Guide to Scaling Ecommerce in the Middle East
Combining insights from Capillary's association with top retailers in the region and secondary research, we aim to assess the current ecommerce market dynamics to throw light on the opportunities, challenges as well as predict the path the market is likely to traverse in comparison to other developed and emerging markets.
The State of ecommerce in the Middle East
With an estimated $8.3 billion in sales which is projected to grow to $48 billion by 2022, the Middle East presents a massive untapped opportunity for pure-play ecommerce retailers as well as traditional players who want to establish an online presence.
The Anomalous Digital Shift in the Middle East
In most regions across the world, ecommerce adoption is typically driven by an ecosystem of products and services (digital payments, cheaper smartphones, better logistics, faster internet, etc). And as the ecosystem matures, there is an increase in digitally-enabled consumers and as more consumers move online, newer ecommerce brands usually follow suit.
The Middle East didn't follow this traditional ecommerce adoption path. Despite a large number of digitally-savvy, high spending potential population who were ready to shop online, almost no major ecommerce brand, except for Souq, focussed on building a full-fledged online portal in this region.
In that sense, it's the consumers in the region who are driving this ecommerce growth by forcing the attention of the brands to the massive untapped opportunity. In fact, until 2014, almost 90 percent of the online purchases in the region were shipped from abroad, according to Gartner. Of course, all of that changed in 2017, with Amazon's acquisition of Souq and the launch of noon with a $1 billion funding by Mohamed Alabbar, chairman of Emaar Properties.
Why the Middle East is Ready for an ecommerce Boom
Traditionally, the Middle East has always been a brick and mortar bastion. This is apparent in that online sales currently contribute a paltry 3% of total retail revenue, as opposed to 12%-15% in developed markets like the US and Europe and 4%-5% in emerging markets like India and Brazil.
In 2017, the Middle East ecommerce market hit $8.3 billion. While the figure may pale in comparison to mature markets like China ($1.53 trillion), what's interesting is its growth rate of 25%. Within the Middle East, GCC has been clocking an impressive ecommerce growth rate of 30% which is way above the global average.
According to PwC's Global Consumer Insights Survey, the percentage of people in the Middle East who shopped online at least once in a month shot up from 23% in 2013 to 32% in 2017.
These figures point at a clear, tangible and massive headroom for ecommerce growth in the region.
Here are some of the factors driving ecommerce growth in the Middle East
Digitally-savvy, Connected Customers
The Middle East boasts of some of the highest levels of internet, smartphone and social media penetration in the world. UAE leads the way with a whopping 91% internet penetration and 99% social media penetration. As mentioned earlier, the internet and smartphone are critical components of the ecosystem which will accelerate ecommerce growth. Also, they play a crucial role in the research, discovery and purchase lifecycle of ecommerce.
Thanks to its first mover advantage, Souq has been able to achieve market leadership in the region. noon is the second biggest player; however, in terms of market share, they account only for about 30%-45%. This is a major deviation from other markets where the top two ecommerce players typically account for more than 50% market share. For instance, Amazon and Flipkart account for 60% of the ecommerce market share in India.
The Digital Shift by Offline Retailers
Pure play ecommerce players have surged ahead in the Middle East by capturing 90% of total online sales. This is a trend seen in most developing markets where the existing physical retail infrastructure is unable to meet the demands of the new-age, connected consumer. Case in point is China where Alibaba's deep product selection and last mile delivery refinements allowed it to scale rapidly and cater to the growing middle class. In contrast, traditional retailers in developed markets like the US still enjoy a 40% market share and have been quickly ramping up investments in technology to shift to an omnichannel play.
Despite Amazon's absolute dominance of online retail with a 50% market share, traditional retailers in the US who were agile in their omnichannel shift have been able to achieve significant success in the online space. For instance, the US retailer Williams Sonoma launched its online presence in 1999 and now generates 54% of its sales from its online presence. The Middle East's well established traditional retailers will do well to move fast in establishing their digital presence to gain this first mover advantage.
Several major retailers in the region like Alshaya, Al Tayer, Al-Futtaim, Majid Al Futtaim, Chalhoub Group and Landmark Group have already initiated their omnichannel play either through distribution partnerships with pure-play ecommerce players or by establishing their own digital storefronts.
Significant Disparity in Category-wise ecommerce Sales
There is a major variance in maturity levels and volume of sales amongst product categories in the Middle East. While beauty, personal care and electronics have almost comparable sales to that of developed markets, fashion and grocery are lagging far behind. This indicates a significant headroom for growth across categories.
