Executive Magazine

Collective commerce

by Thomas Schellen October 4, 2012

written by Thomas Schellen

Social buying is collective bargaining in the Internet age. The advantage that group formation brought workers in the industrial age was greater power to represent and achieve their demands vis-à-vis employers in terms of wages, working hours, and benefits. The advantage that individual e-commerce participants have in joining a group — i.e. using a social-buying website — is that they can benefit from the site’s purchasing power to induce sellers of products and services to give them price discounts, free extras, and, theoretically, better customer service.

Sitting on the other end of the bargaining seesaw, merchants can use social buying sites as online marketing tools to expand their customer base into an online community, gain advantages in fast and precise analysis of marketing campaigns, and, also in theory, increase their repeat business.

The social-buying model is represented in the Middle East by scores of startups and locally-grown companies — ScoopCity, a one-year-old site owned by entrepreneurs Abdallah and Sara Yafi is a Lebanese example — or by the affiliates of companies in the United States where the model was pioneered by the likes of Groupon and LivingSocial.

Four-year-old Groupon has been present in the United Arab Emirates since 2010. LivingSocial entered the regional markets in 2011 by acquiring a company called GoNabIt, which claimed to be the first social-buying venture to launch in the UAE when it opened its online portal in mid-2010. The operators of the sites will usually take their cut from the merchants; for example ScoopCity will offer a typical deal, or “scoop” in its lingo, at 50 percent of the item’s or service’s nominal value to its members. The merchant will provide the deal at 25 percent of the standard price to the site operator; every online buy will leave the operator with gross earnings equivalent to half the discount obtained by the customer.

Enter the iPhone

The original iPhone – i.e. iPhone 1 – sold less than 1 million units on its launch weekend. Apple’s iPhone 4 launched last year with sales of 4 million units in the first weekend. Last month, the iPhone 5 sold 5 million according to an Apple media announcement on September 24. But whether you wonder if there is a pattern or if the world’s most valuable company should perhaps have skipped a few numbers and launched iPhone 7 or 8 this year, the fact is that the most demanded gadget of them all right now is the iPhone 5.

Nice, but what does that have to do with social buying? Quite a lot actually. For one general observation, social buying as a business model relies on high attention rates and short attention spans working in tandem, and the craze of standing in line for a day to get an iPhone in week one instead of week three of market presence is a show of “need-to-have” immediacy and run-with-the-pack behavior.

On the ground, the iPhone 5 tied intimate knots with social buying in the United Arab Emirates last month; the larger operators in the market put up iPhone 5 offers immediately after the device’s launch weekend.

At over $1,000, the deals were not really of the high-discount variety usually associated with social buying, and attracted less buyers than expected, according to Frank Scheunert, board chairman of Mox Deals, the social-buying unit of German-telecoms firm Mox Telecom. Mox Deals operates in the UAE market and seeks to compete with the two companies that are considered the biggest fish in the Emirates’ social-buying pond, American-owned Groupon Middle East and locally grown Cobone.

“I did a comparison [after two days], Groupon had sold approximately 140, Cobone about 100, and we around 50. I was a bit disappointed to be honest; I would have expected that every provider would have seen several hundred orders come in,” Scheunert said.

Bigger rival Groupon Middle East’s Chief Executive Alexander Kappes took it differently. “We have sold 150 iPhones and have taken the deal off the site [after three days]. It was a great demand,” he told Executive, adding that in pricing the smartphone at AED 3,800 ($1,035), the social-buying offer on the iPhone 5 was competitive against the high markups charged by the traditional phone vendors in the first few days of the gadget’s availability in the UAE. “This was not a markup but it was about showing that Groupon can put such a product on the site and be the first to have it available for people to pick up the same day.”

Tough to master

Social buying is an online concept that is easier to set up than to succeed with, and one of the globally leading adopters, LivingSocial, has just experienced a meltdown of its presence in the Middle East. The operator, which had moved into the regional market only a year ago by buying local player GoNabIt, declared in the middle of August that it was urgently seeking a buyer for its regional customer data base encompassing operations in the UAE, Egypt, and Lebanon, and then promptly closed shop before the end of the month, comforting customers that valid deals would still be honored and pointing them to their global head office unit for all other concerns.

In another example, global social-buying market leader Groupon launched a high-flying $20-a-share initial public offering on Nasdaq in November 2011, only to see its share-value crash to $4.15 at close of August 31 this year and trade between $4.15 and $5.27 throughout September, barely recovering from the historic low. Over the course of only 10 months, the stock thus morphed from an investor craze into something of an investor scare and the company’s chairman, Eric Lefkofsky, Chief Executive Andrew Mason and director Brad Keywell all fell off the pages of Forbes magazine’s list of the 400 richest Americans. Mason (31 years old) and Keywell (42) were each worth less than a paltry $500 million, Forbes wrote sympathetically in August.

