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Comment

Piecing together Turkey’s fractured opposition

by Nizar Ghanem June 7, 2013
written by Nizar Ghanem

Walking up and down Gezi Park, you see them everywhere: young, beautiful and rebelling. They are the new Turkish middle-class —demanding more individual rights, less government intervention in local politics and the right to public space.

It is now common knowledge that the government crackdown on a protest at the park was the spark that lit a gas field of anger. The demonstrations raging from Taksim to Besiktas and the protesters barricading streets and chanting slogans against authoritarianism are a testament to a new generation that has come to claim their right to be heard. Yet the extent to which these protests will transform Turkish society remains unclear.

The protests were initially against the Justice and Development Party’s (AKP) urban transformation projects in the Taksim area, which have already claimed many historical treasures in the Beyoglu area including old theaters and cafes.

What started as a small sit-in developed quickly due to lingering frustrations, largely over increasing authoritarian trends in the country. Among the causes of the discontent is Prime Minister Recep Tayyip Erdogan’s push for a new constitution that would give the presidency more power over parliament. This would enable Erdogan to avoid constitutional limits on his term as prime minister by instead running for president.

Related article: Turkey's redeeming value

Furthermore, the AKP is perceived to have drifted away from liberalism. The attempt to criminalize adultery in 2004, in addition to recently banning the sale of alcohol from 10:00 pm to 6:00 a.m, are cited by opposition members as evidence of Islamist tendencies. Meanwhile, the state’s repression of the media is striking. Turkey has the highest number of jailed journalists in the world, with Kurdish journalists among the most frequently targeted.

Economically, too, the neo-liberal policies Erdogan’s governments have pursued have increased anger in some sections of the population. Despite the economic growth of recent years, Turkey has stubbornly high income inequality. Gentrification policies are moving thousands from poor neighborhoods to government construction projects outside the main metropolitan areas, seriously changing the social fabric of the country. 

Not yet a revolution

But while hostilities towards Erdogan and the ruling elite exist, the extent to which the protesters are calling for fundamental change varies. Those on the streets are a temporary coalition brought together from a mosaic of groups: ultra-nationalists, leftists, unionists, Kurdish groups and gay rights activists.

The core of the initial movement, a group of activists in a platform called Mustereklerimiz, (“Our commons” in Turkish), is part of the Taksim Platform — a civil initiative to protect Gezi Park from being turned into a shopping center. Mustereklerimiz, a predominantly middle-class mixture of students, artists and neo-leftists, has been campaigning against the government’s decision to destroy one of the last green spaces in Istanbul for the past four months.

But as protests have grown rapidly in recent days, Mustereklerimiz has been joined by a series of other groups — many of whom it has little in common with. The ultranationalist groups and the traditional communist left share similar authoritarian streaks with the AKP. A fascination with a strong state and a top-down approach contrasts with the horizontal organization of Mustereklerimiz.

The schisms are noticeable at protests — with a battle of slogans common. Nationalist groups lift banners saying “we are [Turkey’s first post-independence president] Kemal Ataturk’s soldiers”, while progressives respond with “we are soldiers for no one”. In fact clashes between demonstrators have erupted numerous times in recent days — including when a Kurdish demonstrator raised a flag of jailed Kurdish leader Abdullah Öcalan.

On the issue of Kurds, the lack of wider Kurdish support has also somewhat undermined the movement. The recent rapprochement between AKP and Öcalan has somewhat neutralized the Kurds — historically the strongest opposition block to the ruling party. So while there have been individual Kurds backing the protests, Kurdish political leaders have chosen not to do so. The Taksim movement has to attract the Kurds in, but by doing that it runs the risk of losing the nationalist forces that form a big part of the movement.

So far, demonstrations in Turkey do not yet constitute a revolution and should not be seen through the lens of the “Arab Spring”. The Arab revolutions were a social upheaval that brought sectors of Arab poor — albeit briefly — to the forefront of their societies. They were more radical uprisings that demanded the reformulation of political institutions, whereas Turkish protestors demand the downfall of the current government but not the modus operandi.  Although severely challenged, the AKP still holds enough of a national consensus to rule, and is unlikely to step down anytime soon.

Can these disparate groups develop into a consolidated political force? If these various ‘oppositions’ are able to agree on a platform they could be successful in staging an alternative. But so far, these demonstrations are less about fundamental change and more about restating democratic rights. Those on the streets are telling those in power that democracy cannot be reduced to the ballot box only – that democracy is weak and fragile when it lacks a strong independent media, local participatory governance and strong checks on the executive.

Whether these groups can form a common position and grow to become a bigger movement is yet to be seen. Erdogan’s image has been hurt and his political standing has been shaken, but at least for the time being he remains the only option in town.

June 7, 2013 0 comments
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Economics & PolicyInsurance in Lebanon

Dead in the water

by Thomas Schellen June 6, 2013
written by Thomas Schellen

When economic times are tough for Lebanese companies, insurers get singed.

Less international trade means fewer cargo insurance contracts. Less hiring means fewer premiums invested in employee needs. Fewer overland deliveries to domestic and neighboring markets means less insurance of commercial vehicles, whether due to smaller fleet sizes or to dropping demand for coverage while driving through the region under the Orange Card scheme.

