E-commerce in the Middle East has become attractive to local and foreign investors of late due to the successes this promising sector has had recently. This is thanks to a leap in online shopping by consumers in the region who have become more interested in online shopping due to greater varieties of goods and better prices on e-commerce platforms. This has revived hopes for expanding the e-commerce market in the Middle East in the future.
In light of the promising future of this sector, it has become of great interest to regional and international investors, who have launched regional e-commerce platforms and funded some startup platforms to collect large commercial revenues in return. Nonetheless, challenges include limited use of credit cards, e-security risks, and lack of confidence by regional consumers in Internet platforms.
Growth trends:
The e-commerce market in the Middle East has promising potential after a boost in the IT environment in the region and expanding use of the Internet, smartphones and tablets. The following are the main trends in e-commerce:
1- Demographic choices: Many indicators show that online shopping has become a top choice for residents in frequent daily transactions. E-commerce platforms now allow consumers to shop at reasonable prices, and at the same time provide a large variety of goods. A 2016 survey by Payfort revealed that 33 percent of consumers in some Arab countries prefer to shop online primarily because of better prices, while 27 percent of those polled shop online because of the variety of goods, and 23 percent because of the availability of unique products.
2- Increase in platforms: In recent years, there has been serious support in the region for startups that provide new technological solutions for a variety of economic sectors, including e-commerce. These companies received public and private funding. Meanwhile, the IT environment became more prepared for wide-spread e-commerce.
Today, there are nearly 140 million Internet users in the region growing at a strong rate of about 50 percent. The availability of the Internet on smartphones in the region is growing at a rate of nearly 25 percent and 75 percent in some areas where there are 3G services. These two factors strongly contributed to an increase in the number of e-commerce platforms in regional countries that market many products, such as Souq.com, which sells more than 40,000 products including electronics, watches, jewelry and clothing with 24 million visitors every month.
3- Growing size: Based on the above capabilities, it is expected that the e-commerce market will grow at a quick pace in the Middle East in coming years. In the UAE (currently the largest e-commerce in the Gulf) it is expected to increase from $2.8 billion to $8.09 billion by 2020, according to Payfort statistics. In Egypt, it is expected to rise from $1.8 billion last year to $7.3 billion by 2020.
At the same time, the Turkish and Iranian markets are expected to achieve high growth rates in the coming period. With expanded use of 3G in Iran and lifting of economic sanctions in January, 2016, e-commerce was given a strong boost. Some international companies are hoping to invest in this sector, such as South Africa’s MTN. Currently, Digikala platform is the largest in Iran with around 750,000 visitors a day and an 85 percent share of e-commerce in Iran.
Currently, Turkey is the largest market in terms of online shoppers in the region, with nearly 9.03 million consumers in 2015. In the coming few years, e-commerce is expected to jump from the current $7 billion to $11.5 billion by 2020.
Investment trends:
E-commerce in the Middle East has recently caught the eye of regional and international investors. The following are growing trends for investment in e-commerce.
1- Large-scale investments: Instead of single-format investment based on limited funding, which was the common form of capital for e-commerce platforms, e-commerce is now attracting large investments from regional investors. For example, Saudi Arabia’s Public Investment Fund partnered with several regional investors to launch Noon e-commerce platform by 2017, at a cost of $1 billion.
2- Financial/acquisition transactions: As well as regional investments, investment funds and several foreign companies are seeking to profit from the fast growth of this sector by investing capital in startups to fund their expansion. Most recently, the US’s Amazon was negotiating to acquire 30 percent of Souq.com for nearly $1 billion.
In recent years, several other regional companies received funding from Western sources such as Turkey’s Trendyol, which in the past four years received $60 million from Western companies and the European Bank for Construction and Development. Russian investors, including Parus Capital Fund boss Andrey Kendriya Muravyov, announced they will invest in Iran’s Digikala, which is estimated to have a value of $400 million. Its value is expected to increase in the coming five years to reach $4 billion.
3- Specialized investments: Investments in Middle East e-commerce are following a new trend with the launch of several specialized platforms for marketing certain products for specific consumers. An investor in the Middle East recently announced the launch of a platform specialized in marketing luxury products online by 2017 with an investment of $138.6 million.
Sector challenges:
There are several structural factors that prevent the growth of e-commerce in the Middle East which need to be addressed in order to generate confidence and support for investments in this sector, including:
1- Use of credit cards: Credit card usage in the region is the lowest by world standards. For example, in Iran it is no more than 38 percent and in Morocco 45 percent. Most adults in the region do not have bank accounts which forces e-platforms to accept cash payments for Internet transactions. This means there is a dire need to promote financial inclusion for the region’s populations for digital payments and in turn e-commerce.
2- Online safety: One of the major concerns regarding e-commerce is online risks that companies and consumers could be exposed to, including hacking of bank accounts, fraud, selling lower quality goods than described, and not delivering the goods.
3- Consumer confidence: Many consumers are still worried about online shopping for several reasons, including waiting for orders to arrive after payment, fraud and scams whether because the goods are not available or do not comply with the online description. There are also some restrictions in regional countries in terms of credit card usage resulting from ongoing foreign currency crises.
4- Efficiency of postal services: Another problem facing e-commerce is poor postal services in regional countries whereby shipment is not available in all geographic locations, or slow shipments that delay the arrival of orders.
In conclusion, the fast growth of e-commerce in the region prompted the interest of investors in this sector, and attracted investors with large financial solvency not only limited-funding entrepreneurs.
