This story is the second in a two-part series documenting Amazon's ambitions in the Middle East. Part 1 focused on Amazon's market opportunity in the region amid a global sales slowdown.
As Amazon.com Inc. seeks to tap the lucrative Middle East, the Seattle-based e-commerce company is facing various challenges, including growing competition and changing regulations.
Analysts say the e-commerce giant's success in wealthy Gulf nations such as Saudi Arabia, the United Arab Emirates, Kuwait and Qatar will hinge on the company's ability to both fend off rivals and also adapt to any new regulations as the region's nascent digital ecosystem matures.
Amazon completed its acquisition of Dubai-based e-commerce player Souq.com for $586 million in 2017 and rebranded it as Amazon.ae in May, giving it a foothold in the region. EMarketer estimates that Amazon reached 26.43% of internet users in the UAE as of January 2018, making it the largest e-commerce platform there and elsewhere in the region. But several local e-commerce players have emerged in recent years, giving consumers more options when they shop online. Meanwhile, Chinese companies like Alibaba Group Holding Ltd. are starting to make inroads in the region.
Matthew Reed, a Dubai-based analyst covering the Middle East for London-based consultancy firm Ovum, said in an email that Amazon believes it is a "good time to become more active in the region so that it can benefit from the expected growth before local players or other international players become well established."
The number of Middle East competitors is expected to grow, along with retail chains transitioning to e-commerce models to serve online and traditional brick-and-mortar customers, according to a 2018 Deloitte study.
Amazon declined to comment for this story.
Dubai-based e-commerce platform Noon.com launched in 2017. Emaar Properties PJSC Chairman Mohamed Alabbar founded the company, and Saudi Arabia's Public Investment Fund is one of its investors. It sells a variety of general merchandise including electronics, makeup, toys and baby products. It ships to Saudi Arabia, the UAE and Egypt.
Another noteworthy player is Dubai-based Namshi.com, which was founded in 2011 and specializes in footwear and apparel from brands such as Calvin Klein and Topshop. Emaar Malls PJSC, whose controlling shareholder is Emaar Properties PJSC, bought a 51% interest in Namshi.com from Global Fashion Group for $151 million in 2017. In February, Emaar Malls PJSC bought the remaining 49% interest for $129.5 million. Namshi recorded sales across the UAE and Saudi Arabia equal to 849 million dirhams in 2018, an increase of 16% annually.
"Emaar has been around many many years in the retail space," Andrew Kitson, head of telecoms, media and technology industry research at Fitch Solutions, said in an interview. "People are probably going to be a bit more comfortable about using [platforms associated with it] than others."
Meanwhile, Mumzworld, a private company founded in 2011 in Dubai, dubs itself as the "biggest online baby shop in the Middle East" and sells items such as diapers, high chairs and bottles. In October 2018, the company closed on a $20 million series B funding round from investors including UAE-based financial services company Gulf Islamic Investments LLC. The funds will be used to further expand Mumzworld's footprint in the Middle East and North African region, where Mumzworld ships goods in 20 countries, and to disrupt the "massive, rapidly growing, and under-served e-commerce market" in Saudi Arabia.
These e-commerce companies based in the Middle East do not publicly break out market share by region, making it difficult to ascertain exactly how much traction they are gaining in the Middle East.
Amazon faces a growing number of competitors in the Middle East.
The China connection
A growing number of Chinese players also have a presence in the Middle East. JollyChic, a Hangzhou-based e-commerce firm founded in 2012, focuses on fashion. AliExpress, a retail service owned by Alibaba, sells a variety of goods in Gulf countries such as Saudi Arabia.
Alibaba does not break out sales figures for AliExpress. But company officials said in May that AliExpress, combined with its Southeast Asian e-commerce platform Lazada, had more than 120 million annual active consumers in the 12 months ending March 31. Alibaba did not respond to inquiries for this story.
JollyChic, Middle East-focused since 2014 with branches across several Gulf countries including Saudi Arabia and the UAE, announced Aug. 6 that it received $65 million from UAE technology company G42 Group.
The investment follows a $1.5 million series B funding round from Legend Capital and other investors in 2016, and a series C round of funding in May 2018 led by Sequoia Capital Growth Fund. JollyChic did not disclose the amount for the series C round, but the company was valued at $1 billion afterward.
The potential exists for the regulatory environment to become unfriendly. The Gulf Cooperation Council, an alliance of six Gulf countries, signed an agreement to implement a value-added tax on the supply of goods and services at a standard rate of 5%. The VAT went into effect in Saudi Arabia and UAE on Jan. 1, 2018, and other Gulf countries are expected to follow.
Per the Deloitte study, e-commerce players must prepare to comply in a manner "such that additional costs are not passed on to customers."
Amazon has run into obstacles with overseas regulations before. In an interview, Moody's analyst Charlie O'Shea pointed to laws passed in India that prohibit foreign-funded platforms from selling products of entities they have equity stakes in, selling goods exclusively on their platforms and influencing prices. Amazon did not respond to inquiries from Market Intelligence about whether these rules have impacted sales in India.
"We've all seen evidence of governments protecting their own," O'Shea said.
Fitch Solutions' Kitson said the Middle East is a young market that is "not fully understood by the government" but that could change as the company realizes that e-commerce is a "cash cow."
As of Sept. 27, US$1 was equivalent to 3.67 UAE dirhams.