Executive Magazine

Zomato’s journey in Lebanon

by Bechara Haddad December 18, 2018

written by Bechara Haddad

When Deepinder Goyal and Pankaj Chaddah were just food-enthusiasts collecting delivery menus in Mumbai to post online, it is safe to say they did not expect their idea to grow into Zomato, the F&B behemoth we know today.

Ten years and 24 countries later, Zomato’s decisions remain guided by one simple mission: to provide better food for more people.

When Zomato launched in Beirut in 2014, it was just a discovery platform where people could make more informed decisions on where to eat. As the Beirut team later went on to give our 750,000 users (across the web and app) the ability to order online, book a table, and reap the benefits of our Gold memberships.

Even though today it has become virtually impossible to navigate Beirut’s incredibly rich and cosmopolitan food scene without the app in hand, our journey here has not been without hurdles.

Search and discover

Dining out involves an increasingly complex decision-making process. With so many questions to ponder—who to go with, how much to spend, and what type of cuisine to eat—we want to give our users all the information they could ever need to make the right choice.

This, of course, means that all our data has to be constantly updated to accurately reflect any change at the restaurant, be it as minor as a menu change, or as major as the restaurant relocating. In Lebanon, this is further complicated by the seasonal nature of certain areas when it comes to their F&B outlets, meaning we need to regularly track their operational status. The variability of restaurants aside, the use of our platform is inevitably dictated by the economic state of the country—specifically, people’s purchasing power.

Looking at our simple “cost for two” metric confirms that over the past two years, our users have been browsing for less expensive restaurants, and this trend does not look likely to slow down anytime soon.

To delivery and beyond

In the same spirit of taking the guesswork out of the equation, our online ordering service is now smoother than ever. Several algorithms are constantly hard at work to make sure that everything our users see is uniquely relevant to them. So if they are health-nuts on weekdays, and pizzaholics on weekends, the list of restaurants Zomato displays for them will reflect that very behavior. Not only that, it will introduce them to other great options to make sure they see the breadth of the choices available.

When it comes to paying for the order, however, the Lebanese market still suffers from an overwhelming lack of trust in online transactions and foreign payment gateways, as is clearly indicated by the difference in card payments between here and Dubai.

And even though our half-a-million app downloads indicate some degree of tech savviness in the market, many users simply do not trust that an app can automate their order, and that restaurant staff will receive it as intended.

The challenge does not end with user resistance, it is also inextricably linked to the city-planning—or lack thereof—in Lebanon. Users must input their address before placing the order, and in Lebanon, addresses tend to be—for lack of a better word—subjective. Due to the lack of consensus on street names and building numbers, deliveries will likely arrive late, or require an additional phone call to determine the exact location, resulting in an unpleasant user experience.

Navigating reviews

In an age where influencer marketing is at its peak, and where customers review everything from the jeans they shop for on AliExpress to hotel stays, it is only logical that at the core of Zomato is the customers. And customers will undoubtedly be vocal about their experiences—some more than others.

One of our main challenges has been getting restaurant owners in the mindset of seeing negative reviews as opportunities for growth, rather than as attacks on their businesses.

Our customers like to know the facts upfront, before visiting or ordering from a restaurant. Unfortunately, restaurant owners tend to underestimate the importance of having an up-to-date page on Zomato, and how critical that is for the user experience. So not only do we give owners and managers a unique log-in to have control over their page, but we also provide a nifty free app (Zomato for Business) that they can use to make changes on the go.

A further challenge is that when it comes to the laws related to running a restaurant, the government in Lebanon tends to be somewhat laissez-faire about standardizing and enforcing them. This means that certain establishments may be hesitant to be listed on our platform, let alone get on board with online ordering, since that would require them to submit a set of government-issued documents.

What’s next?

When we hit our 10-year milestone, we said to ourselves that we had only just begun. We are proud to say we still operate as a startup, in the sense that there is always an opportunity to grow with, and learn from, our partners.

This year has been an incredible ride for us. In 2018, we introduced some exciting new features: We now give restaurant owners the ability to tell their brand story directly on Zomato through Sneakpeeks, as well as allowing them to display their hygiene rating—issued by a restaurant hygiene inspection firm.

In 2019, we hope to bring Hyperpure, our new sourcing business, to Beirut, where we would effectively become the supply platform from which merchants can buy organic, fresh produce, as well as eco-friendly packaging. This way, we can keep on guaranteeing better food for more people.

December 18, 2018 0 comments

Lebanon, expose those hidden gems

by Ralph Nader December 18, 2018

written by Ralph Nader

In its 2018 “Lebanon Overview” report, the World Bank stated that “GDP growth in Lebanon in 2017 is estimated to have undergone a slight acceleration to reach an estimated 2 percent, compared to 1.7 percent in 2016. This has been mainly driven by the services and tourism sectors.”

This year, GDP growth slowed again, down to 1 percent, and while tourist arrivals rose by 3.3 percent year-on-year in the first half of 2018, this was a marked deceleration compared to the 14.2 percent growth in the first half of 2017. Lebanon, it seems, still has a long way to go to recover the numbers it saw at its tourism peak in 2010.

In light of the importance of the tourism sector, and the challenges it faces, it is about time Lebanon seriously considers developing a tourism vision and strategy.

A cohesive tourism plan

Developing a tourism plan is the first step toward sustainable and successful tourism. This plan should outline, for Lebanon as a whole and for each region, a clear mission, vision, and positioning, as well as a set of target markets. It should also define roles for all stakeholders, including the private sector, industry associations, and public agencies.

In creating such a plan, one could take Dubai as an example. The emirate’s tourism mission, set in 2013, was to “position Dubai as the ‘first choice’ for the international leisure and business traveler.” This was backed by a solid and quantitative objective: “Our Tourism Vision 2020 is a strategic roadmap with the key objective of attracting 20 million visitors per year by 2020, doubling the number we welcomed in 2012.”

In order to accomplish this goal, Dubai is harnessing the collective power of public and private stakeholders and focusing on different key objectives. Thus, Dubai’s Department of Tourism and Commerce Marketing established a stakeholder engagement committee that meets on a quarterly basis to discuss the status of the sector and its opportunities for growth.

Emphasize promising potential

Lebanon’s plan should focus on promoting and developing the country’s competitive advantages and its core tourism offerings by improving the existing offerings and developing new products that are adapted to each region’s positioning and target markets.

Travel and Leisure magazine ranked Beirut among the The World’s Top 15 Cities in 2018, and named it the Best International City for Food in 2016. The potential is already there and should be capitalized upon, and concrete action plans aimed at enhancing the country’s offerings should be put in place. These plans could include developing an iconic museum for arts, science, culture, and history, which could be designed by a renowned Lebanese architect and ranked amongst the largest museums in the region. They could also involve augmenting key tourist attractions—examples include Jeita Grotto, Our Lady of Harissa, Baalbek, and Byblos (Jbeil)—by developing add-on products such as hotels, restaurants, parks, and entertainment facilities.

To capitalize on achievements in the culinary department, Lebanon’s plan should include the development of fine dining options in Beirut, by attracting international chefs and restaurants, which would firmly position the city as a center of Mediterranean cuisine. Finally, organizing global mega events that would attract tourists from all over the world (for instance, international music festivals, regional sports events, a women’s summit) would put Lebanon on the international tourism map.

The tourism plan could focus on the MICE (meetings, incentives, congress, and events) market by developing full-fledged MICE infrastructure, ensuring that top convention centers have easy access to shopping malls, transportation, and fine dining.

Smart tourism, which refers to the application of information and communication technology for developing innovative tools in tourism, is the future of tourism in the digital world we live in. In 2017, Singapore became the number one global smart city, beating London and New York, according to a study conducted by Juniper Research. Applied to tourism, collecting data from tourists allowed Singapore to better understand visitors’ needs and behaviors. This information was useful in adapting tourism products, offering tailored services, and communicating targeted messages.

So why not implement smart tourism in Lebanon, starting with Byblos? Byblos is currently facing challenges that are affecting its attractiveness to tourists. Due to recent urban growth and uncontrolled expansion, the old city is separated from the rest of the city by a highway, which limits the connectivity between both parts of the city, increases the traffic in the touristic part of Byblos, and decreases the integration of tourist attractions.

Also, the high pressure on infrastructure and unregulated construction has drastically polluted the air and the water. By implementing smart solutions such as traffic management, energy efficiency, intelligent lighting systems, home and building efficiency systems, and technology ecosystems, Byblos can recover its tourism assets and attract a larger number of tourists.

Infrastructure basics

Even the best laid tourism plans will remain ineffective if basic infrastructure reforms are not implemented in Lebanon, and soon. This includes road management as well as much needed upgrades to the airport.

