Homegrown ecommerce in Middle East finally overtaken Chinese players?

Two words that strike excitement in every online retailer’s mind- Black Friday. For religious and cultural reasons, Black Friday in the Middle East is promoted under different names depending on the ecommerce company. For instance, Souq advertises it as “White Friday” and Noon calls it “Yellow Friday”.

Regardless of what it’s called, Back Friday is one of the biggest online shopping seasons in the Middle East apart from Ramadhan. However, this year, Chinese cross-border  ecommerce platforms and sellers were not happy with the numbers they did.

We analysed as to why their performances were dismal this year and a few reasons became apparent.

First, the market is no longer a hotbed for Chinese companies.

Let’s look into Saudi Arabia as an example. There are two major indicators of this observation.

First, Chinese cross-border ecommerce companies have reduced their promotion efforts in the Middle East. For example, several apps owned by Shenzhen Globalegrow E-Commerce have reduced their marketing spend (Zaful and RoseGal); Romwe (acquired by Shein) has too has slowed down; and Club Factory has reduced its focus on Middle East.

Below is a list of Saudi shopping websites based on download rankings on this year’s Black Friday 2018 (November 23):

The arrows point to the Chinese ecommerce players. Although they make up half of the top ten players, their rankings are not as good as the previous year. Zaful, AliExpress, RoseGal, and Romwe, which were ranked among the top ten last year, are no where on the list.

Momentum Works also has insights into the average amount of time spent by users on the ecommerce apps and data indicates that Shein is the best performer.

Shein has been consistent in its ranking and user time spent on the app, irrespective of promotion season. However, since the general performance in the ecommerce sector has been poorer than usual, it too saw a drop.

Second in user time rankings is Jollychic. Saudi Arabia is the main market for Jollychic, but their growth rate has slowed down a lot in 2018.

Fordeal is fiercely competitive and is spending a lot of money on promotions but the average time a user spends on the app tells a different story: only 8 minutes. It is unable to engage and retain users.

Club Factory too showed poor user engagement time. Ever since they shifted their focus to India, it is said that the resources spent in the Middle East have been reduced by half. this is mainly because the rejection rate of cash on delivery orders in middle east is very high. Order volumes mean nothing if you don’t receive the cash at the end.

The second performance indicator is the decline in sales revenue on the Chinese ecommerce platforms.

The extent of this became more apparent during this year’s Black Friday sales. Momentum Works got a lot of queries: What happened this year? I have a lot of goods, but why are the numbers not higher than usual? What about other platforms? Where did the traffic go?

This brings us to an all important question- why is this happening?

We put our thinking caps on and dug deeper into these observations. We believe that the market in Middle East is cold for the following reasons:

1. Limited market capacity

Take Saudi Arabia as an example. This is the largest market among the Gulf countries but the population is only 32 million.

In fact, before 2015, Chinese ecommerce companies generally did not pay attention to this market. JollyChic inadvertently discovered this “treasure land” in 2015 when it made a lowkey entrance into Saudi Arabia as a part of its expansion into overseas emerging markets. Looking back, JollyChic did the right thing because back then Saudi Arabia was a secluded and overlooked market and the best way to operate was to stay low and silently make money without attracting too much attention from competitors.

However, in May 2018, JollyChic raised hundreds of millions in a series C round from well-known investors such as Sequoia and Junlian. The post-investment valuation exceeded $1 billion. At this point investors suddenly realised the potential in Saudi Market to create a unicorn.

As a result, new ecommerce platforms such as Fordeal and Funmart rushed in, and existing pioneer cross-border ecommerce companies such as Globalegrow and Shein increased their investments.

However, Saudi Arabia’s online shopping user base is only a little over 10 million. This along with the rapid rise of homegrown ecommerce players and suboptimal infrastructure has resulted in the growth reaching a plateau.

2. Rapid growth of homegrown ecommerce

Since 2017, the local ecommerce landscape in the Middle East has also undergone rapid changes. Amazon acquired Souq.com as a part of its global ecommerce expansion plans and is now spearheading its business in the Middle East.

Sooq’s strongest competitor this year is another homegrown ecommerce player, Noon, which has been aggressive in its growth. Mohamed Alabbar, chairman of Emaar Properties, is a leading investor of Noon with the backing of PIF, the sovereign wealth fund of Saudi Arabia. In the second half of this year, almost all of Emaar’s buildings were branded with Noon’s promotions.

Noon was also aggressive in its local promotion strategy during the Black Friday period. Residents of Emaar properties were presented with ~$30 unconditional cash vouchers at their doors. Who can resist this temptation?

In addition to the two giants Souq and Noon, homegrown ecommerce player Mumzworld received $20 million in a Series B funding, and Wadi’s grocery business also received $30 million investment from local retailers.

Apart from typical ecommerce players several of the top apps (as can be seen in the first image of download rankings) are big local retailers, such as the two ecommerce companies under the Landmark Group: Centrepoint Online and Max Fashion.

