Executive Magazine

Grapes of worth

by Nabila Rahhal December 19, 2013

written by Nabila Rahhal

"Wine is a way of living; it is your vines, your terroir… You are, first of all a farmer,” says Ramzi Ghosn, co-owner and winemaker at Massaya, one of Lebanon’s leading boutique wineries. Indeed, for most Lebanese wine producers, their work is first and foremost a passion that has also spread the Lebanese wine gospel both at home and abroad.
The industry has also witnessed new steps toward regulation. This year saw the official creation of the National Wine Institute, a public-private body that will eventually control all areas of the sector. There is still much work to be done but the Lebanese wine producers Executive spoke to are confident they are on the right track.

Lebanon has a rich wine history, dating back to 7,000 BC according to modern scholars. The Phoenicians began exporting wine across the Mediterranean where it developed a reputation for quality, which continued until Lebanon became part of the Ottoman Empire and wine production was forbidden except for religious purposes.

The Jesuits, at what is now Château Ksara, produced the first modern Lebanese wines in the mid 19th century, but with the end of World War I and the arrival of the French a previously unprecedented demand for wine arose. This led to a genuine wine culture that was sustained until the onset of the civil war in 1975, when production was brought to a virtual standstill.
At the end of the war, there were only four functioning wineries: Châteaux Musar, Ksara, Kefraya and Vin Nakad. They joined the International Organization of Wine and Vine (OIV) and officially resurrected the Union Vinicole du Liban (UVL), today Lebanon’s most effective wine lobby.

The sector really began to move in the mid-1990s when a slew of new producers, such as Massaya, Heritage, Clos (now Château) St Thomas, Domaine Wardy and a newly invigorated Domaine des Tourelles appeared on the scene. They were followed soon after by Châteaux Khoury and Ka, Ixsir, and Karam to name but a few.

Today, there are around 43 wineries in Lebanon, producing a total of 8 million bottles a year, according to figures from the UVL. Hady Kahale, general manager at Ixsir, says the wine production sector supports 3,000 to 4,000 families. Lebanese wine is exported mainly to the United Kingdom, France, Dubai, Germany, Sweden and the United States and has penetrated markets as far off as China and Japan.

A mechanism for progress

“Things are going well for the wine sector but with progress, you need to have a mechanism in place to regulate this sector and market the country,” says Michael Karam, author of “Wines of Lebanon”.

This year finally saw the public sector — through the ministries of agriculture, industry and economy — wake up to the idea of winemaking as a productive sector of the Lebanese economy. “Wine production has become such a dynamic sector that the public sector had to acknowledge what is going on and answer a need,” says Kahale.

In June 2013, an official Lebanese delegation led by the director general of the Ministry of Agriculture Louis Lahoud, attended the OIV conference for the first time — an event they plan to attend next year as well. The ministry, with the guidance of the UVL, also held a “Day of Lebanese Wines” in Hotel George V in Paris and will be hosting a similar event in Berlin next year. The OIV chairman was officially invited to Lebanon this year.

But perhaps the most significant ministerial activity was the approval of the creation of the National Wine Institute (NWI), a public-private initiative that will eventually play the role of tailoring rules and regulations regarding Lebanese wine production, as well as allowing for fundraising and NGO support, explains Faouzi Issa, co-owner and winemaker at Domaine des Tourelles.

In explaining how the institute came to be, Serge Hochar, president and general director of Château Musar and current head of the NWI, recalls that in the late 1990s the three major wineries of the time, Châteaux Ksara, Kefraya and Musar, asked for the passing of a law to create a national wine institute to help them in their exports (by giving credibility to Lebanese wine).

“In 2000 we got the law which asked for the creation of a regulating wine institute. The law was officially recognized this January 2013 and the institute was approved this May,” says Hochar. Though the NWI is not yet functioning, its creation is a positive step in the development of the sector.

Current head of the UVL — and also CEO and chairman of Château Ksara — Zafer Chaoui says, “The approach of the Ministry of Agriculture is far more positive now and they are very interested in our sector, but this government has a restricted budget and we sincerely hope this commitment will remain unchanged when there is a government with full power. We then hope to receive this support with a budget as we need to help the smaller producers attend exhibitions worldwide, which is what other countries do.”

Though the winemakers interviewed have learned to rely on themselves and each other for financial support, they see government support as adding weight to their industry and believe it will have a positive impact, especially on the international market, if sustained.

Brewing domestic interest

Fueled by the growing number of local wineries and wine retailers in the country, along with a rising global trend, wine appreciation among Lebanese has increased, and greater focus has been put on comparisons, production and tasting explains Paul Choueiry, manager of the restaurant and wine bar Les Caves de Taillevent in Beirut.

“Healthy competition among wine producers has improved production as a whole and that, coupled with individual marketing efforts and local wine festivals, has indeed piqued the interest of Lebanese consumers,” says UVL’s Chaoui.

Château Ksara has been the dominant force in creating greater consumer awareness. With a production of nearly 3 million bottles (modest by global standards but representing 35 percent of Lebanon’s production) and with a range of 14 wines, it has made a significant impact both at home and abroad.

“Since the 1990s the Chateau Ksara management has invested heavily every year to guarantee our quality is never compromised,” says George Sara, the winery’s chief commercial officer. “We use state-of-the-art equipment, regularly plant new vines and ensure that our vineyard management is second to none. We may be the oldest and most successful Lebanese producer but due to the competition we must always be at the top of our game.”

Lebanese consume almost two bottles per capita annually, according to statistics from the UVL — a number which Massaya’s Ghosn believes is very low and a result of several factors including the Lebanese preference for hard liquor with their meals, the competition arak provides and the previously limited number of wineries.

Still, Ghosn and the wine producers interviewed feel this number is increasing steadily and while Châteaux Ksara and Kefraya dominate the local market, according to Nayef Kassatly of Château Ka, greater exposure to different varieties of wine will create a more level playing field as consumers develop a more attuned taste.

“Locally, consumers go for the big names and it will take time for the more recent wineries to catch up. We wine producers should educate the consumer so communications, press releases and wine tours are very important,” says Kassatly. “The emphasis is on quality and everyone is doing better: the grapes are better, wine is better. So yes we can have more regulations but the best referee is the consumer and the consumer today recognizes good taste,” adds Kahale.

