Friday, July 08, 2011

A double dip foretold

Commentary for Executive magazine
Lax accountability and regulation edges world toward new precipice

More than a few questions have been raised about Federal  Reserve Chairman Ben Bernnake’s claims that the US is not headed for a ‘double dip’ recession

Are we headed for a ‘double dip’? The head of the United States Federal Reserve, Ben Bernanke, said last month that this is unlikely in the US, but a recent CNN poll shows 48 percent of Americans think the country is en route to another Great Depression in the next 12 months. The other options raging through economic debates around the world is whether the US is on track not merely for another dip, but a mega-dip, or indeed if the US economy ever actually pulled out of the first recession.

If a second financial crisis occurs it will be bad news not just for the world's largest economy, but for everyone on the planet. The problem, in short, is regulation, or the lack thereof. It was the lax regulatory oversight of such financial products as derivatives and sub-prime mortgages in the US and elsewhere that triggered the first financial meltdown in 2008.

Major banks were bailed out, consolidation occurred, but few individuals were effectively punished. Perhaps more worrying is the fact that regulators were not empowered to properly leash the insidious corporate culture of casino-style capitalism which, though briefly brought to heel in the throes of the first financial fallout, has now returned to rabid form.

Sure, the Restoring American Financial Stability Act of 2010 was enacted, but financial institutions and the Republican Party are actively trying to weaken the framework. And unfortunately the Financial Crisis Inquiry Commission report was released in January, long after the act was passed, meaning its findings were not taken into account in crafting the legislation. The commission's report makes for sober reading; “We conclude the financial crisis was avoidable… Widespread failures in financial regulation and supervision proved devastating to the stability of the nation's financial markets… Dramatic failures of corporate governance and risk management at many systemically important financial institutions were a key cause of this crisis… We conclude the failures of credit rating agencies were essential cogs in the wheel of financial destruction.”

Where the report was weak was in addressing systemic financial fraud, which was present in much of the sub-prime mortgage loans — a major factor behind the financial crisis. According to William Black, author of “The Best Way to Rob a Bank is to Own One,” a fraudulent loan is where a lender loans to a debtor without knowing how the debtor can repay the loan, hence a form of fraud, or what criminologists call accounting control fraud.

With regulators still lacking authority and having little chance of successfully convicting individuals on charges of financial fraud in the US, the stage is set for “Financial Crisis Part II: The Really Big One”. The irony is that while the US has banged on for years about the need for other countries to implement financing laws — regarding anti-money laundering controls, due diligence and so on — the most pertinent regulations to be enforced are in the US itself, given that a crippled American economy would have a precipitous downside worldwide.

As Black stated earlier this year, “elites can now commit white-collar crimes with near impunity. Yeah, there are exceptions, like the Galleon case [against hedge fund manager Raj Rajaratnam] and [Bernie] Madoff, but that is the teeniest, tiniest percentage of these elite frauds [which have] any risk of being prosecuted. And the result is catastrophic for our nation, and of course not just our nation: we’re seeing these epidemics of control fraud in many other nations.”

One of the more sensible decisions to come out of the US recently was by Treasury Secretary Timothy Geithner, suggesting countries should mutually enact tighter financial regulations and set standards to better control the $601 trillion over-the-counter derivatives market. This would be a sensible move and it would make sense for governments to push for this.

Simultaneously, however, rightwing US lawmakers are trying to cut funding to the Commodity Futures Trading Commission and the Securities and Exchange Commission. This is obscenely irresponsible, raising the specter of the double-dip recession by hobbling effective oversight of multi-trillion dollar markets.

Public outcry in the wake of the financial crisis was relatively muted. But if we are all plunged into hot water again due to a flimsy regulatory safety net, a hell of a lot of people will not only be burned, but also burning with rage — and will know who truly is to blame.

Whisky: A popular cheer in down times

Consumers in Lebanon shift away from the brash high-end

Executive magazine

With sales down in bars, restaurants and hotels, the less glamorous supermarket has become an important outlet for whisky brands

Amid the current economic recession, there has been a general downward shift from luxury spirits to medium-priced bottles, while most distributors have put the launch of new brands on hold. With competition getting tougher, brands are working on revamping their image to appeal to the high-end drinker, while distributors are still paying eye-watering sums to get exclusive rights at the capital’s premier nightspots.

“The market always strives to go upwards, but it has been a difficult year globally and in the Middle East, and it is maybe not the right time to introduce new brands,” said Wadih Riachi, cellar manager at Vintage in downtown Beirut. “Yet the drinks sector has not reached a critical mass in Lebanon, by far, in terms of new products, spirits and packaging.”

