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Middle East retailers urged to embrace e-commerce platforms

E-commerce in the Middle East makes up a tiny proportion of the region's GDP, but this will change as Amazon stokes the market

The e-commerce industry in the Middle East is on the brink of IT-driven innovation as local, regional and global retail players embrace online platforms to enhance their omnichannel experiences.

The region is one of the fastest growing e-commerce markets in the world, but it is starting from a relatively low base, according to a report from BMI Research.

The report forecasts the Middle East’s e-commerce sales volume to rise from a 2016 estimate of $22.3bn to $43.3bn by 2020, of which $19.8bn will come from the United Arab Emirates (UAE). And according to Gartner, only 15% of the businesses in the region have an online presence, and 90% of online purchases are bought from outside the region.

Economic diversification, improved workplace participation rates and expansion of mobile and fixed-line broadband will support the market’s growth over the next decade.

Success for retailers in the Middle East is related to brands and, in some way, the physical store’s links to brands, said Howard Davies, CEO at Context, an ICT channel sales and price-tracking firm.

“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,” he said. “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.”

Speaking on the sidelines of Distree Middle East, Davies said 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 now it has acquired Souq.com.

Read more about e-commerce

Rapid advances pundits say will see the Middle East e-commerce market changed drastically over the next 18 months, and snapping up small, local e-commerce outfits represents Noon.coms best chance of establishing itself before Amazon can steamroller its way into the region.

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

Embracing technology

As the Middle East continues to embrace and implement technology to improve online and offline retail experiences for customers, it is on the cusp of an era 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’s 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.”

Amazon bad news for local rivals

Amazon’s arrival is indeed great news for Middle East customers, and probably bad news for most, if not all, local e-commerce sites. But despite high internet and mobile penetration across the Gulf Cooperation Council (GCC), e-commerce growth is stunted, said Davies.

According to a recent report from AT Kearney, e-commerce only contributed just 0.4% to the GCC’s GDP in 2015 (or $5.3bn). However, that figure could grow to $20bn by 2020 with the right enablers, according to the report.

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

However, on the inside, 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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