“Some have this idea that Lebanese wine is substandard but that’s not true,” says Karam “we can compete pound for pound with the best in the world in terms of quality — especially at the entry level.”

Still, Lebanon has to go up against imported wines which are perceived by many consumers as better. Chaoui explains that, after an agreement with the European Union, customs on European wine were reduced, which increased the quantity of imported wine to 1,200,000 bottles a year, 12 percent of Lebanon’s local consumption.

Indeed one of the recurrent complaints voiced by wine producers interviewed was how some restaurants in Lebanon exclude Lebanese wine from their menu. “While you cannot prevent the consumer from choosing foreign wines in the supermarket, we have a problem with the on-trade, namely restaurants, in that some only have foreign wine in their menus. This perception should change and the government should impose on restaurants to have at least four local wines of their choice on their menu. We should be proud of our country’s products,” says Issa.

Other local market challenges cited were those common to all sectors of the economy this year, including the dwindling number of tourists, the deteriorating infrastructure, the decreased local purchasing power and the increased price of land.

Drip for drip

The relatively limited Lebanese market can only take one so far, and Lebanese winemakers have long carried the name of their country abroad through their wine. Château Musar began during the civil war. “I was not looking for Lebanese consumers; I was looking for knowledgeable wine consumers and I positioned my wine as a fine wine. Other wineries benefited from this. Today, Lebanese wine is positioned as a good high level wine which is important,” says Hochar.

The reputation of Lebanese wine abroad is in large part due to the efforts of the UVL and although Lebanon’s production remains low when compared to other wine producing countries, UVL members hope their capacity vis-a-vis European producers will increase and are enthusiastically planning for further events, now that there is government support. “We are a small drop in the sea of wine production but we have huge possibilities worldwide and every one of us is trying to find our niches. No doubt the world is huge, our wine is good and it is not difficult to sell the part of this quantity which goes into export all over the world,” says Chaoui.

Issa explains that internationally, the UVL works together on generic campaigns to promote “Wines of Lebanon”, citing a campaign in the United Kingdom as an example, where their combined efforts with the UK-based Coco PR to execute a generic campaign included events, roadshows, participation in the London Wine Fair and media trips to Lebanon’s wineries. All this has created a positive vibe for Lebanese wine, which has translated into better distributors and increased sales, with the UK being the number one market in terms of value for Lebanese wine today.

“We are working for Lebanon, and in the end it will benefit all of us. After this equal visibility and campaign… it becomes up to each winery to distinguish itself through its quality and history,” says Issa.

In the international market, regulations and a good image become important because wineries get only one or two chances to attract a consumer to Lebanese wine and if that consumer should happen to try a lesser quality Lebanese wine, it is unlikely he will become a fan, explains Kahale.

France is among the three main markets for Lebanese wine, due to the prevalence of Lebanese restaurants there, according to Chaoui. Some wineries, such as Ixsir, focused first on the international market in France before creating a separate marketing strategy to penetrate the Lebanese restaurants; still others put their efforts into different markets. “[Being considered] ethnic [foreign] is not an insult because people like to discover such categories but you cannot only be ethnic, you have to be in the real world as well,” says Kahale.
Chaoui summarizes other difficulties facing Lebanese wine on the international scene: “The global economic crisis of 2008 affected us all because the average citizen’s purchasing power has gone lower and people won’t consider drinking wine their top priority in times of crisis.

Also, there is an overproduction due to the crisis and prices are getting lower so competition is getting fiercer as compared to a period of economic boom,” adding that Lebanon lost a major export market in Syria this year due to the continuation of the crisis there.

Pressing on

A final challenge the Lebanese wine industry faces is the neccesity to compete on quality and not price internationally, because of its smaller production numbers.

Karam recommends that Lebanese wineries promote certain grapes — such as the indigenous white Obeideh and the red Cinsault which, although French in origin, has been around for over 150 years — to come up with wines with a Lebanese identity that would be a welcome change for the international consumer. “We could have a Lebanese signature wine,” says Karam.

The year 2014 promises to be an active one for Lebanese wineries with Ixsir launching a restaurant on their winery’s premises, Massaya creating a new winery in Fakra and the opening of Lebanon’s first wine museum by the Saade family, owners of Château Marsyas and Domaine Bargylus in Syria.

Most wineries will likely continue to sustain growth, however Ghosn expects that some of the older wineries may consolidate or scale down and he does not believe the sector will witness the same growth it did for the past five years.

Whatever the future holds for Lebanese wines, the path they have carved is smooth and wide and it seems wine will continue to be known as one of Lebanon’s more interesting exports.

December 19, 2013 0 comments

Economics & Policy

A big market for small cars

by Paul Cochrane December 19, 2013

written by Paul Cochrane

For consumers, 2013 may go down as one of the best years to have bought a car, with dealerships touting offers galore, from free registration and buy-back schemes, to $300 fuel vouchers and extended warranties. But for dealers, the market is so competitive that margins are exceedingly tight, profit is limited, and sales staff are scrambling for every potential buyer.

Difficult though the market may be, it has not descended to the level of Dubai in the wake of the 2008 crisis, when some dealers were offering deals of buy one car, get a second half price. The Lebanese car sector has not stooped to such supermarket retailer style discounts. But aggressive advertising and deals are indicative of the overall state of the car sector, which has become dominated in the past few years by the A category — compact cars — that account for some 90 percent of all new car sales in 2013, while the luxury segment accounts for just 2 percent.

As of the end of October, 29,198 new cars were registered, up just 2.2 percent on the same month in 2012. Overall, the total number of registered new and imported used cars has dropped 7 percent in the first 10 months of the year compared to 2012, according to the Automobile Importers Association (AIA).

“The best months for sales are usually June, July and August, but they were almost the worst months of this year,” says Nagy Heneine, general manager of Bassoul-Heneine, dealer for BMW, Renault, Alfa Romeo, Mini and Dacia. Indeed, the number of registered cars dropped by 26 percent in August, while September figures dropped 17 percent compared to the year before. The lack of tourists also caused car rental companies to refrain from upgrading fleets, further impacting sales.

“Before the summer season we used to have those dates locked in logistically and have the inventory to cater to rentals, but that is no longer the case,” says Farid Homsi, general manager of IMPEX, distributor for Chevrolet, GM, Cadillac and Isuzu.

