We all heard the news: Amazon, the world’s largest online retailer by sales and market capitalization, founded 23 years ago in Seattle and with localized operations in 15 countries, has just acquired Souq.com, the Middle East’s largest online retailer, founded 12 years ago in Dubai and with localized operations in the region’s largest markets of Saudi Arabia, the UAE and Egypt.
These are truly interesting developments, because in the past, Amazon has always entered new markets on its own (such as India, China, and Europe) and it has not made any kind of retail acquisition since 2010.
Through this deal, on one hand, Amazon gets the local experience of the Souq.com team and a foothold in our entire fast-developing region, one that already recognizes the Amazon brand and has been shopping with it using cross-border services. On the other hand, the investors of Souq.com get a well-deserved exit, before the requirement for even more funding comes along.
Will the numbers make everyone happy?
Indeed, it seems that everyone involved is happy about the news: the government (voiced by Dubai’s crown prince), Amazon, Souq.com CEO Ronaldo Mouchawar, other ecommerce founders who are hoping for a similar exits and Souq.com’s employees who have been continuously posting on social media with joy since the announcement. Even the stock markets thought this was a great deal for Amazon, raising its stock price to a level that made its CEO, Jeff Bezos, the second richest man in the world right now.
However, with an overall 1.5x return-on-investment (Souq.com has received a total investment of $425 million and was reportedly sold for $650 million), the deal must have left at least some of Souq.com’s investors only moderately happy. After all, the last investment Souq received a year ago was at a $1 billion valuation.
As a comparison, in a similar deal in Asia, Alibaba paid U$1 billion to earlier investors of Lazada and invested another $500m into new stock, taking control of the company. Those earlier investors had put in $480 million which under this deal gave them 66 percent of a company valued at $1.5 billion before the capital increase; which basically means that they got an approximate 2x return-on-investment. In the meantime the founding investor, Rocket Internet, reportedly sold the majority of its early stake at 15x its total invested capital.
What does this acquisition mean for ecommerce?
With its superior web shopping features and recommendation algorithms, Amazon will further improve Souq.com’s online experience.
Furthermore, Amazon, which has mastered the warehousing, fulfilment, and delivery processes to a level that surpasses anything we have seen in this region, will find ways to significantly shorten delivery times with the help of Souq.com’s Q-Express (possibly even with the use of drones).
It will add even more categories and brands online and gradually roll-out more of its products and services, such as Amazon Prime (although probably only in select regions). If we look at the big picture, Amazon is such a trusted brand that more and more people will be motivated to start shopping and the market will grow further and faster.
For other online multi-brand ecommerce players, the news has a varied effect. If you run a generalist marketplace or about to launch one, you are going against 35 years of collective technological and operational investment, a huge combined brand value, a customer database in the millions and really, really deep pockets.
No matter how much money you raise, if you offer the same service as Amazon/Souq.com it will be extremely expensive to keep your existing customers or acquire new customers, and deliver a similar experience. This means it will also be much harder for these competitors to raise new money.
On the other hand, if you are a specialist multi-brand business (such as baby and mum product market Mini Exchange or fashion and beauty retailer Namshi), are focusing on a niche market segment (such as Awok which targets the lower levels of the consumer pyramid), or using a different model (such as subscription like Glambox), you have a chance.
Even though you will face stronger competition in your category, you will still be able to differentiate on brand, long-tail product range, specialized services and benefit from the market growth and shipping cost benefits that will come to the market.
I believe that the larger ones of these differentiated ecommerce businesses may soon be acquisition targets for either foreign players like ebay or rakuten or alibaba or even for some of the regional retail groups (if they act fast enough).
For offline retailers, distributors and brands the entry of Amazon is a mixed blessing. On the positive side, they will have an excellent channel for their online sales.
On the negative, they will suffer by an over-dependence in one or maybe two major platforms, lack of individual brand experience and of customer data-points. Also they may be forced to lower their prices and margins to match those of the same products within Amazon’s global merchant network.
In more developed markets East and West of us, the dominant marketplace is taking the majority of online sales of branded products and only a few really large brands can compete with direct-to-consumer channels. Thus, all these traditional players will need to learn to work with and take advantage of the new ecommerce giant in a way that benefits their goals, at minimum cost.
Regardless on which side of the fence you are sitting on this, clearly there are very exciting years coming ahead, for those us who are active in the ecommerce space and those of us who just love shopping online.
Feature image via Northeastern.edu