Lebanese insurers have nonetheless maintained fair public levels of calm when compared with the swelling choirs of doom that one hears intonating economic laments about banking, hospitality, retail, industrial manufacturing and, most recently, real estate markets.
The most recent Quarterly Report, a statistical compilation of insurance data, issued in February and covering the fourth quarter of 2012 in a full-year context, showed that total gross premiums came in just below $1.3 billion. This voided some mid-2012 statements by several sector leaders who at the time told Executive of hopes for double-digit premiums growth for the entire year. 

However, the overall insurance sector performance in 2012 was satisfactory, as implied by the Q4 Quarterly Report figures. Taking the report’s preliminary full-year figures, gross insurance premiums (premiums before cessation of risk and revenue portions to reinsurers) grew four percent for life and five percent for non-life business. Claims expanded by six percent to $650 million and reported investment returns from insurance portfolios increased by 28 percent year-on-year to $121.7 million. Over two-thirds — $84 million — of these investment returns were achieved in the life insurance business.

Doing well under the circumstances does not equate to reaching baseline targets. The Q4 report also revealed that the Lebanese market’s insurance demand was weaker in the third and fourth quarters of last year when compared with the first half of 2012. In life insurance, accounting for 29.1 percent of 2012 premiums, the fourth quarter appears to have fallen into a lull as the full-year premiums growth rate of five percent was half of what was reported for the first nine months.

Although no data for 2013 are available yet, the possibility that domestic insurance demand will suffer this year can certainly not be denied.

Academic papers on the positive correlation of insurance growth with gross domestic product (GDP) growth have been published on the basis of research in markets as diverse as China and old and new member states of the European Union. The negative effects of slowing economies have also been demonstrated, not least in the impacts of the 2008-2009 downturns on insurance premiums in industrialized nations.

The repercussions of a weak domestic market for Lebanese insurers deserve to be viewed in conjunction with the sector’s fragmentation and its development pattern, which is sharply divergent from that of commercial banking. Whereas banks, with considerable prodding from Banque du Liban, Lebanon’s central bank, went through a period of consolidation in the 1990s, insurers have not.

With many small, family-owned companies, the majority of insurers did not push into new territories to any degree comparable with banks. Having not consolidated or diversified into other markets, insurance companies that have sustained their positions exclusively as domestic players until now may find it much more challenging to remain profitable this year and perhaps years to come as the Syrian crisis impacts Lebanon. 

Rocky in the region

When viewing the situation of the Lebanese insurance industry, it is also to be noted that analysts have recently been less exuberant about regional developments. Beirut-based ratings organization i.e. Muhanna has just lowered its ratings on 28 out of 75 reviewed companies in six countries — Egypt, Jordan, Lebanon, Qatar, Saudi Arabia and the United Arab Emirates —  while it hiked ratings for 23 companies and kept 24 ratings unchanged. Due to the changes, 17 companies, or 22.7 percent of the total 75, were shown in the “uncertain” ratings range for 2012, among them six Jordanian, five Emirati and three Saudi insurers.   

 

At the end of May, international ratings agency A.M. Best diagnosed the Kuwaiti insurance sector as facing regulatory uncertainty and volatile growth, and only a few weeks prior warned of shrinking margins for insurers operating in the important Saudi market. There is a consensus view among industry leaders interviewed by Executive that intense competition beleaguers all insurance markets in the Gulf Cooperation Council, where some 198 companies are now chasing policy buyers, according to numbers published by A.M. Best.
Growth of premiums portfolios is still not a problem under these conditions, but healthy profit margins are very difficult to achieve and it is becoming untenable to operate as a company that has a strong size in only one country, according to Farid Chedid, chairman and chief executive of Beirut-based reinsurance company Chedid Re.

He says, “Only very specialized niche players and regional companies will survive. You have to become regional because the large clients in each country are becoming regional players and you need to service their needs throughout the region.”

This has implications for Lebanese insurers as regional markets are being cornered by international players and domestic consolidation opportunities are few. In the view of Fateh Bekdache, general manager of Arope Insurance, it is “still far-fetched to expect mergers” in Lebanon’s insurance sector.

In recent years, mergers and acquisitions in the Lebanese insurance industry were generally not a winning proposition. Only two significant consolidation moves have been recorded since 2010; both were acquisitions of local companies by foreign firms. However, one of the two acquisitions, the buyout of Compagnie Libanaise d’Assurances by multinational firm Zurich Insurance Group, was recently marred by a court dispute, where insurance industry sources told Executive that both sides were suing the other. 

Reviewing their options for 2013, Lebanon’s insurers would be well advised to use this time of very limited domestic and regional opportunities to upgrade their processes and strengthen their ranks. This could include exploring new needs such as cyber-insurance and enhancing corporate governance, but also improving sector collaboration on risk assessment.

Two years ago, one such effort was initiated: a database that would help companies to identify bad risks in motor insurance and combat auto insurance fraud. However, this project appears to be in danger of stalling, which would remove the most effective deterrent against risky traffic behavior — risk-adjusted pricing of motor insurance — and thus could only serve to further embolden unsafe drivers on Lebanese roads. 

As the regional insurance industry is entering a phase where experts such as Chedid expect consolidation of sectors anywhere but in Lebanon and foresee a maturing of markets, the egocentricities and lack of transparency found in the national insurance industry may prevent consolidation by mergers and acquisitions, but economic imperatives of limited opportunities may very well shrink the provider ranks and separate the wheat from the chaff.

However, the realities that are pushing multinational insurers into emerging markets are also working in favor of Lebanon, says Fady Shammas, the chief executive officer of Arabia Insurance. Growth potential in the Lebanese market “is larger than in Europe and larger than in the United States. We are still showing a higher growth in percentage terms.”
 