With a 23% annual growth, electronics is still the largest ecommerce category in the Middle East and nearly 70% of online shoppers in the GCC have bought electronics at least once. Competition has also been steadily intensifying in the online fashion space which is valued at $1.1 billion. Early movers in the fashion and footwear space like Namshi are being drawn into a three-way battle with regional players like Souq and noon and China-based brands like Shein and JollyChic.
The luxury ecommerce category also holds significant growth potential in the region. Valued at around $200 million, it's currently dominated by pure ecommerce players like Net-A-Porter and Farfetch. However regional players like Ounass and Level Shoes are fast gaining traction.
The resurgence in oil prices, diversification efforts and creation of new revenue streams (VAT and excise tax) in 2018 hints at an end to the government-imposed austerity measures and a return of the good times. Sheikh Mohammed of Dubai has already shared an 8-point mantra of governance and 50-year Charter which includes a plan for a Geo-Economic Map for Dubai and a Silk Road that will boost trade ties. The Saudi Arabian government is also planning an investment of over $100 + billion in the development of logistics infrastructure to boost ecommerce growth in the region.
The Opportunity for ecommerce Retailers in the Middle East
High Disposable Income of Consumers
The Middle East generally sees elevated spending levels as consumers in the region had disposable incomes that were 2-3 times higher than the global average.
While the decline in oil prices and geopolitical instability did lead to the tightening of purse strings, the recent economic surge will likely bounce back spending levels to previous higher levels. According to Nielsen, more than half of the consumers (52%) in the Middle East and Africa are feeling positive toward their current situation.
Large Order Values
Middle Eastern consumers have the highest per capita spending on luxury products. As a result, the Average Order Value (AOV) in the region is 50% higher than the global average.
Online luxury retailer, The Luxury Closet clocks an impressive AOV of $700. AOV is a critical metric since it has a direct impact on revenue and profits for retailers. The introduction of new technological innovations like AI-based recommendations and deep personalization is also likely to have a further positive impact on the AOV in this region.
Relatively Less Competition
Since the ecommerce market in the region is still in its nascent stages, it's the perfect time for new entrants. This is especially true in emerging product categories like grocery and appliances where there are no clear dominant players.
Innovations in Digital Payments
Though the majority of ecommerce purchases in the region are currently cash-driven, it's likely to change in the coming years. A rapidly growing ecommerce market and digitization initiatives by the government are expected to transform the digital payment ecosystem in the region.
For instance, to encourage the adoption of digital payment services, the Central Bank of the UAE has issued a regulatory framework for electronic payment systems.
Reduced Profits in Traditional Retail
The new labour-localization laws (expected to rise by as much as 15 percent), cuts in subsidized utility costs, and new tax measures are starting to erode profit margins of traditional retailers in the region. Furthermore, the per capita retail square footage has increased, and real-estate productivity has declined. Cumulatively, these events have set the stage favourable for pure play ecommerce players - who typically have minimal labour and real estate overheads - to flourish.
Key Things to Know Before Entering the Middle East Market
Customer-centricity is Critical
Traditionally, retailers in the region made supplier-focussed assortment decisions, ie., they simply stocked brands and products that are offered at the best price by the supplier. To succeed in the current dynamic market conditions, retailers will need to understand consumer needs, substitutes for best selling products as well as the factors they most look for when choosing a particular product. These insights can be gleaned using loyalty programs, retail analytics tools or through market research.
The Rise of AI
According to PwC, AI adoption will grow at 20% per annum through 2030. IDC estimates that spending on cognitive and artificial intelligence (AI) in the Middle East and Africa (MEA) will surge from $37.5 million in 2017 to over $100 million by 2021.
This growth and subsequent disruptions will likely occur first in ecommerce and financial services. New ecommerce entrants in the Middle East will do well to invest heavily in AI and Machine Learning technologies to stay ahead of the curve.
Impact of Value Added Tax (VAT)
VAT implementation in the UAE and Saudi Arabia will have an impact on buyers as well as businesses in the region. Since a majority of online purchases in the Middle East are shipped from overseas, consumers will be charged an additional services tax along with the goods tax.
ecommerce retailers in the region will also need to invest in an effective VAT compliance system and therefore, should expect higher costs associated with its implementation.
Leverage Social-Influenced Commerce
Like elsewhere in the world, online shopping behaviour in the Middle East is heavily influenced by product reviews on social media platforms. At 99 percent, Qatar and the UAE lead the region’s social media penetration rate (the UAE with 9.2 million users and Qatar with 2.4 million users.). Instagram usage is especially high in the Middle East with 63 million users in total (about 10% of global users of the platform).
The region is a hotspot for 'influencers' who promote products to a large number of followers. A study conducted by payment gateway PAYFORT found that 42% of respondents were influenced by Instagram to make an online purchase.
Snapchat also has a significant presence in the region with an estimated 33 million users.
