Want to launch an eCommerce business in the UAE? In theory, it’s about the easiest thing to do as long as you have the bare minimum funds to set up one.
You can choose to get a business license from any of the free zones in the country, with many offering multiple incentives for digital-focused ventures. “As such there are no restrictions on (100 per cent) ownership within free zones,” said Nasser Malalla Ghanem (right), Senior Partner at NM Associates.
“Given the proliferation of such licences, it is unlikely any ownership restrictions will be put in place for these categories. In fact, based on the proposed reforms the government is contemplating, it appears as if it is moving in the opposite direction by opening up a number of onshore sectors to 100 per cent foreign ownership, including retail.”
It’s easy to see why everyone in the retail industry, either existing or a prospect, wants to be in the e-commerce. According to industry estimates, the Gulf’s eCommerce penetration is at around 3 per cent of the total share of retail sector sales, and expected to reach around 12 per cent by 2022.
But that’s where the easy part ends. Despite online sales growing in double-digits in each of the last five years, eCommerce businesses — the vast majority of them — are finding that profitability can be a long way off.
Many have been forced to exit. Think of the number of tech and gadget selling online portals that were launched five or six years ago. Most have ceased to exit, a handful transformed themselves to sell multiple categories, while one or two were bought over.
But profitability remains an issue, and by the looks of it, could become even harder to reach. And the threats to profitability is not just coming from within — each time an online shopper in the UAE or the Gulf opts to buy from an overseas portal, that’s a transaction lost to domestic players.
“Studies show that around 50 per cent of eCommerce in the GCC is coming from cross-border transactions compared to 16 per cent in the UK and as low as 6 per cent in the US,” said Rani Nasr, Head of eCommerce at Chalhoub Group, which operates a mix of upscale brick-and-mortar and online stores with a regional footprint. “We have even seen this happen with customers shopping on regional websites although a local website already exists.
“Our main challenge in this region is to show the customer that they are able to buy the same product for the same price.”
Are there solutions out there that can be tried out that would bridge the gap towards a profit? Or is the only way out for home-grown portals is to sell out to a bigger — global — platform? As was the case with the Souq and Amazon deal early last year. And in the way the high-end fashion portal Namshi and the electronics e-tailer got acquired.
There are industry insiders who believe that only some form of government intervention can create a level playing field that would allow it.
“We need to nurture local Arab champions and, hopefully, we’ll have a vibrant capital market to exit by listing instead of having to monetise solely by selling to international players,” said Walid Hanna (left), founder and CEO of MEVP, the private equity firm.
“It is a fact that GAFA (Google/Amazon/Facebook/Apple) consists of American companies only and they eat everybody’s cake on a global level. As a result, we’ve seen in the online space countries like China adopt protective measures that allowed the creation of local champions like Baidu, Alibaba and Tencent.
“In India, Flipkart (before it recently sold a majority stake to Walmart) and (ride-hailing firm) Ola sought government protection from global rivals on multiple occasions.”
But will Gulf governments want to step into a space that is operating on free-market principles? Or in other words, where the strongest will survive.
MEVP’s Hanna is not alone when he says that it is unlikely that Gulf markets will see more multi-category portals/marketplaces make an entry. It’s a space already being carved out by Souq and noon, while Wadi.com has its strengths in the Saudi online space.
What could still happen is “Niche players that play in a specific subfield and be successful at it,” Hanna added. “For example, companies abroad like Warby Parker that sells eyeglasses and Dollar Shave Club that specialises in men’s grooming. And here in the region players like The Luxury Closet and Mumzworld.
“So, we might potentially see other niche players enter, or current ones raise more funding. There is fear of the “big boys” — but if smaller and new entrant players execute well, we don’t see why they wouldn’t see an opportunity for potential M&A down the road.”
But in the interim, the business of eCommerce will see its share of entries and exits in the Gulf. It’s no easy place to be in.
Bringing price parity between here and there
Want to stop more online shoppers in the Gulf from purchasing via overseas portals? Then bring about price parity between what’s sold here and outside.
Some of that may already be happening. “eCommerce is positively impacting price parity by getting prices closer to the global, which is definitely beneficial for the region online and offline,” said Rani Nasr of Chalhoub Group. “To manage this today, we offer price match options on some of our sites and investing in price comparison tools for the Group.”
Nasr says it would be self-defeating if any sort of import duties were imposed on eCommerce purchases shipped in from overseas. “eCommerce is global — adding walls in form of taxes or duties or any other means may drastically slow down customer appetite and regional online growth,” Nasr added.
Source: Gulf News