June 6, 2013 0 comments
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The Buzz

Business briefing: 6 June 2013

by Executive Staff June 6, 2013
written by Executive Staff

Economy and Politics

Gulf Arab countries have issued a travel warning for Lebanon, telling their citizens to avoid what is a popular tourist destination for the region after a spillover of violence from neighbouring Syria.

More from Reuters

 

Qatar has awarded four design and build contracts worth approximately $8.2 billion for phase one of the Doha metro.

More from Reuters

 

The UAE advertising industry accounted for a 33 per cent share of the GCC’s total ad spend estimated at $4.8 billion in 2012 to remain number one, as the print media continued its dominance with a 71 per cent share of the overall market.

More from Khaleej Times

 

Some 72 percent of residential projects in Beirut completed in 2012 are still unsold, a new report has shown.

More from The Daily Star

 

Companies and Business

Zain Saudi, the kingdom's third-largest telecom operator, has signed a SR2.25bn ($600m) Islamic loan guaranteed by its parent company.

More from Reuters

 

Lower GDP growth, falling interest rates on Lebanese sovereign bonds and stricter Basel III measures could affect the profitability of Lebanese banks in 2014 and 2015.

More from The Daily Star

 

Commercial Bank of Qatar (CBQ) and Qatar Islamic Bank (QIB) have asked Qatar Exchange to increase the number of their shares available to foreign investors to 25 per cent of their market capitalisation.

More from Reuters

 
June 6, 2013 0 comments
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Business

Shaping the Middle East’s workplaces

by Joe Dyke June 6, 2013
written by Joe Dyke

Company: Nabbesh

Country: Lebanon/United Arab Emirates

Industry: Recruitment

Founder: Loulou Khazen Baz and Rima al-Sheikh

Established in: 2012

Number of employees: 5

Capital raised: Won $272,000 after being crowned first winner of UAE-based show “The Entrepreneur”

 

Loulou Khazen Baz does not lack confidence. Most people, having made it to the final 10 from over 2,000 applicants for a televised talent show, would feel understandably nervous. Baz’s primary emotion was confidence. “By the time we were in the top 10 I thought we should win it,” she says. And so she did.

Lebanese national Baz, who grew up in Broumana but left at 17 first to study in Australia and then to work in the UAE, was in November crowned “The Entrepreneur” during the first series of the UAE-based TV-show of the same name. The prize was 1 million dirhams ($272,000) plus another $272,000 worth of services, all of which was to be spent on boosting her company Nabbesh, which she co-founded with Syrian national Rima al-Sheikh.

Loulou Khazen Baz became the first winner of 'The Entrepreneur'

Nabbesh.com (which means search in Arabic) aims to connect freelancers with employers across the Middle East. The service is popular in a number of different sectors – including graphic designers, photographers and copy editors. Based out of Dubai, the company currently does around 60 percent of their work in the UAE and Baz says that her plans to help Emirati companies streamline helped her win the competition.

Baz's co-founder Rima al-Sheikh is Syrian, but the two met in Dubai

“Luckily enough I had a product that had a great story — it was not like I was selling shoes. [Nabbesh] is about employment, about a massive problem the region has, about something that could help millions — it was a great story and I knew it,” she says. “So I played that fact [to win the judges over].”

While in the West services for freelancers are fairly well developed — there are now over 40 million freelancers in the United States alone — in the Middle East they are still in their infancy. Baz says there is no meaningful competition for Nabbesh, and their 15,000 registered users make up only a tiny portion of the potential market. Attitudes are changing, however, with a new study showing that 69 percent of Middle Eastern residents consider freelancing a viable career choice — but Baz believes a lack of statistics makes companies hesitant to take the plunge and change their working practices.

“There are a lot of people in this region that are educated but don’t want to work on a full-time basis — especially women or youth. [People] studying who want to do some part-time work or [those who] have a family and don’t want to work eight or nine hours a day — there are millions of people across the region who can benefit from [Nabbesh’s] services,” she says.

Related article: Entrepreneur of the week: Qabila's Perihan Abou-Zeid

“The issue with the Middle East is we don’t have a lot of data. This is what we are hopefully going to show through Nabbesh — we are able to collect a lot of data, find out what skills are most in demand and what people are searching for etc.”

And for her fellow Lebanese, Baz thinks that the service could make a huge difference. Every year thousands of well-educated Lebanese leave the country due to lack of work opportunities, with many heading to the relative stability of Dubai. But Baz thinks freelancing could make it a viable option for people to stay at home.

“We think there is a great place for companies in the Gulf Cooperation Council [to find talent]. If there is a small company in the UAE or Saudi Arabia and they need a talented copywriter or graphic designer we see Lebanon as being a place that is able to provide such talent,” she says.

So far the company’s services are entirely free of charge but in the coming weeks Nabbesh is going to introduce payment through the website. “We are going to enable employers to pay freelancers through Nabbesh and we will take a fee on that transaction. This guarantees that everybody gets their end of the deal — if the freelancer doesn’t deliver, the employer doesn’t have to pay, and if the freelancer delivers we will make sure they get paid through us,” she says.

With the highest employment rate of any region in the world, the Middle East’s workforce face an uphill challenge to find employment. Connecting talent to where it is needed may be the key to solving these woes.

