The e-commerce boost

The coronavirus pandemic is providing a further fillip to the regional e-commerce industry

Worldwide, e-commerce is a structurally growing business. Goods and services bought online have become a $2.2 trillion market with an annual growth rate in the double digits. In 2018, 1.3 million tonnes of cardboard were used in North America alone to safely ship the goods which were ordered online.

In fact, e-commerce has often grown at the expense of physical retail, to the extent that terms like “retail apocalypse” and “Amazon effect” are often used to describe the danger that e-commerce presents to physical retailers. More than 9,000 retail stores closed their doors for good in the US last year, an increase of 60 per cent versus the previous year. Famous brands such as Sears Holdings, Toys R Us, Forever 21 and JC Penny have all had to declare bankruptcy. Meanwhile, Amazon accounted

Biggest slice of the e-cake

Amazon accounted for a big share of US e-commerce sales in 2019

THE AVERAGE GCC CONSUMER IS MORE THAN A DECADE YOUNGER COMPARED TO THE AVERAGE CONSUMER IN WESTERN COUNTRIES

that there is still quite a lot of room to grow. We would not be surprised if global e-commerce penetration were to reach 20 per cent in the mediumto long-term. When it comes to the product mix, we project that the short-term focus of e-commerce will likely be on goods that are non-perishable, such as electronics and books as well as apparel and footwear. As consumers often return every second piece of apparel or every second pair of shoes, this poses a big challenge to the logistics as well as the margins of some e-commerce companies. A bit further in the future, we assess that e-commerce will play a bigger role in the sale of perishable and fresh food products, even though this will require a much more sophisticated value chain.

IMPACT OF THE CORONAVIRUS CRISIS

The main drivers behind the rise of e-commerce are the convenience benefits it offers consumers – such as saving them time and allowing them to compare prices between different stores. If you already know what you want to buy, why would you spend time going to a store, taking the risk that the store might not have the item available, while also not always getting a very competitive price on it?

The coronavirus crisis has only further fuelled the shift from physical store sales to e-commercebased trade by adding health and safety concerns. Finnish researchers have studied the transmission effects of the coronavirus in confined indoor areas such as supermarkets. They found that if a person coughs, infectious particles can spread to different aisles and that they only eventually dilute over the course of several minutes. Hence airborne particles could potentially infect other shoppers even after the infected coughing person has walked away.

THE POTENTIAL FOR E-COMMERCE IN THE MIDDLE EAST

While the rise of e-commerce is a global phenomenon, the GCC is well positioned to see some of the most drastic sector growth rates. This is due to a mixture of three key factors – demographics, infrastructure, and base effects.

The average GCC consumer is more than a decade younger compared to the average consumer in

Western countries. Younger people tend to be more tech-savvy than older generations. They are therefore more likely to adopt e-commerce and make use of technology as part of their purchase routines.

The consumer in the GCC also relies on a solid technological infrastructure foundation – which is needed for e-commerce. The GCC states have some of the higher penetration rates when it comes to of all retailing transactions in the UAE were done through e-commerce channels in 2019 internet, social media, and smartphones in the world.

Despite these two factors, e-commerce in the GCC states is starting off from a low base and therefore has a lot of catch-up potential. While it is estimated that between 10 per cent to 25 per cent of all retailing transactions in the UK, US, France, and China were done through e-commerce channels last year, this figure is much lower for the GCC states. The average in the region stands at around 3 per cent, with the highest rate seen in the UAE at more than 4 per cent.

One aspect that is currently holding back e-commerce in the GCC states is the difference in preferred payment solutions. The GCC states tend to have a substantially stronger cash preference compared to Western countries. Cash is a drag for e-commerce firms because it limits them to work with logistics companies that accept it as a form of payment. This leads to working capital pressure for e-commerce firms and higher rates of failed deliveries and return rates – which in turn increases the costs of doing business. By some estimates, cash-based deliveries are twice as expensive compared to prepaid deliveries.

However, we project that the strong preference for cash will diminish over time in the GCC. When e-commerce firms manage to create a proven track record of consistently meeting customer expectations, clients will be more likely to trust them to a degree where they might choose prepaid solutions rather than cash on delivery. Furthermore, as more and more individuals shift towards digital payments in general, the preference for cash payments might diminish.

Overall, we see a bright future for the e-commerce industry in the GCC.