Noon: The $1 billion bet on the growth of e-commerce in the Middle East
Historically, retail holds a strong position in Saudi Arabia and the UAE due to its culture of shopping in gigantic malls and paying in cash. Yet, Emirati billionaire Mohamed Alabbar thinks this is set to change with a new young demographic that grows up taking technology for granted.
Together with Saudi Arabia's Public Investment Fund (PIF), Alabbar invested a total of a $1 billion to build Noon.com, an e-commerce platform that has now launched in the UAE with plans to compete in the whole Middle-East. Amongst the products sold by Noon are clothes and other fashion items, electronics, kitchen appliances, groceries and more amounting to a total of 20 million products.
Most famous as the chairman of Emaar Properties, a builder linked to the government of Dubai and the owner and operator of Dubai Mall that accounts for near 50% of the UAE's luxury goods spending, Alabbar had already taken several positions in the online space previously. This includes him buying stakes in Italian retailer, Yoox Net-A-Porter. "This is going to be on a global scale." Alabbar told Reuters on his plans with Noon.
Despite its extensive $1 billion reserves to invest in its growth, Noon.com is faced with some heavy competition ahead against the most established player in the area Souq.com, which boasts over 60 million monthly active users according to SimilarWeb.
The competition has however gotten much fiercer recently with Souq.com being acquired by e-commerce juggernaut Amazon in a deal valued by experts at $650 million. Alabbar had offered $800 million to acquire Souq a few days before the deal was publicly announced. Other interested parties included Ebay and Majid Al Futtaim according to TechCrunch. The startup had launched in 2005 and was locally known as the 'Amazon of the Middle East' even prior to the acquisition.
"Amazon and Souq.com will benefit from early-mover advantage in our view" commented Josh Holmes, consumer analyst at BMI. "While the rivalry will be intense, there is more than enough room for both players to thrive in Saudi Arabia and the wider region."
The future Noon and Amazon are betting on would be a major change for commerce in the Middle East, where online sales make up less than 2% of retail, 12 times less than in the United Kingdom according to the Boston Consulting Group. Saudi Arabia trails even further behind with only 0,8% of retail transactions occurring online.
Moving transactions to their platform will however only be one of the many problems solved to build such a marketplace in the area. At the moment drivers ask for nearby landmarks rather than adresses for deliveries and request WhatsApp locations to complete the drop offs.
In a region that is used to completing its transactions in cash, payments will be another complication as less than half of the population there have credit cards. This leads e-commerce platforms to offer taking cash on delivery, which dramatically increases risks for the platform. High unemployment rates across the kingdom could also prevent the businesses from fully developing.
Some companies have however already started to thrive in the digital commerce world in the region. Logistics provider, DHL says over 40% of its inbound parcels into Saudi Arabia are completed through E-commerce.
Detractors are however quick to remind about the possible introduction of a 5% value added tax that would be applied each time a product would cross a border in the Gulf. By the time a product ordered through e-commerce would reach last-mile delivery in this fragmented area, this could amount to near 20%, which would be a big hit for e-commerce in the area.
Alabbar however predicts e-commerce will go up to a total of $70 billion over the next decade in the region, up from the $3 billion industry it is now.
More than a simple platform, Noon operates its own payment system, Noonpay, an in-house transportation system geared towards offering same-day delivery, as well as a network of warehouses to store inventory.
To prepare this launch, the Emirati billionaire also bought a controlling stake in Kuwaiti food conglomerate, Americana in a deal valued at $2,4 billion and a 16% stake in regional logistics provider, Aramex, which became a key element in the e-commerce supply chain.
Noon's main shareholder, the Saudi Arabia Public Investment Fund is itself even more connected in the digital world, having bought a 5% stake in Uber for $3,5 billion and pledged $45 billion to SoftBank's $100 billion fund that invests in late-stage tech firms.
With Amazon now nearing a market cap of $500 billion, it seems that even a $1 billion investment in Noon.com could well payoff handsomely should the platform be able to get a significant enough market share in the region.