But while figures are not rosy for the sector overall, sales are likely to reach the 30,000 mark by year-end — not a bad result considering the current depressed economic environment and ongoing political instability. The figure is significantly above the 19,100 vehicles sold in 2004, although behind the benchmark figure set in 2008, of 35,400 units, which largely continued until the recent economic slowdown as the conflict in Syria started to spill over into Lebanon.

“Back in 2009 and 2010, the economy was growing and there was optimism. Unfortunately due to the war in Syria those golden years have ended, slowly but surely. It is now a very difficult market and we need to find ways to sell cars that we didn’t have four years ago,” says Heneine.

What has kept sales buoyant are compact cars with price tags of around $11,000, making the market a volume game, as well as heavy marketing. “Everyone is making big concessions. Margins are very tight, and that is why there’s sales,” says Homsi. “Margins are low or break-even for more expensive cars, as even consumers in that segment are more demanding. Otherwise people postpone buying, whereas small cars are more of a necessity for daily use.”

got the mettle

Sales of compact cars aside, dealers are somewhat surprised that sales are holding up given the lack of consumer confidence. But this can be attributed to the state of crisis seemingly becoming the norm.

“I feel the Lebanese are getting blasé. Five to 10 years ago when there was a bombing, the country would stop for a month. Two years ago, it would grind to a halt for a week. Now it is a few days and back to normal. People have become accustomed to the situation, and that’s why they are still buying,” says Negib Debs, in charge of Infiniti at Rymco, which also has the dealership for Nissan and GMC.

Debs’ position is backed up by sales of Infiniti, which were up 80 percent on last year’s figures. Other higher-end Japanese cars have also had strong sales, with Lexus, Subaru, Honda, and Mazda reporting double digit growth, and Mitsubishi roaring back into the market to seventh in the rankings through aggressive marketing and a compact model, up 157.58 percent.

Yet while the bottom has clearly not fallen out of the market, it is the mid- to high-priced brands selling A and B segment cars — compact and small size — that have suffered the most in the Japanese, European and American segments. Overall sales of the European brands, which take just under 20 percent of the market, were down 1.73 percent, with Opel, Renault, Seat, Citroen and Alfa Romeo all down in the double digits. American brands, which have 5.49 percent of the market, are down 13.4 percent. Although Chrysler and Ford have had a good year, up 128.57 percent and 92 percent respectively, sales of Jeep, GMC and Dodge are down.

Such an imbalance between brands can be put down to new models coming on the market. “Some brands have been more active due to new models, and the yen depreciating has helped Japanese brands catch up, to have a kind of come back. But there’s definitely more competition and that’s why new models help a lot, as customers like new products,” says Homsi.

BMW, a long time favorite brand among the Lebanese, saw sales drop 38 percent this year, but is banking on a new stable of models to bolster sales next year. “For us, 2013 was a transition year for BMW in terms of models, but 2014 will be a year of BMW, as [we are] launching new models,” says Heneine.

Among the Japanese brands, which account for 27 percent of the market, it is Nissan and Suzuki that have had the weakest sales, down 14 percent and 0.35 percent respectively. For Nissan, this is due to the brand having no A segment car, a new version of its small model, the Micra, and a less competitive exchange rate on the yen for much of the year. The Japanese giant had long been a top seller alongside competitor Toyota until five years ago, when they were both knocked off the top two spots by the Korean brands with their cost competitive cars, which now have 45 percent of the market. Kia has 26 percent and Hyundai 19.7 percent, while Nissan trails with 15.71 percent.

The struggle to keep customers

As a result of the Koreans’ rise and Nissan still keeping a relative edge, these three brands have 61.41 percent of the market, reflective of the downward shift in car size due to lower purchasing power and high fuel costs. Indeed, for Chevrolet, 60 percent of its sales come from its compact car, the Spark, and the remainder in the B and C categories. As a result, Mazda is having to go the extra mile to emphasize quality over price.

“What we see is that people have a monthly budget of between $200 to $300 to pay for a car. With such a budget, cars produced in Korea and China have an 80 percent market share. What did we do in response? As Mazda are produced in Japan, we don’t have that monthly budget — it is $400 instead — so we increased sales by emphasizing the better quality of the cars,” says Anthony Boukhater, CEO manager of ANB Holding. The dealership, like others, has also invested in a new showroom and after-sales facility, added a further eight showrooms to its dealer network, and is using innovative marketing techniques. “We are putting adverts live on TV four times a day on four channels. Not 30 seconds, but 7 to 8 minutes [in total],” says Boukhater.

With so much choice on the market, and dealerships chasing after a limited number of buyers, after-sales and customer care have become important parts of a dealership offering.“The big challenge is to ‘loyalize the customer’ as Lebanese customers are very volatile,” says Heneine.

While the Korean brands made inroads and volumes in the compact segments, helped by a move away from used cars to new due to better fuel efficiency and bank loans, the market leaders are also making headway in the less cost-sensitive segments, adding to the competition. “Before, Hyundai sales were focused in the B segment, but now we are selling C. The Tucson is the number one 4×4, which is something we never achieved before, so each year a notch on the belt,” says Rachid Rasamny, sales and marketing manager at Century Motor Company, distributor of Hyundai.

Aware of market dynamics, Hyundai has expanded its physical presence around the country to ensure it retains its position as the second best selling car in the country. “Since 2009, we’ve doubled the number of showrooms, to 24, to get in areas where there’s no other car company and there’s a market,” says Rasamny.

way of the Chinese

Reflective of the turn away from used cars to new is the fact that veteran car dealer Chidiac Motors entered the dealership business with Chinese brands JAC and DFSK. “Before launching we did our research and felt that an invasion of Chinese cars over the next decade will happen, as it did for the Japanese in the 1980s, and the Koreans now,” says Daniel Chidiac, CEO of Chidiac Motors. “It has not been easy to enter the market but we’re doing well, with sales up 58 percent on last year.”

Chidiac is not alone in believing in the potential of Chinese brands, with other dealers also acquiring importation rights, with Rymco (which holds Nissan) gaining a 50 percent stake in Chery, NATCO (Kia) launching BYD in the market this year, and in June 2012, Rasamny Automotive Industries (Hyundai) launching Geely.

Indeed, Chinese brands had the biggest gains among all brands in 2013, up 75 percent on 2012. But, at 616 units, Chinese brands only account for 2 percent of the market, although up from 1 percent last year.