 

Follow Nabbesh on Facebook or on Twitter

June 6, 2013 0 comments
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Society

The Kings of Clubs

by Nabila Rahhal June 5, 2013
written by Nabila Rahhal

It took a decade for Tony Habre and his partners to secure a foothold in Lebanon’s hospitality industry. Their company, Add Mind, creates, develops and manages food and beverage concepts. Today, it has its mind set on regional growth, emboldened by striking gold with their concepts of White and Iris, two nightlife venues that are icons of longevity and frequently on the lips of many Lebanese socialites. But Add Mind’s path to success was not easy; it was marked by venue closures and learning experiences that helped it to evolve into an operation employing 250 people in the peak season.

“Our industry is a black or white one, with no middle ground and with frequent political turmoil which affects business,” says Habre, now chief executive of Add Mind. “So, basically, we had to accept the losses, pay for them and move on. But we always had a place doing well so we were always making money, though it was being used to finance the losses.”

Related article: Ten of Beirut’s oldest bars

Habre entered the nightlife business as a solo operator in 2001 at the age of 22, creating and operating a bar called Pulse in downtown Beirut. Two years and several hospitality projects on, Habre joined up with four partners to form Add Mind. 

The company’s first project was converting Habre’s Pulse into a restaurant and café venture called House of Salads. The new concept catered to Gulf tourists, and it appeared to be more in harmony with what downtown was then becoming, a tourism hub. While initially a success, — it was franchised in Kuwait and Bahrain — they had to close shortly after the assassination of Prime Minister Rafiq Hariri in 2005. With business shaken across Beirut’s downtown, House of Salads was unable to maintain profits, and it was a huge loss for the company, says Habre.

Fortunately for Add Mind, the company had also acquired the franchise for Pascucci, an Italian coffeehouse. This venture kept them afloat for the time being, but eventually it closed down, as well. 

Following these experiences, Add Mind saw a more secure future — and one more in tune with Habre’s skills and experience — in operating nightlife venues. “Clubs and alcohol and such are always the last to be affected in times of crisis. In nightlife, you make the most money in one bulk — during the holidays and weekends — and it is sustainable for the subsequent period, while in restaurants you make the same amount every day and so are more vulnerable to slumps in business,” explains Habre.

After several trials and errors, such as L Bar in Ashrafieh’s Monot Street, and Asia, a rooftop bar in downtown Beirut, Add Mind found the perfect location for a venue at the end of 2005. On the rooftop of the An Nahar building in downtown Beirut, they developed their first outdoor club, White. 

Habre has a number of open-top bars in Lebanon

 

White was launched three weeks before the July 2006 war with Israel, but they still managed to turn a profit despite shutting down during the month-long war. With the general growth of the lower downtown area, and after some complaints from neighboring commercial establishments, White moved to the Dora seaside highway in 2011. Its space was replaced by Iris, a ‘quieter’ bar concept, at least when compared with White. 

To this day, Habre considers White “a life changer” and eagerly speaks of how their relocation turned out to be for the better, as the much bigger space in Dora meant they could finally attract international performers — something only SkyBar could afford until recently — and be placed on the global nightlife scene. In fact, White and Iris together contribute 75 percent of the total revenues generated by Add Mind as a whole. 

Planning the party

The other seven venues in the Add Mind portfolio consist of clubs, bars, beaches and one restaurant. Habre would not divulge the total revenues that the company achieves from each venue but says that the seven less-grossing ventures are also performing well. Each venue individually yields around 30 percent net profit. 

Habre and Karim Jaber, one of the four partners who joined the company 10 years ago, are the largest shareholders in Add Mind and are joined by three more shareholders. Under the current business model, the company is a shareholder and managing partner in each of the nine venues, but each venue is incorporated as a standalone company with varying shareholdings by, across the portfolio of venues, 30 investors, 28 of whom are Lebanese. 

The investor mix and participation varies from one venue to the other, depending on the investment cost of the venture. White required as much as $6 million, but Cassis, a street-level pub concept in downtown Beirut, needed only $450,000.

 

Add Mind works with two banks, Bank Audi and Societe Generale du Banque au Liban. The company’s solid relationship with these banks is built on its successful track record in the business, says Habre. When the company seeks new debt to finance a concept, he says the banks will be satisfied with Add Mind providing collateral either in the form of business guarantees from the other investing companies — one party guarantees the other in the case of lack of compliance with the loan terms — or from Add Mind’s shares in the venue. 

Add Mind is working on splitting its management activities from its financial stakeholdings in the venues while consolidating ownership of their outlets as much as possible to allow a more organized approach to investments. In collaboration with some of the venues’ other investors, Add Mind is creating Capricorn, a sister company that will manage the outlets’ equity and growth, according to Habre. “Capricorn will be almost the sole investment arm of Add Mind; it will be for pure equity and expansion, while Add Mind will be for pure management. When you have one company with nine businesses, it’s much easier to approach banks and investors, and we can plan ahead more now,” says Habre. 

The ever-popular White remains the largest venue in Add Mind’s portfolio

 

Currently, explains Habre, new venues are set up as individual ventures with mixed funding from Add Mind’s operational profits, from investors and from bank loans, depending on the venue’s lease contracts and the size of the investment. Though he says that a mix of financing from investors and bank loans divides the financial risk between the two and is a good idea, Habre prefers debt over equity because his company stands to make more money that way. 

