As Amazon edges closer to its main e-commerce rival in India, while playing catch-up in China to Alibaba, the American giant will be hoping to leverage its experiences in these markets to gain the upper hand in the Middle East, especially with the much-anticipated launch this week of well-connected local rival Noon.com
Well-known international brands always face a number of challenges when trying to break into a new market outside their homeland and the Seattle-based online retailer has been no different. These include regulatory hassles, cultural differences, infrastructural obstacles and, of course, competition from local players.
“In India and China, Amazon started from scratch and did not acquire any local player. In the Middle East, however, they got a very good deal to acquire the already existing player Souq.com,” Nabil Alnoor Borhanu, president of venture capital firm Graphene Ventures told Zawya in a telephone interview.
“Amazon also wanted to avoid any form of government hassle similar to what they had encountered in India and China,” he added.
The company formally concluded its acquisition of Dubai-based Souq.com in early July and has already started its integration process, with the introduction of the own-brand AmazonBasics goods onto the Souq platform in August. The deal was endorsed by the Dubai government, whose Crown Prince Sheikh Hamdan bin Mohammed said that it “reiterates Dubai’s position as a regional and global hub for the world’s biggest and leading organisations
Amazon currently holds less than 1 percent of market share in China’s $378 billion e-commerce industry, according to a recent report by iResearch China, despite spending more than a decade working in the Far East’s largest market.
“In China, Amazon failed [to become market leader] mainly because the Chinese government made sure they are locking everything for them to protect their own market,” Borhanu added.
The firm also faced regulatory issues when entering the Indian market, as foreign direct investment into multi-brand retail was not allowed when it first launched in the country in 2013.
“Amazon started with simple product meta search called Junglee.com to gauge market demand and build some audience in India. Then it partnered with third-party retailers to provide them with marketplace, as it was not allowed to sell things directly, but the regulation now is pretty diluted and relaxed,” Gaurav Sharma, CEO of SaaS Labs, a software development company based in the Indian city of Noida, told Zawya in an email interview.
Amazon’s struggles in China pushed it to focus efforts and funds to grow in India. The company has pledged $5 billion in investments in India, challenging local companies like Flipkart and Snapdeal.
The two existing players recently held merger talks with a view to building scale to protect against Amazon’s entry into the market, but Snapdeal announced in August that it had ended talks and would pursue its own path.
Yet buying an already existing player in India wouldn’t have helped Amazon, according to Sharma, because when it entered the Indian market, the e-commerce space was tiny as Indians had just started to shop online for clothes or electronics.
“For Dubai’s Souq, given the relatively small market size, it had the complete market to [itself]. So, buying Souq gave Amazon an immediate advantage that it will enjoy going forward,” Sharma said.
With its move into the Middle East, Amazon also wanted to make sure that if one market is closing, another is opening, according to Borhanu.
“The GCC [Gulf Cooperation Council] market will give them access to so many places like Turkey and Iran, for example, better resource allocation, and more efficiency in providing services in other markets,” Borhanu said.
“For instance, they once had problems when they wanted to deal with Iran due to sanctions. Now they don’t have to be in Iran, but they can operate somewhere just across the sea and when the Iranian market is open, they are ready to plug and play,” Borhanu added.
A potential rival for Amazon in the Middle East is Noon.com, a $1 billion venture founded by Dubai tycoon Mohamed Alabbar, with half of the funding provided by the Saudi government’s sovereign wealth fund, the Public Investment Fund.
Alabbar had launched a competing bid for Souq in the days before Amazon’s acquisition was first formally announced in March, but this was rebuffed by Souq’s shareholders.
Noon.com, which announced its UAE launch late on Saturday evening (30 September), was initially due to begin trading in January, but faced teething problems which included the departure of a number of senior staff.
Borhanu argued that “Amazon is dominating everywhere where markets are open”.
“The only chance for Noon to dominate is to have some legislation or government protection around it,” he said.
During its launch announcement, Alabbar said that it was “committed to making Noon the region’s Arabic-first e-commerce platform”.
“As digital technologies cause disruptions across industries and geographies, it is important for us to shape a digital marketplace that is relevant to our local markets and serves as a growth platform for brick-and-mortar retailers,” he said.
According to Hassan Munir, chief creative officer at Dubai-based marketing and advertising company ExtraCake P.R.A, the war for data is a key element in e-commerce companies’ battles for market share.
He said that Amazon’s acquisition of Souq had given the company an edge because of the data it acquired as part of the deal.
“Middle East data worth billions is now in Amazon’s control, he said, arguing that the acquisition was about much more than buying an established brand.
“By this effect of Amazon now being a key player in the region, there will be a lot to think about for all the e-commerce players, including Noon.com,” Munir added.
Closing in on India’s top rival
Meanwhile, in India, the battle for market share heats up as a technology fund of Japan’s SoftBank recently injected $2.5 billion into Flipkart - a company that still retains the market lead, according to a report published in June by its second-biggest investor, Naspers.
But Sharma, who also runs a cloud-based telecoms service known as Justcall.io, said there are three things that have worked to Amazon’s favour in India. The first is its flawless focus on building the right perception of the company among Indian customers.
“Amazon looks more local and connected to Indians than Flipkart or other players. They understand that Indians are emotional, so they made the TV commercials very family-oriented and binding,” Sharma said.
“They used their experience and efficiency to quickly onboard merchants and their products, so as to justify their tagline [of] ‘India's Largest Online Store’.”
Amazon’s Prime offering has also made online purchasing not only a luxury but a habit, Sharma said, adding that the company has already captured more than 30 percent of India’s online grocery shopping market in terms of gross merchandise volume (GMV).
“All of my five family members picked up online shopping pretty early and we were big fans of Flipkart until Amazon entered India,” Sharma said. “Amazon's no-nonsense or no-in-your-face sales made us their loyal customers.”
Last month, Amazon signaled its intention to step up its battle for market share in India, buying a 5 percent stake in a Mumbai-based retailer called Shoppers Stop, in a deal that allows Amazon’s experience centres to be set up in the Indian retailer’s 80 stores.
This is one lesson already learned in the Middle East via Souq. In a region still dominated by malls and cash payment for goods, the building of a centre where customers could touch, feel and even return or repair products was hailed as a method “to overcome online shopping barriers”, according to Souq's founder, Ronaldo Mouchawar.
In terms of growing its audience in emerging markets, this is unlikely to be the last lesson that Amazon learns from Souq and which will no doubt help it as it builds its presence in emerging markets around the world.
© Zawya 2017