The Chinese brands are likely to gain ground in years to come, with Geely utilizing the technology of Sweden’s Volvo, which it acquired in 2010, and JAC touting its 5-star safety rating and international design. “The passenger cars are designed by the same company as Ferrari, electrical systems by Bosch, and the engines by Mitsubishi,” says Chidiac.

Limited Luxury

Luxury sales have not done so well this past year, although there are certain exceptions, such as Land Rover, Volvo, Cadillac and Mercedes, whose sales rose 3.7 percent, and is now the ninth top brand in the country. But luxury and C segment sales are limited due to sheer demographics. As Executive reported earlier in the year, based on Credit Suisse’s Global Wealth Databook 2013, median wealth per capita is just $6,076, while 48 percent of privately-held wealth is in the hands of some 8,900 Lebanese, just 0.3 percent of the population. Such statistics are mirrored in the fact that just two Lamborghinis, one Aston Martin, two Rolls Royces and 18 Maseratis sold this year.

“The very rich can afford anything, but the middle class is no longer a big segment,” says Heneine. “Nevertheless, we sold 25 BMW 6 Series Grand Coupe and some 7 Series. So, not a downsize overall, but smaller cars are the bestsellers. Look at the mix, the best selling is the 3 Series — always the volume seller — at 25 percent of sales.”

The loss of wealthy Gulf Arabs who vacationed or lived in the country, due to governmental travel warnings, has been a further hit for sales and, in particular, after-sales. “We’ve had zero cars from the Gulf [into the garage]. We would fix them here otherwise. When there’s no Gulf Arabs or visitors, it affects the whole business,” says Michel Trad, general manager of Saad & Trad, dealer of Jaguar, Bentley, Lamborghini, Fiat and Abarth. “I built a Lamborghini showroom, but in the end, I need customers. Should I build a Fiat showroom to satisfy the manufacturers? We are not Monte Carlo.”

As Samir Homsi, president of the AIA, pointed out, dealers are dependent on manufacturers bringing out smaller engines and models that reflect market demand. “By mid-next year hopefully the Q50 Infiniti will have a V4 engine. It is a problem, the lack of a V4, and other brands are feeling that too, such as Audi and Mercedes,” says Debs.

Saad & Trad are awaiting the new “mini” Jaguar, while Infiniti has high hopes for its new small model. “People are still worried about image, so they drive a small car with image, a [Fiat 500] Abarth not a [Kia] Picanto,” adds Debs.

Some dealers, however, appear resistant to the changing dynamics of the market, downplaying the rise of the Koreans and the Chinese, as well as the downward shift in spending and vehicle size. But in the years ahead, as congestion increases, fuel costs remain high and with economic forecasts far from bright, those that adapt to this turbulent market will be able to stay, maybe not in the fast lane, but certainly on the highway.

“The market has shifted from large cars to small, and dealers should take that shift into consideration and change inventory orders and marketing strategies,” says Rasamny. “Look at Europe, demand is for the small segment, and they shifted. India has always been about small cars. We’re similar to those markets, and I don’t see that changing.”

December 19, 2013 0 comments

The Buzz

Business briefing: 19 Dec 2013

by Executive Staff December 19, 2013

written by Executive Staff

Economics and Policy

Lebanon has decided to allow Ikea to offer flat-pack housing for refugees, after initially rejecting the idea.

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India's Larsen & Toubro has won a $473m contract to build substations in Qatar as the Gulf state looks to increase capacity amid a construction boom.

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Bank of London and The Middle East expects Islamic bond issuance to pick up in the Gulf next year as companies refinance maturing debt in a strong economic climate.

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December 19, 2013 0 comments

Banking & Finance

Jean Riachi – Q&A

by Executive Editors December 18, 2013

written by Executive Editors

Jean Riachi is the chairman and CEO of FFA Private Bank, Lebanon’s largest investment bank. Riachi sits down with Executive to talk economic outlook, investment opportunities for the bank, and strategies going forward.

What is your opinion of the macroeconomic situation — what’s influencing it and what are the biggest challenges for the country in 2013?

I think 2013 was the year where the regression of Lebanon was revealed and really felt, while probably it started in 2011. It might not be very clear when you look at the macroeconomic figures because they don’t show a big decrease in activity, but we really do feel that, and I’m talking not about recession, but about regression, because the country has entered into a phase of not only much slower growth but also a lot of sluggishness, a lot of bad mood. Now in terms of the banking sector, it has not translated yet into bad figures in terms of loan portfolios…but I think that it will show in the coming years.

In terms of pure investment banking activities, we were very much frustrated by this year because we had a number — not a big one — but a number of merger and acquisition (M&A) deals that were on the right track, where we had started this trend of talking to family businesses — some wanted to restructure, others wanted to sell, others wanted to expand by buying. We had a number of mandates that were going very well, for very interesting deals, that did not go through…We had in numerous cases people sitting together, so the matchmaking was done. Negotiations started on very good grounds, but with time passing you had buyers seeing their figures going down month after month. [They were] worrying about what will happen on the other side, and at the end [you had] both sides deciding to withdraw from doing any deal, because the buyer was worried of doing a deal at the wrong moment at the wrong price, and the sellers were worried about being forced to lower their expectations while everybody says this [situation] is cyclical and things could come back.

So yes, it was a very frustrating year in terms of investment banking/M&A activity. Now we have had a few successful stories in raising capital for companies, but interestingly nothing where the core business was in Lebanon. So [the way] for people like us to survive is to use Beirut as a base but to do deals or invest in markets that are outside markets.

When you say outside markets, is it more industry destinations or more geographic destinations? Let’s say, looking more at Africa, or looking more at Europe, or looking more at certain specific industries where you see growth in the medium-to-long term?

We are not dogmatic. I mean any interesting deal is something we are going to work on. Depends on what business line you’re talking about; we have capital market activities, brokerage, we have asset management activities, and we have real estate and finally we have investment banking activities. Since maybe 2007 there have been no more capital markets. At the time, the breakdown was maybe 30 percent in Lebanon and 70 percent outside Lebanon, I mean dealing on markets outside Lebanon. Today it’s 95 percent outside Lebanon and that started earlier. We cannot say that our brokerage activities were affected. Actually they grew a little bit in 2013. If you look at asset management, as well. All our investments — investments we do for our clients — all the assets we manage for our clients are outside Lebanon.

