Amazon is changing rules of the Middle East retail world

Not long time ago, the e-commerce was totally unexplored area in the Middle East, however, now it is one of the fastest growing markets in the world, according to a report from BMI Research.

The report claims that the Middle East’s e-commerce sales will rise from a 2016 estimate of $22.3 bn to $43.3 bn by 2020, of which $19.8 bn will come from the United Arab Emirates. Only 15 per cent of the businesses in the region are going online, and 90 per cent of online purchases came from outside the region.

According to Howard Davies, CEO at Context, an ICT channel sales and price-tracking firm, success for retailers in the Middle East depends on brands and its links to the physical stores.

“I think the question of customer trust is the key one and that needs to be addressed. If you are going to buy online, you need to have a high level of trust like you have shopping in-store. I think this is the big barrier to overcome, and it’s something the whole retail sector has to overcome in the Middle East market if e-commerce is to grow from a relatively low base,” he said.

Davies explains about sidelines of Distree Middle East: “if you look at Amazon, people think of the company as an online platform, but Amazon is in fact a huge logistics facility, and those facilities will be built in the Middle East after they have acquired Souq.com.”

In his opinion, there are two things that are holding retailers from embracing the omnichannel business model. The first one, according to Davies, is to understand the complexity and to decide in their particular environment how they are going to navigate that. The second thing is how to find the money, management buy-in and time to make the changes that are required while at the same time, running an ongoing business without any disruptions.

“That’s a big issue, and it is forcing most retailers regardless of the sector to hold back on their e-commerce plans and the investment required don’t translate into immediate return on investments,” he said.

Implementing technologies

According to computerweekly.com, the Middle East continues to embrace and implement technology to improve online and offline retail experiences for customers, it is on the top of accelerated e-commerce growth and innovation.

Davies said with over two decades of operating in the online retailing space Amazon is so good at doing this that it is often cheaper to buy goods from the US or UK and ship to the Middle East than pop out and buy it in the mall.

“The Middle East will see some innovation in this space and I would expect for example even to see Amazon take one or two of those mall spaces and open a physical store,” he said. “We see that in the USA with innovation taking place where they have physical stores and I wouldn’t be surprised if they take up some space in Dubai Mall or any of the other big malls in the city.”

Local rivals are not happy about Amazon arrival

Customers in the Middle East must be happy about Amazon’s arrival. However, local e-commerce sites probably are not that keen to see this player on their ground. But despite the high internet and mobile penetration across the Gulf Cooperation Council (GCC), e-commerce growth is stunted, said Davies.

As AT Kearney reported, e-commerce only contributed just 0.4 per cent to the GCC’s GDP in 2015 (or $5.3 bn). But, that figure could grow to $20 bn by 2020 with the right enablers. Davies pointed out that disappointing e-commerce figures are often attributable to low credit card penetration.

He said that, while there is some element of truth to this, it is also worth mentioning that most local e-commerce businesses have limited product range and product stock keeping units (SKUs), slow and expensive delivery and offer customers no real cost benefit. “Going forward, we should expect to see vast differences to where we are today on the external view of e-commerce in general in the region,” he said.

Recruiting to Amazon Prime

On the other hand, the industry can expect to see a massive customer acquisition campaign by Amazon to get people in the region onto Prime. “You will be seeing a lot of videos being watched and streamed through Prime and all those other activities,” Davies said.

Amazon’s mission to offer the broadest range of products at the lowest cost puts it on an inevitable collision course with local distribution and exclusivity franchise agreements.

“I think the thing to bear in mind is that Souq.com has already been addressing the issue of exclusive agreements for a while now,” he said. “Some international brands that have sold franchises in the region have found local consumers usually go to the USA or UK for direct purchases.”

Davies said the franchisees have already been undercut by the online experience. “Souq.com has been addressing this for some years now with those companies and I believe Amazon will continue in that vein,” he said. “The ability to define territory in this new environment is also difficult.”

Looking to the future, Amazon’s popular combination of direct retail and third party marketplace is poised to turn the existing retail landscape and e-commerce on its head in the Middle East. “There are many countries in the Middle East where logistics issues will not be solved overnight, so local IT distributors have an enormous part to play in that,” said Davies.

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