The only operational civilian airport in Lebanon is designed to handle up to 6 million passengers a year, but each year, since 2013, it has exceeded its capacity. In order to avoid angry scenes at Beirut’s Rafic Hariri Airport, which were seen in summer 2018, effective systems should be put in place.

(There is a plan underway to expand the airport, boosting its capacity to 10 million through a $200 million investment. However, this project is not slated to start until 2020 and has been criticized by industry experts. Speaking to The National, Dr. Nadine Itani, an aviation expert and former member of the International Civil Aviation Organization delegation to Lebanon, critiqued the lack of planning or strategy, calling the proposal an “ad-hoc” fix when what is needed is “institutional reform”).

Aiming to create direct flights to cities with large Lebanese expatriate communities, such as São Paulo in Brazil, Montreal in Canada, and Sydney in Australia, will definitely encourage those with Lebanese heritage to visit the country more often, boosting the tourism and service sectors.

In addition, the creation of a low-cost airline—not outside the realms of possibility (just look at Malaysia-based Air Asia)—would assist in widening the target market and encourage visitors to travel more often. Travelers more frequently book with low-cost carriers, sacrificing the pampering services of regular airlines, such as the complimentary meals and loyalty programs. In fact, four of the top 10 fastest growing airlines, according to OAG Analyzer, are low cost carriers.

It’s all in the marketing

Developing a new brand for the country and promoting it through customized marketing messages will put Lebanon back on the global map. Malaysia’s “Malaysia: Truly Asia” is a famous and excellent example of a destination branding campaign.

Also, increasing the sector’s online innovative presence on social media is another important marketing tool, and is especially effective in attracting millennial customers. “When booking travel, 89 percent of millennials plan travel activities based on content posted by their peers online,” Entrepreneur Magazine reported in 2017.

Connecting with specialized and widely-read travel magazines such as National Geographic, Lonely Planet, and Travel Discovery to encourage them to feature Lebanon on their “hot lists” would be an effective marketing tool, as would leveraging Lebanese embassies in foreign countries to promote the country’s touristic revival.

Build a solid public-private partnership

Even though public-private partnerships (PPPs) may be difficult to execute, the reward is worth the extra effort. A number of mechanisms exist through which the public and private sector can collaborate to help reach these objectives, ranging from small to major projects, such as infrastructure and attraction development. The participation of the private sector in sustainable tourism can be varied, such as marketing and promotion, product development, infrastructure development or renewal, attraction development or renewal, and enhanced productivity and other services.

On the other hand, it is squarely the government’s responsibility to determine and approve a tourism strategy, designate major infrastructure projects, grant project approvals and ease the permits, and in some cases act as a regulator.

Chumbe Island in Tanzania—which once was experiencing the destruction of its native ecosystem, putting the health of its coral reefs at risk—is today globally known for its ecological innovation and exceptional reefs. This success story is thanks to a PPP arrangement, in which the government granted an environmental NGO long-term control over the island and reef. The NGO restored the ecosystem by building eco-friendly bungalows, and a visitor and education center. Today, the tourism revenue from visitors to the island covers all the costs of both the destination operation and maintenance, and the environmental improvement effort.

Enable financial support

Continuous financial support and incentives will enable tourism entrepreneurs to take more risks and develop innovative solutions. Thus, it is important to ensure that funds are easily accessible to newly created companies, as well as existing companies. For example, the Development Authority of Lebanon (IDAL) provides projects in the tourism sector—from hotels, to leisure parks and medical centers—with exemptions from corporate income tax that can run up to 100 percent for a period of 10 years, if certain employment or investment requirements are met.

However, those employment and investment requirements—such as an investment above $15 million and a minimum of 200 employees registered with the NSSF—are only met by large hotels and enterprises, making the tax break a “mission impossible” for small- and medium-enterprises.

In addition, it is true that Banque du Liban (BDL), Lebanon’s central bank, is supporting new projects by providing subsidized loans, but these loans are not well-suited to all types of project, for two main reasons. First, when private banks increased their loan interest rates from 7 percent or 8 percent to reach 10 percent, BDL kept its interest at a 4.5 percent subsidy. Moreover, these subsidized loans are allocated only to new projects, leaving existing projects in need of renovation and refurbishment behind.

Invigorating and rejuvenating the tourism sector in Lebanon cannot continue in a piecemeal fashion. The new government must create a solid and calculated plan, one that acknowledges the role of both the public and the private sectors, and their opportunities to work together. Lebanon must take back its place as one of the top tourism destinations in the region—2019 is the year to shine bright.

December 18, 2018 0 comments

Company strategy Hospitality & Tourism

Venture Group talks expansion of their hospitality cluster model in Lebanon and beyond

by Nabila Rahhal & Thomas Schellen December 18, 2018

written by Nabila Rahhal & Thomas Schellen

Marwan Ayoub and Rabih Saba—and their hospitality company Venture Group, specialized in developing and operating purpose-built restaurant clusters—have covered a lot of ground in the past seven years. Today, their team is playing in the premier league of regional hospitality.

Geographically and financially, Venture Group’s cluster business started small. In 2011, Ayoub and Saba began operating a traditional cluster in Beirut’s downtown, meaning they developed a master concept plan for a string of pubs on Uruguay Street. Calculating this project to be worth a few million dollars, they took a gamble on the immediate future. They only had sufficient funds for their first contractual payment when they signed their agreement with Solidere, the Lebanese company for the development and reconstruction of Beirut Central District.

Luckily for hospitality culture in Lebanon, and despite the fact that the Uruguay Street pub cluster did not survive, Venture Group was able to spread its wings financially, geographically, and operationally. Today, the group has three operational hospitality clusters in metropolitan Beirut under its belt (The Village Dbayeh, The Backyard Hazmieh, and Restos Saint Nicolas in Ashrafieh) and another five cluster projects under development from Beit Mery to Saida.

Each of their projects costs $5-10 million in direct investment and can accommodate between 12 and 20 tenants, each of whom is expected to invest between $300,000-700,000 to outfit a hospitality outlet in the cluster, with the investment dependant on the size of the outlet.

Venture Group’s ascent from downtown operator of a pub environment to sought-after developer of clusters in Lebanon with a pipeline of million-dollar projects is notable, particularly in a not uncomplicated economic period. However, the real validation of Venture Group’s concepts will emerge in the next expansion stage, which looks to the Arab world. The group has signed agreements for three $50 million plus (in total value) multipurpose entertainment clusters in Egypt—with the first opening in February 2019—and is currently proactively scouting projects in the Gulf. “We are only looking at countries where we can have more than two to three projects and this is why we are not considering Qatar or Bahrain. We were approached to open in Romania, and we will, because it will serve as a base for Eastern Europe,” Ayoub says. Beyond such limitations, however, the entrepreneurs are intensifying their consulting activities.

Ayoub says that each project in Lebanon adds incrementally to the total value of Venture Group. The first two to three projects provided a basis to break even, in terms of covering overheads and staff costs of the group. Each additional project, in his assessment, will generate $500,000 to $1 million in profit contribution to the group.

It seems the duo has struck gold—even before one accounts for the group’s core intangible asset, which is learning from successes and failures in developing hospitality clusters in Lebanon, where managing successful F&B outlets can be a real challenge for even the most seasoned operators (for more on that see F&B overview).

A cluster monopoly?

Uruguay Street was arguably the first model in Lebanon of a single operating entity running a common space that accommodates several F&B outlets. While it was not the perfect example of a hospitality cluster (Venture Group only operated and controlled one portion of the street, while the remaining portions were owned by other investors who were not obliged to abide by the group’s rules), it opened Ayoub and Saba’s eyes—and the eyes of other hospitality operators—to the potential of such a formula in a country like Lebanon, where social life is key.

Following Uruguay Street, Venture Group opened their next three clusters within a period of three years. Other operators also tried their hands at the cluster model, with around a dozen similar hospitality projects opening in Greater Beirut and various mountainous areas in the last three years—some only minutes away from Venture Group projects or from each other (for more on the unhealthy competition this creates, see F&B overview, page 98). However, few of these projects have enjoyed the same success as Venture Group-operated clusters.

As Saba explains, the group created an unintentional monopoly of the cluster model. “We didn’t intend to fully monopolize the market—we were just starting and didn’t know what would happen. What we were sure of was that we wanted to be fast in developing these clusters while learning from our mistakes and avoiding them in the next project,” he says. He goes on to explain that leveraging economies of scale and collective experience to service all of their other clusters is a key advantage they have over other developers, who typically operate only one cluster project.