Expanding to the Gulf

With the planned consolidation of their venues under Capricorn ownership, expansion is very much the plan — regionally and, to a lesser extent, locally. In Lebanon, Add Mind is taking another stab at the restaurant industry with their latest addition of Copla, an Andalusian brasserie in downtown Beirut. Giving their new run at the restaurants segment their best, the company recruited a chef for Copla who in an earlier position earned two-star Michelin credentials. 

Add Mind’s focus abroad is mainly on Dubai and Abu Dhabi. The company first attempted to grow regionally in 2005 with a club in Jordan, but it closed three years later. A hard lesson was learned, says Habre, “I used to think that a good country to invest in is one where there is no competition but it turned out to be the opposite: no competition means there is no interest in such a style       of venue.” 

Their regional growth is currently limited to Eight, a club in Abu Dhabi which opened in 2009, but several venues are slotted to be launched in the United Arab Emirates soon, and Habre believes Dubai will take them to the next level. “Lebanese in Dubai make more money than in Lebanon and they spend more. It’s also a touristic, stable and party city,” explains Habre.

Add Mind plans to start with two new venues in Dubai, and one in Abu Dhabi and while they will surely be opening White and Iris there, they are also considering launching their smaller bars as they believe the market there lacks such personal concepts. 

Investments for the UAE venues will be higher than those in Lebanon and will come from Capricorn, banks and, potentially, some partners. While Habre is not worried about the competition in Dubai, what concerns him are the legalities of operating there. “It’s easier to open in Beirut because we have a huge team which, over time, works like a well-oiled machine. In Dubai, we don’t have that yet and we have to deal with both the hotel’s owner and the management company, which is a hassle. Dubai is more business-oriented in the sense of paperwork and legal issues,” explains Habre. 

Nightlife is tough business, but, per Add Mind’s success, failing, learning and growing from experience can combine with hard work and determination into a fizzing cocktail of success.

June 5, 2013 0 comments
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Business

An empire on hold

by Thomas Schellen June 5, 2013
written by Thomas Schellen

The fortunes of Beirut’s Phoenicia InterContinental are a chronicle of the ups and downs that Lebanon has experienced since the hotel’s construction in the 1950s. Shuttered during the civil war, the building was restored in the late 1990s, only to have the façade and parts of the interior wrecked again in the 2005 assassination of former Prime Minister Rafiq Hariri. Just a year later, the July war also took its toll on the country’s tourism.

Running the hotel between its reopening in 2000 and today has been a “rollercoaster experience”, says Mazen Salha, chairman of Societe des Grands Hotels Du Liban (SGHL), which owns the Phoenicia and Le Vendome, a boutique luxury hotel. 

Related article: Mazen Salha Q&A

He adds that the last 12 months made up the most difficult business year in his memory. “Other upheavals that we went through lasted for three or four months. The period that we passed through from May 2012 until today was one of the toughest because it was long.”

He told Executive that visitor numbers were so weak that they reversed SGHL’s revenue mix. 

Rooming usually contributes around 70 percent of gross income, but since April or May of 2012, rooming revenues dropped to a point that the ratio flipped to 60 percent of revenues coming from the food and beverage (F&B) stream. 

Strong banqueting capacities were part of the business concept when the Phoenicia was restored with a multi-purpose grand ballroom. The investment has paid off very well throughout the past 12 years but especially in the recent crisis period as banqueting contributed to about half of the F&B turnover that helped the hotel meet survival targets. 

Describing recent business as being more one of a large restaurant and banqueting operation rather than a hotel, Salha says these capabilities “luckily made us survive”, but he adds that this revenue stream needs very careful management because of great differences in profitability margins between staying the night and staying for dinner.

The partnership between the Salha family as owners and InterContinental Hotels Group (IHG) as operators of the Phoenicia has its roots in the 1950s. Mazen’s father, Najib, got together with InterContinental, which at that time was based in the United States and affiliated with Pan Am, the dominant US global airline of the 1950s and 1960s. 

One cannot discuss SGHL without touching upon the company’s history and remarkably robust partnership with the InterContinental brand. 

Tourism doldrums

The Phoenicia was created as the second hotel in the chain, and the linkage endured through various ownership and business concept changes on the InterContinental side, thanks in part to SGHL’s experience in Lebanon’s adverse tourism climate. 

Most industry leaders would agree that the Gulf countries’ travel warnings cut the flow of tourism’s lifeblood in the 2012 season, as Lebanon depends heavily on Arabs as a source market for visitors. Even while the two SGHL properties were under the specter of Saudi Arabia’s travel ban in the first quarter of 2013, Saudi visitors comprised the largest single guest segment by nationality, Salha says. 

While the resilient affection of their Arab clientele meant that the SGHL properties could in the past recover quickly from the intense but short disruptive shocks, such as what Salha calls the “2006 episode”, the latest experience of sustained disruption is a different thing. It shows how heavy reliance on one visitor group makes Lebanese luxury hotels particularly vulnerable to external political shocks. 

This vulnerability is not just a concern because of political trauma but also because of changes in the Arab clientele. The burgeoning young generation of Saudi Arabia and other Gulf countries “does not know Lebanon in the way that the previous generations did,” Salha says, pointing to other destinations that are becoming more attractive — and more culturally compatible for the Gulf’s Islamic tastes — such as Turkey and Morocco, as well as the Far East and Oceania. 

But the difficulties do not end there. The Lebanese hospitality industry is not all it can be because the expansionary global tourism patterns are not adequately reflected in the market, Salha believes. “We have good business but are not seeing the numbers that Lebanon has the potential to attract. Whatever we are seeing is only a drop.” 

