Is Internet Retailing Finally Having its Day in the UAE?

Bricks and mortar retailers in the UAE have long been in denial about the internet being a viable threat to their businesses. But, as the rising growth of this channel in recent years has illustrated, internet retailing is not only making its mark, it is here to stay.

With all the mall extensions in the UAE, one can be forgiven for not thinking internet retailing has much potential in the country. The strong shopping culture, challenging logistics and a weak investment climate for online retailers have all posed a strong hurdle, hindering the channel from really taking off. In recent years, however, e-commerce players have been making strong headway in overcoming these barriers. Euromonitor International’s growth figures show the channel has tripled in size over the past five years, with sales reaching AED2.0 billion in 2014. And, the future of internet retailing also looks bright, with an expected constant value CAGR of 38% between 2014 and 2019.

Evaluating these figures in an international perspective, we see that internet retailing in the UAE lags far behind the Western world. In 2014, Internet sales is expected to account for less than 2% of retail sales overall, while they stand at 15-20% in Europe and in the US. It is therefore fair to say that internet sales do not pose a serious threat to store retailers just yet. Nevertheless, internet sales are expected to account for more than 5% of total retail sales by 2019. In addition, the UAE’s internet retailing evolution is ahead of other large markets in the Middle East, such as Saudi Arabia and Egypt, where internet retailing currently accounts for less than 1% of retail sales.

UAE, a healthy ground for internet sales to develop

Why the UAE is leading the way in terms of internet retailing in the region is easy to see. All the fundamentals are present: firstly, consumers have high disposable income and a tendency to spend on the latest trends in electronic gadgets and fashion; and secondly, connectivity is a megatrend, with over 85% of UAE citizens expatriates who are continually seeking to connect with friends and family in their respective home countries. Expatriates and locals alike are very active on social media. This has driven smartphone penetration to over 83%, one of the highest rates globally. And while visiting shopping malls remains a key leisure activity in the UAE, more hectic lifestyles are leading consumers to seek shopping convenience. Adding to this, showrooming (ie browsing in-store, but buying at a lower price online), is a growing trend, as shoppers are becoming savvier in finding products at lower prices. These factors make the UAE a very healthy environment for internet retailing to develop.

Lack of infrastructure and trust hindered growth in the past

Previously, online players were facing a logistical nightmare, as the right support and tools were not in place. The absence of a clear address system that made it difficult for many home addresses to receive packages, the lack of suitable payment options and a consumer reliance on cash-on-delivery (COD) services posed a serious challenge to retailers. In particular, COD created tremendous security and logistical problems for retailers, in addition to the threat of high returns. These hurdles made it challenging to keep all parts of the business moving while fulfilling customers’ high expectations.

Another issue was trust. Security remains the main concern for shoppers, who fear becoming victim to fraud, non-delivery of products and counterfeiting. Service providers, including airlines, hotels, and deal-based websites such as Groupon and Cobone, have been quite successful in persuading consumers that their systems are secure. Following their lead, other internet retailers have been successful in alleviating consumer fears, introducing COD, more secure payment systems, extended warranties, free same day delivery and free returns, giving UAE consumers the confidence to shop online.

What has changed?

Business for e-commerce players became considerably easier when delivery and payment solution providers, such as Aramex for delivery, and Paypal, Payfort and Telr for payments, were introduced. Consumers have also become more comfortable using their credit cards online. Growth in online payments is quite a step for UAE consumers, particularly considering the cash culture that pervades the Middle East. COD still accounts for the majority of online sales, although it has been witnessing a decline in recent years.

Along with growing consumer demand, online product offerings are also expanding. Not only are bricks and mortar stores coming online, but local players based purely online are also establishing themselves. Whereas global players have been able to deliver to the UAE for over a decade, significant regional players only appeared from 2010 onwards. Since then, they have been quickly catching up with their global counterparts. With significant cash injections, companies like Souq, Sukar, Namshi and MarkaVIP have become household names among online shoppers.

Another key driver for the channel is m-commerce. In 2014, mobile transactions are estimated to represent 22% of total internet retailing sales, up from 12% in 2013. This makes m-commerce a highly important channel, boosting the entire internet retailing category. In particular, mobile phone penetration is quite high in the UAE, and, together with an increase in tablet use, fewer people are purchasing desktop or laptop computers.

And, what is next…?

According to Euromonitor International, internet retailing in the UAE is still in its early stages. As UAE consumers want convenience, speed and an empowered choice, internet retailers which are able to provide this will be successful, be they pure online players or store retailers applying an omni-channel strategy, offering a seamless approach to the consumers through all available shopping channels.

The majority of the Internet Retailing market is dominated by mainstream chain stores and big-label products, which indicates that many niche categories are not yet served online. Numerous opportunities are therefore available. The strongest potential lies with regional players. Knowing their consumers, they are better able to suit local consumer needs, providing tailored product offerings, same day delivery, and top notch customer service. This, in turn, will lead to higher consumer trust.

A crucial factor for new, upcoming players to bear in mind is that growth is being driven by a new generation of shoppers whose first experience with online commerce is through mobile devices and social networking. Applying a ‘mobile first’ focus, including enhancing the mobile interface or offering special coupons for purchases made with mobile phones, will spur further growth.

The rise of internet sales in the UAE is expected to positively impact internet retailing across the Middle Eastern region. Major UAE-based internet retailers have used investments to further expand operations across borders. Key markets to keep an eye on are Egypt, the most populous country in the region, and Saudi Arabia, with its sizeable proportion of young consumers.