Lessons learned

Indeed, Venture Group utilized their experience in each cluster to optimize their model, with the result that each project cost less and profit ratios looked healthier, according to Ayoub. The most important of these lessons is being cost conscious, according to the two partners. “You have to do a proper financial engineering exercise because having the right equity leverage in the right structure can make the entire difference between losing money and making money and advancing investors’ ratios,” Ayoub says. He offers the example that investors might say they do not want subsidized loans since they have the necessary money, yet the savings from a subsidized loan can reach 30 to 40 percent of the net ratio.

Maintaining a good reputation with tenants, even at the group’s own expense, is another learning curve on which Saba elaborates. He recounts how the canopies they had initially constructed in The Backyard Hazmieh could not adequately withstand the winter rain and were a source of nuisance for tenants and customers alike. The partners decided to construct all new canopies on their own dime.

Designing the project right is also an important factor in a successful cluster; the ratio between indoor and outdoor spaces, and the number of outlets per project, should be taken into consideration. “After the Ashrafieh experience [with six outlets in Restos Saint Nicolas], we wouldn’t do anything with less than 20 ‘keys’ (the term Venture uses for outlets in its clusters),” Ayoub says. “However, we have devised a clever model in seasonal locations, where the project expands during the high season then goes down to the minimum number of units needed to serve the community in the low season, thus offering more value per customer.” He explains that this is achieved through the use of rooftops and gardens in the summer as fully operational outlets, whereas in the winter the same areas are used as landscaping spaces.

Being able to reinforce rules and regulations, especially when it comes to music volume, is another important factor and a lesson the partners learned from Uruguay Street. Keeping the project alive with ongoing animations—such as weekly live performances or seasonal popup markets—is also important for the success of a cluster, as is having the right client mix.

Fueling expansions

These learning curves born of experience do not come cheap, and the two men admit that it continues to cost them, even if they have made lemonade out of past lemons. As Ayoub explains, they have utilized lessons learned to design a business model whereby they sell their services to people who have idle assets and want to turn them into income-producing ones, or those who have cash and want to invest in the hospitality industry.

In what Ayoub describes as a turning point in their company’s short history, they decided to become an asset-light company. “The first drive of expansion was that we need to let go of the idea of owning the project and begin servicing other investors,” he says. “So we became an asset-light company that owns the concept in the sense of developing the concept, which includes concept design, architecture, leasing it on behalf of owners, and running it for 10 years—typically like hotel chains would do with hotel owners.” Since their investment in each project is now lower than before, they are able to see faster ROI and thus maintain momentum in launching projects, with five projects currently in the pipeline.

This idea of selling their service and expertise resonated well with would-be investors across all of Lebanon, but Venture Group decided to focus its energies on areas outside of Greater Beirut. “We are being offered new projects by the minute in Greater Beirut, some of which are in proximity to our existing clusters,” Saba says. “But we took the decision that if we use our efforts, while making the same money, to upgrade other communities, we will bring more value in the sense of job creation in the outskirts of Beirut and would not cannibalize [our existing projects].”

The partners estimate that every project they open in areas outside of Beirut (such as Saida or Zahle) directly creates 500 jobs along with another 500 jobs. Venture Group also directly invests $10-15 million, which (by their own assessment) makes the company the biggest driver of investment in the Lebanese tourism industry for the last four to five years.

Hospitality clusters for all

When they are approached with a new project in an area outside of Beirut, Ayoub and Saba consult the usual suspects—otherwise known as their regular tenants—in an initial phase they call concept testing. “When developing clusters, there’s a phase we go through, which is testing whether renowned brands are willing to go into such an area, to start with, and second of all, in such a cluster,” Saba explains. “This phase gives us a lot of insight because these brands are in better touch with the end users. This is because these operators know where their delivery market is and the profiles and spending power of their customers vis-a-vis the project that we’re developing.” He explains that this exercise gives them confidence regarding the project’s potential success, and this is backed by a letter of intent from the operators.

Venture Group then approaches the community’s local authorities to ensure their cooperation. Ayoub and Saba say they are usually welcomed and supported by the local authorities because of the added revenues they will inject into the local economies through their ventures. They then meet with the local business community to assure them that they are not there to compete with them, but rather to offer them a better deal than all other tenants—including subsidizing their inclusion in the project—should they choose to join the cluster. Having well-known local outlets join the cluster is strategic, given the traffic their names would bring into the project, Ayoub explains.

While being in a cluster would benefit a tenant through the brand exposure to around 900,000 visitors a year, some operators choose to remain outside of a cluster due to considerations such as rent, Saba says. Those who remain outside the cluster still benefit from increased footfall in the community as a result of the cluster, which may offset decreased footfall due to competition.

As with all Venture Group projects, these clusters are designed for the local population primarily, but stand to benefit from both local and foreign tourism. “We are very keen on introducing elements which would make the project a one-stop destination for tourism,” Ayoub says. “For example, in Saida, we will go to the producers of local crafts and give them small points of sale, which would allow tourists to make just one stop and buy everything the area is known for. In Zahle we are doing the same thing with the wineries and dairy producers. We will also have one landscaping element which makes the project very visible and so somehow a tourist destination.” He notes that their projects would provide a safe environment for school trip lunches and local tourists looking for a clean meal.

Umm El Dunya

Venture Group has taken its asset-light business model and its expertise to Egypt and is benefiting from the lack of lifestyle service providers there. Ayoub explains that those who have the know-how develop their own projects rather than sell their expertise as Venture Group does, thus their first project in Egypt has a retail element. “The market there allows for ambitions in taking on larger projects because there aren’t any service providers there yet, so we’re taking on supermarkets, retail, cinemas, and we are operating a restaurant park with 50 restaurants and a mall behind it,” Ayoub says. He notes the difference in scale between Egypt and Lebanon, with one project in Egypt comprising the same number of outlets as all of their projects in Lebanon to date.

Indeed, they seem to have penetrated the Egyptian market at the right time. “If you went to Cairo 10 years ago it was totally different from what you see now in terms of the taste, the exposure, the lifestyle … and they are developing by the minute, so maybe in a few years we will not be competitive anymore because they have more money than us, and they are fast learners,” Ayoub says. “We need to be positioned among the first service providers in a very short period of time, otherwise they will catch up with us.”

Venture Group is not worried that Egypt will fall from grace in the same manner as Iraq’s Erbil, but even if that did happen, Ayoub says that since they are an asset-light company they would not lose much in terms of investment.

Saba sums it all up by saying: “The idea of grouping a number of lifestyle facilities including restaurants and bars within the same address has been successful. We managed to master the learning curve of the details in our investment model, the structuring of finances, servicing the clients, renting the shops … you name it. But at the end of the day, four years ago, we were all wondering if this model would work and survive in the Lebanese market. And it did.”

It did, indeed. And with the velocity that Venture Group is moving at, this Lebanese-grown hospitality model could prove a success in multiple markets soon.

December 18, 2018 0 comments

F&B Overview Hospitality & Tourism

Lebanon’s seasoned F&B operators talk challenges and secrets to success

by Nabila Rahhal December 18, 2018

written by Nabila Rahhal

When it comes to the food and beverage (F&B) industry, Lebanon is a country of contradictions.

Although no exact figures are available, those in the industry largely believe that almost the same number of restuarants that closed have also opened. In certain areas, such as the summer hotspot Broummana or in Gemmayze with its restaurants, footfall and the number of new venues is increasing, while in other areas, such as Jounieh and Antelias, customer traffic is slowly dying down. The country is facing an economic crisis, and yet many of the city’s restaurants and bars are abuzz with people having a good time.

Operating a restaurant or club in such a mercurial economic climate is not an easy task, and indeed many have failed. Today, only the fittest in the industry are surviving and growing their businesses, despite decreasing purchasing power among locals and tourist levels still down from their height in 2010. These F&B operators share their frustrations, but also their triumphs and the secrets of their success with Executive.

First, the good news

Although local economic experts speak of the low purchasing power among Lebanese, it seems this has not significantly affected their habit of going out. Those who operate medium- to high-end nightlife concepts tell Executive that clients continue to frequent their outlets. Toni Rizk, CEO of TRI Concepts, which operates The Bohemian and Trumpet, says The Bohemian in Mar Mikhael has witnessed a 30 percent growth in revenues as compared to 2017, and that his seasonal outlet Trumpet, in Broummana, also grew 20 percent.

Meanwhile, a lunchtime drive by the upscale restaurants in Minet el-Hosn, in Beirut’s Downtown—known for attracting bank executives and company CEOs working in the area—or a nighttime stroll through Mar Mikhael, or a trip to the seaside arena street in Downtown—where several of the city’s nightclubs are located—confirms that the cultural desire to socialize is still thriving, among a segment of society at least.