At the same time, he is skeptical that the country could draw visitors from Russia and China, two leading markets of growing tourism to Mediterranean and Arabian Gulf destinations. “We are hoping to attract Russians and other nationalities but I don’t see this as a Russian market,” Salha opines. “They want nice clean beaches and want to be able to come and go with ease, [but] what are the beaches that we can offer them?”

He cites infrastructure and security deficiencies, such as the regular demonstrations that block Beirut’s Airport Road as issues that need to be addressed.

Stalled aspirations

Before the severe drop in guest numbers that gave rooming rates at luxury hotels a good beating, SGHL in 2010 and 2011 was implementing an improvement and renewal plan for the Phoenicia and Le Vendome. The latest upgrade to be completed was the addition of the award-winning Petit Maison restaurant to Le Vendome this spring, but other investment ideas have been put on hold. 

SGHL’s plans to upgrade existing properties and to expand both domestically and abroad are currently suspended. At home, Salha pointed to opportunities to expand into the serviced apartments market, where IHG runs the Staybridge and Candlewood brands, and to branching into the under-supplied market of branded budget hotels. 

Here, SGHL already signed agreements with IHG to roll out hotels under the Holiday Inn Express brand, which has been a success story in several Arab markets. “We thought this is a good market segment to enter and entered an agreement with [IHG] that we will develop their Holiday Inn Express brand here and in Syria,” Salha explains. The plans were disrupted by the Arab uprisings across the region, especially now that Syria is in civil war. 

Expansion abroad involves taking the legacy regional. This idea already provided the underpinning of a brand refocus about two years ago when the Phoenicia part of the hotel’s name was put to the front, and the InterContinental was reset to be more of a supporting attribute rather than the dominant identity. IHG understood SGHL’s desire to realign the brand with the actual perception of the hotel, Salha says. “When people refer to us, they always say ‘we are going to the Phoenicia’, not to the [InterContinental], and the brand is now more in line with this reality.”   

According to Salha, SGHL then registered Phoenicia International as a hospitality trademark and was working on a program to tap into regional and African markets, but this all came to a halt with the recent crises. 

The name Phoenicia for a hotel is not exclusive to Lebanon — a hotel in Malta has carried the name since the 1940s, as well as several hotels in the Gulf region and a small string of properties in Romania. But, as Salha tells Executive, SGHL could leverage the reputation and mystique of the Lebanese hotel with the large Lebanese communities in Africa and build up the Phoenicia International brand in collaboration with partners such as IHG or other operators.       

Dare to dream 

As these long-term plans for regional growth are pending an improvement of the revenue climate, other questions also await solutions. 

However, SGHL is presently not of a size where going public would make sense, Salha tells Executive. While the company does not release its results and financial positions or the size of its war chest to the public, one can deduce from his remarks that any expansion will come with substantial capital requirements. Whether buying land plots to develop budget hotels in the Beirut periphery or expanding into Africa, many avenues to growth appear costly. 

While certainly not impossible, expensive growth will be a risky and audacious task to achieve for a Lebanon-based hospitality company that is family owned. Although regional tourism meetings such as the Arabian Travel Market in Dubai last month reported entire bonanzas of new tourism demand in the Middle East and adjacent markets, the Travel Market event logs equally testify to the massive investments that highly-capitalized holdings and big operators are pushing into these same markets. With major hotel expansions unfolding across the Middle East and Africa, SGHL’s dream of making their mark abroad seems daring.

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Business

Chat in the Phoenicia

by Thomas Schellen June 5, 2013
written by Thomas Schellen

While Arab countries have recently upheld their warnings against travel to Lebanon, there is still hope that friendlier political winds from the Gulf will allow for a good summer for tourism. Still, the past year has shown that resistance to business crises is a must for a Lebanese hospitality venture. As hotels emerge from this survival test, Executive sits down with Mazen Salha, chairman of Societe des Grand Hotels Du Liban, which owns the Phoenicia and Le Vendome hotels, to discuss the realities, challenges and enduring qualities of the business.

 

Given your extensive experience in the hospitality sector in Lebanon, what are your thoughts on the climate that is currently dominating the hospitality sector in Lebanon? Is it the worst we have seen?

It has been a rollercoaster ride ever since we have opened; we’ve become used to it and we adjust our operations accordingly. This time, however, it really was a long stretch since it started in April 2012 and all through the summer until now. With this long stretch, we had to take a lot of measures to survive. 

Related article: Phoenicia's empire on hold

Hopefully we are getting over it and we are starting to see some [Gulf] Arabs coming back. Bookings for June are starting to look good, though we don’t want to be over-optimistic. There will be a natural drop with Ramadan but the good thing is that Eid El Fitr is at the beginning of August so we will see another summer season then, if things remain as they are.  

Why was the impact of Gulf countries’ advisories against travel to Lebanon so severe?

Regardless of what anyone may say, this is predominantly an Arab market, and mainly a Saudi one. I asked our operations manager to look back at the last three months to see which nationalities make up the majority of our clients, and the Saudis are still the largest group, [even with] the ban and despite everything. It is really a huge market, bigger than all the other Gulf states together, and their decision to stay away from Lebanon hurt us a lot as a country. 

While executing investments to improve the SGHL properties a couple of years ago, you have also spent money to exhibit a collection of international art. Was that a financial investment? 

