Successful Ecommerce businesses in MENA – a fairy tale?

The future of retail is shaped by a powerful consumer who has thousands of choices at his fingertips and high expectations when it comes to product offering and customer service. Traditional retailer can often not answer fast changing consumer expectations – brick and mortar retail is dying, online commerce is booming. We can observe this everywhere in the world. In the US and Asia, the successful shopping malls of the 70ies and 80ies are closing down one by one. In Europe, city centers become wastelands as shops disappear. New concepts that combine shopping with lifestyle experience surrounded by restaurant and cafes are implemented.  

In the MENA region it is no different – traditional retail businesses are struggling to survive and looking for new concepts to attract shoppers. On the other side stand the online retailers that see strong year on year revenue growth. Traditional retailers understand that an online presence is a must have and are all rushing in setting up their online shops, often with little success as they have no experience on how to do this.

I am regularly asked by people how to run a successful e-commerce business in the MENA region. It’s clear but at the same time very complicated. The clear part lies in the bare essentials you need (no, a good looking website is not enough!), the complicated part (in MENA) manifests itself in the execution, operation of the business, and last but not least, achieving profitability.

Let’s turn to the essential ingredients for a successful ecommerce business first:

Products, Technology, Marketing and Customer Experience.

1.      Products. It all starts here. If you don’t have the right products you will not succeed. A right product answers a demand from the market AND gives you sufficient margin to operate. To be clear, it’s great to have a product that is in high demand, but if it does not give you sufficient profit margin, don’t take it on or ensure that you have other products that create the right mix to operate a profitable business.

In fact, it is one of the biggest challenges of the business to get the product mix right. There are many parameters that need to be considered, especially in the MENA region. The simple comparison between retail price and purchase price of an item is not enough. Size and weight of the item are important dimensions of the equation. They define your delivery costs that can be very meaningful in the region. Expected return rates are another important aspect to look at. Fashion items for example have a much higher return rate than cosmetic or kitchen articles. The same goes for low vs high quality products obviously. Returns are expensive. Apart from return costs, products that come back to you, have to be checked in the warehouse to decide if they are in resalable condition or not. They often have to be repacked. A returned product might represent a complete loss.

In my view, a business with less than 30% gross profit margin (product, delivery and logistic costs included) cannot be profitable in MENA. Exception from the rule – you can scale your business beyond USD 500m in revenues (and the profit margin is the sufficient to cover your fixed costs).

2.      Technology. You need to present your products on good platforms. This is not only a desktop website! Ensure that the site is mobile optimized. 70% of your traffic will come from mobile or tablets. A good mobile app is a great advantage as it gives you effective marketing tools on hand (ex: push notifications).

Implement a business intelligence (BI) tool into your software infrastructure. BI will give you insight into key areas essential for any ecommerce business: inventory management, pricing strategy, cost strategy analysis, campaign analysis, buying patterns of costumers and sales & margin performance of different products. Even a small business will benefit from having additional insight into their data. There is endless data in an ecommerce business. So collect as much as you can to optimize your business and your customer’s experience. There are multiple BI tools out there. To choose the BI tool that is right for you, consider your target audience, your existing systems and classify the features and functions you consider as must-haves vs nice-to-have.

The use of artificial intelligence (AI) in ecommerce is growing rapidly. Many ecommerce businesses already use forms of AI to better understand their customers, generate new leads and provide an enhanced customer experience. AI in e-commerce is a topic for itself and will go beyond the scope of this article. I will soon post an article that describes how AI helps boosting sales for ecommerce businesses.

3.      Marketing. Budgets for marketing are usually huge in the ecommerce world and represent a substantial cost factor in the PL. It is important to be smart in the way that marketing is done. It is easy to spend hundreds of thousands of Dollars. A smart way, especially in MENA, is to involve influencers. The largest market for any relevant ecommerce company in the region is Saudi Arabia (KSA). There are key influencers such as Manal Alalem, Joelle Mardinian, Noha Nabil and others that you need to get on board. In KSA, the top 10 female influencers all have significant following in the millions. Influencers are not cheap to work with but they will reach your target audience directly and have a powerful impact. And there are always creative ways to work with influencers apart from paying them in cash.

