Saudi Arabia's e-commerce market set to take-off

The GCC region, with its high disposable incomes, saturated mobile telephony markets, rapidly increasing smartphone penetration and young populations, has all the necessary ingredients for an e-commerce boom. Estimates as to the size of the region’s e-commerce market and its potential growth trajectory vary, but a comprehensive study carried out by global management consultancy AT Kearney in 2015 anticipated a rapid expansion in GCC electronic transactions from $5.3bn to nearly $20bn by 2020. Saudi Arabia’s large consumer market means that the Kingdom features prominently in any discussion regarding the region’s e-commerce potential. The AT Kearney forecast sees the Kingdom playing the dominant role in the estimated 30% expansion of the e-commerce market over the short term, its share of the total market rising from the 33% recorded in 2015 to 42% by 2020, which would make it the biggest e-commerce player in the Gulf region by a marginal distance. In December 2017 AT Kearney revised these forecasts upwards, to $24bn and a 35% expansion, respectively.

Government Push

This outcome would certainly chime with the ambitions of the Kingdom’s young and business-friendly government. The expansion of e-commerce in Saudi Arabia is an important element within the country’s developmental blueprint, which aims to diversify the economy, boost investment and strengthen trade across a number of sectors. Saudi Arabia’s Vision 2030 notes that traditional retail practices continue to dominate the domestic market, accounting for around 50% of total market activity. This compares unfavourably with a number of other GCC countries, where usefully disruptive, technology-driven retail channels have increased trade penetration levels and compressed traditional retailing to a 20% share of the market. The government therefore intends to increase the contribution of alternative retail channels, including e-commerce, to 80% of retail sector activity by 2030. As part of this process it will encourage regional and international retail investors to increase their participation in the market – a development which is likely to have a significant effect on the speed with which e-commerce platforms are developed in the Kingdom.

The boosting of e-commerce capabilities also plays a salient role in the Kingdom’s effort to increase the contribution of small and medium-sized enterprises (SMEs) to GDP. Smaller companies currently account for around 20% of GDP, compared to a level of 70% seen in some advanced economies. Vision 2030 proposes a range of measures aimed at increasing this percentage in the Kingdom, and encouraging small retail enterprises to move away from the traditional sales channels to embrace online merchandising forms are an important part of this effort.

Domestic Potential

To some extent, the government’s strategy is following an already-established market trend. According to the US Department of Commerce’s International Trade Administration, the value of e-commerce transactions in Saudi Arabia was predicted to have totalled $5.7bn in 2017, as increasing numbers of Saudis gain access to the internet through their desktops, laptops and smartphones. Nearly 85% of Saudis under the age of 25 researched a recent purchase using their smartphone, according to Google’s Consumer Barometer, including looking up information on local and foreign businesses, comparing prices, and obtaining contact information, location and business hours. And almost half of all Saudi internet users report purchasing products and services online and through their mobile handsets. According to a recent report by online retailer Payfort, the Middle East’s e-commerce growth will not only be powered by business-to-consumer transactions in items such as clothes, watches and mobile phones, but also by the increasingly active business-to-business segment. The Kingdom’s SMEs, which play such a large part in the government’s economic development plans, are likely to form the core of this anticipated growth, as they turn to the internet to procure everything from office furniture and supplies to rooftop solar panels. Technical innovations emerging from the Kingdom’s start-up ecosystem are helping to power this growth, both in the domestic market and the wider GCC. PayTabs, which in 2017 was listed by Forbes as one of the top 10 start-ups in the Arab World, is providing online payment solutions for small businesses which had previously found it difficult to collect money from customers over the internet. In August 2017, the company reported that it had raised $20bn of funding, which it intends to invest in new product developments and a global expansion strategy which will see it expand into 20 markets over two years (see analysis).

