Price of food commodities to see slow correction

With inflation falling from double digit to single digit, people expect the price of food commodities to drop as well. But that is not entirely true, says Walid Hajj, CEO of Cravia, the parent company of Cinnabon, Seattle's Best Coffee, Zaatar W Zeit and Roadster diner in the UAE.

He said most people are resistant to change and this leads to a slow correction in the retail commodities' market. In addition, some shopping malls are still raising rental charges despite the slowdown in traffic and demand, a policy that would push some players out, Hajj said. To address this, food and beverage outlets are forming an alliance that would take on mall managers. "The response to individual effort is negative or zero, but we are hoping that when we band together, they will be able to realise that things are not what they were eight to 10 months ago," he said.



How is the food business in the UAE? Is it relatively sheltered from the financial crisis?

We have to be realistic. The world is going through a tough time and the UAE is no exception and probably it is going to get worse before it gets better. I think we will see a flat out or a little reduction in demand because of drop in tourism and some expats leaving the county, and all this will affect us. This year, we are seeing sales flat or slightly down, compared to a 20 per cent to 30 per cent growth in 2008 over 2007.

Will restructuring or consolidation be one of the strategies to contain the financial downturn?

Compared to other businesses and industry, we are in a good shape. It is not completely immune, but is extremely resilient to the economic crisis. We have not yet sacked any of our employees. What we have done is that we have looked at outlets that are not doing so well and moved redundant staff to our new outlets. And instead of reducing their salaries, we have improved the packages. We have rented a new building for their accommodation, which will cost us an extra Dh2 million to Dh3m every year on housing expenses. Despite the crisis, we have decided to do that because we believe the crisis is temporary but the people we have are permanent. So we want to make sure they are happy.

The costs of construction materials have gone down. Have you seen the same in commodities?

No. Costs of commodities have not gone down. A lot of things have flattened out; a lot of things have not increased for the past five to seven months, but a few commodities have gone down. We are working with our suppliers to get more realistic prices. Eventually, the cost will go down but we have not seen it yet.

Could there be cases of hoarding?

I do not think so. If it happens, it could be in necessary items, such as rice, wheat or bread. We are selling sort of accessories. I think what is happening is that people are extremely resistant when prices go down. Nobody wants to drop prices. For example, in one of our cheese items that we use for Zaatar W Zeit, our supplier resisted to drop its price. But when we said we were going to change our supplier he dropped the price 15 per cent. That shows there is room, it is just a matter of putting the right pressure.

Are you planning to ask malls to reduce their rental fees?

If you go to certain locations, particularly the large new malls, their rents are ridiculously high. The landlords have not yet realised that things have changed and that they have to be realistic, otherwise everybody is going to lose.

Outlets that cannot afford to pay the rents are going to close down and then both the mall and retailers are going to be affected. So, we are currently putting ourselves together – a group of F&B outlets – and approach these landlords together. The response to individual effort is negative or zero but we are hoping that when we band together and talk to mall owners and not just mall managers they will be able to realise that things are not what they were eight to 10 months ago.

Why cannot they be persuaded?

Some of the malls have this attitude of take it or leave it. If you have invested so much on that place you are left with little choice as you do not want to write off your investment. We can take it but such an increase may be harmful for others.

They may take it but after one or two years I can assure you they will exit.

The landlords should take a long-term view, be more realistic and at the end of the day the law of supply and demand will prevail.

But some mall operators/managers say it is also the law of supply and demand that dictates them to raise fees as, according to them, the demand for space is still growing.

Demand in the past few years was unbelievably high, it was a seller's market. I do not think that is the case anymore. Eventually, we will go back to equilibrium – a price decrease will balance the market, which will be good globally and not just for Dubai.

You have been aggressive in the past nine years. What is the investment mood now?

We already have 46 branches, and the number will increase to 47 in June, where we employ 730 people. This year, we are going to launch three outlets compared to last year's 20. Despite the slowdown in expansion, we are expecting a 50-per cent increase in sales revenue from Dh80m in 2008 to Dh120m this year. One of our advantages is that we are in cash business and although we are not a necessity there is value in what we offer, and as long as there is value we will always have customers.


Walid Hajj

CEO, Cravia

Born and raised in Al Khobar, Saudi Arabia, Hajj graduated with a degree in Industrial Management from the University of Petroleum and Minerals in Saudi Arabia. Upon graduation, he worked for two years in brand management for Procter and Gamble, before going to Harvard University for an MBA in Finance and Marketing. Upon completion, he returned to Saudi Arabia, where he joined the family business. In 2000, Hajj bought the franchise development rights of Cinnabon and Seattle's Best Coffee in the UAE and Jordan; and the first outlet opened in Abu Dhabi a year later.

 

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