This attitude, along with Lebanon’s rising reputation as a foodie destination, has encouraged new operators to invest in F&B concepts in Lebanon, despite the risks. “In terms of the economic climate in the country, there is nothing very encouraging for opening a new business. But knowing the culture here—how we want to have a good time no matter what—and also knowing how Lebanon is becoming a destination for the food and beverage industry, we were motivated to go ahead with Zimi,” says Ali Daoud, one of the three partners (along with Rami Demirdjian, the main investor, and Barbara Massaad, food consultant and chef) behind the Mediterranean restaurant, which recently opened in Gemmayze.

When the going gets tough

Although things seem rosy on the surface for some F&B outlets, digging a little deeper reveals that the regional and local economic situation has taken its toll on even the most resilient F&B operators.

Tourist numbers in Lebanon have been increasing year-on-year since 2014. However, these increases have not yet made up for the plummet in tourism numbers between 2011-2013—and so far in 2018, the numbers are trailing close behind 2017 figures. Amid these challenges, F&B operators have been relying more on Lebanese expats enjoying a vacation at home than foreign tourists—but even the expats have their share of economic problems. “Lebanese expats are suffering because of the regional economic crisis, and this is affecting the money that comes into Lebanon,” says Dany Aprat, managing partner at Tavolina, an Italian restaurant in Mar Mikhael, and more recently at Slate, a casual chic international restaurant, also in Mar Mikhael.

Samer Rizk, co-owner of Downtown’s rooftop bar Capitole, and wine bar and restaurant Stem in Monot, also speaks of expats in the region not making as much money as before, noting that they have been visiting Lebanon less and staying for much shorter periods than they did in previous years. Instead, he explains, they are traveling elsewhere to have new experiences and enjoy a proper vacation away from what he describes as the somewhat “unhappy feel” that has fallen over Beirut since November 2017 (the time of then-Prime Minister Saad Hariri’s since-rescinded resignation).

More players in the game

Despite the bleak scenario, the F&B industry continues to attract investors, be it ones who are new to the market or seasoned operators expanding their businesses.

Operators of seasonal summer venues are continuing to open winter-only venues as a way of retaining their staff—whom they have invested time training and would not want to replace every year—and their clients’ patronage. The latest such model is McQueen, a winter-only bar-restaurant opening December 2018 in Saifi, which its owner, Samer Rizk, says will have the same spirit and clientele as Capitole as the natural extension of its summer counterpart.

Events manager Alain Hadife’s Zero 4 cluster in Naccache finally opened its doors in early 2018 and once again brought forward the debate regarding clusters versus standalone venues. Aprat, who opened Tavolina’s second branch in Zero 4, says it all depends on the synergy between the cluster operators and the tenants. “I tend to prefer being a standalone [venue], but I don’t mind being in a cluster if we are aligned [with other operators] on the same vision. But when you are alone, you definitely are freer to make any decision you want, whereas in a cluster you have to abide by certain guidelines.”

Samer Rizk, who experienced being in a cluster with Trumpet in The Village Dbayeh, also says that being a standalone venue allows for more freedom, for example, in which type of music one wants to play or what events to host.

Gemmayze is once again returning to the spotlight, but this time as a creative culinary destination rather than as a bar-hopping strip. “The rents went down after the demand decreased around three to four years ago when Mar Mikhael began,” says Zimi’s Daoud. “This encouraged some investors to open new F&B concepts here and they did well. Their success got people used to the idea of going out in Gemmayze again, which in turn encouraged other restaurants to open. So gradually it’s becoming an F&B street. We are complementing each other and catering to all ages without competing with each other.”

The upper part of Monot Street in Ashrafieh is emerging as a destination for medium- to high-end eateries. Samer Rizk says he chose this area for Stem because of its authenticity and charm—a residential street with a mix of old buildings and high rise towers. He says the neighbors often stroll down for a bite, which adds to his footfall. Toni Rizk also chose to open his newest concept, an Andalusian bar-restaurant called Almodovar, in this corner of Monot. “We liked the area because the venues are big, well-designed, and run by established operators. We feel that the area can live for 10 years and more,” he says. He notes that the limited spaces available for new venues to enter makes the area even more attractive to him because of the certainty of no overcrowding.

Seasonal outlets in mountainous areas outside of Beirut are still a preferred way of escaping the summer heat, and F&B operators have continued to invest in such projects. This year, Broummana was the destination of choice, with about a dozen new concepts opening there in summer 2017, causing traffic problems and increased competition.

The effects of oversaturation are also being felt in Mar Mikhael, which often feels like a long parking lot. The congestion has the area’s residents, the outlets’ clients, and even the operators themselves complaining. This bedlam, says Toni Rizk, could be resolved by regulating the sector. “When we first opened four years ago, Mar Mikhael was a lot calmer,” he recalls. “Today, it has become overcrowded, and this is negatively impacting business as there are more complaints from residents and thus more inspections from the concerned ministries. This is because there is no regulation in this industry—they give licenses to everyone on the same street, and when it gets oversaturated and people complain, they start fining the business owners who have already invested in their business. They should limit the number of venues per street from the beginning.”

Secrets to success

Given such a competitive environment, it is no wonder that only experienced operators have managed to keep their outlets full. For Aprat, who has successfully been running Tavolina for seven years now, it all lies with the four Ps of marketing: price, product, promotion, and place. “In university, they teach you about the four Ps, and you can apply them to running a restaurant business as well,” he says. “It’s that simple, but it’s not easy because you have to be able to combine these four principles well, or else it won’t last.”

Toni Rizk also believes that consistent good management—which manifests itself in good service, food and drinks, and ambiance—is key, and cites it as the reason why The Bohemian has remained popular for four years now, while other venues in Mar Mikhael have opened up and shut down within a year.

Barbara Massaad, chef at Zimi, believes restaurants succeed when they have a soul. “People are realizing that restaurants need to have people behind them,” she says. “Typically, restaurant operation is more of a business, or copy paste, or impersonal, but I am happy to see now in Lebanon that more and more restaurants are opening where you have the personification of the owner, or the chef, or the person working in that restaurant, and this is what is needed. Because of the tough economic times we’re passing through, it’s a survival of the fittest environment, and this is where you are going to see authentic concepts with heart surviving.”

Christine Hauser also believes that the Lebanese are looking for a food experience these days. “People in Lebanon don’t want to feel like they are being ripped off anymore, so we want people to feel that they got their money’s worth in terms of food quality and variety when they come to our restaurant, especially since everyone is cost conscious these days,” she says, speaking of her new restaurant Alma located in Bosa Nova hotel, also for Hauser, in Sin el-Fil.

As another year wraps up, those in the F&B industry are already energetically working on realizing their 2019 goals and expansion plans, despite the challenges they continue to face. This is because they recognize that they operate in a sector that never sleeps, and through which the Lebanese will continue to enjoy their days and nights, come what may.

December 18, 2018 0 comments

Comment Hospitality & Tourism

Tech opportunities for the Lebanese hospitality industry

by Mohammad El Hoss December 18, 2018

written by Mohammad El Hoss

It is the end of 2018, and the tech-enabled generations are finally becoming the decision makers in their workplaces. We live in an era where technology is no longer an industry, but rather a layer that transforms all industries, making them more connected and efficient.

There are more creative and brilliant minds in Lebanon than ever before, constantly solving problems and shaping new value chains that will simplify how we do business for decades to come.

Barriers to innovation

Nevertheless, as any entrepreneur in Lebanon knows, there are many barriers that currently slow down the innovation and adoption of new business models and technologies. Such barriers include complicated regulations on e-commerce as a business, as well as the infamous electronic signature law, which state that electronic signatures, even if verified, are not legally binding. The process of establishing and registering a sal company is in itself tedious, requiring entrepreneurs to navigate all kinds of legal obstacles.

The HORECA industry backbone, which provides services and supplies for hotels, restaurants, and cafes, is ready to adopt innovation and expand, in spite of the various industrial barriers. In fact, the HORECA market is already one of the largest in Lebanon, according to BankMed research and a report published by the World Travel and Tourism Council in 2016. That year, the HORECA market accounted for at least 20 percent of the Lebanese workforce, the report shows.

