Over the last five years, e-commerce has grown to become a significant component of the Middle East’s economy; a development that is reflected in a number of major deals.
Most recently there was Noon’s partnership agreement with eBay that will allow customers in the region to buy products from the US and other parts of the globe. This follows the $800m Amazon-Souq deal that made global headlines in 2017, which confirmed the status of the sector in the region, with the UAE leading the charge.
Noon founder Mohamed Alabbar, who launched the $1bn e-commerce platform last year, has been prominent in the sector, with Emaar Malls Group having acquired 51 percent of online fashion retailer Namshi for $151m in 2017.
There have also been a number of deals in neighbouring Saudi Arabia in recent years, including Al Tayyar Travel Group Holding’s acquisition of online travel company Al Mosafer and the launch of another online platform, Tajawal. Alongside Souq, some of the other regional stars, such as Wadi, Fetcher, Talabat, and Careem, are well-known success stories.
The opportunity is clear. In Saudi Arabia alone nearly 30 percent of the 28 million residents are below the age of 15. Online customers in the region are estimated to be 50 million and are comparable to the size of India’s digital shoppers.
Making debit cards, which are popular in Saudi, ‘online-friendly’ will immediately open up a huge market for e-commerce players”
In order to capitalise, there are four pillars of a successful e-commerce ecosystem:
Pricing is critical for any e-commerce growth, and companies without a well thought-out pricing strategy have often failed to survive in this highly competitive industry.
While consumers do not make their buying decisions solely on the basis of price, pricing still reigns supreme. The rising cost of goods in brick-and-mortar retail outlets has led consumers to research and compare between the myriad options generally available online. Most e-commerce companies, then, use their scale to directly negotiate with manufacturers and bridge the gap of distribution, passing on their lower prices to their consumers.
Creating a “bottomless” search for its products is key to any e-commerce company. Although consumers may buy a few products, they tend to surf and look at various options before making the “buy” decision. This is the most difficult area for companies as they are bound to continuously build and maintain hundreds of stock-keeping units (SKUs) across several product categories in order to provide people an endless choice. Introduction of the market-place model has helped offset this challenge to some extent, but eventually it has led to the emergence of new issues such as counterfeit products reducing trust and high return costs to companies.
The Middle East’s digital infrastructure is taking shape at a staggering pace, and this has catalysed the adoption of digital and card payments in different markets of the region. While the UAE takes the top spot in credit card adoption with a stunning rate of 97 percent, Saudi Arabia has a substantial adoption rate of about 45 percent and continues to witness a strong growth. Credit cards account for over 30 percent of payment modes for e-commerce companies while it is almost over 80 percent as a method of payment for online travel companies – which cannot easily provide a cash-on-delivery option owing to the instant or real-time nature of ticket and hotel bookings.
Digital wallets including Apple Pay and Samsung Pay, and digital cards services such as Visa Checkout and Masterpass have made transacting online a breeze, and well-placed e-commerce companies are remaining ahead of the curve by providing these payment options to their customers.
Nonetheless, due to ease of use, cash-on-delivery remains the preferred method of payment for over 50 percent of online buyers in the region and in Egypt 70 percent of digital shoppers choose this checkout option over others.
Greater efforts now need to be made to deepen the reach of internet banking. Making debit cards, which are popular in Saudi, “online-friendly” will open up a huge market for e-comms players.
This is another important area. The “same-day-delivery” option has been sold as the unique selling proposition of several e-commerce companies and, interestingly, traditional retail chains are now mimicking this model for goods purchased on their online channels.
In the early days when fewer options were available, companies like Souq and Namshi created their own logistics teams and invested heavily in the infrastructure of delivery. The newer players such as Noon are using third-party logistics providers like Fetchr and Aramex, which are catering to the region’s last-mile quirks, enabling e-commerce companies to focus on the inventory, technology and marketing.
Most customers abandon their cart when they see a “delivery charge” added to their purchase and, at the same time, this cost eats into a much larger share of a company’s profits. It is going to be a while before e-commerce players find the right balance between the advantage of same-day deliveries and higher delivery charges to their customers.
According to Payfort’s State of Payments 2017 report, $30.5bn worth of goods and services were bought online in 2016 in just seven countries in the Middle East region, with the UAE and Saudi Arabia contributing around $20bn of the total value. These numbers are estimated to be less than two percent of the overall retail sales volume. The opportunity, then, is huge.
The region offers an excellent customer base with higher per capita income and a propensity to consume. According to Berlin-based e-commerce incubator Rocket Internet’s annual filings, Namshi was a profitable company with just over $100m in sales in 2015. Cleartrip’s Middle East operations became profitable in just three years from launch.
With a market size of $27bn, the UAE will continue to lead the region’s e-commerce scene that is forecasted to clock $69bn by 2020. The Dubai Chamber has estimated that online retail spending in the country will hit double-digit growth over the next few years. To put this into perspective, the retail sector currently contributes nearly 11 percent to the country’s GDP.
Saudi Vision 2030 and the Digital Oman Strategy both hope to spearhead a digital transformation, while The Dubai CommerCity is one of the most recent major initiatives to promote e-commerce in the region. The AED2.7bn free zone aims to attract foreign direct investments and foster entrepreneurship among the UAE’s youth, offering state-of-the-art warehouses that will help companies ship their goods to local markets in record time.
These developments present excellent market opportunities for companies and will contribute immensely to the region’s growth and its transition to a digital economy.
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