We, my wife and I, wanted to give the Phoenicia a cultural element because we are interested in art. We have a small, nice collection. The most valuable piece of art we have in the Phoenicia is the one above the staircase made by Richard Long but it is painted on the wall and so, as an investment, it loses its value. The other pieces we house have appreciated in value.

How do you view the level of the human capital and the quality of training provided in Lebanon for those who want to join the hotel industry?

There is a lot of interest in joining this industry but the problem is that everyone wants to be a manager. They spend a year in a hotel and then expect to move to a higher level, which is not always feasible, and so they move somewhere else; some succeed and advance in their career but others don’t. 

On the training and production level, we are doing well but could be doing better. There is a limited capacity for hotel management training in Lebanon. Only La Sagesse University has an internationally accredited hotel management school but they can only take 50 students, and I am currently working with them to increase this number to 150. 

You represent the second generation in owning the Phoenicia. Is the succession clear? Will the next generation of Salhas be involved in the business?

We really don’t know about the succession at this point. My eldest son has chosen to live in England where he heads his own hotel consultancy business. My brother’s daughter is very much involved in the hotel and is a high-ranking executive but we don’t know what her future plans are. My daughter was in the business and doing very well but since she got married she is now more a homemaker than a hotelier. 

Isn’t it very similar to take care of guests as a hotelier when compared with fulfilling the role of a homemaker and full-time mom?

Believe me, it is not. This is a very hard business; people don’t realize how much time you have to invest in it and how stressful it is. You get all sorts of complaints and all sorts of issues and all the team puts in long hours. You really have to devote yourself to it.

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The Buzz

Business briefing: 5 June 2013

by Executive Staff June 5, 2013
written by Executive Staff

Economics and Policy

Gold prices recovered on Wednesday from a near one per cent fall in the previous session as investors’ hopes of the US bond-buying program staying intact.

More from Reuters

 

Lebanese mobile phone shop owners have held a protest outside a branch of Alfa in the northern city of Tripoli, demanding that the Telecommunications Ministry suspend its crackdown on cellular phone smuggling that went into effect on June 1.

More from The Daily Star

 

Abu Dhabi has completed a $11 billion project to process and bring to land offshore gas to meet burgeoning domestic demand.

More from The National

 

The Turkish power-generating ship Fatmagül Sultan, moored off the coast of Lebanon, has become operational again after a delay, a statement said.

More from The Daily Star

 

Companies and Business

Michael Wright, the CEO of Lebanon-based retail chain Spinneys, is due to appear in court on Wednesday over allegations that employees were fired from the grocer for being members of its trade union.

More from Arabian Business

 

The Iraq unit of the Kuwaiti telecoms company Zain has moved closer to launching its mandatory initial public offering.

More from The National

 

Ford Middle East has confirmed an estimated 3,305 vehicles in the UAE are to be recalled for servicing as part of a global move to check certain 2013 models for fuel tank leaks that could result in a fire.

More from Arabian Business

 

Petrofac Emirates has won a US$500 million contract to expand gas compression facilities at the Bab field in Abu Dhabi.

More from The National

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Economics & Policy

Leading the global one percent

by Thomas Schellen June 5, 2013
written by Thomas Schellen

If you are lucky enough to be able to wander around Qatari households, in every seventh you will find a millionaire — at least that’s what the 2013 Global Wealth Report says.

Just released by advisory firm Boston Consulting Group (BCG), the report rates the Gulf state at the top of the world for density of households where at least one person has assets of $1 million, at 14.3 percent. Comparatively, if you want to get close to an American millionaire it will take an average of 20 house visits while for Canada the number rises to 35.

There is only one conclusion from the 2013 Global Wealth Report: the Middle East isn’t short on blessed folks. Five Arab countries rank among the top 15 nations for the share of millionaire households in the national population in 2012.  

Related article: Not enough Arab Billionaires?

Qatar (1), Kuwait (3), Bahrain (7), the United Arab Emirates (9) and Oman (11) rank among the countries with highest density of millionaire households in percent of the population. Switzerland (2), Hong Kong (4), and Singapore (5) complete the top five and the United States comes in the sixth position — the first country with a large population. In terms of millionaire density, the US is at 4.9 percent, but it remains the country with the most millionaires — 5.9 million, followed by Japan and China. The global community of millionaire households comes to 13.8 million, or about 0.9 percent of all households.

No Arab or Middle Eastern country is among the world’s top 15 countries by measure of total number of millionaire households — but there is no need to despair. Wealth held by private households in a “Middle East and Africa” region – comprising most Arab countries, plus Turkey, Iran, Israel, and South Africa – reached $4.8 trillion in 2012. This represents a growth rate of 9.1 percent from the $4.4 trillion in 2011 and BCG named wealth in equities as a main driver of the gains.

“Globally, private financial wealth grew by 7.8 percent in 2012 to a total of $135.5 trillion. The rise was stronger than in 2011 and 2010, when global wealth grew by 3.6 percent and 7.3 percent” BCG said.

The 9.1 percent rate of wealth expansion put the MEA region in a solid position after Asian, Eastern European and Latin American growth rates. And the outlook for the region in the coming years also looks good. The report predicts private wealth in MEA will grow to an estimated $6.5 trillion by the end of 2017, an average growth rate of 6.2 percent. The majority of this wealth will remain in oil-rich countries, it added.