As it stands, 66 percent of buyers in the hospitality industry are already looking for online alternatives to spare them the hassle of managing the currently offline supply chain, according to CloudSale’s HORECA market survey conducted in May-June 2018, which gathered feedback from more than 50 HORECA outlets in Lebanon. The solutions the buyers are looking for are not re-inventions of the wheel, but rather tools that digitize the workflow they are already familiar with. The biggest problem holding back the shift to digital is industry standard, unregulated, deferred payments. A lot of startups have made it their mission to come up with innovative solutions with banks to deal with deferred payments digitally. However, convincing banks and financial institutions that there needs to be a product before proven traction and sales is a difficult task.

Moving markets online

On the other side, the suppliers of the HORECA industry are ready and eager to list their products online. Even for the most traditional sellers, there is little downside to opening themselves to additional sales channels, especially if these channels are efficient and scalable. However, most of these suppliers do not have their data readily available to transfer online, necessitating an initial investment of time. They need to shoot photos of the inventory and hire further support to organize the companies’ inputs. All this can be difficult to carry out without having seen actual sales growth and cash invoice settlements first.

The path forward is clear: There needs to be a mutual effort between regulators to create predefined frameworks for exchanging products and payments online. Once this happens, financial institutions and banks will be ready for mass adoption, and hospitality businesses will be the first to benefit.

December 18, 2018 0 comments

Comment Hospitality & Tourism

Give Lebanon’s tourism industry a chance

by Dagmar Symes December 18, 2018

written by Dagmar Symes

After five years, my assignment has come to an end, and here I am reflecting on the country I fell deeply in love with. I was blessed to be entrusted with a luxury hotel opening under very difficult and challenging circumstances, and I have enjoyed my time at the helm of the InterContinental Phoenicia, La Grande Dame du Moyen Orient. Beirut was always known as the Paris of the Middle East, and it certainly has the potential to reclaim this title with its present attributes. I have experienced Lebanon as one of the most modern, stimulating, breathtaking yet nostalgic, disruptive places—the contradictory land of the cedars.

Geopolitical challenges and negative perceptions abroad have made Lebanon’s future dependent on the region’s political playground. To return Lebanon to its rightful place as a tourist destination, the country has to be promoted in a purely positive light based on its strengths and unique features—particularly its diversity. It is renowned for its abundance in nature, rich history, vibrant art, music, and fashion scene, culture, architecture, culinary excellence, and, foremost, its friendly, hospitable, and generous people. Should the new government come up with a holistic approach to drive the country’s touristic development in the right direction, Lebanon will fly. This includes the redevelopment of the country’s infrastructure, such as broadening public transportation, the further extension of the Rafic Hariri International Airport, and improvements to the road network.

Although I understand the environmental, economic, and political challenges, Lebanon deserves to be promoted as the Middle Eastern go-to destination. Only then will the hospitality sector have a true chance at healthy development and prove its legitimate position in the international community. Who would have ever thought that you could ski in the heart of the Middle East?

Lebanon boasts the most reputable academic institutions in the region and is a true talent provider in all aspects. Conversing in three languages, as well as having an excellent education provides a huge competitive advantage within the international professional community. I feel, however, that the country’s privately financed education, to some extent, undermines the need for basic expertise within the tourism industry. While education is key to success in life, hospitality is a service industry in which attitude, humbleness, and the right skillset are the basic pillars. Society still stigmatizes certain professions and views certain operational positions in the hospitality industry as somewhat degrading and non-reputable. Yet, the hotel industry relies on its hardworking operational team members, who form the core and the heart of the industry. In other words, the norms set by society are somewhat contradictory to our business. Furthermore, financial investments in the education system are highly unlikely to give good returns at short term.

Technical and vocational institutes need to be elevated in the public esteem to the level of a prime talent hub for our industry and must increase in number. Meanwhile, private institutions’ teaching should adopt the humbleness and service-oriented approach that is the base of our industry. Society has to mature and develop an honest open-mindedness to educational diversity, gender equality, religious co-existence, and multinational cultures.

One of Lebanon’s main challenges is that even the younger generation live in a world of “what could have been” instead of “what could be.” Past-related thinking prevails against future oriented progression—passive versus proactive. Change is necessary for extraordinary results, thus actions speak louder than words. The habit of blaming the establishment and complaining rather than envisioning and creating the future has to be addressed. The Lebanese people have proven to be resilient and to fight against all odds, while bearing in mind that government institutions will likely remain an issue. Society can have a huge impact on the positive development of the country—whereas a negative mindset will never give you a positive life.

Lebanon’s hospitality has it all, if society anticipates a future-oriented growth mindset and positive thinking, despite ongoing internal and external hurdles. As a German, I dare to draw a parallel. If the Germans tore down the wall, why can the Lebanese not tear down their virtual wall? “Wir sind das Volk!” I have never been intimidated by how it is done in Lebanon—“wasta and habibi”—but have focused instead on achieving what needs to be done, in the right way. Lebanon is so close to my heart that, as an adopted citizen, I see the beauty and opportunities lying ahead for a prosperous future.

December 18, 2018 0 comments

Hospitality & Tourism Hotels Overview

Lebanon’s five star hotels diversifying markets and offerings

by Nabila Rahhal December 18, 2018

written by Nabila Rahhal

Lebanon has not given its five star hoteliers many reasons to smile over the past seven years. Political tension and instability has kept away the country’s traditional market feeders, GCC nationals, since 2011.

Meanwhile, regional political and socioeconomic crises have taken their toll on Lebanese expats in the Gulf and in parts of Africa, generally reducing the length of their stay and their spending power while they are in the country. Locally the situation is not much better, with Lebanon’s residents less willing to spend on lavish meals in hotel restaurants or on city staycations.

It is a testimony to humankind’s adaptive nature and the Lebanese people’s well-honed resilience that these hoteliers have not only kept their good natured smiles despite the challenges, but have also persevered in cultivating and growing the markets that continued to visit Lebanon, as well as exploring and developing new ones.

The past year

Most hoteliers saw 2018 as a continuation of 2017 in terms of occupancy: not great, but not bad either.

For Gefinor Rotana, 2017 and 2018 were almost the same in terms of business growth. According to the hotel’s general manager, Gilbert Zeait, this was because the last two months of 2017—when then-Prime Minister Hariri announced and subsequently withdrew his resignation—put a damper on that year’s otherwise positive performance. Meanwhile, the first four months of 2018 saw cancellations and a drop in business in the aftermath of the rescinded resignation before things picked up again. “Summer 2018 was very good for us. Room rates were lower than in the golden years, such as 2010, but in terms of occupancy during the summer, I would say it was above 80 percent,” Zeait says.

The Smallville Hotel in Badaro also reports almost the same occupancy in 2017 and 2018, according to Michel Boulad, its director of sales and marketing. “Summer of 2017 was almost a record year for the hotel. However, summer 2018 was not as good for Smallville, mainly because the GCC nationals did not come as much as last year during the Adha holidays. The end of year 2017 was rather weak following the Hariri incident, but this year, and judging by our December bookings, we are anticipating much better performance,” Boulad explains.

For some hotels, 2018 was a better year than 2017. Nadia Madi, director of sales and marketing at Kempinski Summerland Hotel & Resort, says 2018 saw a 20 to 30 percent increase in occupancy from 2017, and the hotel expects to close the year at 65 percent overall occupancy—a good rate in her opinion, given that they are a summer resort and business is usually slower in winter. “Since we opened in summer 2016, 2017 was a relatively new year for us. So in 2018, we became more established, and people started knowing us more, whether in the local market or through the Kempinski chain,” she says.

Georges Ojeil, the general manager of Le Gray, says 2018 was the second best year in the hotel’s history, since its opening in 2009. He attributes this to a “synergetic team and a quality focused strategy,” whereby the hotel invested a lot of time and money in training and communicating with its employees, while at the same time not compromising on quality customer experience. The hotel’s expansion—which added two floors of rooms, a new lobby, and, most importantly, conference rooms and a ballroom—was also a major driver in the year’s exceptional performance. “The extension supported our financial growth because we managed to penetrate different markets. We closed October on 85.5 percent occupancy and November on 80 percent. Although January was shaky, the year picked up considerably afterwards,” Ojeil says.

The cluster director of sales and marketing at the Phoenicia Hotel, Tracey Bolton, says the hotel has had a 5 percent increase in occupancy from 2017 and will close the year at 60 percent occupancy (according to its performance as of mid-November), which she says is exceptional for a hotel of their size (446 rooms). Meanwhile, Rami Sayess, the regional vice president and general manager of the Four Seasons, says 2017 was a record year for their hotel, and that, despite this year’s drop in occupancy, 2018 is exceeding the expectations they had at the start of the year when the country was more unstable politically.

As such, Lebanon’s five star hotels have managed to maintain almost consistent occupancy—at a positive percentage—despite the tough times.

