Few would have expected a nondescript 50-square metre shop in Hamra Street, Beirut would grow to become the Middle East retail giant Azadea Group, holding the exclusive regional rights to brands as big as Zara, Mango and French bakery and restaurant Paul.
Azadea now manages more than 600 stores with 50 franchised concepts, ranging from fashion and home furnishings to sporting goods, multimedia and food and beverage (F&B). Still headquartered in Lebanon, the group has spread its wings to 13 countries, including Kuwait, Saudi Arabia and the UAE — which is now its biggest market, with 200 stores.
The group’s high presence in Dubai makes it well positioned on a global context, given that the emirate has the second highest penetration of international retail brands of any city in the world, with more than 57 percent, according to property advisor CBRE. London remains top, with 57.9 percent, while Shanghai and New York trail Dubai, with 53.4 percent and 46.3 percent of international brands represented, respectively.
Gaining so much territory has been a feat for Azadea, as it competes with dominating local franchise players and joint-ventures partners such as Al Tayer, MH Alshaya, Apparel and Landmark Group. Despite having secured its share of the market with cash-pumping brands including Bershka, Paul and Virgin Megastore, the group’s primary concern is less about competition and more about a slowing economy amid low oil prices.
“The sentiment has not been that good in the last 18 months,” Azadea deputy CEO Marwan Moukarzel says. “In general, growth has been slow for the past two years. [Revenue growth] has been in the low, single digits.
“I think retailers have to be realistic. It’s tough to go back to [the] days when they would grow double-digits every year. Hopefully, it will go back to being 6, 7 percent.”
The slower economy has particularly hit Saudi Arabia. Moukarzel says Azadea’s operations in the kingdom has suffered but long-term it is a strong prospect.
“Saudi has been soft, which is normal considering the oil prices and the changes happening. It’s a very strong market and we have big plans for F&B concepts there,” he says.
“We just opened our first [Italian casual dining outlet] Eataly in Riyadh in December. It was very well received by the market, but Saudi is still very soft.
“The UAE has corrected a little bit, I hope we’ve reached a stage where it will pick up from here.”
While Azadea has consolidated some of its brands in markets including Kuwait, Qatar, Lebanon, Jordan and Egypt, it has acquired regional rights to others. The new brands include Lefties, dubbed “a Zara but 40 percent cheaper”, casual dining outlet Eataly and make-up marquee Kiko Milano.
Moukarzel says each brand bears huge potential in its own category of the retail sector.
“I think Lefties will keep us busy for the next four to five years. Looking at Kiko, you can do the math and say we can easily open 50, 60, 70 Kikos in four [or] five years. So that’s, by itself, a huge expansion,” he says.
“With Eataly, I hope we can [achieve] a similar story as the one with Paul; today we have 60 Pauls. I only have four Eataly [restaurants] — two in Dubai, one in Qatar and one in Saudi — so the potential is still there.”
Despite consolidating some brands in Qatar and Kuwait, Moukarzel says Azadea plans to launch at least 30 stores in the two Gulf states by 2018, in developments such as Mall of Qatar, Doha Festival City and Al Kout Mall in Kuwait. Outside the Gulf, another 17 stores are slated to open in Beirut, as well as several more in Jordan.
But there is one particular place where the company is fixated.
“I think the UAE has a lot to offer because of the stability of the market and the infrastructure that’s in the UAE,” Moukarzel says.
“It’s much more penetrated in terms of brands… [and] there has been a lot of consolidation lately, but the market is strong. The densities [number of stores of one brand] that you have here in the UAE compared to other places in the world are still relatively high.
[But] a lot are doing numbers that are decent enough.”
Success in such a highly-saturated retail market — barely 2.7 million people live in Dubai compared to 24 million in Shanghai, 8.6 million in London and 8.5 million in New York City — comes down to selecting the most profitable shopping locations within the city, Moukarzel says.
“If you look at the fashion market [in Dubai], I would say that there’s a lot of development and you need to fill these malls. The challenge is actually knowing where to go, in which mall, and where not to go,” Moukarzel says.
“You can’t be everywhere and make a profitable business, you need to be more careful and selective. I think that’s normal, because [in past years] you went anywhere and made money, which is not the norm.
“The cost of doing business is creeping up, putting some pressure on businesses, but then again, like any mature market, eventually things do correct and you need to go back to normal returns.”
Moukarzel describes the process of deciding where to locate brands, and potentially whether to shift them, as “portfolio management”. For example, Azadea recently closed its Piazza Italia fashion shops because they were no longer performing financially.