The fact that stock markets have already reflected overexcitement and subsequent under-appreciation of the biggest player in the social-buying sphere does not say anything about the operational soundness and fundamental validity of the business concept. Nonetheless, with a swell of downside observations in global markets raising concerns over core issues such as customer satisfaction and loyalty, or bad vendor experiences of un-met expectations or user fraud, plus LivingSocial having folded in Dubai, it is natural to ask if the social-buying business model in the Middle East is an already a dying fad or still filled with future.

To answer that question, it must be understood that LivingSocial did not exit from the region because of local considerations, said remaining operators. According to Scheunert, LivingSocial had a very sophisticated website and high-class interface but may have been spending too much in the local market. “LivingSocial has given up on this very early on, as they have been only under a year in the market and invested a lot. Obviously their strategy was too expansive,” he said.

Abdallah Yafi, managing partner of Beirut-based ScoopCity said the LivingSocial decision to pull out was “purely a US-based decision”, citing discussions with concerned parties. “Surprisingly, the company was doing well here in generating traffic and good revenue figures. The decision came from the US where the global cost structure did not allow them to sustain the Middle Eastern operation,” he said. “They were trying to run the company in the region with a similar model to that they used in more mature markets. This didn’t work and they decided to pull the plug because they decided they would rather concentrate on the mature markets where they were making profits, rather than trying to grow a market that still has investment [needed] in order for them to reach the level of profitability that is acceptable to them.”

As for measuring the impact of LivingSocial’s exit on the UAE market, Kappes said that it was still too early to tell the effect on Groupon, while citing that the 2-million plus registered user base of Groupon and the 1.5 million user base of LivingSocial are likely to have significant overlap. “It is a shame to see a big name like LivingSocial exit the market,” Kappes said, because the international brands represent strong skills, and the regional market and operators have still some ways to go before reaching maturity. “There is still a lot to learn,” he exclaimed.

Expanding in the future

While the markets in the UAE and region over-abound with social buying sites, the consensus of the three operators interviewed by Executive was that the potential for social buying was far from exhausted but the next stage of development would certainly involve consolidation.

Groupon is looking at expansion into other regional markets while using the Dubai operation as a hub, and hopes to leverage the strength of the UAE team to grow into markets with high Internet penetration and high incomes.

Some countries in the Gulf “are obviously very interesting if you look at markets with big potentials like Qatar, like Saudi Arabia, like Kuwait. They have very high GDP per capita and very high internet penetration,” said Kappes, but emphasized that recent media reports were incorrectly citing him as saying that the company was planning to launch offices in six Gulf Cooperation Council countries in the near term.

Mox Deals is close starting operations in Saudi Arabia, Scheunert told Executive. “We are in the establishment phase in Saudi Arabia,” he said. “We have a good partner there, an advertising group, and we will announce more in a few weeks.”

Scheunert, whose Mox Deals had announced in August that it was interested in buying the LivingSocial UAE customer database, said the company was still at the table for this acquisition but the process by which the deal on the database was offered had been lacking information; he added that such a data base loses value every week.

For world leader Groupon and smaller international Mox Deals, expansion prospects in the region do not extend to countries such as Lebanon, at least not before they develop their footholds in larger and safer countries in the region as well as master looming challenges, such as the Arabization of platforms that are required to reach audiences in Saudi Arabia. The desire to expand in the other direction, from Lebanon into the Gulf Cooperation Council countries, however, is strong.

According to Yafi, ScoopCity wants to diversify its business into a wider e-commerce range and then quickly go regional. “We will look at the GCC as of first quarter of next year,” he said. “That is our objective.”

October 4, 2012 0 comments

Comment

Nukes and Netanyahu

by Sami Halabi October 4, 2012

written by Sami Halabi

By Mitt Romney’s own admission he has already lost some 47 percent of the vote in the race for the United States presidency to those who believe they are “entitled to healthcare, to food, to housing,” and that the “government has a responsibility to care for them.” So if the Republican candidate is to muster the majority to win the White House, he needs help. Thankfully for him he has his old friend from the Boston financial world to try to bail him out: Former Boston Consulting Group executive Benjamin (Bibi) Netanyahu.

Touching down in the US last month, Israel’s Prime Minister went on a whirlwind tour lambasting the Obama administration’s policy on Iran for not drawing the ‘red line’ that he wanted to see. Later in the month, the right wing group Secure America Now ran a campaign attacking Obama showing a speech by Bibi pleading to the world that Iran is close to developing a nuclear weapon and then reiterating Romney’s rhetoric on Obama’s Iran policy: “The world needs American strength. Not apologies.”

Bibi’s administration has predictably denied that they are picking favorites in the US election. But that has not fooled most political commentators and journalists in the US, Israel or anywhere else who see the PM as clearly favoring Romney. Secure America Now, which maintains one of Bibi’s ex-advisors on its board, has a clear purpose: to air in the districts of Florida where the Jewish vote, estimated at some 20 percent of the total, holds sway at the national level.