Here no more

GCC nationals were Lebanon’s main tourism market for such a long time that the hotel industry became complacent, relying too heavily on this steady stream of guests rather than having to invest energy or resources to fill up the country’s hotels.

Today, this is no longer the case, as most hoteliers admit that the numbers of holidaying GCC nationals are in steady decline (see figures page 116). Rotana’s Zeait explains that this demographic used to account for 95 percent of the hotel’s targeted guests—now they make up only 10 percent. The drop in GCC nationals has also negatively impacted the average length of stay at the hotel, he says. “Even during peak holiday seasons, and although hotels in Lebanon become fully booked then, it is for a shorter period of time than before. That long duration of stays was when we had high numbers of tourists from the Gulf who would stay for at least a week, and up to five weeks sometimes.”

Worryingly, Gulf tourists remain the main market feeders of the Four Seasons, Kempinski, and Phoenicia—although the three establishments confirm that they are staying in lower numbers compared to 2010 and previous years.

Phoenicia’s Bolton explains that although the GCC is still a main market for the hotel, it is not the big spenders that are coming. “Thirty-five percent of our business is GCC, but they are not staying in the presidential suites as they used to before,” she says.

Speaking for Kempinski, Madi says they have seen a slight increase in GCC nationals this year, while Ojeil says Le Gray has witnessed an increase in Kuwaiti and Qatari nationals.

Beyond the Gulf

By now, the hotel industry has largely accepted that GCC nationals will no longer be the chief drivers of their business and so have invested all their efforts on strengthening the other markets visiting Lebanon, even if these markets are shy in numbers so far.

European tourists, which have always represented a small market for Lebanese hotels, have been increasing over the last few years, according to the hoteliers Executive interviewed for this article. They attribute this rise to their own efforts and to Visit Lebanon (a B2B meeting space that targets specific destinations for familiarization trips, which provides all the practical information that those working abroad in the leisure industry would need to arrange trips to Lebanon, organised by the Ministry of Tourism and participating hospitality stakeholders). Other stakeholders can also play their part. Bolton says that the number of Spanish tourists to Lebanon is starting to grow, a consequence of Lebanon’s flagship carrier, Middle East Airlines, establishing a direct flight to Madrid in June 2018. “The key going forward is we have to tackle these markets and maximize exposure to drive business,” she says.

Lebanese expats—typically first generation immigrants who left Lebanon for career purposes—have also been mentioned as a growth market by hoteliers with whom Executive spoke. “This year we saw many Lebanese living in the region coming to Lebanon for a vacation, but also on business trips. They enjoy staying in the resort as a destination for a vacation, and so we had a promotion for Lebanese expats, providing them with special prices to encourage them to stay with us,” Madi says.

Among neighboring Arab countries, Iraqis, Egyptians, and Jordanians are mentioned as frequent hotel guests, while Zeait says that Syrian guests have been on the rise at the Gefinor Rotana. “We have a lot of Syrians using hotels, especially when they are living outside the region and come back to visit their relatives in Syria—they land in Beirut and stay here for some time,” he says.

Various recent efforts have been targeting the Lebanese diaspora—ranging from the Lebanese Diaspora Energy conference, organized by the foreign ministry, to the Visit Lebanon meetings—and these efforts have paid off in the hotel industry. “We at the Phoenicia Hotel have seen a nice growth of the diaspora market especially over the summer season—these are mainly [Lebanese] from Brazil, Australia, and Canada. It is the young diaspora that is coming back, and they are looking to reconnect with their history. And because it’s the younger generation, they are staying in hotels and not in the villages where their extended family is—to them, part of connecting with their family and heritage is exploring Lebanon, so they make the hotel their base and go out from here,” Bolton says.

Ojeil says Le Gray has its eyes on the diaspora market as well. “Latin America is a new market we are targeting, and to a certain extent it is fueled by the Lebanese diaspora. We start with them, but they bring others from their countries with them, or go back and tell them of their trip, which motivates them to come here,” he says.

Looking for something new

Not content with just developing existing markets, Lebanon’s hoteliers are also aggressively targeting new markets, having learned the dangers of putting all their eggs in one basket. “When we knew last year that the GCC market was not coming back as before, and that their confidence had not been restored in Lebanon as expected, we went after new markets,” says the Four Seasons’ Sayess, giving the examples of South America, in particular Colombia, as well as Mexico and Australia. In July, he says, the hotel’s highest number of visitors was from Australia.

Hotels are keen to diversify their guest base. “We at Smallville are looking to expand in new markets such as Russia or Latin America. There is a lot to explore, and so we need to steer away from the traditional feeder markets and to focus on new markets. This is already something we are doing, and we are seeing results, but we have to maintain our efforts,” Boulad says.

He goes on to explain that the hotel has been participating in international exhibitions to explore new markets. At home, the hotel is partnering up with local travel agents who are targeting new markets such as China or Russia.

In fact, several hoteliers spoke of the Russian and Chinese markets, and it seems serious efforts are being made to attract these tourists to Lebanon. “I would love to explore the Chinese and Russian markets—both of which are very important—but we have to sort out the visa issue as it is not easy for them to get visas,” Sayess says. “We need to catch their interest in Lebanon, since they already go to Dubai, Paris, and Egypt, which means we need to go to the countries and talk to tour operators there. For example, we at Four Seasons welcomed a group of 12 Chinese tour operators here to explore Lebanon, as well as a Russian group, which was arranged through the Syndicate of Hotel Owners in Lebanon.”

Meanwhile, Rotana’s Zeait says both Armenia and Turkey are interesting markets due to their proximity to Lebanon. The potential is certainly there but what is needed, hoteliers tell Executive, is sustained work from all stakeholders to promote Lebanon as a destination to tourists who may need a small push before they book that ticket.

While hoteliers are doing their part in promoting Lebanon and attracting new tourism markets to it, there is a lot more that needs to be done—by all stakeholders—before the country will be ready for a higher level of tourism, necessitating a strategy.

Work work work

While GCC nationals mainly frequented Lebanon for leisure, today’s hotel guests—for the most part—hail from the corporate world, according to the hoteliers with whom Executive spoke. “The perception around the area is that the leisure groups are still nervous to come because they are hesitant because of the political situation, so that still needs a lot of work. Whereas a corporate group will come because they need to do business here,” Phoenicia’s Bolton says.

Both Kempinski’s and Le Gray’s expansions of their corporate facilities have allowed them to target new markets and achieve growth. “The majority of the business in the pipeline is corporate business with a little leisure, especially in the summer,” Ojeil says. “The conference and events facilities allowed us to penetrate the MICE market so we have more residential seminars and more events, training, and conferences happening in house, and this is driving more revenue.”

Still, this has not prevented hotels from going after business from both leisure and corporate travelers, playing up their facilities to attract both. For Boulad, Smallville’s location on Badaro Street—minutes away from the French Embassy (one of their main clients, he says), as well as major universities, the new business hub of Sin El Fil, Badaro’s pubs, and the national museum—makes them ideally placed to capture both corporate and leisure business.

Zeait also speaks of Gefinor Rotana’s location as being attractive for both businesspeople—surrounded as it is by major hospitals and universities—and those seeking a good time in nearby Zaitunay Bay or Hamra. “We are positioning ourselves as a business-leisure hotel,” he says. “This is healthy because leisure alone gives you seasonal traffic—and is mainly the business of beach resorts—while the volume of business bookings decreases during holiday times such as the summer or mid to end of December.”

Madi says Kempinski reached 100 percent occupancy at times during the summer, which is normal for a beach resort. During winter, she says, they market the fact that they can offer corporate guests leisure facilities typically found in resorts, such as multiple restaurants, a huge spa, and a marina.

Eyes on Syria

As 2019 approaches, Lebanon’s hotel industry is looking toward the future, and hoteliers say they will continue to develop the new markets they have been working on in 2018. At the same time, they have their eyes open to new possibilities and, at the moment, the potential narrowing of the war in Syria is a very interesting prospect—the impact of which is already tangible, to some extent. “We see potential for Phoenicia Hotel in that a lot of companies—from construction to consultancy companies—will be making their base here,” Bolton says. “When they opened the shipping lines, for example, we immediately saw an impact on our business from shipping companies and freight companies. We are waiting in anticipation because we think it will bring a tremendous boost for our economy.”

Ojeil says Le Gray has also felt the impact of Syria’s impending reconstruction. “We are already sensing increased demand from business people coming to Lebanon for a few days for events related to the reconstruction of Syria. They take 14 rooms for a meeting or conference and stay for a few days. It is happening regularly. If we manage to grab our share of this business, it will be very positive for Lebanon,” he says.

