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Amazon in the Middle East: Leveraging a lucrative growth opportunity

The following story is the first of a two-part series examining Amazon's effort to tap into the Middle East e-commerce market. Part 2 focuses on the growing competition that Amazon faces in the Middle East along with potential regulatory hurdles.

Amazon.com Inc. is taking significant steps to expand its e-commerce business in the lucrative yet largely untapped Middle East region.

Over the past few months, the Seattle-based e-commerce giant has made several moves in the region. In May, it changed the name of its online platform Souq.com to Amazon.ae to boost its visibility and further position itself as a dominant player. That same month, it opened its online platform to retail businesses in Israel. Over the summer, Amazon launched its Prime membership program in the United Arab Emirates and expanded its cloud computing business in Bahrain with Amazon Web Services Inc.

The company's latest international moves come against the backdrop of slowing global sales, an ongoing U.S.-China trade war and fears of recession.

To achieve success in the Middle East, Amazon must focus on branding, building a strong and effective management team as well as avoiding issues the company encountered in China, where it failed to gain traction, analysts say.

Amazon strengthened its foothold in the Middle East in 2017 with its $586 million acquisition of Souq.com, a large and trusted existing e-commerce marketplace with operations in several Gulf states including Saudi Arabia and UAE.

The deal provided the company with an established player, "stronger in-market talent and a strategy tailored for that geography," said Bryan Gildenberg, chief knowledge officer for retail at Kantar Consulting, in an email.

"They bought the market leader in a complicated regulatory environment instead of organically competing with it," he said.

In May, the company rebranded Souq.com as Amazon.ae. The website, a cleaner, more user-friendly version of its former self, offers more than 30 million products from local and international businesses, as well as 5 million products from Amazon in the U.S.

Kantar Principal Consultant Himanshu Pal had no estimates on Amazon's market share across the entire Middle East but said Amazon.ae likely holds between 12% and 15% of the market in the UAE, the region's most developed e-commerce market.

Amazon did not respond to requests for comment for this story.

Market potential

Amazon derives the majority of its sales from the U.S., but analysts say the company has been increasingly pursuing international markets where e-commerce is maturing.

Amazon's efforts to tap the Middle East fall in line with that strategy. Analysts say the region is particularly attractive for its large population of digitally savvy consumers who have high levels of disposable income to spend online.

"There's a huge demand," said Anne-Laure Malauzat, a principal based in Bain & Co.'s Middle East offices, in an interview. "[Consumers] are hungry for diversity that they don't often find necessarily in the stores here."

The e-commerce market in the Middle East and North Africa is expected to more than triple in size to $28.5 billion by 2022, according to a 2019 report published by Bain & Co. and Google. The market reached $8.3 billion in 2017 and has grown by 25% annually since 2014 when the market's size was $4.2 billion.

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Compare that to the much larger U.S. e-commerce market, where online retail sales of physical goods are expected to grow from $501 billion in 2018 to more than $740 billion in 2023, according to Statista.

China is bigger still, with online retail transactions reaching $1.33 trillion in 2018 and forecast to be $1.99 trillion by the end of 2019, according to the International Trade Administration.

Global sales slowdown

Amazon is pursuing the Middle East market as the pace of its international sales growth slows.

Amazon does not break out sales for the Middle East, but the company's international sales in 2018 grew 21.3% to $65.87 billion from 2017, according to data from S&P Global Market Intelligence. International sales grew 10.4% in the first half of 2019, compared with 23.4% in 2017 and 24.2% in 2016.

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Meanwhile, Amazon continues to see steady growth in the U.S. where sales in 2018 grew 33% to $160.15 billion from $120.49 billion in 2017, according to Market Intelligence data. Its U.S. sales grew 33.4% in 2017.

Tom Forte, managing director with D.A. Davidson in New York, said in an interview that Amazon's global sales are slowing due to a combination of factors including sluggish economies in Japan and Germany, two of the company's key international markets. In 2018, net sales in Germany accounted for $19.88 billion of Amazon's sales while sales from Japan accounted for $13.83 billion, according to Market Intelligence. The United Kingdom, another important market that accounted for $14.52 billion in sales in 2018, could face a recession if it exits the EU without a Brexit deal, he said.

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Amazon is focusing its attention on the Middle East after its business failed to gain traction in China.

Earlier this year, the company said it was closing its domestic marketplace business in China, where JD.com Inc. and Alibaba Group Holding Ltd. are dominant players and promote themselves heavily.

Amazon first jumped into China in 2004 when it purchased Joyo.com for approximately $75 million. At the time, Amazon described Joyo.com as "the largest online book, music, video and DVD store in China."

But Choi Chun, a senior analyst at iResearch, said Amazon was "pretty quiet" in terms of promotion and branding in China.

He added that Amazon did not have a "very effective" localized management system in China and that many business decisions had to be passed through the company's U.S. team, which slowed down the company's China operations. Meanwhile, Alibaba's expansion on its home turf continues. Earlier in September, Alibaba announced that it was buying Chinese tech giant NetEase Inc.'s import online shopping platform Kaola for approximately $2 billion.

Citing the NetEase deal, Chun said the chance of Amazon returning to China and being successful is "becoming more difficult."