For those who remember, Florida — which holds more than 10 percent of the votes needed to win the presidency — was the state that tipped the scales in the contested 2000 election that saw George W. Bush enter the White House. Romney, who (by American standards) is trailing wildly in the polls, will need these and other swing states, as well as all the help he can get from his friends in Tel Aviv to have any chance of winning.

It’s obvious why Romney wants to push the Iranian nuclear issue to the forefront of an election dominated by the economy. It will be much harder for Romney to win over undecided votes by advocating his trickle-down economics against Obama’s more populous Keynesian positions. What is less clear is what the difference between Romney and Obama actually is over Iran and Israel.

Despite the fact that not even the International Atomic Energy Agency knows how close Iran may be to having a nuclear weapon, or if it even intends to build one, Bibi assures us all that Iran is “90 percent there”.

But when Romney is cornered, he admits that he draws the same ‘red line’ as Obama on Iran: “My red line is Iran may not have a nuclear weapon,” he said to an American news channel last month.

He then proceeded to suggest that the Iranians could transfer such technology to Hamas or Hezbollah and, if that occurred, it could threaten US shores. How exactly Iran could transfer these materials, under the watchful eye of Western satellites, through Iraq and a civil war in Syria to Hezbollah, or through an Iran-paranoid Israel to reach Gaza, it seems only Romney knows. Apparently he also has information that suggests both organizations have the capacity to then somehow transport these bombs to the US.

It is a fact of geopolitics that the election outcome in the US will have large implications for the Middle East but as far as Iran’s nukes are concerned, the only discernible difference between Obama and Romney is that the former’s red line is the bomb, while that latter’s is the “capacity” to build one. But if his friend Bibi is correct, Tehran is at “break out” capability and can produce a bomb in a relatively short period of time. So, if he is to be true to his word, Romney should advocate bombing Iran today, even if that would gain him few votes from Americans, who overwhelmingly support getting out of the wars they are in, not getting involved in any more. Israel doing it is another issue, and one Romney says he would respect. But most experts have duly noted that any such action would require US military assistance, derailing the process of enrichment at best and setting off a domino effect in the Middle East at worst.

Sorry Romney, you’re going to have to find another way to avoid your self-imposed margin of error.

Sami Halabi is a Masters of Public Policy candidate at the University of Edinburgh and former managing editor of Executive

October 4, 2012 0 comments

The Buzz

Morning briefing: 4 Oct 2012

by Executive Staff October 4, 2012

written by Executive Staff

Economics

Riot police in Iran have clashed with protesters in the capital over sharp falls in the currency, the rial.

Tear gas was used to disperse the demonstrators, some of whom were setting fire to tires and rubbish bins. There were many arrests, reports say.

Eyewitnesses told the BBC that scores of people gathered outside the central bank, calling for the governor to stand down, chanting anti-government slogans.

The rial has plummeted to record lows against the US dollar in recent days.

More from Arabian Business

The airline industry is expected to continue its growth in the Middle East but at a slower pace than previous years, British Airways Middle East Commercial Manager Paolo De Renzis has said.

“I see growth due to strong demand, but I don’t know if it will continue at the same pace,” Renzis said during an interview held in Beirut’s eastern suburbs hours before the touchdown of the first British Airways plane at Rafik Hariri international airport since 1992.

British Airways began running flights to Lebanon in 1987, but ended operations five years later.

More from Arabian Business

Politics

Turkish artillery has renewed firing at targets in Syria after shells from across the border killed five Turkish nationals.

Several Syrian troops were killed by Turkish fire, activists from the Syrian Observatory for Human Rights said.

Turkey's border town of Akcakale was shelled, apparently by Syrian government forces, on Wednesday, killing a woman and three children.

Revolt in Syria

by Joe Dyke October 4, 2012

written by Joe Dyke

One of the most significant challenges foreign journalists have faced in covering the Syrian uprisings these past 18 months has been their lack of understanding regarding the country’s society. Unlike neighboring Lebanon, Israel or regional powerhouse Egypt, Syria’s decades of stability until last year had led the vast majority of Western journalists and analysts to shun it in favor of more ‘juicy’ stories. Even Robert Fisk, The Independent correspondent based in Beirut for three decades, dedicates barely 20 pages to Syria in his 1,000-plus page work on the modern history of the Middle East, “The Great War for Civilisation”.

So when the Arab uprisings eventually worked their way into the country, months after the fall of Hosni Mubarak in Cairo and Zine el-Abidine Ben Ali in Tunis, many foreign correspondents found themselves lacking the basic knowledge necessary to produce top-quality coverage. In the absence of this they often fell back upon simplistic versions of events based upon the revolutions in Egypt, Libya and Tunisia. All the people were against Syrian President Bashar al-Assad, we were told, while those that were expressing their support were regime stooges forced to do so by Damascus. The political nuances of both the country and the uprising were lost in favor of the wider “Arab Spring” narrative.

