This piece is part of our Demystifying E-Commerce Series, which addresses the challenges of setting up and growing an e-commerce company in the region. Stay tuned for more to come at CoE E-Commerce on June 2nd & 3rd.
With an online retail market estimated at over $3.5 billion today, according to a study by Visa released last year, online retail in the Middle East is booming.
With solutions like ShopGo, aggregate online store sites like Dokkankom, in some ways, it has never been easier to go online in the Middle East. Even the somewhat crowded daily deals market seems far from tapped out.
Yet for startups building new businesses, challenges abound. While the region is linguistically monolithic, it's anything but cohesive when it comes to shipment and logistics. The process of shipment is hindered by customs formalities, paperwork, and various duty rates.
At Aramex, says Chief Operating Officer Iyad Kamal, "we're doing what we can to make it simpler," especially for startups. Aramex has, in the past year, built e-commerce solution REDe and begun offering discounted services to startups that include reduced shipping and warehousing rates.
Aramex's vision for developing the ecosystem includes providing startups with advice to help them address the major elements of e-commerce. Startups need to consider 12 primary questions, says Kamal.
1) Why should I go online?
Online retail is also growing faster than offline. Offline retail has grown 4% annually the last two years, while online spending has increased by over 10% annually, according to a recent study.
Especially within the region, the growth potential is apparent. Regional online spending- with an estimated total market value of $3.5 billion a year- currently represents around 5% of total retail spending in the region, according to Aramex. Compare this to e-commerce comprising 15% of total retail in Europe and 17% in the U.S.; the MENA region has room to grow.
By going online, you offer availability to a bigger market, with better bargains and better variety, says Kamal. "There is no way to achieve the same level of variety in a brick-and-mortar store."
2) What should I sell?
The top 7 types of items purchased, according to data from Aramex's international Shop & Ship service, collected in late 2011, are:
- Mail & Magazines
Where electronics places on the list is heavily contingent on iPad and iPhone demand, notes Kamal; this data happened to be collected around the time that the iPhone 4S came out this past fall.
3) Where should I sell?
Aramex's Shop & Ship data reveals that most e-commerce orders are shipped to Saudi Arabia and Kuwait, followed by the UAE and the rest of the Gulf countries, and then the Levant. This hierarchy is unsurprising given that higher per-capita income in the Gulf boosts demand while lower import duties lower cost.
"There is a direct association between e-commerce spending and per capita income," says Kamal.
Customs policies in the Gulf, where typically a 5% tax is levied for items over a given amount, around $270, work well for online retail, which tends towards individual shipments of under $100. Traditional commerce, on the other hand, is characterized by concentrated bulk orders of over $1000.
Thus the Gulf might be a good place to start. Yet to be successful, your target market should be regional, says Kamal. To achieve the scale that will make an e-commerce business profitable, it's crucial that companies take on investment and expand quickly, Entrepreneur of the Week Dan Stuart of LivingSocial recently pointed out.
4) Where should I stock?
The decision to ship directly from a source on each order, stock in a free zone, or stock in a non-free zone depends upon several factors, says Kamal.
First, a company must assess the amount of volume it is handling. For many e-commerce companies, it will make sense to store locally in a Free Zone, to avoid dealing with customs formalities on independent orders, and to reduce the shipment distance for returns.
Those looking to stock their goods in a Free Zone can stock with Aramex if they prefer not to go through the formalities of registering or storing in a given Free Zone. Currently, the logistics company has a presence in Free Zones in Amman, Bahrain, Beirut, and Dubai. "Bahrain is a good location to store in for feeding the Bahraini and Saudi markets," says Kamal.
Another option for those looking to rent their own warehouses while minimizing customs formalities is stocking in Dubai and paying a 5% tax that allows a company to stock items already custom-paid.
5) How should I handle customs duties?
When it comes to customs duties, the region is uneven. In the Gulf countries, as mentioned above, customs are generally free for items below a certain value, typically $270, and 5% for those above. In Jordan and Lebanon, duties are higher, depending on the commodity, reaching up to 40% and more. Duties in Egypt range from 15-30% depending on the commodity.
As companies decide where to ship and how to include fees in their prices based on customs duties, Aramex can help by handling the customs clearance process.
6) Should I offer Cash-On-Delivery?
For a typical online retail e-commerce company, says Kamal, 70% of orders are cash-on-delivery (COD). This squares with casual figures that Wamda has heard from major online retailers in the region; up to 80%-90% of orders in markets like Saudi Arabia and Egypt can be COD, although the percentage is lower in markets with higher credit card penetration like the UAE.
Why do customers prefer COD? It's partly a factor of not having bank accounts or credit cards, and it's also primarily a factor of trust. Clients often like to see the goods delivered to their doorstep before they say yes, Kamal notes. They also simply may not trust a site's payment gateway.
COD circumvents trust issues, and yet, it's a headache. It can be potentially ruinous for companies that encounter high levels of returns and don’t stock inventory locally. Aside from offering warehousing to alleviate the cost of COD returns, Aramex can also manage the COD retrieval process, picking up the cash from customers in order to approach a more seamless delivery experience.
7) How should I determine shipping rates?
Shipping rates will depend on a company's choice of logistics solution. To help keep rates down, Aramex offers a Startup Kit, which provides startups with a bundle of Aramex services, including REDe, access to APIs, shipping rates, and warehousing, at reduced rates.
8) How should I offer customer service? Should I be on social media?
"Your customer service has to be online, on all mediums," says Kamal. A company may want to have call centers, send emails, offer live chat support, and provide status updates and tracking on Twitter and Facebook.
Any e-commerce company founder should know this, but Kamal reiterates that social media is especially crucial for responding to realtime customer feedback.
9) What should my return policy be?
If you're selling goods, your site must have a return policy. To reduce the fees involved when shipping return items, e-commerce companies can take advantage of Aramex's warehousing network to optimize where returned items go. For instance, an item shipped to Saudi Arabia from Dubai could then be stored locally in Saudi for future shipment, to conserve the aleady-paid import duties.
10) How Should I Package Goods?
It's very important to ensure that packages are well packed for cross border shipping, to avoid lost merchandise or, again, the cost of a return, says Kamal.
11) How do I track my inventory?
If companies store with Aramex, they can have live, realtime view of their inventory through REDe and can leverage APIs to connect directly with their backend system.
12) Should I offer customization?
Finally, deciding how to bundle products or offer customized
packages is important for enticing customers who are accustomed to
having control over their orders.
So what do clients ultimately want? A "perfect order," says Kamal, with fast delivery, the ability to track it online, flexible return policies, and great customer service.
Yet making it easy for e-commerce companies to achieve that perfect order will necessitate going a step beyond these 12 questions. It's clear that greater dialogue between the region's e-commerce stakeholders is needed in order to evoke change in the ecosystem. That's one element that Aramex is also working to facilitate, says Kamal.
Better internet connections, more internet availability, lower cost of internet services, and lowered import duties are in the region's future. Yet if the sector's players can unite to address universal issues and push for change together, it may happen even more swiftly.
In time, the barriers to entrance will lower. Until then, Aramex is working to build the right stepstool.