The spirits segment has developed over the past few years, evident in the rise in premium vodkas, gins, brandies, rums and tequilas on offer. Vodka sales grew by up to 4 percent over the past year, above the 120,000 cases benchmark, but Lebanon is still very much a whisky market, with more than 450,000 cases imported every year.

It is in whiskies that there has been a maturing of the segment, with tipplers increasingly opting for single malts instead of reaching for the ubiquitous Johnny Walker Black Label. “Knowledge about single malts really started last year; we’re on the right track,” said Paul Atallah, wine and bar manager at Le Gray Hotel. “I think single malts will boom, and it is a great match with cigars,” he added.


Currently, imported fine and single malt whiskies average more than 8,000 cases per year, far more than cognac, at around 1,000 cases. Of those 8,000 cases, an estimated 70 percent are the 12 and 15-year-old single malts.

To differentiate the malts from the mass whisky market, companies are working on packaging. For instance, Glenfiddich, the biggest selling single malt label in the world, realized that the packaging for its 21 and 30-year-old malts being the same as the significantly cheaper 12 and 15-year-old malts was detrimental to sales.

To make these older and super premium malts stand out, Glenfiddich got rid of the cardboard tubes in favor of wooden boxes, first for the 30-year malt and later this year for the 21-year. There has been a corresponding 15 to 20 percent rise in the price, but the brand is banking on the improved aesthetic appeal.

The bottle has also changed, along with specific numbering on the labels, which has an appeal to collectors. “Some people want special numbers, such as one customer asking for the ‘600’, for example,” said Vintage’s Riachi.

Glenfiddich’s re-packaging seems to have worked. Vintage typically sold one to two bottles of the 30-year malt a month, but after the makeover they sold two cases in three days. “They got it right,” said Riachi.

Outlets are also emphasizing the range of whiskies a distillery offers. “People like collecting whisky in the same way as wine; instead of a 2001 or 2003 vintage it is a 12, 15, 17, 21 or 30-year-old malt. You drink less but better. And that is the magic of spirits; wine is drunk immediately [after opening], but spirits keep for ages,” added Riachi.

Rising from the snow

Rare malts and varieties from specific years are also proving attractive.

“Scarcity is the best salesman of wine or spirits,” said Riachi. The Camus 1971 Armagnac, for instance, is likely to sell well this year as a lot of people will be turning 40. And in terms of a unique drinking experience, one of the most sought after this year by whisky connoisseurs is Glenfiddich’s Snow Phoenix.

The Snow Phoenix is a one-off combination of single malts that came about following heavy snowfall at Glenfiddich’s distillery in the Scottish Highlands in January 2010 that caused some warehouse roofs to collapse. With casks exposed to sub-zero conditions, the master distiller decided to bring together the whiskies from ex-bourbon and Oloroso casks that had aged for 13 to 30 years into a non-aged single malt. It is now being hailed as a cult malt; some websites selling the Snow Phoenix have already sold out, while in Lebanon only 250 bottles are to be available for sale and half have already been pre-ordered ahead of the July launch.

The region’s window display

With the summer season not expected to be as dynamic as in years past due to a dearth of tourists, and Ramadan falling in August, drinks sales are expected to be down. But Lebanon still remains a top venue for marketing spirits, from the low to the premium level.

“Lebanon has become a Club Med destination, with two seasons, and the rest of the year having to survive on the Lebanese,” said Carlo Vincenti of Vincenti & Sons, distributor of St. James, Label 5, Glen Moray and Pitu Cachaca. “Lebanon is a window display for the whole region, as a big percentage of the profits from spirits sales in the United Arab Emirates and Saudi Arabia is spent on marketing in Lebanon.” Surprising though it may seem, Saudi Arabia is unofficially the fifth largest whisky market in the world.

Marketing is evident at Beirut’s infamous Sky Bar, where distributors have been spending ever-increasing sums over the past three years to target trendsetters. This year, according to distributors, some $630,000 was spent by Diageo for exclusive rights to sell its brands and by distributor Etablissements Antoine Massoud to plug its Russian Standard vodka at the rooftop bar.

“It is ridiculous, but more outlets are asking for money in advance to exclusively sell alcohol brands, despite the downturn,” said Nagi Hmouda, business manager at Fattal, distributor of Dewar’s, Grey Goose and Patron. “We are skeptical about the season as a lot of losses will be incurred.”

Fattal will not be introducing any new brands this year. Vincenti has launched the premium cognac Bisquit, but is focusing on faster moving spirits such as cachaca — the fastest growing spirits category in the world — rum and vodka.