“Unfortunately, sometimes we have to divest from brands that we think are no longer giving that edge to the customer,” he says. “We’re not emotionally attached to brands as much as we want to make sure that our customer really appreciates whatever we bring to the market and I think moving from malls to malls is a new trend that you will see now.
“Logically, no one will close in Dubai Mall and no one will close in Mall of the Emirates, but if you go to, say, Abu Dhabi, where you have Reem Mall and Al Marayah Mall coming up and you already have Yas Mall, there’s [going to be] a lot of offering in the market. Probably in some of the existing malls, brands will need to migrate to the new commercial real estate and the customer expects you to be in the new development.
“The trick as a retailer is you shouldn’t be emotionally attached to any location; you just have to follow your customer and the market. So yes, sometimes you have to close doors.”
Azadea is perhaps better able to maintain an emotional distance from its brands because none are original concepts. Moukarzel concedes that even with two or three decades of experience managing brands under its belt, creating new ideas is not the group’s forte.
“What we [have been] able to do is be a great executer [of brands]. I think the minute we start creating our own concepts, especially in fashion, we will start competing with our franchisers,” Moukarzel says.
“I don’t think we will succeed, because it’s not our DNA. I think we’re a great delivery platform, more than creators, and it’s good to know what your strength is and building on it. There’s a lot more to do anyway; we’re very busy. Spending time and resources to come up with your own concept is not something we’re entertaining.”
But he does believe there is great potential for young entrepreneurs.
“I think there’s still room in the market for new concepts that bring a different experience. Look at some brands that have come up lately and are doing pretty well and were created locally. For example, look at Papparoti — such a simple concept but [it’s getting] a lot of attention. There’s a concept from Egypt called Zooba — very nice street Egyptian food but with a different environment,” he says.
“Retail is and will remain a very exciting and interesting sector. People will never stop eating out or wearing the latest fashion; there are a lot of opportunities. [But] I believe getting into the franchise business like ours is getting too crowded. There are big players; it’s going to be tough for someone to get a brand and make it.”
Even e-commerce is already crowded, he says.
“For new entrepreneurs wanting to get into that game, I see e-commerce as also being already crowded, with Souq.com, Noon coming up, and SIVVI. I think a lot of money will be spent in this industry, it depends on how much you want to invest or lose,” he says.
Azadea will not be entering the fray. Despite direct access to dozens of brands already, Moukarzel says the group will focus on using online as an additional shopping option for its existing brands.
The online ordering platform for Virgin Megastore launched a year ago, followed by Zara Home in the UAE.
“The way we look at e-commerce is it’s another channel with a touchpoint with the customer. For some, it’s another business, for us it’s the same business, just another way to provide the customer with the same experience online as offline,” he says.
“It’s going to be a bit slow, but I don’t think retailers have an option whether to go online or not, as you need to have presence online. I think in two years’ time all our brands will be offered online. It’s just a normal evolution. We don’t have a choice. You need to look at it as being just one more store, as if you have ten stores in the UAE and you need to open the 11th.”
While online sales are an unavoidable part of the retail future, Moukarzel is adamant bricks and mortar stores will remain important, particularly in the GCC.
“In the Gulf, no matter how big that industry [e-commerce] might grow, people would still want to go to physical stores because that’s the entertainment destination, that’s the family destination,” he says.
“I don’t want to be like everybody else and tell you, ‘wow, e-commerce’. I think people have to be careful. Let’s look at e-commerce in general and let’s be realistic. It’s no surprise or secret that everybody’s getting into the e-commerce business hoping one day the Amazons or Alibabas of this world are going to buy them out. It’s a very cash-draining industry; it requires a lot of investment. You need to really have deep pockets and be able to raise capital.
“Look at players in the market; some of them are already suffering while others are hoping to be bought. And then you have Noon coming in very strong, those guys are going to spend big money here [$1bn]. So for anyone to come into the e-commerce [sector] and compete is tough… because it’s much more than just selling online; it’s a supply-chain game.”
Mourkarzel says there are some gaps in the market, but it takes a keen eye to find them. New entrants need to ensure they research well, rather than basing their ideas on instinct or feeling, he says.
“It’s a tough environment, I can tell you. Ten, 15 years ago, opportunities were there. Today, it’s very tight,” he says.
There is room, he says, for local designers who offer something different and personalised, while unique food concepts are also likely to do well.
For a retailer who has made his money from selecting the best brands and concepts and helping them to expand in the Middle East, Moukarzel’s advice ought to be worth paying attention to.
Subscribe to Arabian Business' newsletter to receive the latest breaking news and business stories in Dubai,the UAE and the GCC straight to your inbox.