A tough operating environment in the last two years has pushed luxury retail colossus Chalhoub Group to reinvent its business
In the first week of May, the senior management team at the Chalhoub Group wrapped up its launch event with international online fashion marketplace Farfetch.
Much like everything else surrounding the joint venture (JV) deal, which was unveiled at the end of January, the event was arranged on an accelerated timetable.
As promised at the time of the initial announcement, the plan was to grow the Middle East operation “very, very fast” according to Farfetch founder José Neves.
Since then the JV has delivered an Arabic-language site, curated Ramadan collections for Arabic customers and delivered an improved local supply chain.
We need technology to transform, which is costly. We need experience, we need services. We need relevancy in our stores and in our digital platforms”
The joint entity will be headquartered in Dubai and employ 50 people by the end of the year. And it’s a deal that makes sense on a number of levels: it enables Farfetch to expand its regional footprint as it charges towards an expected year-end IPO, while Chalhoub Group plugs into a tier-one digital luxury player, thereby facilitating a complete transformation of its digital strategy with the minimum of risk.
Prior to the Farfetch deal, Chalhoub Group’s digital strategy centred around standalone sites for its individual business units, such as Level Shoes, Level Kids, cosmetics concept store Wojooh, Tryano, Ghawali, Lacoste, Swarovski among others.
But progress was slow as the group tried to find a formula that would enable it to develop a compelling digital story across its 40-brand operation.
Initially, it set up a centralised “digital competence” centre in Sharjah to develop online initiatives. The team was technically strong but, as Patrick Chalhoub, CEO of Chalhoub Group, tells Arabian Business in an interview from the company’s expansive new offices at Dubai Design District (D3), it was also “too far removed from the business. There was a lot of bottlenecks because they were not able to move at the speed of the business.”
The need to transform the 63-year old, family-owned business has been underscored by slow growth and rising costs over the last two years. According to an earlier interview with Arabian Business, which was published in August last year, Chalhoub Group registered one percent growth in 2016. The group’s growth in 2017 was in line with an industry growth rate of between one and two percent.
Speaking in 2017, Chalhoub said that since mid-2015 the Middle East had entered a new era. “We are finished with the period of abundance,” he said. “It’s now about more rationalisation. And I think it’s here to stay.”
We have to be relevant, which is a really big challenge. That means that most of our network is not the one we want in the future”
It is also a period of profound digital transformation, hence the Farfetch JV, which not only reenergises a faltering digital strategy, but also connects Chalhoub’s luxury brands to a tried, tested and successful platform. At the start of May, four group companies had connected to the local platform and more were expected to join.
“We have a partnership team and they encourage stores to connect to it. The idea is if they connect then we can speed up delivery to customers because the product is readily available here,” says Chalhoub.
The partnership team isn’t just working across Chalhoub Group – it’s enticing other local luxury retailers and local designers to sign up. The site has enjoyed some early success, with the likes of Modist.com supplying items for the site’s Ramadan collections. Other major fashion brands are present through global deals with Farfetch, which are then fulfilled by local distributors.
“The customer only sees one product. The algorithm [decides] between availability, location and price. This is all about customer convenience, not supplier or distributor convenience,” comments Chalhoub.
“It is good for our competitors to connect to Farfetch. From one side we want to get more traction and from the other, we want to have more access to the customer. It is a win-win,” he adds.
1955 - Michel and Widad Chalhoub open the first Christofle boutique in Damascus, Syria
1967 - First local partnership in Kuwait and regional distribution of beauty, fashion and gift brands
1980 - Birth of Tanagra, a timeless luxury concept store in Kuwait
1983 - Contractual relationship with Louis Vuitton
2004 - Alliance with Saks Fifth Avenue
2007 - Launch of Chalhoub Retail Academy
2008 - Opening of more than 90 shops, making the group one of the key retailers in the region
2012 - Opening of Level Shoe District, a unique shoe metropolis in Dubai Mall
2018 - Farfetch and Chalhoub Group sign JV
The Farfetch deal is an indicator of more fundamental change within the group. The tough operating environment brought by globalisation and the power of internet retail is driving the group to transform its entire operation.
It is good for our competitors to connect to Farfetch. From one side we want to get more traction and from the other, we want to have more access to the customer. It’s a win-win”
There is also the wider realisation that despite the success of many local firms between 2010 and the nosedive in oil prices between 2014 and 2015, few – not just those in retail – considered the impact of globalisation and the mobile internet on their business.