Mastering Localization is Key
According to Internet World Stats, there are 86 million Arabic speaking internet users in the Middle East. While English is widely spoken, there is still a sizeable number of consumers, especially in Saudi Arabia, who have refrained from shopping online due to language barriers.
This renders localization a critical factor to consider before venturing into the market. Several luxury brands like D&G, Blue Nile and Burberry have launched an Arabic version of their website as well as marketing campaigns to cater to the local population.
Dominance of mCommerce
Across the world mCommerce has been steadily establishing it's dominance and the Middle East is expected to follow the trend, only at a much faster rate of adoption. According to an Admitad report, 65% of Saudi Arabian consumers are active smartphone users and 70% of online purchases in the country happens on a mobile device. In the UAE, it's around 80%. Overall, almost half of all online purchases in 2017 from both countries were done on a smartphone. Top brands and etailers were quick to jump in on the trend: Ikea launched its mobile app in 2013 and Souq revealed its multi-language app in 2014. Mobile spend is forecast to grow at 25% and reach $5.45 billion, by 2020.
A mobile app, PWA and a mobile-optimized website has quickly transitioned from a 'good to have' to 'must have' for retailers and ecommerce brands venturing into the Middle East market.
Cross Border Commerce
The Middle East, especially UAE is home to a diverse and global population who are increasingly sourcing their favourite products from overseas.
Cross-border commerce accounted for an estimated AED 12.5 billion ($3.4 billion) of all online spend in 2017 and is expected to hit $26 billion by 2020.
Vendors in UK and US account for more than half of all cross-border online transactions in the Middle East.
The biggest deterrent to cross-border purchases is lack of clarity around custom duty or tax, with 30% of customers admitting to abandoning cart at the payment page due to confusing tax payment terms.
Therefore, retailers will do well to have a 'Duty & Tax Calculator' widget to maximize conversions.
Challenges ecommerce Retailers will Need to Overcome
Cash Reliant Economy
Except for UAE, much of the Middle East is still heavily reliant on cash for online purchases. According to a study by MasterCard, 80% of online purchases in the Middle East are made with cash on delivery. There are several geo-specific reasons for this trend; for instance, in Saudi Arabia, several credit cards do not comply with Sharia Law rules of Islamic banking and finance. Meanwhile, in Egypt, a large majority is unable to meet the minimum deposit required to open a bank account. But the overarching narrative is simply a lack of trust in online payment systems and fear of online fraud. However, this is expected to change as seen in emerging markets like India where Cash on Delivery has seen a decline once the ecosystem matures.
Last Mile Delivery
Last Mile Delivery has been a major challenge in the Middle East due to lack of postal codes or a traditional mail courier system in many countries. It's common to find unnamed streets or places with names in multiple languages. The silver lining is that several startups are working on a fix through innovations like exact location pinpointing on a map.
Souq’s QExpress has expanded rapidly to become the largest delivery network in the region. It's primary competitor, noon has also been investing in last-mile delivery infrastructure and employs more than 1,000 drivers across 20 cities.
Deep-rooted Mall Culture
The Middle East is famed for its mall culture and is often credited for spearheading the 'experiential retail' trend long before the term got associated with 'New Retail' wave.
The region is home to some of the biggest malls (the Dubai Mall alone can accommodate 80 million+ visitors) in the world and offers a range of entertainment options like theme parks, movie theatres, aquariums and even ski hills. Also, the unavailability of alcohol in several countries means the idea of a Friday night usually involves a night out at the mall with friends and family. Therefore, it's unlikely that ecommerce will fully replace malls or other traditional retail spaces but instead compliment it to create an omnichannel experience.
Limited Warehousing Facilities
A large part of ecommerce purchases in the region is sourced from overseas vendors. As a result, the lack of a good warehouse network in the region creates multiple logistic issues for retailers besides increasing the overall costs.
The high trade barriers in the region result in volatile currency exchange rates, higher tariffs and sudden changes in regulations. These can create sourcing and logistic blockages, especially for smaller online retailers.
Credit Card Fraud Holds
This is a major problem for international ecommerce businesses operating in the Middle East, especially for high order value transactions. The scenario often leads to customers getting their credit card rejected due to risk of fraud. The issue is especially prevalent in Morocco and Egypt but is common elsewhere as well.
The Way Ahead
With a sales poised to hit $28.5 billion by 2022, the Middle East is currently one of the hottest ecommerce markets in the world. There is a clear and present demand for deeper product selection, and new online shopping experiences amongst the tech-savvy consumers in the region.
While the Middle East has got one half of the ecommerce success equation - internet and smartphone penetration - right; the rapidity of growth will depend on how quickly payments and logistics - the other two critical components in the ecommerce ecosystem - matures in the region.