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UAE’s e-commerce sector is booming but rushing into it can crush you

E-commerce in the UAE is lucrative but competition is stiff and strong market incumbents make it hard for newbies and even harder for those with size but who fail to innovate

The GCC e-commerce sector is forecasted to reach a value of $50 billion by 2025 (from $18bn in 2019) The average annual spend per user in KSA and UAE between 2018 and 2019, reached $600 and $1,280 respectively Awok, which had seen its online traffic plummet by more than 70% in Q1 2020, has stopped operations

The GCC e-commerce sector is forecasted to reach a value of $50 billion by 2025 (from $18bn in 2019), according to a new report by Kearney Middle East.

Evolution in this business is fueled by consumer’s growing appetite to buying online, sectors more aligned with a digital economy and contactless transactions hastened by COVID-19.

But there are dangers. Competition is stiff and strong market incumbents make it hard for newbies and even harder for those with size but who fail to innovate.

E-commerce bonanza

The report predicts that e-commerce will become the main source of growth in the retail sector over the next five years, with 20% acceleration between 2020 and 2022, and 14% until 2025. Pre-COVID-19, growth was projected at 14 and 10% respectively.  

Large investment in digital by retail giants and the declining physical store sales pose a threat to the survival of SMEs that have not yet adopted to online sales channels. 

An earlier survey by Kearney in the UAE indicates that just 36% of SMEs have made the investment so far, while only 4% planning to sell online in the future.

The sector has revenues of about $24 bn today.

The average annual spend per user in KSA and UAE jumped by about 30% between 2018 and 2019, reaching $600 and $1,280 respectively, according to Kearney.

Since 2015, e-commerce went from 3 million to 21 million users per month and the number of related websites tripled from about 45 to more than 150. 

Fast-growing e-commerce sectors

Fashion and beauty are some of the fastest-growing, most competitive and attractive categories in e-commerce growing 18% annually over the past 5 years, nearly 4 times faster than traditional retail, now a $5 billion market. 

Meanwhile, online food delivery and grocery has been growing at more than 20% each year since 2017 and has become a $3 billion+ market.  

Stiff competition 

Amazon and Noon are in prime position, with over 50% share of e-commerce sales making it difficult to compete with them effectively (see figure 2) with the road to profitability dangerous. 

Amazon’s sales in the Middle East grew by 26 % to $76 bn in Q1 2020. Mumzworld saw growth of 800% in the same period, while Namshi’s sales grew by 40% in 2019.  UAE-based Instashop has recorded a 70% spike in app downloads, an increase in orders of 53%, and an average basket value increase of 70%, Kearney said. 

Read: E-commerce sector records sharp increase in sales

Casualties of e-commerce wars

According to the report, Nisnass is in the midst of shutting down and Awok, which had seen its online traffic plummet by more than 70% in Q1 2020, has stopped operations.

While this can be partly attributed to the pandemic, in the same period Kul has fared well, gaining customers and market share thanks to lower delivery charges, paid marketing efforts, and a willingness to invest.

Inefficiencies in the supply chain, which lead to problems such as sourcing issues, late deliveries, and higher return volumes, changing consumer behavior giving well-funded e-commerce players an edge in turning a profit, and strategic marketing and promotions are the difference between success and failure.                                            

While offering free delivery and discounts, holding large sales events, and investing in online ads can increase customer numbers, Kearney found that it can also inadvertently add 3 to 5% to cost and slash profits by up to 5 to 10% or even go into the red. 

2,500 retailers are actively pursuing e-commerce capabilities.

A webinar by the Dubai Chamber of Commerce and Industry’s representative office in China offered a solution to this increasingly crowded market.

Dubai-based Huda Beauty’s flagship store on Tmall Global, China’s biggest cross-border e-commerce platform, is an example of a smart strategy to escape competition and expand sales internationally. 

China is the biggest e-commerce country, contributing to almost 45% of global e-commerce revenue. Cross border e-commerce is a relatively new business model regulated by the Chinese government that allows international companies to sell products directly to Chinese consumers online at preferential duty rates and without a license to operate a business in China. 

Read: WARC releases Guide to E-commerce and the Future of Effectiveness

Consumers and trends 

Millennials account for more than 45% of the base, which is growing at 6% annually. About 60% of millennials shop online, where they spend an average of $1,500 each year on electronics, clothing, and travel.

A recent global study by Mastercard shows a surge in online payments in line with the rush to e-commerce, with 54% of respondents in the UAE saying they prefer e-commerce over in-store shopping.

Recent alliances

The Dubai Economy has facilitated strategic alliances between Emirates Cooperative Society, Dubai’s leading grocer and supermarket chain, with online fulfillment partners talabat, Careem, and Dukkaani for enhancing convenience and contactless shopping.

 The fulfillment partners will showcase up to 4,000 products of Emirates Cooperative Society and deliver them to customers within 60-90 minutes from the time of online order.