Will Saudi Arabia be the dark horse of the MENA e-commerce?

According to estimates, from 2015–17, the online retail market in MENA region went from $4 to $6 billion. By 2020, the MENA’s e-commerce is estimated to surpass $15 billion at a CAGR of about 35%. UAE and Saudi Arabia lead the market in the region, due to the size of their populations as well as due to the penetration of internet and high purchasing power. Consumer electronics and fashion dominate as categories on all major e-commerce platforms in the region. But the shift from physical retail to online retail is still more gradual than one would expect with the kind of per-capita incomes and the internet penetration that exist in the region.

MENA’s online retailers have had to contend with myriad challenges — poor transport and payment infrastructure, low customer awareness and trust as well as limited selection of goods– which contributed to stunting the online growth.

However, after the rise of ride hailing startup Careem and its eventual big-ticket acquisition by Uber, things have started to change. The “Careem Gang”, much like the “PayPal Gang” of the Silicon Valley and the “Flipkart Gang” of India, is providing critical leadership and innovation in growth of other digital business in the region — from food delivery to supply chain and logistics, from grocery shopping and traditional e-commerce to payment solutions et al. The government’s impetus towards a digital economy and the rising investor interest are the other major reasons. Funding from significant local investors, especially those in the brick-and-mortar retail businesses, have gone up in the last few years is leading to a wave of infrastructure development and building a strong value proposition for the customer. Availability of talent, faith in the future of these businesses and ready availability of capital are fuelling rapid growth in online commerce across the region.

Yet, despite a larger population Saudi Arabia seems to be lagging in terms of number of startups in the digital space and its ability to attract global talent. UAE seems to have a clear edge in being able to host the investor interests, invite quality talent and push for greater adoption of e-commerce. But even in UAE, the struggle of e-commerce against the physical retail is significant. In the desert states devoid of many fun and engaging activities, opulence of the luxurious malls provides for an entertaining shopping experience. Shopping clubbed with the trip to the movie theater and a fine dining restaurant is a great value proposition for many in a relatively price insensitive market. It is partly a failure on the part of the online retailers for not being able to create an entertainment value in their in-app experience and the convenience factor is not always as valued by the consumers in the region as the ability to experience the products tangibly. While technologies exist to increase the user trust and feeling of tangibility in the online commerce they are under-utilized by most players as of now.

E-commerce companies being able to understand the user preferences and being able to investing into improving the user experience vs more users actually coming onto the platform is like the proverbial chicken-and-egg problem. Hopefully, this vicious circle of poor adoption -> poor product experience -> poor adoption should break with significant investment in creating awareness by the e-commerce companies in the future. As of now, the lack of user awareness can be gauged from the fact that

· Almost 56% of consumers in UAE, KSA and Egypt start their online shopping journeys using search engines as opposed to retailers’ websites

· 43% of Google Search queries in the apparel segment in the UAE and KSA are generic (not related to any particular e-commerce platform) compared with 32% in the UK

· In UAE and KSA, 20% of consumers watch online videos when researching products and services versus 7% in the UK which indicate lack of trust in product information pages of the website or lack of awareness about their existence or the product pages not being comprehensive enough

While, influencer based promotion strategies are fairly common in all e-commerce markets, its unusually high rate in MENA indicates a broken product experience.

It is worth contrasting UAE v/s KSA at this point.

KSA’s e-commerce penetration in 2017 was 1.4%, this was less than half of that of the US’ in 2005. The same for UAE is almost 3%. This is despite the average time spent online per day by consumers in Saudi Arabia being 6 hours and 45 minutes, which is 15 minutes more than the average American consumer.

Saudi Arabia, with its 33.6 million inhabitants, has the third largest population in the Middle East after Iran and Iraq. It also has the second largest internet user population that reaches 24.1 million, which is 16.4% of total digitally connected population in the Middle East. The internet penetration rate of 72% in Saudi Arabia is well above the regional average of 57.8%. Saudi Arabia has a high smart phone penetration rate of 65.2% (which is nonetheless behind regional leader UAE at 78%), meaning almost all the internet users in KSA have access to mobile internet.

Despite a slower growth rate than the global average (12.5% as opposed to 24.8% worldwide), 6.34 million additional Internet users are expected to start shopping online in Saudi Arabia by 2022, by which time Saudi Arabia would surpass UAE to become the top e-commerce market in the Middle East.

Noon.com, based in the UAE but owned 50% by Saudi Arabia Public Investment Fund, launched a local version of its website in Saudi Arabia at the end of 2017 and is a strong player against Amazon backed Souq.com and Alibaba owned Aliexpress in Saudi Arabia. There a slew of smaller players and some segment specific player but these bigger platforms dominate the sales, like anywhere else.

