Follow The Leader: Patrick Chalhoub, Co-CEO, Chalhoub Group "From being brand-focused, we have become customer-focused. Rather than having our customers coming to us, we are now going to them."
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The main rule about interviewing Patrick Chalhoub, the co-CEO of the Chalhoub Group, a luxury retail giant founded in 1955 in Damascus, is not to run out of patience. I am in what is called "The Library," which serves as a waiting room at the Group's headquarters in Dubai Design District (d3). The expansive room includes two almost identical sitting areas -the business is jointly run by brothers Patrick and Anthony, the sons of founder Michael Chalhoub- with black leather sofas and side tables on each side, framed by elegant standing lamps, and surrounded by bookshelves stocked with decorative art pieces, a collection of business award trophies, and books on leadership, retail, and startup success. The latter entertains me for nearly half an hour, after which I am joined by the Group's Communications Director. Then, Patrick Chalhoub storms in, panting and apologizing for keeping me waiting, with his face breaking into a grin. My tolerance is then generously rewarded with sufficient time, lengthy explanations, and many more smiles from Chalhoub.
In a similar fashion, the immense fortunes of the Chalhoub family might have not been amassed without them belatedly altering their tactics and going full steam ahead thereafter.
In 1965, a decade after opening their first international boutique Christofle in Damascus, the economic uncertainty in Syria urged Michael and his wife, Widad Chalhoub to move their business to Beirut. Another decade later, in 1975, the family relocated to Kuwait due to the civil war in Lebanon. By the time Iraq invaded Kuwait in 1990, the two Chalhoub brothers had been actively involved in the family business, and, just before the war started, decided to move its operations to Dubai. Today, Chalhoub Group operates more than 600 retail stores in 14 countries, employing more than 12,000 people from 100 different nationalities. It is comprised of over 125 companies, affiliates and joint ventures. "When you face adversity, there are many negative elements, but positive ones as well," Chalhoub says. "Perhaps these movements assembled us closer together. I would say that there was more unity among us, created by that adversity, which put us together to fight against it."
These days, however, Patrick Chalhoub seems to be fighting the same battle, yet not across geographies, but between the online and offline worlds. Before we delve into details of the group's plans to digitally reinvent itself, Chalhoub gives a detailed account of its past. "Since inception, our business has been an original business, which means that it was conceptualized and founded by my father in 1955, after he worked in a retail store for two years," he says. "At that time, he felt that the Syrian market was too small for luxury products, and that he either had to diversify or to expand regionally, and thus he saw opportunities in the Gulf. Because of this regional view from the outset, we've always felt that if the business stops or slows down somewhere, it will continue to grow in the rest of the region. Also, I would say, the business was of a size which was more easily managed. It was a small enterprise with less complexity, maybe less opportunity as well, but due to less complexity, we felt like it was one big family."
Chalhoub continues, "When we moved from Syria to Lebanon, I was very young, but when we moved from Lebanon to Kuwait, I had just turned 18 at the time. I was more mature, and I remember that we moved for six months only. We had a small office in Kuwait, which was actually a workshop for spare parts. I moved to France to continue my studies, but the rest of my family moved to Kuwait, and they were living in that office. At night, they would turn sofas into beds, and the office desk into a dining table. There were eight or nine of our colleagues with my family at the time. One of the reasons for living in that office was because they thought it would be only temporary, however, our headquarters stayed there for 15 years. Of course, not in the same office. Then, when the Iraqi invasion happened in Kuwait, my brother and I took the decision to move to Dubai, but we first stayed in Paris, and we repeated what our parents had done, but in a different way. We invited our colleagues who had also fled Kuwait to come, live, and work in our house in Paris. We also believed it would be only temporary. Then we decided to move to Dubai because it was more practical. But these two stories show that sometimes you have to shrink in order to grow, you have to push through conditions that are not the best. It also reminds me of the startup mentality that you have to work day and night for something to pick up."