Looking forward to 2014, when you meet with your board of directors and you want to put together a strategy for 2014, how do these meetings look?

You know, when you are an investment bank and you have your home market, especially when you are a leader in your market, which is our case, this is where you can do best. Now we have to take things as they are and say, ok, we don’t have a local market. Our domestic market is frozen, so let us try to build on what we have to grow our operations.
It’s important to remember that people still have money, I mean, there is a lot of cash in the hands of the Lebanese, and they are looking for investment opportunities. So our role is to try to find, to source, to study, to evaluate, to do due diligence on opportunities, and if they don’t exist in Lebanon, we’ll go and get them outside Lebanon.

December 18, 2013 0 comments

Banking & Finance

‘2014 will be the toughest yet for banks’

by Executive Editors December 18, 2013

written by Executive Editors

François Bassil is the chairman and general manager of Byblos Bank and head of the Association of Banks in Lebanon. Bassil sits down with Executive to talk about the bank’s performance in dire economic times and the bank’s strategy for next year.

How do you gauge the performance of the bank in 2013?

In 2013, it wasn’t bad. It was an acceptable year up until now, at least up until last month [October]. We made a [positive step with] the bank’s balance sheet up 8 percent, and deposits increased 7 percent the first nine months of the year. There was a small decrease of profits of 6 percent. We took a lot of provisions because of the situation in Syria. In general, all Lebanese banks worked hard this year but their profits were stagnant. And credits to the private sector increased by 5 percent.

Next year will be difficult because unfortunately there is the security problem in Lebanon, there is the political problem, there is the rift within the political class, which is not able to agree to form a government. The administration is crumbling…banks are not on an isolated island. They will be affected by the economic sector which is on the brink of…well up until now it hasn’t collapsed. There are just difficulties in certain sectors, in tourism which has been affected the most. Up until now banks are not calling upon their dues, neither from the hotels nor the restaurants. They are instead rescheduling debts. This can last one year, two years, but not any longer.

What strategy do you have for 2014 in such an environment?

There is a new development now with the accord between Iran and the international community. That will likely have a positive effect on the whole region. Will it have a direct and immediate impact on Lebanon? That’s a question mark, it all depends. If it has a direct effect and leads to the formation of a new effective government inspired by the Baabda declaration, I think it will be a positive step for the country. Otherwise, we are in the course of establishing the budget and perspectives of the three next years. In any case we have already taken measures to activate our activities abroad.

Of course if Syria’s health improves, we have a lot to do in Syria and it will improve the situation in Lebanon. Everything depends on what is going to happen in Syria. These improvements do not enter our outlook for next year’s budget, for our plan in 2014. Instead we continue to take provisions, and [know we will]stagnate in Syria. We are managing a crisis in Syria.

We are developing our activities in Iraq. There are ways to develop despite certain precarious regions like Baghdad. In Baghdad we don’t have a lot of activity. We have a presence there; we have to be there. We were one of the first banks there. And we have operations in Basra and Erbil that are working well. In 2014 we are going to open in another city in the region of Kurdistan. In Iraq, I am optimistic that we are going to double our numbers.

In [the Democratic Republic of the] Congo (DRC), we bought a bank that belonged to Lebanese. They kept 33 percent, and we bought 66 percent. It is beginning to be profitable [after] three years. The first year we had some losses, but the next year we had small profits, this year was good. And next year I think it will be much better because we have developed relationships with local and foreign companies established in the DRC.

And we are becoming more and more active in Africa, especially in the Congo. We have a team that travels in Africa, looking for business, and we are going to count on our foreign relations for 2014. Of course, if things budge in Lebanon for the better, we are here.
Besides that, the problem for Lebanon is whether the state can continue to pay its personnel.

Is this a real danger?

It’s a real danger because banks do not want to continue to finance the deficit of the state. If you have a client that is gradually going out, and taking no measures to improve his situation, to continue to finance him, to help him, without any effort on his part…he is a big client to the banks. He is continuing to squander the money that he is receiving, and making no effort. Besides this, his revenues are diminishing because his business is diminishing. In the business community, there is a decrease of productive activities, of the taxes paid by individuals, of the taxes paid by businesses. Next year, they will decrease much more.

December 18, 2013 0 comments

Banking & Finance

Hadi Naffi — Q&A

by Executive Editors December 18, 2013

written by Executive Editors

Hadi Naffi is the executive general manager of Banque Misr Liban (BML). Naffi sits with Executive to talk about strategies for a small bank to remain competitive in the Lebanese market, and the impact of turmoil in Egypt.

Tell us about the performance of the bank in 2013.

Our deposits increased by over 12 percent in the first 10 months of the year. Our advances to the private sector, the credits to the clientele increased 16-17 percent. The situation is healthy, the situation is good for now. We are making profits but we are not making as big profits as we could have expected in a flourishing economic situation, that’s all. The times are tough, we are fighting, we are working hard, but our numbers are good. We have witnessed a serious development of our bank.

In Lebanon there are five large banks that alone dominate 60-65 percent of the market. When you think that in total there are 49 banks in Lebanon, of which 10 control up to 85 percent of the market, the others have to fight for the remaining 15 percent of the market.
When we arrived [on the scene] in 1929 BML did not even represent 0.5 percent of the market. Today, despite its growth, we only represent around 1.1 percent of the market. That’s nothing.

Have the developments in Egypt had a negative impact on your bank?

None. None because it is Egypt that invests in Lebanon, we don’t invest anything in Egypt. We are completely autonomous, and the flow of investments [means it] is the Banque Misr in Egypt that invests in the capital of Banque Misr Liban. The BML doesn’t invest anything in Egypt, doesn’t give credits to Egypt.

What were your largest investments in 2013?

We have made many investments that are not apparent, we have invested in technology, in the sense that we are updating our IT platform.

We also invested in the workflow of operations within the bank to ensure a higher quality of service to the clientele.

Today we are in very tough competition between banks. The only thing — the only value added thing — that one bank can have over another is to offer a more sophisticated service which responds better to the needs of the clients. The more sophisticated it is the better equipped we are to participate in an active competition.