The Landmark Group is a major developer and retailer in the Middle East and North Africa region. The founder is Micky Jagtiani from India whose net worth in 2017 was $4.3 billion not too far away from Alabbar’s.

These traditional retail brands have been in the Middle East for many years, have a strong brand presence, and have a clear advantage in supply chain.

3. Infrastructure is still behind

While the competition in Middle East ecommerce has intensified since 2017, infrastructure such as logistics and payments haven’t seen much improvement. Customers still prefer to pay by cash on delivery, and logistics has proven to be a bottleneck during peak seasons.

Souq (which was set up in 2005) may not have made it big in its first decade, but what it did was to build a strong foundation over time. Not only does it have the most influential payment gateway in the Middle East, Payfort, but its homegrown logistics company, Q express, is the most efficient in the Middle East. This enables Souq to deliver goods to their customers on the same day or next day. Noon too has built its own logistics and is investing big in it.

This places Chinese cross-border ecommerce competitors at a disadvantage. There are not many payment and logistics partners to choose from and they often have to outsource deliveries to bigger logistics players such as Aramax or Fetchr.

Fetchr is also a star startup in the Middle East. During peak sales seasons, Fetchr lacks sufficient resources and has to outsource a large number of its parcels to Aramax. According to some of our sources, in 2017, a Chinese ecommerce company incurred so much backlog during Black Friday sales that they could complete delivery only by Chinese New Year. It doesn’t take a genius to imagine what the rejection rates would have been like.

Third-party logistics in the Middle East are in a conflicted position. If they choose to invest heavily in strengthening their capacity, they run the risk of sitting idle for most part of the year. However, choosing not to do so would mean inability to fulfil demands during peak sales seasons.

4. Chinese sellers lack traffic advantage on large platforms

This is for sellers that are based on big platforms such as Noon and Souq. Since distance presents a challenge in terms of importing goods, they often choose products that are small in size, low in value, and that require no post purchase warranty or services. However, during promotional seasons, Noon and Souq attract large traffic to their self operated stores that sell 3C electronics or to other electronic brands. These are the kind of products that shoppers look forward to saving big bucks on during Black Friday!

So how can Chinese sellers deal with the challenge?

We at Momentum Works believe that there are two ways in which Chinese players can improve their performance and stay competitive in the middle east market.

First, they need to refine their operations. At present, most Chinese ecommerce companies are operating in a very haphazard manner. The quality of goods shipped to the Middle East is generally not high, the packaging is poor, and the price is often outrageous.

Some sellers have a misunderstanding that consumers in the Middle East are rich and are willing to pay any amount quoted. The price of many commodities that we saw in the logistics warehouse is jaw dropping: for example, an ordinary wig was priced a few hundred dollars. Yes, the spending potential in the middle east is high—owing to a high per capita income-but customers are not stupid.

Ever since Noon entered the market, this factor has become even more crucial for Chinese sellers. Noon cares a lot about consumer experience, fast delivery, and attractive packaging (so much so that even the invoice is carefully placed in an envelope).

In contrast, most of Chinese ecommerce packaging consists of a flimsy plastic bag which is often torn and tattered by the time it reaches the customer due to handling at various logistics points.

Packaging is only one aspect. They also need to think about improving their customer service as well as post purchase services.

2. Opportunities are available in verticals

Is ecommerce in the Middle East saturated? Far from it, we think. At the end of this year’s Black Friday sales, we received feedback that Noon and Souq’s self-operated stores had  skyrocketing sales.

In 2017, the number of Saudi ecommerce users was 12.5 million, and according to forecasts this is set to grow at an annual rate of 12.4%. Ecommerce also only makes up less that 2% of retail in the middle east leaving a lot of room for online sales to grow.

It will be difficult to take on the two giants Souq and Noon in the short term, but investments into startups like Mumzworld (mother and baby products) and Wadi’s groceries app tells us that there is still opportunity to grab in the vertical field.

However, interested players need to act fast since the giants will sooner or later dive into these verticals as well. The limiting factor in Middle East is the population, and in the long run, opportunities in the different verticals too will hit a ceiling.

In summary, we believe that the Middle East is still in the early stages of ecommerce development. There is room for growth but the era of exponential growth has passed.

Momentum Works Emerging Markets Tech Investment Index

Momentum Works has just released the Emerging Markets Tech Investment Index for Saudi Arabia ecommerce. We believe that the Middle East is still in the early stages of ecommerce development and the risk is moderate. The image below shows the projected time between the different stages and the valuations you can expect at each stage:

We will also launch the Saudi Arabia ECommerce Report in the near future that comprehensively and systematically analyses opportunities, risks and investment opportunities in the Saudi ecommerce sector.

If you are interested, please write to us at [email protected] with your name + email + company + position to get more details about the report.