Challenges

Another reason for the high growth projections for the GCC e-commerce market is its relatively low starting point. The 2015 AT Kearney study found that GCC e-commerce activity accounted for approximately 0.4% of the region’s GDP, a modest level in comparison to rates seen in more developed markets, such as the UK (where e-commerce accounted for approximately 3.5% of GDP), Finland (3%) and South Korea (2.8%). A number of factors lie behind this relatively slow start. A lack of satisfactory payment methods, currently being addressed by companies like PayTabs, has been a historic obstacle to e-commerce growth in the region. In 2015 nearly 70% of payments in Saudi Arabia were made in cash, a phenomenon which arose partly from a lack of suitable alternative options. This remains a challenge in the Kingdom: in 2017 regulations governing e-commerce prohibit the use of online debit card payments, largely confining transaction activity to those possessing credit cards. Saudi Arabian e-commerce company Ora La Moda, which sells fashion apparel, reports that about 80% of its sales are paid for by cash on delivery.

While increased credit card usage and the emergence of new payment solutions are eroding this barrier, consumer concerns regarding online security continue to act as a drag on the expansion of online transactions. A recent survey carried out by Norton, a digital security firm, revealed that 40% of mobile shoppers in the MENA region had been victims of cybercrime, while more than 70% said that they had observed cyberattacks. According to global cybersecurity firm Gemalto, the number of data breaches in the Middle East rose 16.67% between 2015 and 2016, with approximately 45m data records in the region compromised, compared to 38.5m in the previous year. The bulk of these breaches targeted large-scale databases associated with social media or specific sectors such as health care, and not well-secured e-commerce transactions. However, the perception that information exchanged online is vulnerable to theft is a significant disincentive to making online purchases for many consumers.

Legislation

The challenge of cybersecurity is being met by improved ICT practises and investment in security infrastructure, a trend which is being led by the financial sector, where a number of high-profile breaches in the GCC over recent years have threatened business growth. There are also potential legislative remedies to security concerns, and this is an area where many market observers feel that a government intervention would provide a boost to e-commerce activity in the Kingdom. While the government has passed several regulations to monitor electronic transactions and combat cybercrime, the lack of a comprehensive e-commerce law is seen as a block to the expansion of online trading. The Ministry of Commerce and Investment began to formulate a draft e-commerce law in 2014, and in early 2018 it was still being reviewed by the government. According to the ministry, the new law aims to establish a trustworthy environment in which online transactions can be made, and will include provisions covering online errors, the protection of personal data, online advertising, and rules governing warranty guarantees and return policies. The ministry’s own data indicate that there is a need for a robust framework to control online sales activity. In 2016 the ministry confiscated 90 social media accounts which between them had directed 45,000 scam advertisements for dubious products to more than 1.5m online consumers.

Looking Ahead

The introduction of dedicated legislation for e-commerce activity in the Kingdom would prepare the ground for a considerable uptick in online trading. However, a significant non-technological block to e-commerce expansion remains, and the remedy for it lies largely in the hands of the private sector. Based on AT Kearney’s analysis, fewer than half of the biggest GCC retailers offering an e-commerce option have a regional distribution centre. As a result, the kind of rapid delivery being demanded by consumers, which in advanced markets is now running at 24 hours in some cases, is a challenging prospect for many online businesses. Adding to this problem is a lack of postal codes, which makes for a difficult operating environment for last-mile logistics companies. Here, however, Saudi Arabia’s introduction of a new postal code system in 2010 positions it well in comparison to its regional peers, allowing for the employment of technological advances. “Delivery methods in the Kingdom are changing. Smarter GPS devices are decreasing delivery time and costs, and delivery drones are on the horizon.” Turki Fahad Alkhorayef, CEO of W99L, told OBG.

The e-commerce arena also stands to benefit from the arrival of some global giants to the market. In 2017 Amazon bought the Dubai-based online retailer Souq. com, which was valued at $1bn in its funding round of 2016, and claims around 23m online visits per month. Saudi Arabia’s Public Investment Fund, meanwhile, has taken a 50% stake in a new venture lead by a prominent Dubai businessman which will launch the $1bn e-commerce platform, Noon, in 2018. The firm will have its headquarters and a warehousing facility in Riyadh, with plans to dominate the regional e-commerce market, starting in Saudi Arabia and the UAE, before expanding across the rest of the Middle East. While there are still some challenges to overcome, the combination of customer demand and recent investment in the sphere suggests that the prospects for the Kingdom’s e-commerce market over the medium term are positive.