By Massoud A. Derhally
The e-commerce industry in the Middle East is worth around $11bn a year. Why are local retailers such as Namshi big business right now?
Internet ventures are no longer a mirage in the Arab world. Enthusiasts will remember the era of Arabia.com which is no longer around. The challenges for start ups remain, but the landscape has evolved and is continuing to grow. With the growth of broadband, one key area that illuminates how business is being conducted is e-commerce.
Aramex, the largest online courier in the Middle East, started its shop-and-ship service to help its clients shop overseas what now seems like light years ago. In many ways, one could argue that move has served as a catalyst for other entities that came to the market later. Though the Middle East, compared to other regions, has been slow coming to the market when it comes to e-commerce – mainly due to logistics related to security of transactions, payment execution, technology speed and banks being risk-averse due to the high rate of fraud - the business environment is changing. Things are becoming more accessible.
Today, a growing number of people in the region buy their tickets and book their hotels online, they pay their bills the same way and they do it from local companies rather than from Amazon and eBay.
The value of e-commerce-related transactions is about $11bn a year in the Middle East, according to Jawad Abbassi, founder and general manager Arab Advisors Group. Europe has the largest e-commerce market in the world, growing 19 percent last year, with the total value of the market estimated at 246bn euros, according to figures from the European Multi-channel and Online Trade Association (EMOTA). The North American market is valued at 237bn euros.
Online retail sales now account for around 5.1 percent of the total value of the retail market in Europe, with 240 million e-shoppers spending an average of 1,000 euros each, according to EMOTA.
"People are investing because they're waking up to the fact that this is almost a virgin market and as the broadband penetration rate is increasing, people are using the internet for value-added services," Abbassi says. By end of 2011, there were more than 77.7 million internet users in the Arab World with an internet user penetration of around 22 percent, Abassi says.
Last month, Namshi, an e-commerce site founded less than a year ago, which sells shoes and clothing in the Middle East, said it secured $20m in financing from JP Morgan Chase and Blakeney Management.
Namshi is now set for major regional expansion, says Muhammed Mekki, one of the company’s founders.
"This investment is a turning point," says Mekki, a former executive at consultancy McKinsey & Co, who founded Namshi with partners Louis Lebbos, Hosam Arab, and Faraz Khalid.
"It shows the commitment of some of the biggest names in international finance to the potential of this region and positions Namshi as the engine driving that sector's success," the 29-year old Iraqi-American added. "All eyes are on Namshi now, the horse that has been backed. We have a responsibility to prove to other investors that this is an attractive growing and lucrative market."
Among the Gulf states, the UAE leads the way in e-commerce spending with sales reaching about $2bn in 2010, according to a study by Visa and Interactive Media in Retail Group International. The UAE's online spending equated to 55 percent to 60 percent of total GCC e-commerce sales. Saudi Arabia was the second largest market, with an estimated $520m, followed by Qatar ($375m), Kuwait ($280m), Bahrain ($175m) and Oman ($70m), according to the study.
"I think it's high time for e-commerce to take off in this region," Mekki says, adding: "it's a well-educated region that has a proven retail market".
Namshi, which went into full operation in January of this year, has over 100 employees. The capital injection will help the company expand its operations particularly within Saudi Arabia, its fastest-growing market, and also increase its product selection, Mekki says.
To help it gain visibility the company launched a TV campaign that aired on satellite channels across the region.
"We started the business in the UAE, then we expanded to the GCC, after which we started to see growth especially in Saudi Arabia, but post our television campaign we've seen the Saudi orders overtake other geographies and we expect that trend to continue," Mekki says.
The company has a dedicated version of its platform for Saudi Arabia, the largest market in the Arab world, and intends to invest in developing its interface with customers.
Saudi Arabia's economy grew 6.8 percent last year, the fourth-fastest growing market in the Middle East and North Africa after Qatar, Iraq and Kuwait, according to the International Monetary Fund. The kingdom's economy is expected to grow by about 6 percent this year, the IMF estimates.
"We expect to invest more to educate the market on e-commerce," Mekki says.
