Middle East – Budding opportunities for ecommerce?

In his New Year’s speech, Luo Zhen Yu (co-founder of LuoJiSiwei, an independent media platform and online community providing insights into entrepreneurship and business) made special mentions of three overseas Chinese IT companies.

One them happens to be JollyChic, which braved competition from Amazon and local competitors to become Saudi Arabia’s single biggest ecommerce platform.

Luo’s speeches have always gravitated towards the side of entertainment. On this topic however, his mention did reveal a critical shift in Chinese paradigm towards ecommerce in the Middle East. Over the past one and a half years, many Chinese platforms began investing in the region.

Apart from JollyChic, other ventures investing into the region include Sheln, Zaful, Wish, AliExpress and LightInTheBox.

Understanding Middle East ecommerce

Just like how Indonesian investors once viewed Chinese companies with skepticism a few years ago; many Chinese investors have generally maintained a skewed perspective of the Middle East as a deeply religious and turbulent region. This is on top of the general thought that businesses are owned by a handful of prominent families.

The Gulf countries, having traditionally accumulated their wealth through sale of petroleum, is under intense pressures to revamp itself. Egypt is waist-deep with its socio-economic problems. Iran is challenged to respond to the uncertainty brought about by the sudden termination of its nuclear deal. Turkey has to deal with repeated losses in its various ventures overseas (and also internal political turmoil). All of these, pieced together, paints a complex landscape of uncertainty and opportunities.

Fast growth with great potential

Overall, there is a positive outlook on the region. Data from Emarketer tells us that the region has expanded by 20% in the past two years, and is projected to maintain the same pace of growth in the next few years.

On major markets in the region, market analysis from Research and Markets reported the doubling of sales revenue in UAE, making it the biggest ecommerce market in the region. It’s neighbour Saudi Arabia, with more than three times its population, is regarded as the hotspot for ecommerce growth and is projected to overtake UAE by 2020.

Despite the rapid growth in the market, ecommerce sales only makes up to 2% of total retail volume. To put some statistics into perspective, ecommerce amounts to 14% of the total retail sales in China. This signals huge growth potential for investors looking into the Middle East markets.

Middle East has the ecommerce DNA

• High internet penetration

The major markets in the region have smartphone penetration rates of over 70%. On the highest end of the spectrum – Qatar’s smartphone penetration rate exceeds 90%. If that’s not enough, it was reported that Ooredoo’s (Qatar-based Telecom provider) domestic monthly ARPU is over US$50. By comparison, Ooredoo’s Indonesian operations generates an ARPU of around US$2.

• High disposable income

Middle East has a sizeable wealthy population, with a high per capita income in the major countries. In UAE and Saudi Arabia, GDP per capita exceeds US$40,000 and US$20,000 respectively. When the price of petroleum was higher a few years ago, the GDP per capita of Qatar exceeded US$70,000.

Even whilst being sanctioned and isolated from international financial institutions, the GDP per capita for Iran exceeded US$5,000 in 2017. In comparison, Vietnam, widely recognized as the hotspot for SEA, only has a GDP per capita of around US$2,000. Egypt, with all its turbulences, has a GDP per capita of US$3,500 which is around the level of Indonesia and Philippines.

• Convenience for household consumption

Middle East countries remain relatively conservative in religion – where many females abstain from revealing themselves outside of home. For many years, Saudi Arabian females were even forbidden from driving. Yet, females are also often the main determinant of household consumption.

Hence, they are an important and untapped target market for ecommerce platforms. In addition, Middle East’s mostly hot weather for the majority of the year also creates a sizeable demand for hassle-free shopping from home.

• Deficiency in offline consumption choices

Those who have been to shopping malls in Saudi Arabia would be astonished by the relative lack of product choices. In these regions, choices are extremely limited, particularly for middle to high-end goods. It is absolutely a demand waiting to be fulfilled, as there’s pent-up consumption power.

We have been to a few shopping malls in Tehran, where we could not find many imported brands. Deficiency in choices, as we can observe, is one of the main reasons for the low consumption level.

Major ecommerce parties in the Middle East

• Amazon

Amazon’s acquisition of Souq last year was filled with twist and turns, where it eventually only paid 60% of its original valuation for the company. We believe that this process shows the negotiation skills of Amazon (similarities exist with Alibaba’s brutal negotiations with Lazada the year before).

Souq was established in 2006 as the first and most prominent ecommerce platform in the Middle East. By 2017, Souq announced that it has monthly active users of 45 million, with 8.4 million products across 31 categories. Its market stretches across the Middle East and North Africa, with its main clients base coming from Egypt. At the same time, Souq has built its own infrastructure in logistics and payment with Payfort and Q Express.

Nevertheless, Souq was facing immense pressure prior to the 2016 acquisition. Saudi sovereign funds and Emaar established Alabbar and collectively announced the investment of US$1billion into ecommerce platform, Noon. Chinese entrants have also established their foothold in a short amount of time and are rapidly growing, revealing the weaknesses in Souq’s supply chain and operational capabilities.  