Small banks, when they are dynamic — such as the Credit Bank led by Tarek Khalife — the reason they are dynamic is because they want to attract capital which will allow them to take a bigger share of the market. To what extent does BML have this option?

Dynamic banks, such as Tarek Khalife’s…they see big. They have reason to see big. They tell themselves, ‘by staying dynamic I will be able to show that [others] have an interest in joining me.’ This is normal. The only difference between Tarek Khalife and BML is the following: Over there it’s under the control of the family of Tarek. Here it’s under the control of an Egyptian financial institution. The decisions within Tarek’s bank will be made more easily.

So would the idea of augmenting capital and having a more aggressive strategy work?

It exists, but I will explain one thing. When I arrived here at the end of 2007, the capital was LL27 billion — a little less than $20 million. In 2009, I asked for an increase in capital. We brought it to LL100 billion. Today, we don’t [increase capital] because we don’t need it. We know that the Basel II and Basel III calls for capital adequacy ratio of liquidity coverage rate and all of that and we have completely conformed. Certainly we will need to increase the capital when there is an increase in activity, but this will come with time.

Today the Banque Misr in Egypt is subject to compliance with regulators there. To what extent, on a regulatory level, do you have to accommodate?

Today, we are living in an environment of globalization, a world of globalization. All regulators, worldwide, in the emerging countries and in the developing countries, are referring to the recommendations of Basel committees. Basel II and Basel III have [put forward] many recommendations, some very complicated. But in all cases, all regulators are applying them, though in different ways. But at the end of the day it’s the same regulation everywhere. This problem is not raised [for our bank] at any time because actually [we all follow] the same regulations. It’s all based on the Basel committee.

December 18, 2013 0 comments

Society

Dressing down

by Nabila Rahhal December 18, 2013

written by Nabila Rahhal

It was a common sight this year to see sales assistants lounging on the doorframes of their trendy boutiques in Beirut, sleepily waiting for customers to walk in. Meanwhile, the public was assaulted by a barrage of text messages urging them to benefit from the latest sales, discounts, and ‘unbeatable’ offers. This was a hard year for the retail sector in Lebanon.

Retail’s issues are the same as those of other sectors: a lack of wealthy tourists hunting for the latest fashions, coupled with lowered local purchasing power which has caused many Lebanese to downgrade their tastes or skip buying all together, save for necessities.

Figures from Global Blue Lebanon of purchases by tourists who reclaimed their value added tax for the first nine months of 2013 as compared to the same period in 2012, show a decrease in spending across almost all nationalities of tourists, with most significant drops coming from the Gulf Cooperation Council countries (GCC).

Renata Zeidan, owner of Santiago Boutique, a multi-brand upscale boutique with branches in Ashrafieh, downtown Beirut and Kaslik, says her business has dropped 15 to 20 percent, mainly due to the decline in tourist numbers, especially the wealthy Syrians who used to come to Lebanon for the weekends and Arab and Turkish nationals.

Nadim Chammas, CEO of Menawear, distributor of Slowear in the Middle East and North Africa region, says that the initial plan was for the the Slowear flagship store in Beirut to act as a model they could present to others in the region. “I had many potential customers and clients who were supposed to fly in and see the store in Beirut but most of them cancelled their trip [due to the incidents we had last year],” says Chammas.

MID-MARKET SUFFERING

Although Hamra Shopping and Trading Company (HSTC) expanded significantly this year, opening four new stores in Lebanon and two in Baghdad, its chief executive officer Rami Rayess says they were not immune to the effects of the current unstable political situation and they had a challenging 11 months, though they are still waiting for the increased activity the holiday season will bring to formally assess the year.

With purchasing power on the decline, and the internal situation showing no signs of improving, it was no wonder that Lebanese chose to spend less on fashion and luxury items this year. “Even Lebanese who have money are spending less because psychologically they are not in the mood to spend and are not going out as much,” says Zeidan.

Luxury goods in Lebanon, as is often the way, did not appear to feel the sting of the declining economic situation as deeply, and it’s still possible to hear, for example, of the latest $35,000 Piaget watch being sold to a local a few days after the model arrived in Lebanon, and of people spending thousands of dollars on a bottle of cognac. Executive’s special report on luxury goods in August 2013 concluded that the sector is performing relatively well.

Instead, it is the mid-market that is suffering and Zeidan feels that this is a global problem. She describes how, when she was at Milan Fashion Week this year, it was only the luxury brand stores, such as Hermès and Chanel, and the mass market retailers that were busy while stores targeting the mid-market were empty.

In Lebanon the challenge is felt more acutely, due to the added difficulties of local instability. This has caused retailers such as Zeidan to rethink their strategy and opt for less expensive brands without sacrificing quality. “Fashion has changed and the mid-market clients’ lifestyles have changed to the cheaper products worldwide and we have to keep up,” says Zeidan.

Still, although Lebanese mid-market shoppers may be opting for lower-priced retailers for everyday wear, they still frequent the mid-market stores for special items. Sales assistants at the downtown boutiques say they had increased sales during prom season and in the summer, Lebanon’s wedding season.

Looking back at 2013, Slowear’s first year of operations in Beirut, Chammas says, “The response was more than we expected from the Lebanese customers and I thought it would take more time to achieve this level of success with them. Of course we suffered from the fact that there were practically no Arab tourists this year and this part of the business on which we were also relying did not happen, but the rest was good.”

Lebanon saw the longest sales season this year with almost 52 weeks of discounted items, according to Nicholas Chammas, head of the Beirut Traders Association. The reason behind this was to clear inventories and make room for the new collection of season friendly items, though some items were sold at a loss, according to Chammas. A quick glance at shops during that period would show that, although many browsed the shops, few came out with bags in hand.

Considering the expenses retailers have to pay, some items cannot be sold at lower prices while still being viable. “This is why our clothes have to be expensive, considering what we spend to get them into the country, the rent prices we have to pay, the electricity bills and employee wages. The consumer cannot afford this but we cannot afford to have it cheaper as well,” says Zeidan.

PAYING THE RENT

Beirut is the 37th most expensive country for retail rent in the world, according to a survey by property consultants Cushman & Wakefield with locations such as downtown, ABC Ashrafieh and Hamra popping up in the list of the most expensive retail spaces in the Arab world.

