Luxury retailer Chalhoub cuts costs and presses on with transformation as it looks to 2022 pandemic recovery

Exclusive: Company to close some stores, lay off staff and seek voluntary pay cuts as revenue forecast to shrink by one-third in 2020

Patrick Chalhoub, chief executive of luxury retailer Chalhoub Group. Courtesy: Chalhoub Group.

Dubai-based luxury retailer Chalhoub Group is cutting costs and preserving cash as it restructures its business to cope with the Covid-19 pandemic that has hit sales, but will press on with its e-commerce strategy and expects a full recovery by 2022, its chief executive said.

The family business – which has more than 750 retail outlets across the Middle East with a portfolio of 300 brands that include Sephora, Louis Vuitton, Tod's, Michael Kors, L'Occitane, Lacoste, Tory Burch – will close 10 per cent of its stores over the coming months and invest more in remaining shops, Patrick Chalhoub told The National in an interview on Monday.

The company, which employs about 12,000 people, will also lay off 10 per cent of its workforce and ask employees to take voluntary salary cuts for six months to offset declining revenue this year.

"We put a plan together ... to pass through these difficult months to come and at the same time continue building into the future," Mr Chalhoub said.

"After [a] deep assessment, we said we need to ... restructure, re-organise and resize ourself to compact our organisation and our structure," he said.

"It's not an easy decision for a family business very attached to its people, whom we love and care for and who've done nothing wrong, but we need to compact our business at a time when business will contract, in order to protect not only the group but employees who are part of the group."

The global luxury goods market is expected to contract between 20 to 35 per cent in 2020, driven by lockdowns and shutdown of tourism, according to Bain and Company. The slowdown will accelerate in the second quarter of the year, after a 25 per cent drop in demand for luxury goods in the first quarter when Covid-19 spread in Asia and globally.

The Chalhoub Group forecasts its sales will drop by one-third this year compared to 2019, which contrasts with the 5 to 7 per cent growth the company projected for 2020 before the virus outbreak.

"We have to re-evaluate constantly, but in 2020 we will be at two-thirds of our business last year," Mr Chalhoub said. "We expect recovery to the level of pre-Covid will be in the fourth quarter of 2021. In 2022, we expect to have totally recovered."

This is in line with Bain & Company, which anticipates that a global recovery to 2019 levels will not occur until 2022 or 2023. Market growth will resume gradually from then on, reaching an estimated €320 billion (Dh1.3 trillion) to €330bn by 2025.

The regional retail industry – centered around shopping malls and dependent on tourists and residents during summer months – has taken a hit as outlets closed during the coronavirus and consumers tightened their purse strings amid job losses and salary cuts.

In March, as the countries it operated in began to announce lockdown measures to curb the spread of the virus, the Chalhoub Group faced periods of "zero" turnover but still had fixed costs to pay.

To protect the business, it began taking "defensive" measures. It negotiated terms with suppliers, bankers, mall developers and other stakeholders to reduce costs, delay payments and "have enough cash for ammunition," Mr Chalhoub said.

Some 1,000 of its top executives, representing 8 per cent of the workforce, took voluntary pay cuts ranging from 20 to 50 per cent for three months from April 1 to June 30, while Mr Chalhoub took a full salary cut, he said.

The company also benefitted from government initiatives to shore up the private sector in countries such as Saudi Arabia, Bahrain and Jordan, which included paying nationals' salaries and extending liquidity to help businesses survive the crisis, he said.

The crisis also accelerated the company's push into e-commerce. Online sales jumped to 20 per cent of the business in April, compared with pre-Covid levels of 3 per cent, though it was insufficient to cover costs and loss of revenue, Mr Chalhoub said.

"We ramped up to the levels we had forecast for 2025 in one month," he said.

As governments gradually ease restrictions, the retailer anticipates a "slow and gradual" return to normality, he said.

In May, the group saw footfall to shopping malls return to 20 to 50 per cent of pre-Covid levels, depending on the city, with more traffic in community malls than in larger ones. Cities such as Riyadh and Abu Dhabi recorded higher recovery in footfall as they took longer to re-open malls and were less reliant on tourists.

Hand-in hand with the cost cuts and re-sizing the business over the coming months, the group will also invest in areas such as e-commerce, data and analytics, consumer experiences, staff training and innovative ideas, Mr Chalhoub said.

For the past three years the group has been transforming from a traditional to a hybrid retailer with a wider online reach along with its physical stores.

"What has happened now with Covid will only accelerate our plans and we should absolutely stick to our vision and make sure we realise it as fast as possible," Mr Chalhoub said. "We don't have the time anymore to have resistance to our movement, we need to continue the drive, which means investing in our talent."

Mr Chalhoub, a veteran of the luxury retail industry in the Middle East, says his outlook for the market entails a period of 9 to 12 months where consumers will have "limited appetite" for spending amid concerns of job security and salary cuts, will travel less and spend more time at home.

"This period will be one where we have to make sure we understand what customers want and how they will react," he said.

Asked about the initiatives he would like to see from shopping mall developers, Mr Chalhoub said a "win-win" scenario comprises of retailers and developers limiting their "losses together", with developers offering a variable rent option, instead of fixed, to help retailers make their payments until the crisis ends.

Governments can support such discussions between tenants and developers, decrease the cost of doing business and help ease the requirements necessary for businesses to close their stores or offices during the crisis with more flexibility or a new rent law, he said.

The Chalhoub Group has faced many crises over the span of its 65 years in business and while the challenge posed by the coronavirus pandemic is "tough", the company expects to rebound, he said.

"I'm not worried about luxury, honestly," Mr Chalhoub said. "Yes, there could be a change of category, some people will not buy three items and will buy only one, but better one of quality than 15 of non-quality which they will change every week."

"Even if we have this tough period, which will be tougher in some categories, the rebound will be more meaningful for the rest," he said.

"Now it's up to us, partners and brand owners to be creative and offer things that are attractive, meaningful and purposeful."