Is E-Commerce The Best Bet For Middle East Start-Ups?

The Middle East’s e-commerce space has been booming over the last few years, with a recent report by payment solutions provider Payfort, suggesting regional e-commerce sales could touch $15 billion by 2015, up from $9 billion in 2012.

Competitive pricing and better deals (60 per cent) were found to be key motivations for users shopping online, while convenience (56 per cent) was also a key factor.

The report found that there are around 4.43 million online buyers in the region mainly spread across the Uae, saudi arabia, egypt and Kuwait, with the Uae accounting for the biggest chunk at 3.6 million.

Up to 85 per cent of the UAE’s population now uses the internet and almost every home in Dubai has at least one computer and a WiFi connection, stated Vikram Shroff, president of the UAE Chapter of the Entrepreneurs Organisation (EO) and director of Regal Group.

Not surprisingly given these numbers, a large chunk of regional entrepreneurs are now targeting e-commerce or online platform based industries.

“Creativity is the name of the game moving to the future. Hence, the internet offers regional entrepreneurs new ways to market their goods and services and differentiate themselves at the same time. thanks to social media and heavy internet usage, people are turning to online portals for time and efficiency,” said Shroff.

“Businesses that are centred around facilitating time and those that help consumers find solutions to existing problems will be extremely successful.”

But while the industry is flourishing, experts highlight the lack of established players, with only a few successful ventures standing tall in the region.

The problem is that it is actually very difficult to make money through an e-commerce venture, explained Rabea Ataya, founder and ceo of recruitment firm Bayt.com.

“Most ventures lose a vast amount of money in the initial stages and the long- term viability needs to be determined,” he said, speaking at an event organised by the EO.

Paul Kenny, founder and CEO of daily deals website Cobone and its travel offshoot, Safarna, agreed that it is hard for e-commerce ventures to attain profitability in the short-term.

“A lot of people underestimate the cost of launching operations online and then scaling the company.”

For instance, Souq.com, one of the most successful e-commerce platforms in the region, has grown more than 10-fold in the past two years, registering over 23 million visits per month on its website, with 6.2 million registered users.

But Kenny stressed that many underestimate the manpower required to keep up with that level of activity – Souq employs around 1,800 staff, he stated.

It is important to be pragmatic and understand that these are businesses that need a long-term vision, agreed Shroff.

“They should be in it for the long haul and although it may take some time to kick start a great idea, the real fruits of their labour will be seen a few years down the line. That has been the case with a number of well known online business models.”

SETTING UP TROUBLES

One major challenge to set up an online venture is that although it is extremely easy for an entrepreneur to start a business in cities such as Dubai, permissions for e-commerce gateways are still a grey area in the region.

“In order to set up full fledged e-commerce portals, companies invest a hefty sum or generally piggy back off existing portals. We are presently learning from more advanced digital markets like India, where the technical talent and resources have really made it easy to launch a digital venture,” explained Shroff.

He also highlighted the persisting issue of funding, with banks hesitant to lend because they don’t have a track record of e-commerce businesses.

“I know banks are working hard to fund these thriving SMEs as some of them are doubling every year but at the same time there is a lot more to be done.

“Generally banks prefer tangible businesses like general trading, construction and manufacturing purely because they understand them and their business model is fairly standard,” he stated.

However, successful e-commerce ventures have managed to attract sizeable funding, primarily from overseas investors, since local and regional investors remain wary.

Souq.com, launched in 2005, has received funding of up to $150 million, including $75 million from South African media group Naspers Limited in March this year.

UAE-based start-up Careem, which offers chauffeur-driven car booking services through its website and mobile apps, received funding worth $1.7 million in a round led by STC Ventures, part of Saudi Telecom Company in September last year.

In March 2013, Cobone.com was acquired by US-based investment firm Tiger Global Management, for an undisclosed sum, while in 2012, J.P. Morgan Chase and Blakeney Management invested over $20 million in Namshi, a Dubai-based e-commerce firm that sells designer clothing.

In line with this trend, Kenny believes that travel and retail are dominating the e-commerce scene at present.

“The largest markets in the region are the UAE, Saudi Arabia and Egypt. Airlines and hotel websites command a large chunk of travel e-commerce sales and retail is generally dominated by a few online parties including online market place communities such as Souq.com, Namshi and MarkaVip.”

Despite this, Mona Ataya, founder and CEO of mother, baby and child site Mumzworld, is confident of future growth within the industry – not just from new entrants, but also from traditional retailers.

“For the past three years we have witnessed speedy growth with numbers doubling annually. Today, 15 per cent of brick and mortar retailers in the GCC are online. This number will change radically within the next 12 months as platforms such as ours are making it easier for retailers and smaller businesses to jump on the e-commerce band wagon quickly and cost effectively.”