Stephen Starr’s book, “Revolt in Syria – Eye-witness to the uprising,” should serve as a counterpoint to this view, which has increasingly proved inaccurate in the past year. Starr had been based in Damascus as a journalist for five years by the time the protests broke out and had written almost exclusively about his host country. He had a detailed knowledge of the key figures involved in the regime and, having even worked for a state newspaper, understood what made it tick.

In “Revolt” Starr recounts the first year of the revolution as seen from his home in Damascus. He assiduously searches out different viewpoints to those that were given so much prominence in the early part of the revolution.

In one of the early chapters he documents the revolt through the eyes of Syria’s minorities – its Christian, Druze, Kurdish, Shia, and Alawi communities. The process is both illuminating and startling. Far from being opposed to the regime, the majority were focused on the threat posed by the opposition. One particular fear — of the uprising taking on a sectarian element as the majority Sunnis seek control over the rest — comes through clearly. At one point the writer hears rumors of three churches that had received a note saying “you’re next,” which is interpreted as a threat that Christians would be targeted following the fall of Assad. While it is disappointing, if in a practical sense understandable, that the writer did not verify those claims himself, these stories provide an insight into the atmosphere in the country during the middle of 2011.

Building upon this, Starr shows how the Syrian state media manipulated these fears by exacerbating sectarian tensions to serve its own interests. Featuring interviews with several key pro and anti-regime journalists, the book breaks down the traditional portrayal of Syrian media as a monolith by drawing a distinction between the state-owned publications and those that are independent but have tended to back the regime.

It is also at times a wonderful portrayal of the average day-to-day normality of Syrian life, far away from the conflict. While the war has now come to Damascus, for much of 2011 the city’s residents felt removed from the crisis. The Damascenes quoted in the book often talk about the war in Homs and Hama as if it were in Timbuktu. But Starr also captures the sense of regime paranoia in the city and documents how the crackdowns gradually increased in intensity even in the capital.

The book is not without fault, however, and at times it feels like both the writer and the editor failed to make the most of Starr’s unique viewpoint. Most importantly there was the perplexing editorial decision to start the book on the first day of the revolution, without allowing space for the background information to which the writer has almost unique knowledge of.

Starr has said elsewhere that the uprising was largely caused by the government’s failure to deal with the 2008-10 drought, but this kind of in-depth detail is not given much prominence. Some of the best parts of the book are anecdotes of the inner-workings of the regime before the uprising but they are not used in an intelligent manner. In a sense the writer’s unique selling point has been underplayed.

Similarly, while parts of the book are well written, with sound analysis being supplemented by fascinating anecdotes, the structure is weak — with a number of middle chapters seemingly lacking purpose. There are also grammatical errors that leave the reader wondering if the book’s editors were so keen to capitalize on the news-value of the Syrian crisis that they rushed it onto the market.

Nevertheless ‘Revolt’ will serve as a key resource for those trying to understand Syrian society during the uprising. Many books will be written on the crisis in the coming years, but this will prove a vital and rare first-hand account of Damascus during the first year of a crisis that is still unfolding.

October 4, 2012 0 comments

Society

Junkyard tapas

by Nabila Rahhal October 3, 2012

written by Nabila Rahhal

What do you do with your plot of land waiting for a delayed permit from the Ministry of Tourism to build a new restaurant on it? Options vary from converting it into a parking lot to watching the weeds grow as the space goes unused.

Mario Junior Haddad and Chef Tomas Reger, respectively owner and executive chef of Le Sushi Bar, however, had other ideas, and decided to have fun with their space by turning it into the ‘Junkyard Pop Up’ — a temporary outdoor restaurant located in the alleyway next to the United petrol station in Mar Mkhayel. They plan to build an Italian restaurant there when the permit comes through — hopefully, they say, early next year — but in the meantime, the Junkyard is great publicity for their restaurant consultancy company Food for Thought, and a trendsetter in Beirut’s restaurant scene — being the first pop-up restaurant in the city.

With Christmas lights hung all above a flooring of grass and gravel, the restaurant has a Mexican backyard party feel. Divided into two areas, on one side there is a square bar set on oil barrels that seats several dozen people around its four sides, and to the other a seated dining area. Even on the weekday Executive visited, the bar started filling up around 8 p.m. and was packed an hour later, while the dining area required reservations ahead of time.

For a place with relatively little publicity, the Junkyard is surprisingly popular. “As this is a temporary project with a low budget, we did not want to spend too much on promotions,” says Guy Salame, brand developer at Food for Thought. “We used word of mouth, and some social media, therefore creating some mystery, as well as a snowball effect where people tell each other about the place and create a buzz.” The temporary nature of the restaurant also created a sense of immediacy, that one needs to try it at least once before it shuts down.

