Emerging markets such as the Middle East, Asia Pacific and Central and Eastern Europe, will fuel the growth of online shopping all over the world. ©
Last updated: May 9, 2013

Middle East online businesses come of age

Banner Icon Despite some obstacles, e-commerce is expected to grow significantly in the Middle East in the coming years as customers embrace Internet and seek more convenient shopping.

Think of the Middle East and the mind conjures images of mega malls offering heavy seasonal discounts and indoor ice-skating. On the other hand, the marketplace may also be viewed as traditional and highly dependent on the influx of tourists in the region. But times are changing. Shopping in Middle East is on the road to becoming more sophisticated as a growing number of shoppers buy online from global retailers.

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"In the Middle East, participation in multi-channel retailing is still in its infancy with consumers immersed in an established mall culture that has become a focal point for everyday life and an avenue for social interaction among the region's growing youth population,” Matthew Green, head of research and consultancy for CBRE Middle East, told The National. “To be successful online retailers will have to become more creative in their offer in order to entice shoppers away from organized formats.”

He noted that online businesses in the area of web-based auction sites, group discount sites and flight and hotel bookings engines, have shown impressive growth during the last few years.

A survey of 50 leading international retailers made by CBRE shows that global online shopping is expected to double in the coming years. An estimated 63 per cent of global retailers believe that shifting customer preferences would force them to fully integrate their physical stores with online shopping and mobile apps in the next two years.

Emerging markets such as the Middle East, Asia Pacific and Central and Eastern Europe, will fuel the growth of online shopping all over the world.

A study by Visa underlines the growth in online spending by Middle East consumers, reports Arabian Business. The UAE leads the region’s e-commerce market, with online spending totaling around $2 billion in 2010. This makes up about 55 to 60 percent of total GCC e-commerce sales. The UAE online retail market is followed by Saudi Arabia (USD 520 million), Qatar (USD 375 million), Kuwait (USD 280 million), Bahrain (USD 175 million) and Oman (USD 70 million). A growth in online sales volume has been achieved by increasing Internet penetration in the Gulf region. The number of Internet users has increased to 18.7 million in 2010 from 1.2 million in 2000.

Most of the online businesses in the Middle East are clones of successful business models in the US and other developed countries. In 2005, Souq.com entered the Middle East’s infant online retailing market. The business was based on the model of eBay in the United States and tried to gain the early movers advantage in a nascent market. The business was a success and has since then been fancied by international investors, who poured $45 million in October 2012 to provide backing for its aggressive expansion plans. The funding has sent a clear signal to similar businesses – venture capitalists are willing to engage in direct investment in any online business, which has a consumer appeal and potential to disrupt traditional markets.

However, the evolution of e-commerce in Middle East is not complete without examples of failure. During last year, the regional e-commerce community faced several setbacks with the sudden closure of popular sites such as LivingSocial, Joob, Nahel and Mizado. The shut down of these sites raised some question marks over the sustainability of e-commerce business models in the Middle East, although success stories have done well to learn from these failures.

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Namshi.com, which is a replica of Zappos.com, has witnessed robust growth in its first year of operation. The online shoe seller, which started off with three employees in October 2011, now employs more than 100 people and manages 600 orders a day. The company received about $20 million in funding from J.P. Morgan and Blakeney Management in September for its ambitious growth targets, The New York Times reported.

“There are challenges around delivery of product, setting up efficient distribution centers and making the right decisions about styles to keep in our inventory base,” Muhammed Mekki, one of Namshi’s three co-founders told The New York Times. “The initial funding was there to test and see if fashion e-commerce can work in the Mideast. Now that we’ve proven the model works, we’ll focus on expanding.”

MarkaVIP, a Jordanian site offering discounts on luxury items, also attracted attention from investors in Europe and the US who together funneled an estimated $10 million into the business to help it expand regional operations.

Such investments are expected to provide an impetus to a young industry, which is fragmented, highly capital intensive and faces barriers in logistic operations. The growth of online businesses in the Middle East has been hampered by undeveloped postal services. As a result, about two-thirds of the retailers predict that while shoppers would order online, they would continue to pick up the goods from physical stores. Middle East businesses are keen on providing shoppers the chance to use online kiosks in their stores, while also focusing on mobile apps or smartphone-enabled websites within the next two years.

With different currencies and legal structures across the Gulf, these online businesses face difficulties in shipping goods to customers and are forced to open new bank accounts in each country. They also struggle to find local partners and manage inventory at each location. Therefore, established players like Souq are using new funding to establish new distribution centers, expand geographical footprints, offer new products and streamline business operations.

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Online payment has not been a popular choice among shoppers in the Middle East. Most of the customers preferred the cash on delivery system, which increased capital requirements of the business. Nevertheless, online businesses in the region are set to grow as customers embrace Internet and seek convenience in shopping.

Muhammad Waqas
Muhammad is a freelance writer focusing on business and economy related topics.
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