In the region's startup circles, Chalhoub is one of just a handful of greats always ready to advise young entrepreneurs. He is a Board Member of Endeavor UAE, the local chapter of the New York-based high-impact entrepreneurship platform Endeavor. As a member of the Dubai Design and Fashion Council, he works on nurturing young talent in order to position Dubai amongst the 10 global cities in fashion and design. Chalhoub takes a particular interest in the young –Generation Y (born between 1975 and 2000) and Generation Z (born in 2000 and onwards)– who, he says, have been redefining not only the region, but his business as well. According to a 2016 UN report, they now form a large and active portion of GCC consumers: 52% of the population in Saudi Arabia, 51% in Oman, 49% in Bahrain, 47% in Kuwait, and 40% in the UAE.
"I've really noticed a big wind of change in the region," Chalhoub says. "This young generation who, at one point in time, I'm sorry to say it, used to be spoilt, take things too easily, and stay in their comfort zone, is today extremely engaged. It makes me so happy to say that they have plenty of ideas and want to work on them. They went from being passive people who wanted to live on the glory of their parents, to people who are challenging everything in the world."
One of them is his son Michael Chalhoub, whose own break in business came very early when he founded Sport360, an online sports portal in English and Arabic. When it comes to the often sensitive topic of succession in family businesses, Chalhoub says that the transfer from the second to the third generation poses many challenges that they have already been preparing for. "From the first to the second generation, I would say, it is usually quite an easy ride, because we have all lived in the same home, we have seen the business growing with the first generation, and we have accompanied them on their journey since we were born. In our family business, we are only two brothers, and both of us have been engaged [in the business]," he says.
"From the second to the third generation, it is usually a very critical moment for all family businesses, because, firstly, the family business is usually more established. For example, we went from 100 to over 12,000 people, and it has become another kind of company, meaning that strong governance has been put in place. That is important, but it removes the soul of the family business a little bit. In our case, since the business has become so complex, it is important to have clarity with the third generation. So, we have established a few principles for them." Chalhoub then goes on to list out these guidelines.
"The first one is that there is no obligation to join the business, but in order to do so, you must want it, and you must earn it. The second one is to say that even if you are not in the business, you have a role of the owner, which is different from the role of the manager. In my and my brother's case, that was never a question, we were immediately both the owner and the manager. But with the size and the governance structure that we have today, our children can separate these two roles. They can inherit shares, without an obligation to be in the business. We have also established some rules in case they decide to disinvest. My brother and I made sure to teach them how to be good owners, which means to obey strict governance, to know how to assess whether somebody is or is not a good manager, to sell in an intelligent manner, and not to go against each other, and so on. The third rule is that before working in the family business, they should do something else. Both education and experience are important to us, meaning that it is important that our children are business-minded and street-smart at the same time. Lastly, it is about making sure that people who haven't lived under the same roof but have even lived in different countries and have gained different perspectives are able to work together."
Once the time comes, the third generation of the Chalhoub family will face their own set of market challenges, some of which have already shaken the family's business to the core. Over the past few years, Chalhoub has spoken openly and often about the group's difficulties in adjusting its traditional retail brick-and-mortar model to the fast-paced digital world. In 2015, business growth was stagnant. In 2016, the figures also didn't paint a particularly sunny picture- only 1% business growth, with the Group closing more and opening fewer shops than planned, trying to adapt its strategy to the new consumption patterns arising from e-commerce and online retail growth. "Since July 2015, the economic situation in the region has become more complicated," Chalhoub explains. "The first big change was the drop in oil prices, which has shaken a lot of businesses and changed consumer habits. However, the second change was more important for me, and it was that our consumers changed a lot. So underneath this economic slowdown there was another, much deeper change, and it was the shift in our customers' mindsets. Perhaps this other phenomenon was sped up due to the economic slowdown, but nevertheless, in July 2015, it took us time to understand that there was another challenge."
