Online Retail in MENA – Ready to Roar

The online retail industry in the Middle East and North Africa (MENA) is at the cusp of reaching its tipping point and is likely to grow exponentially till 2020. 

This growth will be driven by a combination of supply side initiatives. Product selection is expected to show manifold growth, as the nascent seller ecosystem expands sharply. Growth in operational efficiency driven by inventory stocking will shorten delivery times significantly - leading to strong consumption spike. Thirdly, hyper competition will drive consumer experience focus especially on after sales - boosting adoption significantly. Together, these factors should push the market to its tipping point and truly make it roar.

2016-2017: A Watershed Moment in Online Retail in MENA

Online retail market is evolving at a rapid pace in MENA region. We believe that the last 12 months will go down as a watershed moment in the history of online retail in this region. There were two game changing events over the last 12 months: announcement of Mohammed Alabbar’s ecommerce venture and the acquisition of Souq, the largest regional e-tailer, by Amazon.

Mohamed Alabbar has been on an aggressive capability building spree to build end-to-end ecommerce capabilities since 2016. He has announced the launch of Noon, a new e-tailing portal and acquired talent across the world. His companies have also acquired stakes in a regional logistics leader (Aramex), an international online fashion portal & white label technology provider (Yoox-Netaporter), two regional ecommerce providers (JadoPado / Namshi), a regional venture capital firm (Middle East Venture Partners) and a FMCG company (Americana).

On the other hand, Souq, the regional online retail leader, has been acquired by Amazon, the global leader in online retail. Amazon is a pioneer in online retail and has deep online retail capabilities with more than 50% market share in USA. Also, Amazon is war-hardened after it cracked open an emerging ecommerce market, India, as demonstrated in our latest E-tailing leadership index. As the index shows, Amazon is now neck-to-neck with Flipkart, the incumbent, across dimensions.

Indian online market grew by almost 3x in 2015, it’s breakout year. We estimate MENA online retail market also to break out in the coming three years to reach more than $20bn by 2020.

Capability: Steep Improvements Expected

These initiatives will provide an unparalleled access to processes, technology and more importantly talent (a recurring challenge for the region). This will in turn improve capabilities across the online retail value chain. Key capabilities where we expect to see significant improvement are:

• Improved product variety and availability
• Better operational efficiency
• Better customer experience

Improved Product Variety and availability

Mohamed Alabbar has stated that his ecommerce venture will offer ~20m product listings. Amazon had a product listing of 15m in India within 10 months of its launch. Souq, in comparison, has <8m products (with ~6m of them in the “book” category). These numbers also vary significantly by the country of delivery. We expect the online product assortment to increase multi-fold in the coming years.

One of the challenges to increasing product assortment is the nascent seller ecosystem in the region. A survey of sellers by Redseer Consulting showed that 50% of sellers were willing to go online – a healthy number given the current size of online retail market (~1% of total retail). However, there was a lack of understanding about ecommerce and cost of online sales was perceived to be high. 

This indicates that seller-related processes need to be further optimized. Emerging markets such as India have already gone through this transition. For example, Flipkart tied-up with local vendors to reach out to sellers and created a seller protection fund to resolve disputes quickly.

Amazon India increased seller awareness and on-boarding through its innovative Tatkal and Seller Café concepts. 

Better Operational Efficiency

MENA market is divided into multiple countries with different legal framework and custom taxes making the operations complex to manage. This is very different from other large markets such as USA, India and China which are relatively homogenous to operate. This is arguably one of the biggest challenges for e-tailing to grow in the region. Smooth operations impact speed of delivery to customer which in turn impacts both profitability and customer experience.

Our research shows that less than 10% of the orders in the region have a promised of less than two days currently. This is in part because majority of the orders are still fulfilled by the sellers (inventory is stocked with sellers). In the coming years, we expect that e-tailers will start stocking inventory required for fulfilling orders in warehouses controlled by them. In India, today more than 60% of orders are warehouse fulfilled. When Indian e-tailers transitioned to stocking inventory in their warehouses, the order-to-shipment delivery times reduced by one full day. We expect that MENA will also witness similar improvements in delivery times once they moved to stocking inventory. Redseer’s research indicates that customer satisfaction improves with improving delivery speeds. It is not surprising that Souq is already experimenting with same day delivery while Noon is expected to make two-day delivery a central part of their proposition.

Better Customer Experience

We expect e-tailers to build on the best practices across different geographies while customizing them to the region. Some examples include

• Communication channels: Currently, customer interactions are primarily through call centers and emails while other channels are used sporadically. We expect additional channels of engagement such as virtual messaging chats between stakeholders to be more widely available. Also, currently, many e-tailers insist on returns only through call centers. With increasing competition, most e-tailers would decide to provide website / in-app based returns to remain competitive.
• After-sales care: E-tailers will look to move away from pricing to identify sustainable sources of differentiation. For example, installation services provided after sales in electronics have a significant impact on the net promoter score (NPS) of the e-tailer.

Margins Pressure to Increase

While we expect the revenues to grow and capabilities to improve, we also believe that the online retail will see hyper-competition from the regional online players, international online players (for example, Alibaba although not officially present already has significant market share) and the large brick-and-mortar players who are currently experimenting with the digital channels.

In such a scenario, online players might be tempted to choose growth over profitability. For example, it is estimated that the Indian online retail industry was losing ~30 cents for every one dollar of sales couple of years ago – Redseer research indicates them to be losing ~20 cents for every dollar of sales now. Online players that take a data-driven approach to decision making and continuously innovate will be able to exploit the online opportunity and come out stronger on the other side.

We, at Redseer Consulting, have helped many e-tailers to accelerate their performance through our in-depth E-Acceleration Program using our proprietary Integrated Research Approach (IRA).

Conclusion: Ready to Roar

Online retail is at its inflexion point in MENA. Experienced, well-funded and deep pocketed players with a long term view are entering the market - this is expected to exponentially improve capabilities and topline. We should see improvement across all key capabilities: sourcing, operations and marketing. However, topline growth with a clear path to profitability will be equally important for long term sustenance for e-tailers.