Whether it is business from Syria’s imminent reconstruction or from one of the far flung markets that Lebanon’s hoteliers have been tirelessly developing, or even from markets closer to home finally making a comeback, this country’s hotel industry is prepared to welcome it all, having passed through the fiercest tests.

December 18, 2018 0 comments

Business Infographics

Infographics

by Ahmad Barclay & Thomas Schellen December 18, 2018

written by Ahmad Barclay & Thomas Schellen

December 18, 2018 0 comments

Banking & Insurance Q&A

Q&A with Freddie Baz, chief strategist and board member of Bank Audi

by Thomas Schellen December 18, 2018

written by Thomas Schellen

Lebanese banks are the life raft of the national economy. While this raft is astoundingly large in comparison to the real economy, with banking sector assets surpassing the real economy by a factor of four, the existential role and solidity of banking make it the focus of attention in national economic and policy debates. Many reports and studies, and an exponential number of rumors, have increasingly questioned if and how the Lebanese banking sector can keep functioning so well. Executive sat down with Freddie Baz, chief strategist and member of the board of Lebanon’s largest bank, Bank Audi, to see how the economy looks from the top of the banking industry.

E Do I understand correctly that you believe the perspectives presented in many of the alarming economic reports that have been circulated in Lebanon in recent months have somehow been tainted—flavored, for example, by ulterior motives or even by ignorance?

The background of our discussion today is the plethora of economic reports in the media in the past two years that were filled with warnings, some of which had zero substance. People do not know how to look at things in relative terms. The Lebanese economy is facing major macro-imbalances. Nobody is disputing this. But for those imbalances to translate into a hard landing for the economy, there has to be a causality between the problem and the hard landing. We have seen reports alleging the [imminent breakdown] of the Lebanese economy. However, while these reports [offer a] more or less fair diagnosis of the situation, things start to diverge when some ignorant economist [starts] saying that we are heading [toward an] imminent hard landing. Some others, who know that there are strong implicit buffers in existence, are even more alarmist in their tone of analysis, because it might be in their interest to see the collapse of the economy happen.

E What is your view? Is Lebanon’s economy in danger of imminent meltdown?

No. What does it mean to have more pain? One does not kill [a] patient in order to [cure] him. What I am telling you is that I technically agree with most diagnoses regarding the problems of the Lebanese economy. Where I diverge from the analysts that are honest and not technically ignorant, is in saying no—those problems, in the case of Lebanon, will not necessarily translate into the same hard landing we observed elsewhere. This is because we have a financial dimension in Lebanon that is far above the economic dimension, with four times the GDP in bank assets.

Despite all you read and hear, we are still having gross financial inflows. In the first eight months of 2018, inflows amounted to $10.5 billion. We pay a small premium on those USD denominated funds, obviously, but as long as the magnitude of inflows is far above the absorption capacity of the economy, a part of them ends up in the accounts of the central bank for the purpose of getting [banks] a higher yield on liquidity. We already pay a premium, and so we want to reduce negative carry.

Thus, when you look at Lebanon’s history, the last several years have seen BDL [Banque du Liban, Lebanon’s central bank] foreign assets as [a] percentage of the local currency money supply in ranges above 70 and 80 percent—81.9 percent today. This [percentage ratio] is where you have evidence for the risk of a collapse in the local currency. I am talking about 18 years during which the central bank’s foreign assets have represented 80 percent of the money supply in local currency; this is a technical buffer.

I am not saying that there is resilience despite all those distorted risk profiles and debt ratios [in Lebanon], but what we are trying to explain is that there are technical buffers that [stand against] the conceptual translation of macroeconomic imbalances into a correction of the currency. This auto-correction mechanism of markets to restore equilibrium does not work in Lebanon or would take much more time [to unfold].

E The World Bank’s latest Lebanon Economic Report, published this October, said “global market conditions have become a more important determinant of Lebanese Eurobonds’ risk/return profile,” and seemed to suggest that Lebanon’s financial sector today is more strongly correlated with factors that influence other emerging markets. Is that a point of concern?

There is no such correlation. Otherwise the correction [of the currency] would have happened years ago. [In the 2000s] we went through two years when debt to GDP was at 186 percent. When you look at peer groups in the global economy, the foreign reserves at the central bank [in these countries] represent, on average, 35 percent of the money supply in local currency. We are at 80 percent, so you see how this is about technical buffers.

[However, viewing Lebanon] on a standalone base, I am not at all happy about [the country’s] risk profile, and I believe that it needs to be adjusted very quickly. I know that we can sustain [such a risk profile] because of the specificities that I mentioned just before, but our capacity to sustain such risks has, over the years, created a huge laxity among our decision makers.

E Are political Lebanon and economic Lebanon like two different planets?

First of all, I don’t believe that we have decision makers in [either realm]. This is unfortunate. If we take the current situation, the talent that we have is not represented in either field. If we talk about the commitments of CEDRE, for $11 billion, out of which $800-$900 million are to be grants, which translates into an average cost of these commitments for borrowing at market rates that is very acceptable to Lebanon. Especially since those funds, as per the [Capital Investment Plan] presented by the government, would cover major infrastructural bottlenecks as priority, which, once adjusted, cannot but improve the overall efficiency and competitiveness of the Lebanese private sector. [But] look how this issue is dealt with politically and economically. Still, I do not believe that it is a situation of harakiri.

E Do you then fully believe that the banking sector is healthy and the monetary sector remains buffered in 2018 while the real economy is not doing well? Where, then, would the problem of our political economy figure into this picture?

If I want to be a bit more nuanced, I will say that the banks still enjoy a good standing but that one cannot say that banks are doing well. You cannot do well in a depressed and weak environment. But again, we have good standing, which is measured by the large size of the banking sector in comparison to the size of the economy. If the banking sector were smaller in size, any setback in the economy would translate into a more material [impact]. [Notwithstanding] the fact that [banks] have lent too much to the domestic private sector.

E How high is the ratio of lending to the private sector today? The Lebanese Economic Monitor (LEM) mentioned that BDL-subsidized lending via banks created strong credit flows to the private sector between 2012 and mid-2018, saying that “by June 2018, the stock of outstanding credit to the resident private sector reached 99 percent of GDP,” and 130 percent to the resident and non-resident private sector.

[The ratio] is 105 percent loans to GDP all in all, for the resident and non-resident private sector. But still, a ratio of 100 percent of loans to the private sector is too high. However, let’s talk about the situation in US dollars, because this is the real firepower of Lebanese banks. I believe, based on tables I prepared two or three weeks ago, that we have lent $40 billion.

At the end of August 2018, domestic deposits of Lebanese banks stood at $119 billion. Banks have provided loans to the private sector of $40 billion and have outstanding Eurobonds of $16.5 billion. This means that we have lent to the public and private sectors in Lebanon $56.5 billion out of $119 billion, which in turn means that we have $71 billion of operating surplus, which is placed with the central bank and with correspondent banks abroad. This is a huge amount. I am amazed when people point to our decreased deposit growth rate and ask what if banks are no longer capable of financing [the public and private sectors]—but our operating surplus today represents 1.26 times GDP. When people look at liquidity in terms of flows, we have decreasing trends in deposit growth, but this is on the background of an operating surplus of $71 billion.

E Turning to the regional landscape and specifically to the exposure of two large banks, Bank Audi and BankMed, to the risk in the Turkish lira, the LEM said in October: “Any significant erosion of the capital base for the Lebanese banking groups” behind Turkish banks Odeabank, in the case of Bank Audi, and Turkland Bank, under BankMed, “will likely require intervention by the Lebanese central bank”—referring to the need for recapitalization by BDL. What is your response?

These are basic conceptual analyses. All banks have recovery resolution plans as per [Banking Control Commission] regulations. The central bank has intervened to provide liquidity, not to provide capital, because the main risk is liquidity, not capital. In response to this remark [on the possibility of capital adequacy issues at Turkish units of Lebanese banks], at the end of September, Odea had the highest [capital adequacy] ratio in the whole Turkish banking sector.

We did a stress test [using Basel III methodologies] that showed that we can sustain an exchange rate of 12.5 Turkish lira to one US dollar for our [Capital Equity Tier One (CET 1)] to fall below the 7.5 percent minimum requirement in Turkey. Even at the consolidated level, since the article that you are referring to said that the groups could be impacted because of Turkey, our stress tests show that in order to fall below minimum 10 percent CET 1, the Turkish lira should be above 10 TRY to one USD. This [LEM comment on the Turkish exposure of Lebanese banks] is a conceptual theoretical report made by analysts sitting in a room somewhere and having very little interaction with what is happening on the ground. How can you make such a statement without picking up the phone and talking to someone at BankMed and Bank Audi to get info? Say what you want, but at least get information, listen, and educate yourself.