Yet Vincenti also expects the upward swing in vodka to tail off. “Vodka was a discovery drink and many new brands were introduced to the market, but I think people will shift back to something less neutral in terms of taste, to whisky, rum and tequila, which are taking off.”

With sales down in on-trade — at bars, restaurants and hotels — the less glamorous supermarket has become an important point of sale. Indeed, supermarkets are now charging higher listing fees and investments to display brands.

“High-end brands are on supermarket shelves, but in terms of shelf off-take it is very weak,” said Vincenti. “Such brands shouldn’t be there as the consumers are not the type of people that go to supermarkets. There is a question mark on prestige if a bottle is on a supermarket shelf for months.” The supermarket as a high-end spirit venue may constrain the launching of new products and curb rise in consumption of single malts.

“Demand for single malts has risen over the last two years but I’m not sure it can go on. If on-trade doesn’t evolve, launching luxury spirits will not succeed. You can’t launch a 16-year old whisky in a supermarket, and you can’t sell more than one case per month,” said Vincenti. “But the downturn is not necessarily a bad thing. Lebanon was living in an imaginary world, as you never saw anyone in Europe paying $400 for a bottle in a club. It wasn’t healthy.”

Lebanon: Excessive taxes put the brakes on super-car sales

Executive magazine

Unfavorable import  taxes keep luxury cars like this Bentley  Continental GT 2005 across the pond  from Lebanon

There are around 200 super cars in Lebanon tucked away in garages, strategically parked by valets outside high-end night spots and, on occasion, swerving around suspension-wrecking potholes on Lebanon’s mountain roads. In the summer months, a further 100 Lamborghinis, Ferraris and Maseratis with Gulf license plates are to be seen zipping around town, the cars having been sent ahead by container ship for their holidaying owners.

Luxury cars are a tiny niche market and are likely to remain so due to the high level of cumulative taxation levied on imports, value-added tax (VAT) and registration, starting at 60 percent of the car’s value, and at its highest exceeding 70 percent. Given such costs, it is little surprise that owners of such vehicles are part of a very exclusive club. But that does not mean there is no demand.

“We would double or triple sales of luxury cars if taxes were reduced,” said Michel Trad, director of Saad and Trad, dealership for Lamborghini, Bentley, Jaguar and, as of this year, McLaren. Sales would also be made not just to Lebanese buyers, who are “99.9 percent of clients” in the luxury segment, added Trad.

Expatriate Lebanese and frequent visitors with cash to burn would undoubtedly boost sales, allowing dealerships such as Saad and Trad to shift more than the one Lamborghini sold over the past year, or the 17 Bentleys, nine Aston Martins and 27 Maseratis purchased by wealthy Lebanese. Indeed, at the height of the economic boom in the United Arab Emirates, Lamborghini alone sold 60 models in 2008.

As Nabil Bazerji, dealer for Maserati, noted, “sales are always to the Lebanese, as luxury cars are highly taxed, so foreigners are not happy to pay that and they bring over their cars, especially the Gulfies as taxes are much lower there on high-end cars.”

The joys of mountain roads

The fact that British super car manufacturer McLaren selected Beirut as one of its regional hubs as part of its global expansion gives some indication of its potential as a luxury car market. “There are very few McLaren dealers as the network is not finished yet,” said Trad. Indeed, while Saad and Trad joined other dealerships in Jeddah, Riyadh and Doha in having joint Lamborghini-McLaren showrooms, the McLaren MP4-12C super car has yet to be launched in Beirut, with New York, London and Dubai up first before the car will grace the roads of Lebanon.

While there is a lot of competition in the luxury car segment to get the country’s few affluent car aficionados to splash out on a new set of wheels, it is Lebanon’s position as a window display of the latest trendy products that gives the nation a special significance for luxury car brands.

Jaguar CX75

“A lot of people summer here so Beirut is important for visibility, and [since] people come from the GCC. We have double the business at our repair center in the summer as our after sales department is well equipped and we have the only aluminum body repair shop in Lebanon,” said Trad.

Further reflecting Lebanon’s marketing importance, in May the country was chosen by Bentley to host a Beirut Drive day for VIP guests to test drive the Flying Spur, Supersports and Mulsanne models on the roads to Beit Misk and Broumana in the hills above the capital.

“Why pay millions to hire a circuit when you can just do it on the roads?” said Trad of the event. “Circuits are boring, and the conditions of the roads here add to the driving experience. In Dubai you go straight and then stop. The configuration of mountain roads is much better. My customer is Lebanese, not a foreigner coming here that doesn’t know about the road conditions or how to drive in Lebanon.”