In terms of décor, the Junkyard lives up to its name. Broken-down 1960s style televisions lead the way to the bathrooms, which are themselves housed in cargo containers rescued from the Beirut Port. The kitchen is located in a similar, yellow container, which has led some to dub the makeshift restaurant the ‘Yellow Container’. Charming, junky decorations — such as the old fashioned blender still used to make drinks, lights hanging off a helicopter blade above the bar and the antique water heater lying on the grass — provide nostalgic conversation cues to clientele, and also come at a low cost to the owners. Salame again talks about the low budget in relation to the décor, which he says inspired the architect to use rescued and recycled items.

In keeping with the idea of having fun with their place, Chef Reger changes the menu daily. While chicken, meat and seafood are always on offer, the methods of preparation and type of fish will differ depending on what is fresh in the market, and what the chef’s mood is that day. Executive tried the wild mushrooms dish, the teriyaki chicken and the steak with butter sauce. Though it sounds like a hefty plateful, the portions are small and are meant as tapas to share, rather than full meals. The wild mushroom plate was a medley of tasty fungi garnished in a light soy-esque sauce, the pepper-seasoned steak was rare and juicy, though the chicken was a touch oily. The average bill per person — for a drink and three tapas — was approximately $40, thus don’t come on an empty stomach unless you’re prepared to pay $120 to get full. At such prices, this ‘fun’ restaurant, with little overhead to speak of, likely also leaves the owners counting cash with a smile.

“The pop up concept is an idea Food for Thought might repeat next summer in other locations,” says Salame. “We could just take our yellow container and set up somewhere else.” In the meantime, he says he wouldn’t be surprised if other restaurateurs began copying the “pop-up” formula. While it is yet to be determined how popular the idea will be, the Junkyard is currently providing a unique and rustic dining experience — and one that will only last so long.

October 3, 2012 0 comments

Society

House of Stone

by Nabila Rahhal October 3, 2012

written by Nabila Rahhal

Anthony Shadid’s remains were scattered under the olive tree in the garden at his house in Jdeidit Marjeyoun, South Lebanon. He was not buried in the United States where he was born and raised, but in the home he had chosen as his own. This home, or bayt, as Shadid refers to it, is the main character in his third book “House of Stone”, and represents the very human concept of belonging.

Returning to Lebanon on sabbatical from his post as a journalist covering the Middle East for the New York Times, Shadid was not at peace. In his words he was “stunned by war, and shockingly no longer young, married or with my daughter Layla.” Perhaps this emotional state is what led Shadid to decide to fix his ancestral home in Marjeyoun, as a distraction from his internal turmoil and to finally have a place he could call home.

Through describing the renovation, Shadid draws a picture of modern life in a small town. His prose is simple yet well crafted, bringing the characters to life with an objectivity which allows the readers to draw their own opinions of each. Shadid enters Marjeyoun a stranger, but since his roots are from there, townsfolk immediately know his whole family history and think him insane for deciding to repair the house; others simply think he is an American spy. Gradually though, some warm up to him and Shadid’s retellings of nights around the dinner table with some of his new friends are absorbing.

The repair process clearly fascinates Shadid and some parts of the book get weighed down with the details of knocking down a pillar or building up a stone wall.

However, interactions between contractor and workers lighten the tone with humor. When he tries to locate antique tiles for his flooring and ends up meeting a dealer who strips tiles from homes destroyed by the war, the story sheds light on the lesser known aspects of home repair in Lebanon.

Rebuilding memories

Parallel to the home repairs is Shadid’s recounting of the history of the house and his ancestors who lived in it. With the same precise attention to detail he was known for in his journalism, Shadid reconstructs the life of his great-grandparents, while imagining them in the various rooms of the house and what they would have been doing at the time.

Through this, the reader learns about life in Lebanon during the Ottoman Empire and the French Mandate which brought on the beginning of Lebanese emigration.

Shadid’s depiction of his great-grandfather, Esper, and his struggle to decide whether to send his children to the United States for a chance for a better life, or to keep them with him in the perilous times he was living, carried an understanding and sensitivity for not just his own ancestor’s quandary, but one still as relevant to Lebanese families today. And while Esper’s children emigrate after all, they take their home with them in their hearts.

This is evident when Shadid describes the almost daily Lebanese gatherings his grandparents used to host in the US, which again parallels the experience of many Lebanese emigrants to foreign lands who try to build space in which to belong.

Unfortunately, the author passed away before he had the chance to really enjoy the fruits of his labor, his bayt, and after finishing the book, the reader is left with a sense of loss for Shadid, his home and a Lebanon long gone.

It was not in the house of stone’s fate to be forgotten once again, however, as neighbors say Shadid’s second wife and his son still reside there on weekends and vacations. Shadid would be pleased.

October 3, 2012 0 comments

Society

Nicolas Chammas under the cosh

by Nabila Rahhal October 3, 2012

written by Nabila Rahhal

There seems to be little end to the litany of woes Lebanon’s economy has been suffering this year, brought on by regional unrest and internal instabilities mushrooming across the country. Many industries have felt the impact. For a closer look at the implications of this soured environment on the country’s traders, Executive sat down for a frank one-on-one with Nicholas Chammas, head of the Lebanese Traders Association (LTA).

