After Many Slip-Ups, Mideast e-Commerce Gains Its Footing

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DUBAI -- Back in 2005, Souq.com was a new Web site modeled after eBay in the United States, catering to the nascent online retailing market in the Middle East. In the last week of October 2012, the fast-growing site received $45 million in funding from international investors, creating a new benchmark for the region's evolving e-commerce scene.

"When we launched at the end of 2005, e-commerce was still in its infancy, and getting started that early gave us time to find a business model that works today," said Ronaldo Meshawar, chief executive of Souq, which is based in Dubai. "It also helped us be an enabler in the region for businesses to sell their products online."

The $45 million deal bolsters an industry that is still relatively young and fragmented, extremely capital intensive, and facing logistical hurdles that have led many sites to shut down.

The large size of the funding shows that money, particularly from foreign investors, is available for the right kind of business. That means one that appeals to consumers and has the potential to grow.

There have been a lot of mixed messages for the regional e-commerce community over the last year. The sudden exit of LivingSocial, the global daily deals site, from the Middle East in August seemed put a nail in the coffin of the regional online retailing market.

The demise of other promising, local sites, including Joob, Nahel, Mizado and Jamalon, in the months preceding the abrupt closure of LivingSocial's regional operations suggested that e-commerce business models in the Gulf were not working.

But success stories are now starting to emerge from a handful of e-commerce sites that are figuring out how to run an online business in the area.

Namshi.com, a copycat of Zappos.com, which sells shoes online, has shown strong growth in its first year of operation. The site grew from three to 100 employees since it began in October 2011, and now manages 600 orders a day, according to Namshi's founders.

Backed by e-commerce veterans, including Rocket Internet in Germany, Namshi also received $20 million in funding from J.P. Morgan and Blakeney Management in September to further grow the business.

"There are challenges around delivery of product, setting up efficient distribution centers and making the right decisions about styles to keep in our inventory base," said Muhammed Mekki, one of Namshi's three co-founders.

"The initial funding was there to test and see if fashion e-commerce can work in the Mideast," he said. "Now that we've proven the model works, we'll focus on expanding."

MarkaVIP, a Jordanian site that provides discounts on luxury items, has also caught the eye of international investors, attracting $10 million in capital from European and American investment firms in April.

Souq is the latest and biggest in a string of new sites. The firm received funding from the South African group Naspers and Tiger Global, a New York hedge fund.

The firm's parent company, Jabbar Internet Group, still holds a majority stake. Jabbar Internet manages the spin-off brands that were not purchased by Yahoo when Maktoob, a news site, was sold to Yahoo in 2009 for $175 million.

When Souq started up in 2005, the team brought eBay's auction model to the region, in Arabic. They soon faced a slew of problems that smaller sites had been unable to resolve in the early years.

For one thing, transporting goods ordered on the Web across the Gulf countries was not easy because currencies and legal structures varied from place to place. Often, there was the added necessity of opening new bank accounts or finding a local partner to share the business. This also made it more difficult to manage inventory.

Online payment was also a hurdle. Many customers preferred to pay with cash on delivery rather than entering credit card details online. Cash on delivery put a strain on the company's resources as it had to ship goods first and collect, or not, the money later.

Online payments are now becoming more widely accepted and some of the shipping issues have been resolved. As part of those efforts, Namshi joined with Aramex, a global shipping firm based in Amman. The arrangement lets Namshi use Aramex's network of warehouses to store its inventory and ship orders in 24 hours.

To simplify things, Souq scrapped the eBay-style auction model in 2010 and instead adopted fixed prices. "You can't take a model and just apply it to the region," Mr. Meshawar said. "The copycat model doesn't work, we had to execute on the ground and adapt."

Now, Souq has 8 million to 9.5 million unique visits each month and a client base of 3.5 million customers across the Gulf, according to Mr. Meshawar. The site ships thousands of items a day.

The new funding will go toward setting up new distribution centers, expanding geographically and streamlining operations. Plans are in place to open logistics centers in the United Arab Emirates, Saudi Arabia and Egypt, where the site already has a strong following.

The money will also help Souq expand into new categories, including fashion and lifestyle, following the site's recent acquisition of the fashion site Sukar.com and the sports site run2sport.com.

This is the third round of financing for Souq, which has 200 employees and 50,000 sellers in its online marketplace.

"The failure of some sites just shows that the get-rich-quick, poorly managed sites won't make it, and it's a learning curve for entrepreneurs trying to enter the region's market," said Alexandra Toomey, an independent e-commerce analyst in Dubai. "Established e-commerce companies with a proven product can succeed if they adapt to the market correctly and have the right backing."

world

This article originally appeared in The New York Times.


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