Momentum Works’ predictions for 2019 – Middle East

A few days back we gazed into our crystal ball and shared with you our 2019 predictions for Southeast Asia.

We now turn our attention towards the Middle East, where Momentum Works has had an office since the middle of this year.

2017 was an exciting and dynamic year for tech and ecommerce in the region with various major mergers, acquisitions, and market entries. The seemingly dormant tech scene was definitely shaken up for the better.

In comparison, 2018 seemed to be a much quieter year. However, don’t be fooled as this may just be the quiet before a storm waiting to break out in 2019. There are many undercurrents that are – if you are a participant or a close observer – fundamentally shaping the region and its tech outlook.

So here are our 10 predictions for 2019:

1. Uber and Careem consolidate;

There have been multiple rumours doing the rounds and we foresee this happening in the coming year. We don’t really care who buys whom (although we think Uber buying Careem is the more likely outcome), the consolidation makes sense for both parties.

Since the upheaval that led to the departure of Founder Travis Kalanick, Uber has been making a number of ‘rational’ steps towards profitability and eventual IPO, ideally in 2019.

Careem has expanded its presence across more than 100 cities and diversified its business to give Uber a strong competition in the Middle East. It now deals with take-out, express delivery, pharmaceuticals, bus services, a car rental company with the Dubai government, and fashion ecommerce.

All this takes huge sums of money. Currently, the capital market in the Middle East is not conducive for startup IPOs and acquisition is almost the best way for founders to exit. So, when Uber offered to buy Careem for $2 billion this year, it’s easy to see why Careem executives were very happy.

However, an acquisition down this road is also full of uncertainties. Ecommerce giant Souq.com, which was hard to compete with for more than a decade, was originally valued at US$1 billion. However, when it was acquired by Amazon last year, the price was almost cut in half. We can expect tough negotiations here as well.

It will be interesting to see how this plays out.

2. Big logistics companies invest more in ecommerce logistics

Middle East ecommerce has become an important growth sector for traditional logistics companies. For example, Aramex’s net profit increased by 25% in the first nine months of this year, thanks to the rapid development of cross-border ecommerce (most cross border orders come from China and Turkey).

In addition to Aramex, other logistics giants also realize the lure of ecommerce.  Logistics is currently among the biggest bottlenecks preventing ecommerce from realising its full potential. Since the second half of 2018, we have seen more and more investments pour into ecommerce logistics.

For example, in early December, Kuwait-based global logistics giant Agility announced that it will launch the digital logistics platform Shipa and invest $100 million over the next three years. At the beginning of this year, Agility hired former Aramex executive, highly familiar with ecommerce, Hassan Mikail to plan the ecommerce delivery business.

Another logistics giant, DHL Express, just joined Middle East and North Africa in its “Where Everything Clicks” service plan in October to provide distribution services in Middle East to global ecommerce sellers. UPS’s similar service “UPS My Choice” also extended to the Middle East this year.

The startups that got financing this year are Quiqup, which is based in London, but mainly in the Middle East, and Load-Me, a transportation sharing platform.

In addition to ecommerce, traditional logistics and warehousing suffer from inefficiency that can be solved through technology and innovation, and even startups. Some have criticised traditional companies such as Emirates Post for being slow in decision making – however, we believe many just have not found a convincing solution that fits their strategy, yet.

We believe that this situation will improve in 2019.

3. Amazon rebrands Souq.com;

Ever since Souq was acquired by Amazon in March 2017, integration of its services have been underway. Souq’s organizational structure, personnel, and management methods are gradually being ‘Amazonized’.

We also observe that Amazon has been diluting the Souq.com brand, and increasing the focus on the Amazon brand.

Be prepared to see one of the oldest internet startups in the gulf region to be completely morphed into “Amazon” by 2019.

4. Noon solves some major issues preventing its effective growth

Amazon’s acquisition of Souq certainly alarmed Noon.com, a joint venture by Chairman of Emaar Properties Mohammad Alabbar and Saudi Arabia’s Public Investment Fund (PIF). This set into motion a race for dominance in the potentially lucrative ecommerce market of Saudi Arabia (and UAE).  

In order to compete with Amazon (and more importantly, attain regional dominance), Alabbar took a number of actions in addition to launching Noon. He led a consortium of investors to acquire significant shares of Arame; Emaar also acquired 51% of Rocket Internet’s fashion ecommerce platform Namshi in order to prevent Amazon to get a hand on it (Amazon is weak in the fashion category).

Anyone familiar with the Middle East ecommerce is aware of Noon’s lengthy delays before its eventual launch. After tackling with issues related to the teams, strategic focus, supply chain, etc. – Noon eventually went online in the second half of 2017, more than half a year later than originally scheduled.

It’s growth has has been choppy and there are many issues yet to be resolved.

Many often dismiss Alabbar’s efforts – “what does a real estate tycoon know about ecommerce?”.

However, one cannot underestimate his resolve (and that of PIF’s) and deny the fact that the group has the resources to make a success. It has very evidently been aggressive in many areas this year.

However, Amazon too has a lot of financial resources at its disposal, and it is not short of resolve either. So it is interesting to see how this clash plays out.

5. More consolidation of online-offline, led by big groups (who have had a fair number of failures trying to penetrate into ecommerce)

Like Alabbar, other retail giants in the Middle East are equally reluctant to be left out in their home turf. For example, at the end of October, ecommerce player Wadi received $30 million in funding from Carrefour’s franchisor in the Middle East, Majid Al Futtaim (MAF). Note that MAF’s investment is specifically focused on the grocery business, since it has more synergy with Carrefour’s strengths (think about Carrefour online?).