E They did not call you?

Zero [calls].

E So in summary, how do you see the Lebanese banking sector’s development in 2018 as compared with the rest of the economy?

It is not about trends. It is about performance. This is different. I do not see any major weakness, but I see that we can do more and achieve more, in terms of turnover and results of operations for the banking sector.

E How about Bank Audi?

We have released our results, and there is some paradox in achieving such important results. I mean, when you achieve a 20 percent year-on-year [increase in net profit after tax before accounting for results of discontinued operations in the 2017 income statement] for the first nine months in your main markets, under the current operating conditions in these markets, people say: “What is this?” But when you go into details, you see that we launched, almost two years ago across the group, a performance management strategy. Turkey was the trigger [for implementing this].

This strategy aims at derisking, deleveraging, and rebalancing our balance sheets in our main markets from foreign currency exposures to local currency. This has translated into an important overall decrease in our risk-weighted assets and has been triggering the improvement in our capital adequacy ratios, but not to the detriment of our bottom lines. In our rebalancing, we let go of opportunistic big tickets from depositors, which were highly priced and not stable. We are trying to replace them with more granular customers, and we also did not renew many of our maturing loans to non-core or non-prime relationships in terms of providing the group with ancillary business. This has translated into reducing our size in Turkey—the size of Odea—from close to $11 billion to approximately $6 billion. Out of these $5 billion [in the reduction of assets in Odeabank], probably 60 percent is due to exchange rate depreciation, but there [is] $2-3 billion of real derisking and deleveraging. We also have rebalanced our loan portfolio toward local currency lending instead of foreign currency lending.

E Only in Turkey or also in Lebanon?

This was in Turkey, Egypt, and Lebanon, but the bulk was in Turkey; this has allowed us to sustain almost the same level of daily net interest income in Turkey, despite the fact that the size of the business has shrunk. Thus the first reason behind those important results is improved topline net interest income. Our consolidated spread in the first nine months of 2018 improved by almost 40 basis points (bps) with respect to the corresponding period of last year. This has been generated by improved spreads in Lebanon, Turkey, and Egypt. It is not coming just from one geography.

The second point to note in relation to the performance management strategy is the cost efficiency measures which have been implemented. We have shown 20 percent increase in profits. When you look at our operating expenses in the consolidated nine-month 2018 results, they decreased [year-on-year] by $80 million, out of which probably 25 [million] are due to depreciation of the Turkish lira, because of the resulting shrinking in the counter value of the cost base. The remaining [reduction in operating expenses] is real cost savings in Turkey of $30 million and from Egypt and Lebanon, too.

We also have improved NIM [net interest margin] from $780 million to $907 million, so we have $127 million of additional topline, and we have $80 million of reduced cost. Our profits increased by $68 [million] because we had $80 million of additional taxes with respect to new taxation of banks, mainly in Lebanon, comprised by the tax on deposits and the increased income tax. The remaining was $40-50 million in additional provisions—this is real recurring [income] driven by the performance management where people [in the bank] are focusing much more on sustaining the quality of existing loans instead of granting new loans on a daily basis and revising yields on loans with respect to operating environments in each market. We are trying to reduce the cost of deposits not by decreasing [deposit interest rates], but by letting go of opportunistic big tickets—this translates into savings [for the bank], while we are also increasing the more granular base of small depositors.

E Did the cost of deposits in Lebanon go up significantly after the extension of high interests for long maturity deposits?

By end August, we had $120 billion of domestic deposits in Lebanon [in the banking sector]. Bank Audi is always lower, although we launched 15 percent [interest] programs for deposits of five years. We did maybe $500 million or $600 million [of such long-term deposit contracts with high interest rates] and probably other banks did the same, whereas you have the equivalent of $54 billion in local currency deposits. So if there was $1 billion [out of these $54 billion], this is a small margin [of the total deposit portfolio in the sector].

Look at three-month LIBOR. The average cost over one year increased by 60 bps whereby the benchmark rate increased by 1 percent year-on-year, from 1.32 percent to 2.32 percent. This means we are paying less spread with respect to the benchmark, despite the fact that the costs [in the form of interest on deposits] are increasing, and stand at 4.2 percent today. I would not be surprised if they reach 4.5 by December. But can you imagine that if you make a big ticket deposit, say $5 million over three months, in whatever large global bank today, they will give you 2.6 or 2.7 percent?

My main message is that Lebanese banks—assuming [for this exercise] that they would be a single bank—today are capable, despite all that we are witnessing in the country, to sustain a deposit base of $120 billion at 4.2 percent. This represents less than a 2 percent premium over what leading global banks are paying [as deposit interests]. This speaks for itself.

December 18, 2018 0 comments

Business Comment

Outlook and potentials in the Lebanese insurance sector

by Nadine Habbal December 18, 2018

written by Nadine Habbal

Regional geopolitical turmoil and ensuing economic uncertainties continue to place increasing pressure on the insurance sector. Stagnation in most of the sectors of the national economy is reflected in slower growth in premiums written by Lebanese insurers, and higher strain on profit margins.

In light of this, the Insurance Control Commission (ICC), which is the regulatory authority for the supervision and control of the insurance sector, reporting to the Ministry of Economy and Trade, forecasts growth rates in 2018 of -7 percent for life insurance, driven by lower new business and little activity on mortgage and personal loans: -4 percent for motor insurance also driven by lower new business; and -1.7 percent for property and casualty insurance. The stagnation in property and casualty lines is directly correlated with the economic situation in the country, which is witnessing little activity in terms of new projects, transportation, and other similar activities.

The downtrend in the above business lines is juxtaposed with an important expected 16.1 percent growth for medical insurance, triggered by an anticipated increase in the number of persons insured following the recent implementation of Decision 186/ICC, pertaining to the guaranteed renewability of medical insurance products.

As such, the expected gross written premiums in 2018 should reach $465 million for life insurance, $365 million for motor, $560 million for medical, and $270 million for the property and casualty lines, for a sector total of around $1.66 billion, a growth of 1.2 percent when compared with 2017.

The mitigation of the challenging economic conditions requires increased focus on innovation in terms of products, services, and operations in the broad sense. Large segments in personal and property lines remain weakly insured, if at all. The sector is yet to show a marked commitment to innovation, despite serious but sparse initiatives.

Digitalization is still largely shy; while it imposes an understandably complex path, it remains a necessity if the sector wants to benefit from the present challenges and prepare for coming growth opportunities. Digitalization needs to be considered at different levels of the insurance operations, starting with distribution and going all the way through to financial reporting. Embarking on this path will undoubtedly foster significant improvements to the core administration systems, enhancing the data quality and enabling advanced pricing and risk management techniques to be deployed.

Good governance and transparency play a major role in this proposed scenario, as they provide the guarantee that an institutionalized and rigorous approach to capacity building and innovation can be deployed. In other circumstances, shareholders would be highly reluctant to provide the support needed to boost innovation through digitalization or other creative ideas.

The ICC is progressively deploying a framework that would help the sector to pursue new avenues. The rollout of this framework started several years ago with enhanced reporting transparency, through annual report statistics, providing stakeholders with an enriched perspective on what is going on with the sector. Risk-based capital would be the next major step, reinforcing the financial condition, and establishing a scientific context within which insurers would have to manage their underwriting, investment, and credit strategies to reach an optimal setup.

In this context, one of the ICC’s focuses is its service tasked with providing Lebanese policyholders with adequate assistance and consultation for complaints related to insurance policies and services. Launched in 2018 under the name “ICC Care,” this service’s uptake by policyholders is already showing the importance of ICC Care’s growing role in the resolution of misunderstandings and complaints. At the time of writing, the ICC is preparing the launch of an extensive awareness campaign related to ICC Care, targeting the insured population holding individual or group medical insurance coverages. This is essentially an extension of the social media efforts that were initiated recently. The latest announcement related to the commencement of Lloyd’s direct activity in Lebanon via cover-holders is reflective of the ICC’s efforts in this perspective.

On a separate note, the ICC is using its website and social media to keep the public informed about the implementation and implications of Decision 186/ICC, which is related to the guaranteed renewability of medical insurance contracts for individuals and groups. For instance, the ICC published a list of insurance products that have received the ICC pre-approval, and introduced a number of infographic slides that summarise the key features of this decision.

As a concluding remark, I would like to restate that the insurance sector in Lebanon has an excellent opportunity to build itself into a natural platform for insurance in the Levant region. This is within our reach, and we all need to strive toward this objective in a disciplined and cooperative way.

December 18, 2018 0 comments