The Trofeo Cup

While Bentley opted for the everyday extreme driving of Lebanon’s roads to showcase its latest models, Italy’s Maserati has gone for extreme speed to show off the new GranTurismo. For the first time outside of Europe, the brand has organized the Maserati GranTurismo MC Trofeo race in the Middle East for what Bazerji calls “gentlemen drivers and rookies.”

Running from October until April 2012, the cup allows drivers that stump up to $135,000 to rent the racing version of the GranTurismo for the season to compete with up to 16 identical versions of the car in more than seven races, from the Formula One tracks in Abu Dhabi and Bahrain, to Qatar’s Lusail Circuit and the Dubai Autodome.

“The purpose is to initiate people into safer driving, the pleasure of a luxury car and the driving experience,” said Bazerji.

The new GranTurismo MC Stradalé was launched in May, “despite what’s happening in the neighboring countries and the economic and political crisis in Lebanon,” added Bazerji. “We hope to exceed a sales mix of 20 to 24 Maseratis this year. But if the government reconsiders taxation and reduces it, the luxury segment should grow considerably.”

Is that a no. 9?

Telling the Cubans from the copies
Executive magazine

A worker labels a Cohiba cigar at the Partagas factory in Havana.

Demand for cigars is so strong that the sector is inundated with counterfeits. An estimated two thirds of cigars smoked in Lebanon are “fake”, with a Honduran, Dominican or Nicaraguan stogie attempting to pass itself off as the crème de la crème of smokes, the Cuban cigar. It is not easy to notice the difference until one sparks up, as the counterfeiters are pros, switching the paper ring around the cigar for a Cuban brand and using real or counterfeit boxes.

The situation has become such a concern to the legitimate sector that leading distributor, La Casa del Habano, owned by Phoenicia Trading, spent $50,000 this year on a billboard and media awareness campaign to inform consumers about fake cigars, particularly the Cohiba brand.

“The Cohiba Behike is the most expensive and the most popular right now,” said Wael Zeidan, executive manager at Phoenicia Trading. “We classify consumers of fakes into two segments — one, a consumer that knows it is a fake Cuban but smokes it to show off and doesn’t care. The second is a beginner that is easily bluffed, so we focus on him.”

To ensure that fake Cubans are not being put in boxes as the container empties — a classic scam to bump the price of a $2 cigar up to, say, $30 — Phoenicia has undercover employees that go in to check for fakes at its 300 wholesale customers. They are also opening a new outlet to better distribute Cubans from its current five stores.

While Honduras and the Dominican Republic do produce high quality cigars, primarily for the American market due to the trade embargo with Cuba since 1962, such brands are more expensive in Lebanon than Cuban cigars. Hence the fake Cubans are lower quality and normally machine made. One to watch out for is the Cohiba Siglo no.9, as real Cohibas only go up to size six. “It’s so big, it’s crazy,” said Zeidan.

Cohiba is the number one brand around the world, and in Lebanon this is no exception. Top sellers are the Robusto size (50-54 ring gauge), which is ideal for a half hour to one-hour smoke. Cigarillos — the small, lean cigar just a centimeter longer than a cigarette — are also becoming more popular, with Phoenicia Trading bringing out its own brand, Phoenicio.

“Demand for cigarillos is starting to grow, and women are increasingly smoking cigarillos,” said Zeidan. As cigars have a somewhat “old man” reputation, every month Phoenicia holds a breakfast cigar event for women in Ashrafieh, and has introduced cigarettes into Casa del Habano “to get youngsters into the shop and to find out about cigars,” said Zeidan. Pushing sales further are the cigar lounges at some of the capital’s leading hotels. At Le Gray, cigar nights are coupled with tastings of single malt whiskeys. And awareness of cigars is rising, said Paul Atallah, wine and bar manager at Le Gray.

“Some 80 percent of people know what they’re smoking. The rest, it’s just to show off that they are cigar smokers while swallowing the smoke,” he said. “But the culture has changed, and we’re seeing more people go for [brands] Partagas and Hoyo instead of Cohiba; this shows a change in awareness.” Most of the hotel’s cigar aficionados are guests from out of town but it is increasingly attracting non-guests to come to enjoy a cigar, sip an Armagnac and relax.

The economic downturn in the country has affected sales but the 400 percent rise in people smoking cigars since 1980 has provided a loyal customer base. “People get used to smoking cigars, and they continue to buy them,” said Zeidan. Indeed, big spenders are still out there. On a recent Saturday at La Casa del Habano in downtown, a customer bought a whopping five boxes of Cohibas as well as several packs of cigarillos.