By Lubna Hamdan
Big companies do not like to publicly admit their mistakes, let alone family businesses. But Patrick Chalhoub, whose eponymously named retail giant is the regional franchisor for luxury brands including Gucci, Prada and Swarovski and the creator of Level Shoes, is different. He gives an exclusive, honest account of why the past two years have gone so badly, and how he intends to fix it
Patrick Chalhoub is questioning everything he knows about business, 38 years after joining his family’s luxury retail empire, the Chalhoub Group.
“Everything you know is not necessarily relevant anymore,” says the co-chief executive, laughing nervously. “We have a big wave of digital coming into the retail sector today — and all kinds of sectors — with a lot of disturbance. It’s not one wave; it’s different waves from all sides. But it’s the new reality.”
As we have our most recent conversation at the group’s mega department store Level Kids, a little more than a year after its opening, one thing is clear: Chalhoub is planning to ride the waves.
The CEO of the Dubai-based firm that houses more than 600 stores is responsible for the distribution of the luxury industry’s biggest names in the region, including Chanel, Christian Dior, Louis Vuitton, Givenchy and Prada. He plans to grow bigger and better — but this time, online.
Sipping on an espresso, he is not lacking energy, eagerly revealing he plans to launch websites for the group’s marquees one brand at a time, with a number of platforms already up and running, including skincare name L’Occitane and cosmetics concept Wojooh, while women’s fashion label Michael Kors and jeweller Swarovski are set to go live in September and October, respectively.
But for the decades-old giant, it may take more than an e-introduction to turn the tide.
“We have to be engaged in the new world, in creating our own sites, our own experience, in opening up to new possible customers and attracting them both offline and online. But it means that we cannot continue what we’ve been doing in the same way. We have to shift our way of approaching our business model,” Chalhoub says.
And he is, undoubtedly, feeling the changes in the family-operated retail giant, despite facing sharp competition and a fast-developing market, making it even more difficult to cash in revenue.
“We are squeezed in our margin and we have much stronger competition. We are squeezed in terms of sales and market share where we have to struggle a lot to reach our targets and get better. And we are squeezed totally in our margin because we have more investment, more expenditure, for a revenue which could be even decreasing because of price alignment,” he reveals.
“We have to work in becoming more productive, optimise our costs and really reshuffle all of our business model. Even stupid things like our credit cards; we were paying a rate of 1.3 percent. Today, by challenging our bankers, we are paying 0.3 percent.”
While Chalhoub Group has historically taken five years to experience a return of investment (ROI) for regular-sized stores and seven-ten years for department stores, some of its newest initiatives, including Level Kids, are expected to take more than a decade.
A stagnant 2015 and just 1 percent growth in 2016 does not make it any easier for Chalhoub. The chief executive reveals the firm closed twice as many shops than expected last year and opened 20 percent less than planned.
As a result, the group will not be developing new initiatives in 2017. What it will do, however, is rectify mistakes made during the previous two years. Chalhoub is unexpectedly open about the errors, including the big blow to its three-in-one store Tryano on Yas Island, Abu Dhabi.
“One of our mistakes in Tryano — and I take full responsibility for it — was to say we’re going to create a store with three categories of products only — kids wear, beauty and handbags — when in fact our customer was expecting a department store. So they couldn’t understand [the concept]. Now we are rectifying our mistake. We are transforming it into a complete department store by the end of 2017,” he says, pausing before adding, “I’m giving you all my secrets.”
He laughs and continues to reveal more inside details.
“[With] Level Kids, one of the mistakes we did is, we created this strange feeling of very high luxury. When you look at the prices of our kids’ items, they are not very high, but the perception is, perhaps, too luxurious,” he says, referring to the store where an average shopping basket is approximately $200 (AED600).
The chief executive admits he is “not very proud” of the group’s 2016 financial results, and says initiatives launched in 2015 and 2016 will require more time to become profitable. It is a new reality, he says.
“Since July 2015, we have been living in a new era in the Middle East. We finished the period of abundance or easy money and flow of things when everybody was talking expansion, expansion, expansion. [Now it’s] more rationalisation. And I think it’s here to stay, unlike the crisis of 2009 or the one of 2000 or the 1990s, where there was a kind of slowdown and then a re-bounce again,” he says.
“I think we’re living in a new era where there is less abundance and more normality, which is happening everywhere in the world. We’re experiencing the beginning of the transformation in the region. It’s not like in the US, where stores are closing down because of the digital wave, but we are starting to feel that people are much more engaged in e-commerce.
“The Amazon-Souq.com [deal] would probably transform Souq into a much bigger player than it has been, but I’m not sure today how much it will affect luxury. The drive of Amazon will be more affected by some of the specialists, like Net-a-Porter, which are on a global scene.”
But Chalhoub is not worried online retail will wipe out the brick-and-mortar version in the GCC. Instead, he is convinced the group can have the best of both worlds.
“It will definitely happen a little bit everywhere in the world, where we have a good balance of online versus brick-and-mortar stores. It always reminded me of the cinema and movie theatres, where you had your television but you also wanted to go to the movies to have the experience,” he says.
“I think it goes with what we have to offer. In the Middle East, at least for our customers, shopping is a real pleasure. I don’t know how it is for you, but for me, I really enjoy it. My wife went to her nail salon [at the mall] yesterday, so I went shopping. I could read a book or watch a movie, which I do sometimes, but I really enjoy shopping. And I think that we are in a part of the world where shopping is very much enjoyed.”
The case is not the same in the US, however, where Chalhoub says the market is saturated.
“Perhaps Dubai will be over-retailed too, but the States has been absolutely over-retailed. When you look at how many stores are closing down, if you compare how many square metres of retail there is by the number of people, it’s two or three times the number [of people],” he says.
“The good sign is, the Amazons of this world are opening retail stores [and] the Apples of this world are investing a lot in retail stores, so it goes both ways.
Even the online gurus are going into brick-and-mortar.”
The group’s high number of buying shoppers, as opposed to browsers, is also helping the bottom line.
“We have certain indicators, which we call conversion rates — how many people enter the store and how many people buy. The conversion rates in most of the initiatives are higher than expectation, so we can reach 16-23 percent conversion in any of our department stores. In a regular department store, the rate is usually 5-6 percent. [So] we might not have enough traffic, but we have a good conversion rate,” he says.
While few can argue the chief executive is up against a fight, it is safe to say he is nowhere near giving up. Thirty eight years since he joined the decades’ old, tight-knit family business, Patrick Chalhoub is still rolling with the punches.