How to take advantage of Saudi Arabia's booming ecommerce market

By Anita Hayward and Lidia Houley

The Middle East is an investor’s dream for aspirational retailers looking to take advantage of a waking giant. In recent years, the Kingdom of Saudi Arabia (KSA), has been innovating in the ecommerce space, and is now ready to embrace worldwide trade.

Vision 2030, announced in April 2016, is a strategy for the region to focus on growth outside of oil, and the Middle East has a vast collection of resources to drive this vision. With an enthusiastic group of New Millennials whose pockets are growing ever deeper, the market for online commerce is also steadily improving. The Middle East is a region with clear goals and New Millennials who have a desire for convenience of spending, and these factors make ecommerce in the Middle East a recipe for success.

For those in the UK and the EU who still have their doubts, read on. The KSA has altered its focus dramatically from oil to commerce and has become a paradise for investors wishing to spread their wings.

Increasing Target Markets and Spend

The KSA has a population of some 30 million people. The World Bank has identified the KSA as one of the 20 wealthiest countries in the world in terms of spending power. Surveys confirm that New Millennials (those between the ages of 15 and 24) make up the largest group of online participants, and even if they do not yet have the spending power of older groups, they are extremely tech-savvy.

In 2017, 12 million people in the region went online to meet their shopping needs, averaging an expenditure of £470 per individual, with an average basket value of £120. Steady growth is expected, with estimates being pinpointed to reach 12.4% in 2020, demonstrating a valuable and stable investor destination for this burgeoning Middle Eastern industry.

Other sources confirm that online business has boomed, escalating over 1500% in the past 10 years – additional evidence that the region is relishing the deserved attention and unprecedented growth of its ecommerce environment.

Online shopping in the KSA grew by 22% to 40% between 2015 and 2017, making this an intensely lucrative market to invest in. And it is not only the younger generation who have promoted a growing interest in ecommerce: the older generation are also taking advantage of the convenience of online shopping.

Popular online product purchases so far have seen a concentration in grocery orders, with electronic equipment, clothing, and beauty and personal care products also being clear favourites, comparing favourably to offline purchases.

Ipsos graph

Comparison of offline and online KSA shopping behaviour (Ipsos)

The ecommerce fashion segment is a clear winner for the majority of shoppers. This market comprises individuals between 25 and 34, who account for half of all the orders in the fashion environment.

The next significant group are those from the 34 to 54 age range, with the number of online female shoppers set to expand as women continue to be welcomed into the KSA workforce.

Although the male target market is significant in terms of online shopping, they are fast being challenged by women and New Millennials – all indications that the interest in online purchases is set for a continued steep trajectory over the next decade, as previously indicated.

Saudi Arabian women

eCommerce Key Drivers

With communications and information technology having been identified as a positive avenue to leverage higher growth in the KSA, it is little wonder that Saudi Arabia has produced a tech-savvy nation of young people.

It is also not surprising that the older generation have begun to appreciate the benefits this technology brings to adding value to their lifestyles. Adoption of new ecommerce technologies is an exciting and ever-expanding industry in the KSA, which has made the ecommerce trend sustainable and destined for longevity.

Indications of this longevity are apparent in the upsurge of online purchases over the past decade. Clothing is one of the most promising, with leading Western brands enjoying great popularity.

Due to many women in the KSA finding it difficult to access traditional stores, online shopping offers them an easy path to access brands and new fashion trends. Once the destination of the wealthy alone, ecommerce sites have also now begun to draw large followings from middle classes as well, extending the target market for investors even further.

Clothes rack

The Middle East is yet to be hit by the costs of returns, which has put a price tag on UK e-retailers of up to £20 billion a year. Saudi Arabian returns are currently sitting at 15%, which is significantly lower than other major markets.

Digitisation of payment methods has not taken off substantially, with low credit card penetration still apparent in the Middle East.

