Landmark logistics to test Saudi online battle between Amazon and noon
Landmark logistics to test Saudi online battle between Amazon and noon
But two powerfully-backed companies are trying to do just that, betting a young, tech-savvy population will eventually deliver up a large slice of the Arab world’s largest consumer market.
After months of delays, Noon.com launched in the UAE on Oct. 1 and said it would enter the Saudi market “within the coming weeks.”
That will start a race for dominance in a largely untapped market against Dubai-based Souq.com, which is already present in Saudi Arabia and poised for expansion after its acquisition this year by Amazon.
Both companies are well armed for the fight.
Investors in Noon.com, including Dubai billionaire Mohamed Alabbar and Saudi Arabia’s sovereign wealth fund, have put $1 billion into the project. The business also plans to leverage existing assets from Alabbar’s Emaar Malls, Aramex delivery service and Namshi and JadoPado online marketplaces.
Souq.com was known as the “Amazon of the Middle East” even before its purchase by the world’s biggest online retailer, having built up a following and brand relationships since its launch in 2005.
“Amazon and Souq.com will benefit from early-mover advantage in our view,” said Josh Holmes, a consumer analyst at market researcher BMI.
But with online sales in Saudi Arabia expected to surge to $13.9 billion by 2021 from a projected $8.7 billion this year, he said there would be plenty for Noon.com to play for.
“While the rivalry between Amazon/Souq and Noon.com will be intense, we believe there is more than enough room for both players to thrive in Saudi Arabia and the wider region,” Holmes said.
Shifting retail online would be a sea change for commerce in the Middle East, where Internet sales now represent less than two percent of total retail, twelve times less than in the UK, according to a Boston Consulting Group report.
In Saudi Arabia, which has lagged behind regional leader the UAE, it is only 0.8 percent of the total, and both Noon.com and Souq.com will have to adapt to the particular challenges of the market to prosper.
One is getting deliveries right. Currently, delivery companies in Saudi Arabia regularly ask for landmarks rather than addresses, with drivers often requesting WhatsApped locations.
Then there is payment. With less than half the population owning credit cards, e-commerce businesses often have to offer cash on delivery options, increasing their risks.
There are other dangers too. High unemployment among the kingdom’s millennials could cap spending power in the long term.
Yet analysts point to the young population, high rate of technology adoption and high-quality transport networks as reasons for optimism. Some companies are already thriving.
E-commerce now represents more than 40 percent of logistics provider DHL’s inbound parcel business into Saudi Arabia, said country general manager Faysal ElHajjami, forecasting this would continue to grow.
Start-ups are also developing ways to accommodate the kingdom’s last-mile delivery quirks.
Dubai-based Fetchr, for example, operates an app that allows users to identify their location by using GPS, like Uber.
“We realized nobody in Saudi really has a formal address, but everybody has a smart phone attached to their hip,” said co-founder Joy Ajlouny, speaking with partner Idriss Al Rifai.
Over the last year, Fetchr has grown its presence in the kingdom from three to 84 cities, with plans to tackle another 25 by the end of the year, and now employs about 1,000 people.
Ajlouny and Rifai estimate market growth of 20 to 30 percent per year over the next five years, but caution that a five percent value added tax, planned for introduction next year across the Gulf, could check that forecast.
As planned, the tax would be applied each time a product crosses a border, they said, which could be a 15 percent total by the time a customer receives the parcel and 20 percent if he or she decided to return it.
“It would be a huge hindrance,” said Ajlouny. “Everybody is talking about the growth of e-commerce, but this would completely cripple that growth.”
Gulf companies challenged by debt and rising interest rates
- Debt restructurings on the rise, but below crisis levels
- Central Bank of the UAE has raised interest rates four times since last March
There has been an uptick in recent months in heavily-borrowed companies in the Gulf seeking to restructure their debts with lenders. Although the pressure on companies is not comparable to levels witnessed in the region following the 2008 global financial crisis, rising interest rates will eventually begin to have a greater impact, say experts.
Speaking exclusively to Arab news, Matthew Wilde, a partner at consultancy PwC in Dubai, said: “We do expect that interest rate increases will gradually start to impact companies over the next 12 months, but to date the impact of hedging and the runoff of older fixed rate deals has meant the impact is fairly muted so far.”
The Central Bank of the UAE has raised interest rates four times since the start of last year, in line with action taken by the US Federal Reserve. The Fed has signalled that it will raise interest rates at least twice more before the end of the year.
Wilde added that there had been a little more pressure on company balance sheets of late, although “this shouldn’t be overplayed”.
Nevertheless, just last week, Stanford Marine Group — majority owned by a fund managed by private equity firm Abraaj Group — was reported by the New York Times to be in talks with banks to restructure a $325 million Islamic loan. The newspaper cited a Reuters report that relied on “banking sources”.
The Dubai-based oil and gas services firm, which has struggled as a result of the downturn in the hydrocarbons market since 2014, has reportedly asked banks to consider extending the maturity of its debt and restructuring repayments, after it breached certain loan covenants.
A fund managed by Abraaj owns 51 percent of Stanford Marine, with the remaining stake held by Abu Dhabi-based investment firm Waha Capital. Abraaj declined to comment.
Dubai-based theme parks operator DXB Entertainments struck a deal last month with creditors to restructure 4.2 billion dirhams ($1.1 billion) of borrowings, with visitor numbers to attractions such as Legoland Dubai and Bollywood Parks Dubai struggling to meet visitor targets.
Earlier this month, Reuters reported that Sharjah-based Gulf General Investment Company was in talks with banks to restructure loan and credit facilities after defaulting on a payment linked to 2.1 billion dirhams of debt at the end of last year.
Dubai International Capital, according to a Bloomberg report from December, has restructured its debt for the second time, reaching an agreement with banks to roll over a loan of about $1 billion. At the height of the emirate’s boom years, DIC amassed assets worth about $13 billion, including the owner of London’s Madame Tussauds waxworks museum, as well as stakes in Sony and Daimler. The firm was later forced to sell most of these assets and reschedule $2.5 billion of debt after the global financial crisis.
Wilde told Arab News: “We have seen an increasing number of listed companies restructuring or planning to restructure their capital recently — including using tools such as capital reductions and raising capital by using quasi equity instruments such as perpetual bonds.”
This has happened across the region and PwC expected this to accelerate a little as companies “respond to legislative pressures and become more familiar with the options available to fix their problems,” said Wilde.
He added that the trend was being driven by oil prices remaining below historical highs, soft economic conditions, and continued caution in the UAE’s banking sector.
On the debt restructuring side, Wilde said there had been a “reasonably steady flow of cases of debts being restructured”.
However, the volume of firms seeking to renegotiate debt remains small compared to the level of restructurings witnessed in the aftermath of Dubai’s debt crisis.
Several big name firms in the emirate were caught out by the onset of the global financial crisis, which saw the emirate’s booming economy and real estate market go into reverse.
State-owned conglomerate Dubai World, whose companies included real-estate firm Nakheel and ports operator DP World, stunned global markets in November 2009 when it asked creditors for a six-month standstill on its obligations. Dubai World restructured around $25 billion of debt in 2011, followed by a $15 billion restructuring deal in 2015.
“We would not expect it to become (comparable to 2008-9) so barring some form of sharp external impetus such as global political instability or a protectionist trade war,” said Wilde.
Nor did he see the introduction of VAT as particularly driving this trend, but rather as just one more factor impacting some already strained sectors (e.g. some sub sectors of retail) “which were already pressured by other macro factors.”