Mohammad Choucair, president of the Lebanese Chamber of Commerce, Industry and Agriculture, as well as some economists we have been speaking to, are saying the economic situation in Lebanon is the worst it has been in a while. What are the figures that alarm you the most?

In the first quarter of the year the numbers were exceptionally good where the trade sector is concerned. We had an increase of 7 percent compared to the same period in 2011, and this is because it came in the realm of a very strong fourth quarter for 2011. Unfortunately, the middle of the second quarter (April-June) 2012 saw a strong turnaround due to the events in the north and the other instabilities, which led to a barely even quarter as compared to 2011. In the third quarter, all hell broke loose due to the closures of the airport road, the abductions of foreigners and the continuing violence in the north.
These factors and the [Gulf] Arab travel warnings, led to the almost complete absence of Arab tourist. Also, Lebanese expatriates have not come back for the summer in the expected numbers. Add to that the slim purchasing power of those residing in Lebanon and you have a recipe for an economic disaster.

How much has the trade activity fallen from the beginning of the year?

So far, we have dropped a good 15 percent compared to 2011 as the third quarter accounts for about 50 percent of our annual sales and when it is hit, our entire year suffers.

What is your forecast for the rest of year?

Though Q3 has not ended, if you extrapolate and assume all things remain equal, I foresee a drop in the commercial activity of around 20 percent for the year 2012 (as compared to 2011). This is a disaster because trade constitutes about one third of the total gross domestic product (GDP) of Lebanon.

Your forecasts are based on 2011 numbers, which was already a bad year…

We have been going downhill since 2010; 2009 and 2010 witnessed a growth rate of 9 percent, which benefited the trade sector a lot. Unfortunately, we got the wrong cues and traders spent hundreds of millions of dollars on luxury retail expecting good times to come. Then the events in Syria happened, and now traders are in a debt trap; they borrowed huge amounts of money and now the cash flow is severely restricted and our expenses have skyrocketed.

So you forecast bankruptcies going forward?

Definitely. The operational costs have risen so much and at the same time the top line has dropped in a dangerous way. Either you incur more debt, which is poisonous in the long run, or you have to increase your equity or you liquidate. They are all bad solutions and there are no good options.

How much do you believe the raise in minimum wage has contributed to speeding up the pace toward bankruptcy?

Very much so, as we have stated plainly in past negotiations with the Ministry of Labor when all was well. Back then, we agreed that there is an imported inflation due to the high exchange rate of the euro versus the United States dollar and the expensiveness of raw materials like oil — raising wages only lead to home grown inflation.

Last time you spoke to Executive, you were asking the government for subsidized loans for the retail sector, which they have done for other sectors. Where do you stand on this now? Is it likely it will still occur?

We are very much in need of this and are even more strident about it as we are facing difficulties with outstanding loans, and need to renew the loan base with more favorable conditions. But, I don’t see it happening now as the government’s budget carries a huge deficit and they are unable to figure out ways to pay their dues.

What is the LTA doing to help support the sector in these challenging times?

We are a strong voice within the economic organizations of the country and we often take the lead in negotiating with the government on issues that affect the sector. In the end, 80 percent of our problems are due to security issues and the lack of law enforcement in the country, so we cannot do much more than give advice and be persistent about representing our demands.

Regarding social security, the National Social Security Fund (NSSF) is requesting that the salary ceiling for contributions to the end-of-service indemnity funds be increased from LL1.5 million to LL2.5 million. This would represent an additional burden on the private sector. What would you be rooting for in this case?

Our position has been adopted by all the economic organizations. Early on, we refused to move the ceiling, but we were outnumbered on the board of directors of the social security fund. [The NSSF board is made up of 10 representatives of employers, 10 for employees and six from the government.] The issue went to the government who stopped it because they realized it was unfair to the employers. As a concession, we agreed to take the ceiling up from LL1.5 million to LL2 million.

With the economic crisis we are facing, what sectors in your opinion are the most heavily impacted?

The most exposed sector is obviously tourism. We cannot expect hotels to fill up when there are no tourists in Lebanon. Directly after that, restaurants have been suffering and then it comes to us, the traders. We had increased our capacity in the wake of 2009-2010 to accommodate for the demands coming from abroad and now there is an increase in supply and hardly any demand.
Manufactures are also suffering and while they are selling abroad, they are facing logistic problems when it comes to shipping over Syria. The banks will be the last to suffer because they deal with us and there will be a leap time before they start to suffer. As for real estate and construction, they hit a plateau in 2011 because of increased capacity and no demand and a bubble was created, but it will take a while to pop and even then, it won’t be as drastic as it was in other countries, such as the US.