“Prices in downtown are very expensive and are the same as those in New York which has a much higher volume of shoppers than Beirut. This is really too much and one wonders where we are heading,” says Zeidan. She adds that this is the reason one sees many empty shops in Central Beirut and although landowners are working to reduce the rent fees, they would still be considered expensive.

The Beirut Traders Association, along with BLOM Bank, have issued a credit card that will encourage shopping in small and medium enterprises with reward points and hope this initiative will inject some much needed life into the sector.

Retailers Executive spoke to are going ahead with their expansion plans, with Slowear expanding further into the Middle East and launching two points of sale in Dubai, and a new point of sale in Qatar and Kuwait and HSTC planning to pursue expansions in all aspects of their business both in Lebanon and in the countries where they are already in operation.

“On the Lebanese side, I am optimistic,” Chammas says. “Lebanon can always offer you a surprise. When everything is doing well, it unfortunately comes up with a surprise you didn’t expect and on the other side when things are bad you get a good surprise.”

December 18, 2013 0 comments

Economics & Policy

Back in the black

by Joe Dyke December 18, 2013

written by Joe Dyke

There were very few positives for the Lebanese economy in 2013, but the industrial sector was perhaps one of them. If 2011 and 2012 were years of crisis — with the Syrian civil war destroying trade routes and wreaking havoc with business plans — 2013 was a year of adaption and stabilization.

In the first eight months of 2013, industrial exports totaled $2.2 billion, an increase of 12.3 percent from $1.9 billion in the same period in 2012, according to the Ministry of Industry. Industrial imports reached $217 million in the same time period, up 7.7 percent from $201.4 million in 2012. The government does not collect accurate information for total industrial output but Neemat Frem, head of the Association of Lebanese Industrialists (ALI), told Executive that growth was “certainly double digit” in 2013. These figures were, admittedly, starting from a low point after terrible years in 2011 and 2012, but growth is growth and there was precious little of it in the Lebanese economy this year.

In fact, industry was one of the key reasons why Lebanon’s economy grew at all in 2013. The meager 1.5 percent growth in gross domestic product (GDP) achieved nationally was — according to World Bank figures — mostly from industry. While services — the traditional driver of the economy — and agriculture made up less than 0.5 percent of GDP growth, industry alone was responsible for over 1 percent.

This is somewhat of an anomaly, mostly due to the rapid decline in services, which in the boom years of 2008 and 2009 made up over 7 percent of GDP growth. Industry’s input to GDP growth has never been more than nearly 3 percent in 2010, and is unlikely to be the major driver if and when the economy does start to grow again. But the positive numbers do point to a strong level of resilience in the sector.

RELATIVE RESILIENCE

Eric Le Borgne, lead economist at the World Bank’s Lebanon branch, agrees that “in relative terms” industry was a success in 2013. “The big losses have come from the services sector; industry has remained a small part but relatively resilient. It has been resilient even though some sectors have been impacted by the trade disruptions through Syria and the Gulf/GCC customers going through Syria. But overall what we see is relative resilience.”

Confidence is gradually returning as well. Banque du Liban’s Balance of Opinions quarterly business survey — a key measure of how industrialists perceive their positions — was at -5 in the second quarter of 2013. While this was clearly negative (a positive score means that more industrialists forecast growth than decline), it was up from -11 in the same quarter 2012, and -8 in the first quarter this year. There was, however, clear geographical divides with those in the North (-30) and Beirut and Mount Lebanon (-7) negative, while those in the Bekaa (+5) and the South (+34) were positive about the coming months.

In terms of policy, it is hardly a surprise that little if anything was done by the government to support industry in 2013. The industrial sector has long complained of marginalization — the industry ministry is one of the worst backed financially, with an annual budget of little more than $5 million — and the fall of the government in March made policy-making impossible. Caretaker Industry Minister Vrej Sabounjian, however, denies that his time in office has been a failure. “[We] have achieved a lot of things, but of course there are some things we could not do yet — especially because in the last 6 or 7 months we have not had all the powers of execution,” he said.

The biggest disappointment has perhaps been the failure to implement the tax reduction for Lebanese exports, which would see the rate fall from 15 percent to 7.5 percent. The deal was first backed by the government of Omar Karami in 2005 but has yet to be implemented. A year ago Sabounjian told this magazine it would be done in 2013, but he now believes the collapse of the government in March and the subsequent failure to reach a unity deal has made it impossible in the short term. “It is in the parliament. It has been over seven or eight months in the parliament but I hope one day they meet again and finalize this law,” he said. Industrialists have grown weary of political promises and none that Executive spoke to believed the decision will ever be implemented.

The fall of the government has also led to a moratorium on all plans to develop other parts of the framework for Lebanese industrialists. Lebanon’s bid to accede to the World Trade Organization (WTO), which officially began in 1999, is now all but consigned to history. In February USAID, the American development agency, indicated as much when they cut their funding aimed at supportting the bid. “We had done everything we could and it was up to the government of Lebanon to take it to the next level,” Heath Cosgrove, director of economic growth, water and environment of USAID said, explaining the decision. The key competition law which needs to be passed for WTO status to be granted has been sitting on parliament’s to-do list for a while, but the economic interests of the country’s oligopolies make sure it never makes it to the top. Improvements to intellectual property laws, research and development schemes and tax incentives also went unmade in 2013.

But the absence of government support may be helping unite the industrial sector. ALI’s Frem told Executive that industrialists have given up hope of government leadership but are looking to improve support within the sector. Chief among their proposals is an industrial park (see box above), which, if it is formed, will be run without any government support.

MEASURING GROWTH

Similarly ALI is seeking to establish an industry index to reliably measure industrial development. Among the key indices to be included will be job creation, investments, proper industrial output statistics and a yearly overview of change in costs. In a country where reliable data on almost any sector is lacking, this initiative is to be welcomed.
More fundamentally, however, Frem makes the case that the shockproof nature of the industrial sector means that there should be more focus on orienting policy towards supporting it. “We are living in a country that is built on many fault lines, so we shouldn’t build an economy that is not resilient,” he says, referring to the service and tourism-oriented focus of the economy. “In 1974, 25 percent of Lebanon’s GDP was from industry. Now it is 10 percent but it should be around 20.”