“We only engaged in 2014-15, so it was quite late compared to what is happening in the world,” he admits. “Globalisation on the one side, and digitalisation on the other. It obliges us to transform. We have to get better,” says Chalhoub of the new realities his industry faces.
To move this aim from theory to reality, the group worked on a strategy throughout 2017 to “get better” at what it does – serve customers. The result is a focused business plan that calls for a complete change in the approach of the organisation that will eventually create a customer-centric, hybrid retailer.
“We gave ourselves 900 days to totally transform, with one single thing in mind – the client at the centre,” says Chalhoub. “The client today is totally empowered. So we have to make sure we have this client centricity.”
For Chalhoub, this isn’t a token change in the company’s mission statement. It is an attempt to rewrite Chalhoub Group’s operational DNA. If successful, it will transform the group into an omni-channel retailer, capable of delivering competitive customer service both online and in-store. But that alone isn’t enough; it also hopes to foster an open company culture that encourages bottom-up innovation and collaboration.
To become more competitive and nimble, the group is shifting decision making “much closer to the market and the customer”, says Chalhoub.
The retail group began its 900-day quest for reinvention on January 1, 2018, after spending much of 2017 absorbing lessons from its initial digital experience.
With the strategy introduced in June, a “shift team” was created to work alongside existing business units to make sure they are “agile, quick and use the best possible technology”, explains Chalhoub.
To retain momentum and focus, Chalhoub Group has broken up the two and half year programme into ten, 90-day sprints, each with its own set of deliverables.
The initial sprint focused on positioning the group around its strategy and educating employees. There were also some quick wins including launching three new sites, completing the Farfetch JV and signing an agreement with Duval Union Consulting. Many business units also submitted plans to transform their customer approach.
At the end of the first quarter, Chalhoub admits that the group achieved approximately 40 percent of its target.
“Some would say that is very bad, but I would say that shows movement,” says Chalhoub. “Now we are on sprint two. We have some less ambitious projects and some more ambitious projects, but I think we will have better fulfilment of our targets,” he adds.
If by June 2020 Chalhoub Group achieves its objectives, the organisation will be radically changed. It will offer customer products by whichever channel is most convenient, whether it’s via a store or a website.
Also, individuals and teams will operate with a greater degree of autonomy, enabling them to serve customers better. Leadership roles will become less about issuing instructions and “validating” decisions and more about coaching and mentoring staff.
“We will become totally customer centric. We will be a hybrid of physical and digital; with teams that are totally empowered to take their own decisions. It will be a radically different organisation, but much more relevant for the client of today,” he explains.
To operate in this shifting landscape will mean more than embracing a new corporate culture. Chalhoub Group must overhaul much of its physical retail operation, as it marries memorable customer experience with the efficiency of online shopping.
Cost-wise this is an expensive exercise for us. Revenue is uncertain and we are totally out of our comfort zone, but we just need to get better”
“Customers today want to have a fantastic experience, very good service, an absolute uniqueness in what he sees. They want storytelling. So it is not the end of retail – it is the end of retail that has no more meaning, or no more feeling than just the availability of products, because digital is just so much easier. Brick and mortar retail has to transform,” he says.
Chalhoub Group plans to use technology to create a seamless customer experience. It will also leverage a customer’s buying history to improve service, suggest preferred brands and remember product sizes. “If I can bring the best of these services to my stores; then fantastic,” enthuses Chalhoub.
The group’s hybrid retailing ambitions will have repercussions for its existing network of 600 stores. Larger outlets are likely to expand as they focus on storytelling experiences, others will open closer to communities and some will close.
“Will it be more or less stores? I am not sure,” he says of the possibilities ahead. But I have to be relevant, which is a really big challenge. That means that most of our network is not the one we want in the future,” he adds.
Chalhoub knows that a hybrid retailing model will struggle unless it can leverage customer data to enhance its services. But collecting data, organising it, extracting customer knowledge and offering personalised services is time-consuming, expensive and often not successful.
Despite the concerted effort by local retailers in recent years to collect data with almost every purchase, it rarely results in personalised services. As each brand rolls out online initiatives, the management of customer data will become critical.