Why is social media so big in MENA? It’s mainly due to the fact that 50% of the MENA population is below the age of 30, in KSA it is even 67% of the population. These millennials have a huge appetite for social media consumption. KSA has the highest per capita video (Youtube) consumption in the world. So be aware of this when planning your marketing campaigns.

4.      Customer experience. There is no rocket science to this – a happy customer is a must for any successful business. But how to achieve this? It all starts with transparency: no hidden costs, clear product descriptions and high quality product images are key for a great customer journey. Smooth checkout process, order tracking and quick delivery comes next. Note that in MENA, there is a clear correlation between the delivery time of an order and a customer’s willingness to accept the product. Remember that 90% of the business in MENA is conducted via cash on delivery (COD). If you don’t deliver fast (i.e. within 2 days max in city areas and 4 days max in rural areas) then you have a high chance that the customer will not respond to a courier call, you will not deliver the order and you will have an unhappy customer that will not order again.

Inventory management plays a key part in your ability to deliver fast (or deliver at all). It is one of the main pain points of every ecommerce business. It needs your utmost attention from the start of your business as it not only effects your customer satisfaction and sales, but also your cash flow! You might end up with huge piles of unsold stock that you have paid for and that you cannot return to your suppliers. If you fail in effective inventory management, you will fail with your whole business.

Handling of questions, complaints and returns is the final step in the customer journey. Make it easy for the customer to return a product. In today’s competitive environment you have no choice than to apply a “no questions asked” return policy. Ensure to calculate those costs into your business plan.

We have now discussed the essential ingredients (the “clear part”) of an ecommerce business and highlighted some specific characteristics of the MENA region.

The complicated part is to put all of this together and make it work. In order to mix the above ingredients together in the right way, you will need experienced staff and/or consultants. Even if you are a small ecommerce business, it will help you tremendously to get someone aboard (even if just on a project basis) to review what you are currently doing. The least that every player in the market needs to do is to run an internal update on where the company stands in respect the above essentials. Many aspects of the business can be improved without involving much cash. Standard BI tools for example are most likely already part of the ecommerce solution that you are using. Customer experience can be improved by working very closely with your courier company and following up on every delivery they do.

The final question is, how to achieve profitability? I will give you an honest answer – it is extremely challenging to run a profitable ecommerce operation in MENA. In my view, it is only possible in two cases: (1) as a general ecommerce player if you planned your operations very carefully and in detail, if you have the right experts on board and (!) if you have deep pockets, or (2) as a niche player if you sell high margin products to a very specific audience.

Starting out as a general ecommerce player selling all sorts of consumer goods without having strong financial backing will definitely lead to bankruptcy. Not good news, but true. 10 years ago when there was much less competition and customers were not price sensitive, it was possible to succeed as a player targeting the mass without deep pockets as your margins were very high. Nowadays with players such as Souq (ie. Amazon), noon.com, namshi (focusing on apparel) and citrussTV, that is not the case anymore. You will need time and occur substantial losses until you have reached a critical revenue level that allows you to cover your fixed costs with a lower (than 30%) gross margin.

A major challenge for any ecommerce player in MENA is that the region is very fragmented and there is no working address system. Every country has different customs procedures and requires specific product documentation for importation of products. Managing courier companies to ensure they achieve satisfactory delivery success rates is time consuming and frustrating. Courier charges are high. So an ecommerce player will have to subsidize delivery costs. In addition, 90% of the business is based on cash on delivery (COD) which attracts a further cost and makes it harder to achieve high delivery success rates which leads consequently to higher return rates and costs.   

What could change the situation? There are positive initiatives such as Dubai CommerCity dedicated to the fast-growing ecommerce industry to attract foreign direct investment. This is a great initiative but will not solve much of the above challenges that an ecommerce company in the region is facing today. A necessary step forward would be to achieve a unified market among the Gulf Countries (GCC) with common import rules and no customs barriers. Goods must be able to move freely within the GCC. This would give a huge boost to the ecommerce industry and invite many more players to the table.  

Some of the (region specific) challenges on the other hand form a strong barrier to entry for competitors. If your business gets the above essential ingredients right AND manages the challenges well, then the market can be very lucrative! In MENA you are looking at 300 million people that want to be served.

The fairy tale of a profitable ecommerce business in the region could become reality.

Looking forward to receiving your comments.