Cash payments on delivery have, however, overcome the digital payment challenge, with this factor having had little dampening effect on the eagerness of individuals to engage in online sales. Greater education and improved security measures could conceivably meet this challenge and harness the opportunity of online payment methods to further improve ecommerce profits.

Mobile technology is another great driver of online sales, with the younger generations being particularly fond of this method for accessing online shopping sites and making secure payments.

Phone on table

Of the 312 million mobile phone contracts in the Middle East, 93 million of these are active on social media sites. These figures afford an inkling of the enormous potential the region holds for further growth, which brings us back to the first mover advantages mentioned earlier in this piece.

Certainly, first-mover advantages are frequently accompanied by steep (and at times, expensive) learning curves, which benefit later market entrants. The fact remains, however, that first movers will often create such strong positions in an industry, that others will find later entry near to impossible. 

Currently, China has been the key cross-border player in ecommerce with the Middle East, despite the attractiveness of Western retailers to the Middle Eastern customers, two-thirds of which are under 30, showing huge and growing opportunities within the Middle East.

Further to this, as aforementioned, online shopping penetration has risen by 22% in 2 years (2015-2017), and continues to do so, indicating a massive investor opportunity in the region.

Deloitte graph

Penetration statistics across the Middle East (Deloitte)

Government and Private Partnerships

The Saudi Arabian initiative Vision 2030 has ensured a relaxation of many regulations, encouraging greater investment in ecommerce. Further, government assistance in establishing free-zone ecommerce sites is another promoter of this environment.

One example of such a long-term initiative is that of the Dubai CommerCity, designed to attract further ecommerce to the region from North African countries. The creation of this free zone for Dubai has seen investment interest reach 120% growth, a persuasive figure for other countries in the GCC (Gulf Cooperation Council) to follow suit.

Private/public partnerships are in the process of creating an investor destination that will rival that of other emerging economies across the globe. The recently established online retail company Noon, created by Mohamed Alabbar, which has several agreements in place to source a variety of US products and goods from other countries, is another example of expansion in Dubai.

Service delivery is a vital component in meeting customer demand for improved service offerings, which is one more area where competition will drive businesses to enhance their total product offering.

Saudi Arabia sky scrapers

Between Vision 2030, the strong growth in ecommerce, and a positive government approach in the region, shoppers can anticipate continual improvements in the value added by the ongoing upward trend in ecommerce.

Further investment and ongoing competition are set for the additional stimulation of online purchases, as customers reap the benefits of public/private partnerships in the industry. More exciting is the fact that customers will be able to access products online which have not previously been available.

With positive steps having already been taken in terms of strong government and private partnerships, the KSA and other GCC countries are encouraging investor interest.

Major brands are making inroads into the country, creating more competition, and improvements are being made in relation to product deliveries to customers. Although distribution channels still require attention in getting products to customers, this is yet one more area where opportunities can be leveraged by future investors.

Stock market screen

Primary Takeaways for Investors in eCommerce in the Middle East

The major point is that ecommerce as a business method is growing at a rapid pace. The variety of payment methods available is a positive factor in stimulating these purchase types.

Online shoppers are drawn to favourable promotional offers and online discounts, primarily when purchases are not urgent. Smaller purchases such as groceries, electronic equipment, apparel and so forth are popular, but must be accompanied by excellent service delivery.

KSA shoppers tend to plan their shopping both online and offline, but small online purchases lean more toward spontaneous purchasing behaviour.

Additional takeaways from the ecommerce environment in the KSA are that government/private partnerships are directed at facilitating growth in this industry. UK and EU investors should, therefore, find this an attractive market in which to exercise expansion strategies to enhance profitability. The Middle Eastern online retail giant is awake and well, offering investors a stable platform in which to grow their businesses.

Despite some drawbacks, such as payment methods and distribution channels presenting some obstacles to customer satisfaction in the services provided, these elements also suggest opportune areas where competitive advantages can be harnessed and leveraged.

UK and EU partnerships are welcomed in the Kingdom of Saudi Arabia, where there is extensive leeway for stable investment and growth in the ecommerce environment.

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