Chalhoub takes expensive look at itself

Challenging year amid global downturn drives home need for a new approach to business.

The region's largest luxury retailer and distributor, Chalhoub Group, is spending US$30 million (Dh110.2m) to reshape the organisation and adjust to what has suddenly become a "mature" retail environment, a senior executive says. Having spent years struggling to keep up "irrational" sales growth of between 20 and 25 per cent, profits from carrying brands such as Chanel and Louis Vuitton in its home market of Dubai fell dramatically this year.

Now Chalhoub is cutting costs and investing in consumer research, employee training and marketing, said Patrick Chalhoub, the co-chief executive of the group. "It is a year where we had to reassess the way we have been doing business up until now," Mr Chalhoub said. "Over the last five years, we have had totally irrational, 20 or 25 per cent growth. "You were in a mood of growing and of spending, which is totally different than the consolidation phase we are living in now."

Chalhoub Group, which has 350 stores in 14 countries across the Middle East, will spend $30m in a major review of its operating costs. The money will be spent on initiatives including new information technology and management consultants over the next three to five years to reduce annual expenses, Mr Chalhoub said. "People are saying, 'Are you crazy? You are making now an investment to review your process?'" he said. "And I say, 'The aim is to reduce our costs by as much'."

This year has been a wake-up call for retailers the world over but especially in the UAE, where many merchants had enjoyed years of double-digit sales growth. After the economic crisis began to hit the Emirates this year, consumers became more cautious with their cash and sales fell by as much as 40 per cent. Although consumer confidence has started to return, retailers such as Chalhoub are adjusting their strategies to stay competitive.

Chalhoub was hit by the dramatic fall in Dubai sales this year just as it was making investments in additional stores in new shopping centres, such as Dubai Mall. For the group, the brands of which also include Fendi and L'Oreal cosmetics, UAE turnover this year stayed level with last year at about Dh1 billion, but profitability fell by between 40 and 60 per cent, Mr Chalhoub said. Stores that were flush with inventory ordered last year were forced to have bigger and more frequent sales, even as shoppers were carefully considering each purchase and no longer buying on impulse.

"When sales were expanding like crazy, we could buy and buy, and if it doesn't sell today it will sell tomorrow," Mr Chalhoub said. "Now, we have to analyse our processes more." The opening of Dubai Mall and other shopping centres across the emirate, as well as a drop in the number of Eastern European tourists, also cut into revenues, he said. Although sales are up between about 7 and 12 per cent in Abu Dhabi, sales in Dubai have dropped by as much as 50 per cent, depending on location and store brand, Mr Chalhoub said.

Shopping activity also became more dependent on events such as Eid and Christmas. "We are more hammered with up and downs, which really happens more often in mature markets," he said. "The market is becoming much more mature." Naeem Ghafoor, the chief executive of the consultancy Skyline Retail Services in Dubai, said cutting costs was a good move, as many luxury retailers in the Emirates had grown excessively.

"Dubai was booming for such a long time and every business in Dubai was doing well," Mr Ghafoor. "But the economy, in every country, kind of collapsed. And lot of economists say that we're not out of it yet, not by a long shot." If it is spent in the right way, such as buying a system to monitor and direct inventory among its stores, Chalhoub's investment could lead to big savings, Mr Ghafoor said.

Chalhoub will continue to spend on marketing, training and consumer research. It has maintained its marketing budgets this year and has increased spending on employee training from 3 per cent of salaries to 5 per cent this year. It has also opened a new retail academy in Jeddah, in addition to its Dubai campus. The group is also doubling its investment in consumer research from between Dh2m and Dh3m to between Dh5m and Dh6m, Mr Chalhoub said.

Next year, the firm plans to open more than 30 stores across the Middle East, including the region's first Christian Louboutin and Michael Kors shops, and close about 10 underperforming outlets. This is down from the 47 stores it opened and 15 it closed across the region this year. Mr Chalhoub expects a sales growth of between 5 and 7 per cent next year. The group also plans to shift its focus towards new regional markets.

"Today, if we look at the growing cities in the Middle East, I would say it is Doha and Abu Dhabi," he said. "The cities that had been counting on more visitors, like Bahrain, like Jeddah, or Dubai, have been more affected than those which count on the local population." @Email:[e-mail]