Do you think there are any economic opportunities for Lebanese companies from the increased inability of Syrian companies to meet their domestic demands?

We have noticed that imports of merchandise into Lebanon have increased 11 percent year-on-year (for the first three quarters of the year) and this is not explained by domestic consumption. So, part of it is explained by the Syrian [impact] on Lebanon.

You are threatening civil disobedience. Who are you going to strike against and what are your demands?

This is the last resort for us. We will first try to keep the discussions with government officials open and convince them of the danger of the situation we are in to reach a common ground. Then, we are willing to symbolically close down for one hour or a day, followed by an open-ended strike. For us, it is an issue of survival, so if we have to go on strike, we will. The key demands are the basic demands of order, a state of law and security.

Do you believe the situation is a cycle the Lebanese will eventually overcome, like the ones before, or is it more severe this time?

I have mixed feelings about this. Speaking about the long run, Lebanon has seen and overcome worse. But this is not just another obstacle, it is extremely painful and no one would have imagined the extent of the economic chaos due to the situation in Syria. So far we have shed five percentage points of growth in 2011 and 2012, which means billions of dollars lost that cannot be made up for.

October 3, 2012 0 comments

The Buzz

Morning briefing: 3 Oct 2012

by Executive Staff October 3, 2012

written by Executive Staff

Politics

Two car bombs exploded on a main square in a government controlled central district of Syria's second city Aleppo on Wednesday morning, a pro-government television channel said.

Al-Ikhbariya TV said the bombs detonated in Saadallah al-Jabari Square in western Aleppo, Syria's largest city which has now been split in two with forces loyal to President Bashar al-Assad mainly in the west and rebel fighters in the east.

Fighting only with light weaponry, rebels have resorted to bomb attacks in areas still controlled by Assad. Several large protests in support of the president have been held in Saadallah al-Jabari square.

More from Arabian Business

Iraq’s Finance Ministry has begun paying an initial $650 million to Iraqi Kurdistan for oil companies working in the autonomous region, Deputy Prime Minister Rosh Nuri al-Shawish told Reuters Tuesday.

Baghdad and the Kurdish Regional Government agreed last month to settle a dispute over oil payments, after the latter pledged to continue exports and the Iraqi government said it would pay foreign companies working there.

“The federal Finance Ministry has started transferring the first oil payment of $650 million to the Kurdish region,” said Shawish, a Kurdish member of the central government negotiating team.

More from Arabian Business

October 3, 2012 0 comments

Society

Retail and the economic crisis

by Nabila Rahhal October 3, 2012

written by Nabila Rahhal

After the hotels and restaurants, it is the retail industry that is feeling the effects of the current economic strain,” says Nicholas Chammas, head of the Lebanese Traders Association.

The retail industry in Lebanon depends heavily on Arab tourists and has suffered the effect of their decreased numbers this summer.

“During the good summers, we used to have an average of five Arabs daily entering our shop. This year we are lucky if we see five a month,” says a salesperson in Nine West’s Verdun branch. Walking through downtown Beirut, one quickly notices the unusual quietness relative to previous summers, and though there are a few shoppers strolling around, it appears no one is buying.

Numbers obtained from the tax free shopping services company Global Blue show there was an overall decrease in visitor refunds between the first quarter of 2012 and the second. Syria was one of the few countries whose percentage of spending evolution went up in the second quarter of 2012, which is likely the result of the increased number of Syrians fleeing the violence in their country.

While there was an undeniable economic setback this summer, major retail companies declined from commenting on difficulties they might be facing. Small shop owners in Hamra and Fern El Shebak, traditionally busy shopping areas especially during the summer, spoke freely of the lack of activity in the market, the decline in their sales and of the extended discount periods they hoped would encourage shoppers to spend, but to no avail.

“There are no tourists to buy, and we cannot depend on the Lebanese residing in the country as they barely have enough money to eat, let alone shop. There is basically no way forward until the political situation improves,” said one shop owner in Hamra, summing up the feelings of many in the industry.

October 3, 2012 0 comments

Economics & Policy Industry

Q&A: Vrej Sbounjian

by Paul Cochrane October 2, 2012

written by Paul Cochrane

Lebanon’s productive sectors are often short-changed in favor of tourism, real estate and banking. What’s more, Minister of Industry Vrej Sbounjian commands a paltry budget of LL7.71 billion ($5.14 million). In such an environment the nation’s industrialists need a well-informed fighter holding their corner in the Cabinet. Executive met with the minister to see if he has been up to the task.

The 2012 budget lacked any tangible or creative initiatives to boost Lebanon’s productive sectors. Was this not a failure on your behalf?

We can’t forget previous governments in the past six or seven years couldn’t even pass a budget, so I want to congratulate this government on even having passed a budget. With regards to industry, it is fine, we don’t have any complaints concerning the economy or industry.

Where are we at with the draft law to slash export taxes?