"The value is providing our customers with the broadest selection available with [the] highest level of convenience," he adds. "You can shop simultaneously on our site and view 400 brands and 10,000 styles and compare these to one another instead of going from boutique to boutique in a mall. And we will deliver anything you choose, for free, to your home."
Mekki declined to say whether the business model of the company envisioned an initial public offering.
"Right now, we are committed to building the biggest and best running e-commerce business in the region and what comes of that we are open to all options," he says. "We are focused on building this business and are thrilled by the extra fuel this funding has given us."
The investment in Namshi is a vote of confidence in entrepreneurs and e-commerce businesses in the region, says Fadi Ghandour, CEO of Aramex.
"It's a substantial amount, there are very few companies in the region that have gotten $20m other than Maktoob," says Ghandour who helped back Maktoob with seed funding.
In 2009, Yahoo!, which runs the second-most popular internet search engine, agreed to buy Arabic-language internet venture Maktoob.com, the largest portal in the Arab world, for about $165m. In June, Thomson Reuters bought, for about $40m, online finance and business portal Zawya, which aggregates content on the MENA region, provides proprietary research to its users and has a partnership with Dow Jones Newswires.
The investment in Namshi "sends a very clear message that e-commerce is happening in the region, that there are investors who believe in it and serious people that are building that business in the region," Ghandour points out.
Al Jabbar Internet Group, which includes Souq.com, the largest e-commerce company in the region, may sell partial stakes in some of the eight companies under its umbrella, says chairman and CEO Samih Toukan, who started the group after selling Maktoob to Yahoo!.
"Jabbar has raised a capital of $60 million so definitely we'll be talking millions of dollars," Toukan says, declining to specify the potential size of investment. "We always raise capital in order to grow the companies. We are expanding in new markets and we are doing acquisitions so we always need capital. At the same we have interested investors that come and say we're interested either to expand in you and invest, or to acquire one of your assets."
Though Toukan declines to specify details on the talks being conducted because of non-disclosure agreements, Souq.com, which was founded in 2005 and operates across the Middle East, could sell for as much as $40 million, according to sources who spoke on condition of anonymity.
Buyers may include Naspers, a South Africa-based multinational company with comprising electronic media and ecommerce businesses. Naspers did not respond to an email from Arabian Business seeking comment. Souq.com competes with Namshi.
If Souq.com gets a capital injection, the investment would enable the company to invest in its technology, overall operations and expansion, Toukan says.
Mekki declined to provide revenue figures for Namshi, however Toukan says Souq.com has recorded double-digit growth in the last six months in terms of the number of transactions carried out and revenue generated.
"Every month we're growing at double digits from the month before," Toukan says. "Dubai is big. Saudi is growing, things are moving in Egypt, Kuwait is interesting. Souq.com is a huge growth story in the region and I think will be one of the biggest internet companies in the area. Souq.com is big but it's the beginning of e-commerce in the region," he said.
Jabbar's other companies include Sukar.com, Cobone.com, Run2sport.com, Cashu.com, Ikoo.com, Tahadi.com and Nibras.com.
An investment or acquisition in Jabbar or its subsidiaries would be a further boon for e-commerce and start-ups in the region after two ventures, LivingSocial and Mizado, closed down in the last two months.
The investment in Namshi is "very good news to the industry - it shows that international players are willing to invest and it helps although Namshi is a competitor of ours," Toukan says. "E-commerce is happening now in the Middle East, its being conquered, a lot of investment is being put into it. It's happening, investors see the opportunity and it's the beginning of it."
Ghandour who is stepping down as CEO of Aramex at the end of this year to focus on entrepreneurship agrees.
"As an angel investor and as the CEO of Aramex, a company that does a lot of services for the e-commerce industry, I can tell you the industry is growing substantially, and is one of the last few unconquered markets," Ghandour says. "This is our biggest-growing business in the express business today. The express business in the Arab world would be growing in single digits and because of e-commerce its growing double digits now," he says.
The investment in Namshi is, he adds, "a vote of confidence, big time."For all the latest tech news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.