"So, as soon as we felt the importance of being more digital, more connected, we took the first step, but it was, I would say, late," Chalhoub notes. "We should have taken it before. Our first step was to create a digital center in order to enter the digital world. However, although we felt that we were moving in the right direction, we weren't necessarily doing it in the way that was sustainable for the future. The reason is that, at first, we felt that going digital was just a marginal part, whereas it wasn't, it influenced everyone and everything. We couldn't have only one part of the organization looking into this, as we had initially thought, but we had to make sure that everyone was included. So, from January 2016, it took us six months to formulate our digital strategy, but when we did it in July 2016, we felt that it shouldn't be only digital transformation, but the overall transformation of the organization, including the change in our culture, our behaviors, our processes, and so on. It was about making sure that people made quick decisions using digital technology in order to be relevant to the consumers, who, at their end, were also moving very quickly. So, it wasn't about going from point A to point B anymore, because point B was continuously changing."
Once again, the Chalhoub Group demonstrated that it is never too late to amend its approach and catch up quickly. The Group has already been active in educating their employees on how to serve their customers better, such as establishing the Chalhoub Retail Academy in 2007, and also developing a professorship in luxury brand management with the American University of Sharjah (AUS). This year, the Chalhoub Group also entered into a joint venture agreement with the UK-based Farfetch, which allowed the Group to feature some of its brands on the Farfetch online platform. As part of the agreement, Chalhoub has agreed to share its distribution and marketing services with the Farfetch e-commerce platform and curate content in Arabic. However, at the beginning of 2018, the Group set a 900-day timeline to realize the digital transformation across its entire network. The process is split into 10 phases of 90 days each, in order to measure progress more easily and make timely adjustments where needed.
"We set up seven guiding principles and changed our vision from being a traditional distributor and retailer of luxury in the Middle East to becoming an agile organization that places convenience at its customers' fingertips," Chalhoub says. "So, from being brand-focused, we have become customer-focused. Rather than having our customers coming to us, we are now going to them." Two important pillars of the Group's 900-day makeover are Ibtikar, an innovation lab for the Chalhoub community to foster new ideas, and the Greenhouse, an accelerator program for creating technology-driven solutions to address the group's brands' specific pain points. "We have decided to empower our team so that if their idea succeeds, we will scale it quickly, but we wouldn't fire people who failed, but learn with them," Chalhoub concludes.
"So, both failures and successes have become sharing moments. We invited our employees to work on their ideas and develop a proof of concept with our support, giving them three months to move away from their day-to-day work but remaining on the same salary and with the job being secured after this period in the case that the idea fails. When we launched Ibtikar, we had 150 employees coming up with the ideas, three were chosen and they got three months to work on them. One has been retained and we will invest in it, one girl got three more months to develop hers, and one has been rejected. We launched the Greenhouse being aware that we have not only big competitors, but also startups that we feel threatened by. So, we decided to consider those startups as our allies. For that reason, the Greenhouse is open to any entrepreneur in the tech retail space. We offer a working space, mentorship, and so on, but what we have noticed that startups need most is not money but a ground to test their proof of concept. And through our more than 600 retail stores or 10 websites they can do that- test their technologies. If it works, we scale it up with them throughout the group. So, the message for entrepreneurs and our team is that if you have an idea, make it happen, and we'll support you."
ASK THE EXEC
Patrick Chalhoub, Co-Ceo, Chalhoub Group
Given your experience in the business realm, what would be your advice for entrepreneurs today?
"Patience and persistence. A lot of entrepreneurs are very impatient and tend to abandon their projects very quickly. Sometimes things take more time, so they need to be persistent. Not to be patient forever but also not to change your course too quickly. We live in a collaborative world, so it's great to have mentors, spend time with them, seek their advice, but you sometimes need to listen to them. You don't necessarily need to follow their advice but at least listen to it. Collaborate rather than trying to reinvent everything yourself. Lastly, they need to keep in mind that there is a difference between starting up and scaling up your organization, which is that when scaling up, you need other people and certain competences that you don't have. This is an area where entrepreneurs get uncomfortable because they are used to doing everything on their own."