That law has been approved in the Cabinet and I met with [Speaker] Nabih Berri and he promised me it will be in the first parliamentary meeting. That law will mean taxes on all Lebanese products that are exported will be reduced by 50 percent. We pay 15 percent on income tax and profits, but that will be reduced to 7.5 percent.

Can the government afford to lose that revenue?

We don’t look at it from that perspective but rather at how many more jobs we will create and how many more opportunities and investments will come to the country.

One of the biggest disincentives to invest in Lebanon is bad infrastructure. What has happened to the plans to develop industrial zones in Lebanon?

There are lots of industrial zones in Lebanon that you can use. If you want to build a factory or a warehouse to produce or assemble a product you don’t need to go to an industrial zone.

In this government’s mission statement it said new industrial zones would be created…

I’m not saying I don’t want to do it. These are for places where there is no industry in Lebanon. But in a lot of areas there are factories that have been there for years. We cannot ask them to move.

It’s not about moving existing factories but providing the infrastructure to attract investment for new industries…

We are not looking to heavy industries. We are interested in service industries and assembly industries for export to other Arab countries. The investor will take advantage of the 7.5 percent tax rate, plus…

It’s not 7.5 percent yet…

It is 15 percent but it will be 7.5. There is nobody against this law.

If you are not focusing on heavy industry, what efforts are you making to develop high-skilled, light industry within Lebanon?

First of all we have great education and great schools and I would like to encourage…

The problem is that the well-educated and skilled workforce leaves to work elsewhere.

I think the reason of leaving is because the opportunities available in a large economy are more than in a small economy. This is not new. Look at Spain and Italy now and how many people are leaving.

They are going through an economic crisis and there are huge levels of unemployment.

And we are having an economic downturn. It happens.

But once intelligent and skilled young people finish their education, what strategy is there to keep them in Lebanon to help develop its industries?

We have to create the right environment and laws and then leave everyone to be creative themselves.

In your last interview with Executive you said more bilateral agreements were in the pipeline once those with Armenia and Sudan were signed. Are they?

Absolutely, we are looking to have agreements signed with Tunisia and Cyprus very soon.

Why is there no progress on Lebanon’s plans to join the World Trade Organization?

I want to ask you, is the WTO doing well for other countries?

Are you insinuating you are against Lebanon joining the WTO?

I didn’t say I don’t think it is a good idea. With my experience I have learned we have to take into consideration the size of the country and the size of the population. I don’t know all of the details of the WTO but I think that those two issues must be taken into consideration.

What have been the major impacts on Lebanese industry from the Syrian crisis and how has the government responded?

I think the major impact is the fear. People from any country that had a neighbor at war would be worried. People are seeing what is going on and are understandably worried. This is the only major worry so far.

But what about tangible impacts such as increased costs of overland freight?

We have found some ways, such as getting to Iraq going through Tripoli in the north to Turkey and overland from there. As for other countries, for some we are shipping from the Port of Beirut but in many cases the overland route is still fine.

Could the Qlaiaat airport be opened up for the freight of Lebanese produce to foreign markets?

This is one of many ideas people have…

But is it an idea you support?

Would it work? Would it be sustainable? Or would it just be another cost for the government? We are just speculating. Everything is working so far. Everybody is able to export fine from land via Syria and imports are coming in.

Lebanon’s industrialists have asked for faster reimbursement of the value added tax (VAT). What is being done in this regard?

I want to ask what are they doing in other countries? Some are doing well but all the rest are in financial trouble.

VAT reimbursements is a local bureaucratic issue; how is that related to the Eurozone crisis?

In some countries they raised VAT to say 21 percent. We are at 10. They are reimbursing but taking the money back in another way. The Lebanese enjoy very low taxes.

What is your stance on article 59, which allows industrialists to reclaim their VAT on industrial machinery and mineral materials?

If you are importing a product that you want to use to manufacture items and then you want to resell it, that should be excluded from VAT. Secondly, industrial machines that are imported should be excluded. Also whenever a product is being sold to the army we are putting VAT on it. This should be excluded.

Is this up for discussion in the Cabinet?

I need to discuss with my friend the Minister of Finance, but this is the right thing to do…

I would like to add a comment about the economy here. There is a lot of complaining but I don’t think it’s justified. There was great growth from 2006 to 2011, but in economies there is growth and then recession. Without the discipline of recession, continuous growth would bring us to a larger fall into recession.

But the lack of development of Lebanon’s productive sectors makes it more susceptible to external shocks and undermines long-term sustainable growth.

Where are the Lebanese? We are innovative, we had vision, where are these people? Why are we always complaining now? We need to be creative and have a long-term vision.

You need electricity, you need Internet, you need good roads…

We have some drawbacks, but we also have many advantages. We had six years of great expansion with an incredibly strong real estate market. We may be in a recession but that is a discipline we need to go through. We need to be more realistic and enjoy life a little bit. We don’t have to make money every year; there are many nice things to be done in the country.

October 2, 2012 0 comments