“We use customer data to connect to clients. We have to understand our clients and service them better,” explains Chalhoub.
Chalhoub Group currently uses customer data to identify buying patterns at the group and business unit level. However, the current data strategy doesn’t yet enable sophisticated analysis that would enable it to suggest products or brands to individuals, based on previous buying behaviour.
“It is key for us to develop a sustainable competitive advantage given the volume, depth and accessibility of our digital and offline data.
“At group level we can deliver in-depth analysis of our customer across brands looking at their purchasing behaviour. But for now we are not yet equipped with a technology that allows predictive analysis, but it is part of our strategy,” he adds.
Given the scale of change Chalhoub Group is trying to engender, it faces significant challenges if it is to succeed; not least of which is getting employees to step out of their comfort zone and embrace the idea of empowerment.
“If we could crack it, and get people to not only to be trusted but to trust themselves and move forward, this by itself would be really transformative,” says Chalhoub. “As soon as people discover what we mean by empowerment we will see a huge change,” he continues.
Evolving into a customer-centric organisation is also going to be expensive. At a time when the group is juggling “uncertain revenues” managing the cost of technology investment is a challenge.
“We need technology to transform, which is costly. We need experience, we need services. We need relevancy in our stores and in our digital platforms. All this is new investment and sometimes we will have to prioritise because we are not sitting in a goldmine,” he says, admitting that, “we are totally out of our comfort zone, but we just need to get better.”
But the situation also presents an opportunity. Chalhoub Group has over 60 years of experience selling luxury goods and a large retail footprint across the Middle East.
If it can harness customer data and build customer relationships that mirror its partnerships with its exiting fashion principles, there is no reason to think it won’t just regain momentum but will have set the foundations for future expansion into new markets.
“If I was better I could ship from here to the outside,” Chalhoub says of this urge to grow.
For those plans to succeed the clock is ticking on those 900 days. This is a fascinating and important time, not only for Chalhoub but for retail in the region.
The fashion industry has experienced unprecedented upheaval in recent years. Weak oil prices, political developments across Europe and a slowing Asian economy have smashed headlong into the growing power and disruption wrought by the internet.
Luxury brands that have historically championed their exclusivity and expense must compete in a world where social media has empowered consumers and created a whole new industry of “influencer” marketing.
E-commerce has undermined local distribution agreements and provided near endless choice and seamless service, which are now seen as the bare minimum for customer expectation.
With luxury sales in China and other parts of Asia only recovering in the last 12 months after several stagnant years due to lower economic growth and a crackdown on corruption in 2011, international fashion brands have increasingly eyed the Middle East as the next big market. The region’s appetite for luxury items is not new, having been home to a number of best performing luxury stores for some time.
Retail in the Middle East
Market research compiled by Chalhoub Group estimates the value of the regional luxury retail market at around $8bn. With just one percent of those transactions taking place online, the market opportunity for rapid growth is apparent.
Indeed, Chalhoub Group, regional distributor for the likes of Chanel, Christian Dior, Louis Vuitton and Prada, predicts that GCC’s luxury e-commerce market will top $1.5bn by 2021.
Given the GCC has the youthful demographics, mobile penetration and disposable income to justify the optimism surrounding online sales, the stampede for the region’s audience of digitally fluent, young and affluent shoppers is well underway.
The internet has fundamentally altered the retail landscape; websites such as Net-a-Porter.com, Matchfashion, Shopbob and at the lower end of the scale, Asos.com and Amazon.com are aggressively targeting Middle East shoppers with a greater range of fashion items, localised collections, rapid delivery models and competitive prices.
UAE’s retail scene
Local retailers haven’t sat idle. Al Tayer Group, one of the biggest local fashion distributors, which also counts Bloomingdale’s and Harvey Nichols in its portfolio, rolled out its multi-brand site Ounass.com at the end of 2016.
Also at the end of 2016, Mohamed Alabbar’s Symphony Investments (part of Alabbar Enterprises) revealed its intention to move aggressively into online fashion retail, leveraging a joint venture agreement with Yoox Net-a-Porter Group (YNAP).
According to the announcement, Yoox and Outnet sites should launch sometime this year and localised versions of flagship websites, Net-a-Porter and Mr Porter are due in 2019. Alabbar also launched Noon last year and also bought a 51 percent stake in Namshi.