Making The Cut As A Profitable E-tailer In The Mideast Space

After discussing the essential ingredients of any ecommerce business and the regional specifics in earlier columns, I will now turn to the complicated part of matter.

In order to mix the ingredients together in the right way, you will need experienced staff and/or consultants. Even if you are a small ecommerce business, it will help you tremendously to get someone aboard (even if just on a project basis) to review what you are currently doing.

The least that every player in the market needs to do is to run an internal audit on where the company stands in respect to the above essentials. Many aspects of the business can be improved without involving much cash. Standard Business Intelligence (BI) tools are most likely already part of the ecommerce solution that you are using. Customer experience can be improved by working very closely with your courier company and following up on every delivery they do.

The final question is, how to achieve profitability? I will give you an honest answer — it is extremely challenging to run a profitable ecommerce operation in MENA. In my view, it is only possible in two cases:

1. As a general ecommerce player if you planned your operations very carefully and in detail, if you have the right experts on board and if you have deep pockets, or;

2. As a niche player, if you sell high margin products to a very specific audience.

Starting out as a general ecommerce player selling all sorts of consumer goods without having a strong financial backing will definitely lead to bankruptcy. Not good news, but true.

Ten years ago when there was much less competition and customers were not price sensitive, it was possible to succeed as a player targeting the mass without deep pockets as your margins were very high. Nowadays with players such as Souq (i.e., Amazon), noon.com, namshi (focusing on apparel) and citrussTV, that is not the case anymore.

You will need time and occur substantial losses until you have reached a critical revenue level that allows you to cover your fixed costs with a lower (than 30 per cent) gross margin.

A major challenge for any ecommerce player in MENA is that the region is very fragmented and there is no working address system. Every country has different customs procedures and requires specific product documentation for importation of products.

Managing courier companies to ensure they achieve satisfactory delivery success rates is time consuming and frustrating. Courier charges are high. So an ecommerce player will have to subsidise delivery costs.

In addition, 90 per cent of the business is based on cash-on-delivery (COD), which attracts a further cost and makes it harder to achieve high delivery success rates and consequently leads to higher return rates and costs.

What could change the situation? There are positive initiatives such as Dubai CommerCity dedicated to the fast-growing ecommerce industry to attract foreign direct investment. This is a great initiative but will not solve much of the above challenges that an ecommerce company in the region is facing.

A necessary step forward would be to achieve a unified market among the Gulf countries with common import rules and no customs barriers. Goods must be able to move freely within the GCC. This would give a huge boost to the ecommerce industry and invite many more players to the table.

Some of the region-specific challenges on the other hand form a strong barrier to entry for competitors. If your business gets the above essential ingredients right and manages the challenges well, then the market can be very lucrative. In MENA, you are looking at 300 million people that want to be served.

The fairy tale of a profitable ecommerce business in the region could become reality.

The writer is an investor and analyst in the digital media space.