Amazon faces ‘mother of all battles’ with Gulf e-commerce push

Amazon founder and CEO Jeff Bezos and real estate tycoon Mohamed Alabbar.
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Amazon founder and CEO Jeff Bezos and real estate tycoon Mohamed Alabbar.

Amazon founder Jeff Bezos's visit to the cavernous Dubai Mall in November last year with real estate tycoon Mohamed Alabbar sparked feverish speculation of a tie-up to transform the region's nascent ecommerce market.

But only a few months later, Amazon has instead made a different move, this week concluding five months of negotiations to agree to acquire 12-year-old Souq.com, and setting up a battle for the region's fast growing digital sales market with the Gulf's most influential business figures.

"Bezos and Amazon are coming to the Middle East, setting up the mother of all battles with the locals," says one regional internet entrepreneur. "The market is totally under-developed — the Middle East, and Africa, are the final digital frontier."

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Competition for the market has suddenly become fierce. Mr Alabbar, chairman of Dubai developer Emaar, had been showing Mr Bezos the region's biggest shopping centre, nestled in the shadow of Burj Khalifa, the world's tallest building.

The two-hour meeting was misread by many in the region as foreshadowing an unbeatable combination of the world's largest online retailer with Dubai's real estate king turned internet entrepreneur.

Instead, days after the meeting, the Dubai businessman unveiled plans to launch Noon, a $1bn ecommerce start-up, with investment from Saudi Arabia's Public Investment Fund.

Now in the final stages of testing, Noon is expected to launch "within weeks". Mr Alabbar's plan is to build homegrown tech giants — a project backed by Saudi Arabia's deputy crown prince Mohammed bin Salman, who sees technology investment as a key to the oil-dependent kingdom's ambitious diversification reforms.

But when it finally emerges after two months of delays, it will find the market is already being transformed. Amazon's agreed acquisition of Souq.com for at least $650m will immediately make it the region's largest ecommerce platform. Few analysts are betting against the US internet giant causing the same sort of disruption to the retail sector as it has elsewhere in the world.

The Middle East lags behind other regions in embracing digital commerce. Online sales only amounted to $5.3bn in 2015, but that number is forecast to rise to $20bn by 2020 with annual growth of 30 per cent, according to research carried out by consultancy AT Kearney.

To date, obstacles to the sector have included poor logistics and cross-border barriers, combined with under-developed digital payment systems and the prevalence of cash transactions. That has limited digital sales to 2 per cent of the retail market, compared with up to 15 per cent in more developed western markets.

Adel Belcaid, principal at consultancy AT Kearney, says investment in payment and delivery infrastructure shows "things are moving in the right direction"."

It's exciting that this battle is starting — it will bring ecommerce to new levels," he says. "Amazon comes with undisputed leadership in this space, but Noon is backed by significant investors who know the retail market extremely well."

Amazon's entry is seen as an endorsement of the growth potential in the Middle East by local businesses. The last online acquisition of this size and prominence was Yahoo's purchase of portal Maktoob in 2009.

Amazon has already taken its first steps into the market. Amazon Web Services — the US group's cloud computing division — opened offices in Dubai and Bahrain in January.

But purchasing Souq, which along with partners and couriers employs about 6,000 staff, will allow the US giant to fast track the entry of its core business into the Middle East, avoiding the headaches of organic growth. The strategy stands in contrast to other large markets such as India and China, where Amazon has chosen to grow its own platform.

Amazon's arrival in the Gulf states will allow customers to benefit from the sort of same or next day "fulfilment" now commonplace in much of the western world, utilising Souq's established network, including semi-autonomous fulfilment centres and technical offices in Jordan and India.

However, details of how Amazon will merge operations with Souq have yet to emerge, with questions still about whether it will retain what has become one of the Middle East's most recognised online brands since it was founded in 2005 by Syrian entrepreneur Ronaldo Mouchawar.

Amazon is expected to retain key employees but invest heavily to expand on Souq's existing set-up to "own the market," according to one person briefed on the plans.

Amazon already controls a large segment of the online delivery market from outside the region, using Dubai-based logistics group Aramex as a logistics partner, people aware of the matter say.

But local retailers and internet investors are not convinced that Amazon's scale will mean instant success in a market where local contacts are crucial to win support of suppliers.

In Noon, which already has almost 500 staff, Amazon faces a locally-savvy, well-financed local competitor — and one that since last year owns a stake in Aramex, its delivery partner, which counts Mr Alabbar among its more significant investors.

"The investment in Aramex reflects on the belief that ecommerce is about logistics," Mr Alabbar said at a banking conference earlier this month. The Middle East has been late in its adoption of ecommerce, he said, especially given the prevalence of smartphones among the youthful, digitally-savvy population.

The start-up is running a "soft" early launch of its fulfilment centre operating proprietary technology near the city's Al Maktoum International airport, promising to offer 20m products over time.

In a demonstration of his influence in the market, critics have even accused Mr Alabbar of putting pressure on retailers at Dubai Mall to place their products on his platform. He denies the charge, saying he has longstanding relations with brands which are happy to partner with Noon.

Local business executives also say that Amazon — which uses its hefty global scale to bring down costs — may face resistance from local retailers. Many products offered by Amazon elsewhere are covered by exclusive agency agreements held by powerful local families, who may act against any attempt to undercut their margins.

Large bricks-and-mortar retailers, such as Al Futtaim Group, Majid al-Futtaim, Landmark and Alshaya, are also working on their own ecommerce strategies to meet upcoming competition from Amazon and Noon.

"While Amazon is clearly the juggernaut in the retail e-commerce space, it doesn't have the massive cross-channel opportunity of our 2,000-plus store network," says Savitar Jagtiani, Landmark's business head of ecommerce.

Local retailers still fear that Amazon's presence will challenge operations, which are already struggling with a subdued retail market as low oil prices and a strong US dollar dampen sentiment.

But this has led to some of the more ambitious to rethink their business models. In the Gulf, where malls also act as havens from the oppressive heat, operators are already diversifying away from retail to provide more "experiential" offerings such as food and entertainment.

"Amazon will be a major transformation, a whole new ball game, so mall operators will have to transform — and we are already doing that," says an executive at a senior retailer. "But this will accelerate things for sure."