Unlike the Emirati e-commerce, fashion products lead online sales in Saudi Arabia. In 2017, total revenue generated by the online fashion industry In Saudi Arabia stood at US$ 1.91 billion, followed by electronics & media at US$ 1.85 billion. The online fashion market is expected to grow at an average of 20% between 2018 and 2021 and continue to lead the e-commerce market with an estimated value of US$ 3.08 billion by 2021 while the electronics & media category is set to reach US$ 2.66 billion in the same year. The footwear segment is forecasted to have the highest growth within the fashion market during this period (average annual growth of 28.3%).

Saudi online shoppers are rather frequent buyers, as 23% of e-commerce customers purchase a product at least once every two weeks, while only 3% buy less frequently than every six months. Overall, 19% of male and 27% female Internet users are considered ‘heavy buyers’, purchasing online at least once every two weeks. That rate is particularly significant among those under 30, as 29% of all internet users in that age group shop online at least once every two weeks. The average Saudi consumer spends US$ 618 online, an amount which is expected to grow only slightly to US$ 642 by 2021.

Saudi online shopping is also characterized by the prevalence of cash-on-delivery (comprising between 69% and 85% of online orders according to various estimates), while e-wallets such as PayPal, Amazon Payments and Google Wallet account for 24% of all purchases. High cash transactions, despite access to credit cards and other digital payment options, indicates a low trust in users for e-commerce.

Another limiting factor is the relatively low number of listed products. Enabling greater assortment of products is quite critical to great user experience. This can only be enabled with the development and on-boarding of Small to Medium-sized Enterprise (SME). SME marketplace model has been the backbone of product expansion in most e-commerce markets including USA, India, China and SEA. In the US, half of all items purchased on Amazon come from more than a million SMEs. In China and India, SME’s contribution to economic activity has always been vital and e-commerce companies there have created right support and incentives for them to join their marketplace, offering consumers a wide array of online shopping choices. This has not been the case in MENA. While SMEs constitute around 90% of registered companies in the region, they only make up 15% to 30% of MENA’s GDP (which contrasts with the 50% share typically seen in most developed markets). Also, they have also been very slow towards moving online.

Large groups, especially in core categories such as fashion and electronics, historically have dominated the MENA retail industry. Most of these groups have been late in making their vast product selection available online — whether their own online store or independent marketplaces. It is estimated that less than 20% of top global fashion brands physically present in MENA have presence on local e-commerce platforms that offer delivery to the regional consumers. While they should be brought online, the marketplaces have largely stuck to chasing these retail majors rather than developing the SMEs. Limited access to a broad and deep selection of products has been one of the main challenges hindering the development of MENA e-commerce. The region’s largest e-commerce platform — Souq — offers an estimated 8.4 million products, far fewer than the 550 million offered by Amazon in the US.

Saudi Arabia, with its huge population, relatively robust manufacturing environment and proximity to all other countries in the region, may also be positioned well to solve the supply side issues by investing into this space.

As observed earlier, the online shoppers in the region tend to rely on the influencer reviews and recommendations for the purchase and with the Saudi internet users being hyper connected with social media, it makes sense to have a strong social media presence, cost-effective influencer led commerce strategy and video first approach to sales in order to corner the market and bring the millennial into the e-commerce fold. Saudi Arabia has a total of nearly 19 million social media users (59% of total population and 79% of internet users) and 16 million of them also access their social media accounts via mobile. Almost all social media users are reported to have a Facebook account (nearly 19 million) and 45% of them access the platform daily. As in most other GCC countries, WhatsApp is used by a large amount of internet users (88% of total — 21.2 million people). Twitter and Snapchat register their highest usage rates in Saudi Arabia across the MENA region, with 40% and 45% of social media consumers using these platforms which amount to 7.6 million and 8.5 million users respectively.

Thus, there is a long way to go in terms of improving the sourcing, supply chain as well as solving user experience, trust and awareness issues related to e-commerce. There is a lot that the e-commerce companies can learn from the journey of e-commerce in India and China. Attracting right talent and solving actual customer pain points are going to be two critical factors for success. With the governments and investors in the region behind them, these hurdles should probably be temporary in nature and the companies should soon be able to convert the difficulties into opportunities and who knows, god willing, the region may actually become the mecca (pun intended) of the digital commerce and usher into a new economic boom in the region, sans the oil.

(Data courtesy industry reports from Bain & Company, Redseer Consulting and Hootsuite)