The acquisition by Amazon addressed Souq’s problem for survival. Amazon channeled a large amount of resources to the region for support, addressing the problem of absence of talent which Souq has faced for years. As we can see, if Amazon used the same level of determination as it did for India for the Middle East, its competitors will be up for a huge challenge.

• Noon

Mohammed Alabbar is the founder and CEO of Emaar, the region’s largest real estate company, known for innovation and operational prowess. Two years ago, Alabbar announced its US$ 1 billion joint venture with sovereign fund PIF to build Noon. Last year, it attempted to pay a high price to acquire Souq from Amazon. Failing to do so, it immediately committed US$130 million to acquire Namshi (under Rocket).

News has it that the sole reason for this was to prevent Amazon from filling in the remaining gap of Souq in the fashion market. Alabbar’s son, Rashid currently runs his own fashion ecommerce, Sivvi.

It is worth noting that among the regional ecommerce platforms under Rocket (Zalora, Lamoda, etc.), Namshi is the only one making profits. This is not surprising as Namshi has an average basket size of over US$100, while that of Zalora is within US$35.

The emergence of Noon was not a smooth sailing one. Originally planned to go live on 1 Jan 2017 with its headquartered in Dubai, a series of internal problems caused its implementation to be delayed to the second half of 2017, and for its headquarters to be moved to Riyadh.

The main challenge faced by Noon is the lack of ecommerce talents in the region. This is hopefully solved by having Alabbar in the picture – as it brings aboard its consultants and operations personnel with experiences in ecommerce operations; particularly in the complicated details of upstream supply chain operations.

Ecommerce and real estate are fundamentally different sectors and Noon is faced with vastly different challenges from what its expertise. Nevertheless, Alabbar and PIF have committed its reputation on its success.

• JollyChic

As compared to many other cross-country ecommerce platforms, JollyChic has built an established infrastructure, particularly in the area of supply chain management. The platform has gained considerable ground in Saudi Arabia and will subsequently focus on expanding product offerings, creating an ecosystem to compete with Amazon.

Apart from JollyChic, there are several other Chinese ecommerce platforms like Sheln, Wish, etc. with plans to expand into the ME market.

• Iranian startups

Apart from “Digikala” and Rocket Internet-backed “Bamilo”, Iran does not have many ecommerce platforms. The two companies have relatively isolated operations from the world, indicating opportunities for growth.

Challenges for Ecommerce

Given its circumstances, growth is no small feat.

• Logistics Bottlenecks

Logistics in the Middle East has been traditionally dominated by Aramex (point to note – Alabbar family is the single biggest shareholder of Emaar). This is the opportunity identified by Fetchr, which raised US$40 million within a year to subvert the market. (One of Fetchr’s co-founders is a friend of MW.)

Along with other logistics providers in the market, Aramex and Fetchr face similar challenges. An absence of postal codes for many Saudi Arabian citizens makes it difficult to manage addresses; a culture of gender hegemony prevents females from opening the doors in the absence of their male counterparts; education and discipline issues of logistics staff.

At present, logistics capacity is unable to meet the demands of the two main “shopping season” in the region – Ramadan and Black Friday. Unit transportation cost increases during the period. While Fetchr and similar providers have attempted to revolutionize their operations,  none of them have seen considerable results.

Furthermore, especially in Saudi Arabia, the logistics industry is not completely open. Licensing is difficult – Fetchr and Souq’s Q Express are currently on the sidelines on this matter. Customs is another major obstacle for the business models of many Chinese and Turkish ecommerce platforms.

• Payment Bottlenecks

The main incoterm adopted by ecommerce platforms in the middle east remains to be Cash on Delivery (COD), even in Gulf countries with high credit card penetration. Those familiar with ecommerce will know that COD brings along its series of associated problems: Cost of cash management, Billing cycle, higher rejection rates, etc. Many ecommerce platforms face rejection rates of over 30%, causing high cost of capital.

Many players in the market have the potential to take over payment operations, but in the present landscape, the payments market has yet to reach the SEA level of popularity.

Iran’s payments industry has another layer of challenge – the transfer of cash out of the country. At present, with the exception of US-sanctioned Bank of Kunlun, there are no other official legal channels. Even the Bank of Kunlun is unlikely to make an exception for non-Chinese enterprises. Non-official channels bring along tremendous risks – beyond the risk of funds, operations can also be affected by American policies, making the operations a taboo for enterprises holding USD or with plans for overseas IPO.

• Silver lining

With every challenge emerges opportunities, and we remain optimistic about the future of the Middle East market. Timing is key as always. We have friends who entered the Iranian market in 2015 when the signing of the nuclear deal facilitated trade and growth. Trump’s recent termination of the nuclear deal, however, brought about much uncertainty to the outlook of the market.

The Gulf countries, on the other hand, are ready. With rapid growth and large potential for development, the region is a literal investment hotspot.

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Thanks for reading The Low Down, insight and inside knowledge from the team at Momentum Works. If you’d like to get in touch with us about any issues discussed in our blog, please drop us an email at [email protected] and let us know how we can help.