19 November, 2020
By: Frank C. Bracco, Khalid Attalla, and Omar El-Sharawy
The economic fallout of the COVID-19 pandemic combined with disruptions in the oil market is accelerating changes to both business and consumer behaviour in the Middle East that were already being driven by the Middle East Megatrends. Businesses - under pressure economically, facing rapid digital adoption, and the evolving consumer behaviour of a young, tech-savvy population - have long been alert to the need for digital transformation to remain competitive. As evidence, 88% of Middle East retail CEOs already reported ‘Digital’ as one of their key priorities prior to the dual shock.1 Consumers are now accelerating this priority based on PwC’s recent Global Consumer Insights Survey COVID-19 Pulse Survey (conducted in May 2020): 53% of Middle East respondents increased their usage of mobile shopping due to the pandemic while only 9% of respondents did not report shopping online.2
While enabling digital transformation and growing the digital economy has been a pillar of national reform agendas - from Saudi Arabia’s Vision 2030 to Egypt’s Digital Transformation sectoral plans - the Middle East region has traditionally lagged behind in business adoption of digital technologies. This comes despite high consumer adoption and, in the GCC at least, a relatively affluent population. In 2017, E-commerce accounted for just 2% of overall retail sales in the MENA region - compared to 15% in developed markets - with 90% of those transactions conducted with foreign firms.1,3
Even in the regional leader, the United Arab Emirates, e-commerce penetration accounted for only 4.2% of sales in 20173, compared to penetration rates of over 10% in markets like China, the United States, South Korea, and the United Kingdom.4
While the MENA region has seen organic growth over 15-20% per annum for the last several years in e-commerce sales (outpacing other regions)3, the pandemic has completely reordered priorities and upended timelines, significantly accelerating already rapid growth within the sector. As examples: BinDawood Holding - a Saudi retailer - saw e-commerce sales on a 10-day basis had increased by 200%5 at the beginning of the pandemic while UAE’s Majid Al Futtaim saw year-on-year online sales grow by 59% in March 2020.6 To accommodate the transition to remote working, distance learning, and rapidly expanded demand for e-commerce created by the pandemic, institutions of all kinds have been forced to significantly accelerate their digital transformation journeys - adding as many as six (6) or seven (7) years of digital maturity in just six (6) months.7
The ability of a country to swiftly expand its digital economy rests on three (3) fundamental pillars:
1. Internet, smartphone, and broadband penetration
In 2019, the Middle East had an estimated 67.2% internet penetration rate compared to the global average of 56.8%8, with an approximate 174 million smartphone users. This high penetration rate showcases the level of connectivity and technology savvy population of the MENA region. It is this population that values the ease of access to information, speed of transactions, and luxury of consumption at the tip of their fingers.
2. Digital banking and payments infrastructure
As digitisation continues to change the economic landscape of the region, e-commerce is also supporting the rise of, and benefiting from, the growth of digital banking in the region. Both online and mobile banking have a high rate of penetration in the region. In 2016, the UAE had a 92% rate of online banking penetration and 79% rate of mobile banking penetration, while KSA had an 85% and 81% rate of penetration, respectively. Compared to the average of 92% online banking penetration rate and 61% mobile banking penetration rate within developed Asia, the MENA region offers a high ceiling to the growth of e-commerce.9,10 More recent reports show high digital banking penetration has translated into high uptake by customers: 60% of banking clients in KSA use online and mobile apps (2018)11 while over 85% of personal loans for a major bank in the UAE are opened digitally (2019).12
3. Supportive regulatory environment
Finally, the growth of the MENA’s e-commerce sector depends on a supportive regulatory regime. The region has seen several policy initiatives aimed at encouraging businesses to invest in e-commerce. This includes initiatives such as establishing CommerCity (an economic free zone tailored for e-commerce opportunities) in Dubai in 2014, establishing the ADGM RegLab as one of the world’s most active fintech regulatory sandboxes, and - even this year - the Central Bank of Oman (CBO) granting its first payment service provider license to a non-bank fintech company. In 2018, the Arab League further established the Arab Federation for Digital Economy, a successor to the Arab Federation for e-Commerce, to facilitate cross-border and regional collaboration, representing the region’s appetite for digital transformation.13
Even with many of the fundamental pillars in place, countries throughout the region are at different stages of readiness:
Ranking of Middle Eastern Countries on 2019 UNCTAD E-Commerce Readiness Index
The market opportunity is sizable for countries that can ready themselves to ride the e-commerce wave. Even before the pandemic, e-commerce in the region was growing at rapid speed with the number of people in the region shopping online at least once a month rising from 23% in 2013 to 32% by 2017.14 In 2018, Visa reported that the Middle East e-commerce market was expected to nearly double in size from $26.9 billion that year to $48.6 billion by 2022. Overall growth for the period 2018-2022 across the Middle East and Africa was estimated to be growing at a CAGR of 23%.15
Moving forward, one should expect e-commerce growth in the region to accelerate in response to the pandemic. Reflecting back on the Global Consumer Insights Survey COVID-19 Pulse Survey (conducted in May 2020): of the 53% of Middle East respondents that increased their usage of mobile shopping due to the pandemic, 92% planned to maintain their increased level of mobile shopping; similar patterns exist for online shopping via PC and tablet.16
Consumers are further reporting growth across all retail segments, with many consumers making their first online grocery and pharmacy purchases during the pandemic:17,18
Revenues for brick and mortar retailers have also declined dramatically in recent months, prompting many stores to shift or expand their presence online, while also quickly building out their ability to process cashless and contactless payments. A prominent example includes the Dubai Mall’s partnership with Noon19 to create a virtual store to continue to engage with customers online.
These changes in both consumer and business behaviour set the stage for a long-term shift in how business is conducted throughout the region and fundamentally alters the growth trajectory of the e-commerce sector.
The accelerated growth of e-commerce caused by the dual shock being experienced provides a wide range of potential benefits for the region, including:
1) PwC Middle East, “Navigating the new retail reality,” 2019.
2) PwC, “Global Consumer Insights Survey COVID-19 Pulse - Middle East findings,” 2020.
3) Visa, “The UAE eCommerce Landscape,” June 2019.
4) Statista, “Share of online retail penetration worldwide in 2017, by country,” accessed on 6 November 2020.
5) Radcliffe, D. and Sink, H., “The Middle East used to hate shopping online: Here's why that's changing,” ZDNet. 18 August 2020.
6) Gowling WLG, “E-commerce in the UAE: is it the new normal? (Part 1),” 22 July 2020.
7) Twilio, “COVID Digital Engagement Report,” 2020.
8) Statista, Internet penetration rate in the Middle East and globally 2009-2019
9) Statista, Penetration rate of online banking in the GCC region in 2016
10) Statista,Penetration rate of mobile banking in the GCC region in 2016
11) Bowen, Mike, “Saudi Arabia ranks as top digital banking market in Middle East,” Intelligent CIO. July 2018.
12) Arabian Business, “Why the days of 'cash is king' are nearly over in the UAE,” July 2019.
13) Arab Federation for Digital Economy website, 2020
14) PwC Middle East, “ADAPT Framework”, 2018
15) AMEinfo, “E-commerce sector records sharp increase in sales”, 2020
16) PwC, “Global Consumer Insights Survey COVID-19 Pulse - Middle East findings,” 2020.
17) Visa, “CEMEA Impact Tracker”, 2020
18) Wired, “The future of shopping after Covid-19”, 2020
19) Arabian Business, “Coronavirus: The Dubai Mall to open virtual store on Noon.com”, 2020