December 18, 2013 0 comments

Economics & Policy

‘We have tried to attract Syrian industrialists’

by Joe Dyke December 17, 2013

written by Joe Dyke

Vrej Sabounjian is perhaps the most positive person in Lebanon. Despite worsening security conditions, a refugee influx and a stagnant economy the country’s caretaker minister of industry is convinced that there are plenty of opportunities — companies just need to find them. Executive met with him to discuss his record in 2013.

When this government was formed, you promised to be the most pro-industry government in Lebanon’s history. Have you failed?

I have succeeded. The government was not saying that we were going to be 100 percent pro-industry. I think governments should have balanced policies with all the sectors — industry, services, tourism, etc.

As far as industrial policy, I think we have done well and I would thank all my [ministerial] colleagues and the prime minister and president. We can say that after two and a half years the Lebanese industrialist has achieved a lot of things, but of course there are some things we could not do yet — especially because in the last six or seven months we have not had all the powers of execution. So that is a minus, not a plus. But we have done a lot of things.

What specific successes are you proud of?

I don’t want to specify what I am proud of and what I am not proud of. For me as long as it is a service for the Lebanese, it is my priority. Some services help big industries, some help smaller industries — neither is necessarily more important for me.

Secondly I don’t like to brag and say, “I did this,” and “I did that.” There is a very long list of what we did — maybe one day we will publish it. But I don’t want to brag while I am in the post that “this is what I did.”

You still have not been able to implement the cut in export VAT from 15 to 7.5 percent?

It has been in the parliament for seven or eight months. I hope one day they meet again and finalize this law. But other than that there are many, many things we have done — for example the [establishment of the National] Wine Institute and the obligation of manufacturers to have three kinds of insurance. This allows safety for the employees and for all the neighbors.

What about plans to encourage the United Nations to only buy Lebanese goods when supporting refugees?

We are working on that plan with the UN. We have been meeting with them to urge them to spend their money in our country. We have opened our doors to our Syrian neighbors who are temporarily here. I want them [donors] to spend their money here by first giving priority to whatever we manufacture in this country and, secondly, if it is not available in this country, the Lebanese merchants can import for them. But it has to go through Lebanese businesspeople.

Have the UN accepted this yet?

This policy is not implemented. There is no policy.

Could Lebanese industrialists cope with the scale of the demands?

Of course. We are capable and we are willing to be capable. Once we finalize the plan we will have an office so that small companies can go and register so that when there is a tender they can participate and we can support them with the paper work. We are able to give [the UN] whatever they need — supplies, food, water, clothing. Whatever they need.

You would be in favor of making this legal so that they would only be able to get resources from Lebanese companies?

Not only in favor. I am convinced this is our right. We have one and a half million refugees in our country and I hope all the donor countries think this way.

The industrial zones were in the government’s mission statement. They are no longer realistic and private sector leaders are planning to establish them without government support.

This industrial zone is an idea and I don’t say I don’t like it, it is fine…

…but you are not fully in favor of it?

I am in favor but this should not be a reason for us to say, “Well we don’t have an industrial zone we are not doing good business.” I want to say, “If you want to do industry, do it wherever you want and I am with you. Wherever you have a piece of property, do it, invest in it and the minister will help you.”

So you will support a privately run industrial zone?

If they have land they want to [develop] I am willing to help them as well. But I am not going to ask the people that have their factories somewhere for the last twenty years to close their places and go there — this is not going to happen. I don’t favor this at all.

That is not what they are arguing for, they are arguing for government support for these zones similar to tax breaks you see in other countries…

I don’t think the Lebanese people need more tax breaks. We are one of the lowest countries, we are paying 15 percent tax — that is all. The lowest advanced capitalist countries are 35 percent, France is 75 percent [at the top rate of tax]. We are 15 percent and they are still saying they don’t want to be taxed? This is one of the lowest taxes. Let them think about how we can produce better, faster and in alternative ways.

Is it fair to say accession to the World Trade Organization is not realistically going to happen in 2014?

I don’t know about that. Maybe we should ask about the World Trade Organization — I am with open markets and equal opportunities for all. But the same rules apply for a country with a population of 90 million and a country of 4 million? If we are a small country we are always under regulation from larger countries. I disapprove of that. I think there should be exemptions. The WTO is a good thing but I think there should be some precautions and protections [based on] understanding the real situation of every country.

Why has Lebanon not been able to attract more Syrian industrialists fleeing their country?

I don’t think we did not attract. We have said many times we are ready to help if anybody wants to invest. It is a matter of choice where they go — it doesn’t mean we are against their investments. On the contrary we are with their investments. But if they don’t want, they are welcome. Many industrialists visited me, I showed them ways they can invest and they were very happy. But it is their choice — we cannot say, “No, you have to invest here.”

Were you disappointed not to attract more?

Not at all. Why should we be disappointed?

Industrialists complain that the minister of agriculture is able to attract more support for his policies than you are as he comes from Hezbollah. Have you had the full backing of the rest of the government?

As I said, I thank all the ministers. Whenever I need it I have the support. If not 100 percent — that is not possible with any minister. Not every minister can get the support for everything he wants, but mostly whatever I needed, I got the support. It had nothing to do with my background or who was supporting me.

How confident are you for Lebanese industry in 2014?

I would say that there will be great opportunities in Lebanon in 2014. There will be a lot of things for sale. Some businesses will close down, some will open up — but there will be opportunities. I think they should look at opportunities in 2014 and beyond.

December 17, 2013 0 comments

The Buzz

Business briefing: 17 Dec 2013

by Executive Staff December 17, 2013

written by Executive Staff

Economics and Policy

The United Nations appealed for a record $6.5bn for Syria and its neighbours on Monday to help 16 million people, many of them hungry or homeless victims of a conflict that has lasted 33 months with no end in sight.

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New car sales in Lebanon are forecast to decrease in 2014 as the country’s deteriorating economic situation reduced the number of imported cars registered by 6 percent in the first 11 months of 2013, the Association of Automobile Importers has said.

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Qatar’s economy is likely to grow 6.0 per cent this year, slightly faster than previously expected, partly because of higher gas production, the Ministry of Development Planning and Statistics has said.

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The authorities in Egypt have had an unfortunate start in their attempt to publicise next month's referendum on a new draft constitution after a mistake with their poster.

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Companies and Business

Bank of Sharjah expects net profit growth of around 25-30 percent in both 2013 and 2014, aided by an improved performance of the economy in the UAE, its chief executive said.

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December 17, 2013 0 comments