virtues of standing up for the little guy and for the public good must preserve the dignity of these causes. The responsibility to present facts and argue with fairness is incumbent not only on news media but also on activists. Even the simplest examination of the accusations against Spinneys and Waterfront Development showed that the companies were often not given a fair hearing. Most significantly, the attacks against both companies were pushed forward not only by media and activists but also by leading Lebanese politicians, while a politician was also the main target in the attack on Waterfront Development.

The entanglement of political figures points to a major dilemma as the Lebanese wait for a new government to help find a solution to our macroeconomic trough. The dilemma is that the Lebanese need their politicians to be active but that the political class is perceived, often with good reason, as producing more problems than solutions.

Politicians should speak out against abuse of public properties and scrutinize economic actors for treating their employees fairly. But if politicians single out one and keep silent about all the others, they raise suspicion that their motives are not pure. And by damaging companies that otherwise would grow, it loads another straw onto the back of this heavily burdened camel that is the Lebanese economy.

February 5, 2014 0 comments