During this year’s Black Friday shopping festival, we also observed that Landmark Group, another real estate and retail giant in the Middle East, had two of its ecommerce companies on the top ten download list, namely Centrepoint Online and Max Fashion.

Furthermore, support infrastructure for ecommerce in the Middle East will take time to mature. Thus, in addition to the online exploration of traditional retailers, pure ecommerce players are also looking to diversify their business offline for quick growth.

For example, Noon has partnered with Saudi Arabia’s electronics giant  “United Electronics Company” (eXtra).

We definitely expect more online offline synergy in 2019.

6. More fierce competition for consumer traffic pushes up the prices for influencers;

Online businesses are realising that ‘traditional’ ways of digital marketing via Google, Facebook, and Twitter are fast reaching a saturation point.

It has become immensely challenging to reach out to novel consumers. Additionally, existing consumers are fatigued and weary of information overload via ads and promotions.

As a result, social media influencers have attracted the attention of advertisers. Consumers in the Middle East are very passionate about social media – fertile ground for influencer ecosystem.

The demand for alternative ways to market effectively will see eager businesses pouring in their money in social media campaigns by influencers. The cost of each blog post by Huda Kattan, a beauty blogger, can reach about $33,000.

Be ready for these prices to rise further in the coming year. Also, small and medium (and even micro) influencers will find ways to monetize their influence, however modest each individually has.

7. Everyone goes back to the third Future Investment Initiative summit – BAU;

The crisis that followed the murder of Saudi journalist Jamal Khashoggi is slowly fading with the passage of time. Softbank continues to look for global investment targets and is seemingly earnest in its obligation to help the Saudi state manage their financial resources and achieve economic diversification. It is expected that Uber will go public in 2019, and Saudi Arabia, the major shareholder, will rake in a big profit and continue to inject money into Vision Fund.

Not surprisingly, the 2019 PIF Future Investment Initiative (FII) will become a huge success, and the scale of Softbank Vision Fund will be further expanded.

Of course, one uncertainty that looms is the price of oil. Oil prices have plummeted in the past three months. And regarding the trend of oil prices in 2019, analysts have differing views. Falling oil prices will definitely affect PIF’s cash reserves, but it may also make the Saudi government more determined to diversify and invest in forward-looking sectors.

Unfortunately, predicting the oil prices is not one of our strengths at Momentum Woks. At least not yet 😛

In order to raise money for PIF, Saudi Arabia’s oil giant, Aramco has been flirting with the idea of the largest IPO in human history since 2017. However, it has not been easy as nobody has handled an IPO of this size before, and lots of rules probably need to be customised. Regardless, FII will march ahead.

8. Chinese money-burner ecommerce wave recedes, JollyChic remains;

Black Friday in the Middle East this year was a sombre affair for China’s cross-border ecommerce companies due to disappointing sales. Players that rushed into the Middle East market in dreams of making quick money seeing JollyChic’s success will have to choose to retreat, leaving those companies behind who truly want to win the Middle East market over long run.

JollyChic will be one of those. In addition to traditional ecommerce, JollyChic will probably explore growth points in other areas, such as offline retail, social ecommerce, O2O and so on.

9. Competition intensifies for people’s screentime, with social and video apps fighting a bitter battle; Content producers (including Netflix) invest heavily

Arabic content, especially video content, has always been scarce, and the existing content is far from satisfying the huge demand of consumers. Content startups in the Middle East have easily gained capital traction, such as Uturn in Saudi Arabia, Telfaz11, and Kharabeesh in Jordan.

In the new year, content producers (including Netflix) will invest heavily in Arabic content, and the region will see more and more content companies from China (not a surprise anymore right?).

10. More acquisitions create more serial entrepreneurs (who made money through exit to build something else)

Compared to other emerging markets of the world, the entrepreneurial ecosystem in the Middle East lags behind still. Most startups are concentrated in the seed round, with few progressing to series A rounds. Additionally, the environment of the public markets and the requirements for IPO make it almost impossible for many startups to list in the Middle East. Hence, the best exit channel is acquisition. However, in the past decade, startups that have successfully exited via acquisitions can be counted with one hand (we do not count fire sales or down round acquisitions, obviously).

The exit of Souq, Namshi, and the possible exit of Careem will result in a group of experienced entrepreneurs, which is conducive to the optimization of the entrepreneurial ecosystem. For example, after the Arab portal Maktoob was acquired by Yahoo in 2009, the entrepreneurs who withdrew created the investment agency Jabbar Internet Group, and the founder of Aramex, which was listed in the US, also founded Wamda, which is an excellent and active startup in the Middle East.

BONUS: Many of you readers may know that Momentum Works started its presence in the Middle East through some consulting projects in the Middle East in 2017. As of 2018 we have a full-time team in Dubai and continue to focus on this market. In the coming year, Momentum Works will delve deeper into the Middle East and explore this market with local and global entrepreneurs. Yalla!

Momentum Works Emerging Markets Tech Investment Index

Momentum Works has released the Emerging Markets Tech Investment Index for various emerging markets. The image below is an example that shows the projected time between the different stages and the valuations you can expect at each stage:

We also launched Indonesia Fintech 2018 report and Indonesia ecommerce 2018 reports that comprehensively and systematically analyse opportunities, risks and investment opportunities in the respective sectors.

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