 

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Economics & Policy

Cut the factory fat

by Samer Tabbal June 4, 2013
written by Samer Tabbal

Lebanese industries face stiff competition in their main market, the Gulf. Their competitors, Gulf companies themselves, have the advantage of proximity to the marketplace and lower manufacturing costs.

Therefore it is upon Lebanese manufacturers to deliver, on very short notice, differentiated and customized products. To do so, they have to apply time-based management. One such approach is “Lean” manufacturing. Lean, which originated in Japan, is now widely applied and has become a staple for many successful industries.

Lean is a production management system based on waste reduction and continuous improvement, aiming at safely applying the “Just-In-Time” concept, or aligning production with customer needs. While it offers a well-known toolkit of principles and techniques, knowing how to apply them and in what order is a constant challenge for manufacturers.  

Lean implementation applies its different tools in parallel so they all reinforce and synergize. During the whole process, through every action, the end goal is always to eliminate wasteful activities that customers are not willing to pay for. In fact, waste elimination is the concept underlying continuous improvement; it is an ongoing and never-ending effort.  

Going against instinct

Lean manufacturing is a corporate cultural revolution. Its application requires a change in our mindset, a reversal in our way of thinking, shifts in our professional paradigms and changes to some principles that we have imbued throughout our education. As such, Lean principles may sometimes feel counter-intuitive.

For example, when I started to work in a factory as a fresh graduate engineer, my boss taught me that a factory in which one or several machines are not running is an inefficient factory. I lived by this principle until I was trained on Lean. In Lean, the new rule that governs this domain dictates that any factory in which all the machines are running all the time is an inefficient factory; the complete opposite to my supervisor’s earlier teachings. 

The reason is simple: A manufacturing process cannot be balanced all the time, for all product types. Consequently, if all the machines are running all the time, they will build an inventory of work-in-process. This is a sure-fire recipe for failure. We can deduce from the above that the difficulty in implementing Lean will be to get employees, employers and customers committed to this change. 

Convincing staff

Most employees I have worked with in Lebanon are smart and open-minded people. Furthermore, while cooperation may not be a trait us Lebanese are famous for, I am regularly surprised by how well employees work as a team when necessary. When they meet in quality circles, they are able to come up with proposals for improvements that are simple, cheap and efficient. 

However, in the presence of technical or managerial staff, they are often reluctant to participate for fear of making blunders or being ridiculed in front of their superiors or colleagues. As such I have learned to give them sufficient autonomy to unleash their creativity. The management facilitates from the sidelines, scheduling meetings, encouraging participation and perhaps most importantly, executing the proposed improvements. 

A problem I regularly face that undermines the Lean process is a lack of discipline. Without discipline, all improvement will vanish in a short period, and things will slip back to their original state. Unfortunately, in Lebanon people are not properly educated in respecting the rules and regulations in force, and this often carries into the workplace. This invariably leads to mediocre results that can discourage the workers from persisting with the Lean implementation program.

The individual egos of staff can also interfere with what is essentially a finely tuned team process. Workers often start testing improvement ideas without following the established procedures, hoping to take credit for them. To avoid this problem, it is important to equally reward the team when they come up with a bright idea. Teamwork should be promoted through training. 

Change starts at the top

Management also plays an integral role in ensuring the success of Lean. Negative vibes propagate very rapidly within the company when management falters in the enforcement of Lean application. Managers should be trained on their leadership role in Lean implementation, and they should sponsor Lean culture, deploy a communication strategy, review application progress, motivate their teams, solve conflicts and hold      people accountable. 

Even when committed to Lean, executive managers, chief executive officers and other senior managers oftentimes do not feel comfortable with the initial changes on the work floor. They are accustomed to seeing piles of accumulated work-in-process and subassemblies lying idle on the shop floor between machines. The sight comforts them, as it gives the illusion that the factory is adequately loaded with orders and consequently production output is high. 

However, with the application of one-piece flow, products after processing are directly sent from one machine to the next instead of being loaded into boxes or on pallets. This dramatically reduces the amount of work-in-process, giving the impression that capacity utilization is much lower than its optimal value. In my experience it often takes them quite some time to get used to the new panorama and to overcome their initial negative reaction. 

The customer leans, too

Bringing the customer on board is essential to the successful adoption of the new Lean production system. If customers can be convinced to break down their monthly orders into smaller, weekly ones, they will enable the producer to balance load and capacity more finely.

In my experience, distributors almost always reject this proposal out of hand, even though it is to their full advantage. Segmenting orders allows them to reduce the volume of their stocks, be more flexible and maintain a streamlined cash flow. The reason for their reticence is that they are afraid they would not deliver within shorter periods of time; instead of having one late delivery per month, they would end up with four late deliveries. 

Moreover, instead of running an inventory analysis once per month, they would now have to do it weekly. However, by highlighting the advantages, stringently committing to delivery dates with a penalty clause, and moving progressively by increasing order frequency step-by-step, customers would come to accept the win-win scenario of adapting to the Lean processes.

Lean forward, not back

Applying Lean manufacturing is a time-proven model that consistently delivers results. Within the parameters and principles it lays down, there is flexibility for innovation and development, and, as such, it can be applied to any manufacturing process.

While Lean may require a change in mentality, sustained training and close follow-up under strong leadership, the outcome makes it a worthwhile endeavor — essential, even. The only alternative is to watch the competition steal the market and wither away into yesteryear’s realm.

 

Samer Tabbal is a partner at Takt Consulting

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

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