Amazon is buying Souq.com, which is apparently already known as the “Amazon of the Middle East”, despite competitive bids which were said to be worth $800 million by retailer Emaar Malls PJSC (Turner & Wang, np). Souq is an online retailer in the Middle East, one which already has a strong following and market. Turner and Wang report that Souq has 23 million visits per month, 3,000 employees and more than 400,000 items for sale. Assuming that Souq follows the Amazon model, this indicates that there are also many participating sellers and resellers who are using the platform to support their business. There are some interesting aspects to the deal, notably the cash price being paid. This value seems rather volatile. Turner and Wang reported a valuation of $1 billion in the last round of funding, and the other bidder offered as much as $800 million, however it is reported that Amazon made the sale with an offer of just $650 million (Turner & Wang, np). This could lead analysts to believe there is more to this deal than a simple sale, and other advantages or benefits are likely part of the offering such as continuing as a shareholder is some fashion. Overall it was still a smart move at almost any price for Amazon given the potential of the lucrative market for online shopping in the Middle East and the fact that Amazon needs to grow in order to stay the leading online retailer. It is likely that there will be more interesting details released after the finalization of the acquisition.
The Middle East is filled with shoppers; it is just that they haven’t been shopping online.
There is considerable interest in shopping in the Middle East, and in Dubai, where Souq is based, there are even shopping festivals (Visitdubai.com, np). The growth in online shopping was previously slow, however there has been a dramatic growth in mobile phones, and this has spurred interest in online shopping and other activities (D’arpizio et al., 18). Many parts of the Middle East have developed rapidly, with the United Arab Emirates and Saudi Arabia investing oil and gas revenues into tourism and infrastructure. As a result of this there is an enormous population of foreigners living and working in Middle Eastern countries, and it is quite likely that they are already familiar with the Amazon brand. This may be a natural target, particularly as this group is known to have higher disposable incomes, making them a very attractive market. The high volume of consumers with disposable income and a love of luxury in Middle Eastern consumption lead to the next point.
There is a growing market for exclusive luxury products in the Middle East.
Amazon will have considerable potential to capture the growing consumption of luxury goods in the Middle East. While this market is growing rapidly, only about 5% of luxury goods are bought online (D’arpizio et al., 18). This is likely to grow, particularly if there is a strong marketing campaign along with access to brands and items that are currently not easily available in the Middle East. If the consumers seeking luxury items have been turning to Souq the profit margin for participating as a seller, for Amazon and for consumers in the Middle East could be significant.
Amazon needs to grow to stay huge.
It can seem counterintuitive, but for Amazon to stay the world’s largest retailer it needs to be expanding, particularly into new markets overseas. Every online retailer would like to be the next Amazon, and by imitating Amazon in areas where Amazon has not really penetrated, they have the potential to compete with, or even to be bought by Amazon. Most of the world’s growth is actually occurring in formerly developing countries, where rising incomes lead to a rise in consumption and shopping for products. Amazon can expand by launching in other regions and countries; however acquisition can provide an advantage of speed and a ready marketplace. This may be particularly important given that Amazon stands accused of just giving up to its competitor, Alibaba, in China. China is clearly a growing market and one with many global advantages as so much trade is sourced from there (Turner & Wang, np). They are taking a very different approach in India, where Amazon has embarked on a significant marketing campaign to overtake its rival Flipkart Online Services Pvt (Turner & Wang, np). In fact, the marketing budget for Amazon in India over the next few years is claimed to be over five times higher than the price paid for Souq.com (Turner & Wang, np).
Neither Amazon nor Souq was ready to comment on the deal.
In their article, Turner and Wang (np) stated that “Amazon and Souq.com didn’t disclose deal terms and declined to comment”. This is interesting given the size of the deal and the potential for this lucrative market. It may be that there are still many details to be worked out, or it could be that one or both of the parties are not as excited about the deal as one would think. The other possibility, given that the agreement in principle has been reached but it still remains to be executed, is that there are concerns about keeping the terms of the deal quiet until it is actually complete and ready to be implemented. Turner and Wang reported that the closing of the deal should happen sometime in 2017.
- D’arpizio, Claudia, et al. “Luxury goods worldwide market study, fall-winter 2014: the rise of the borderless consumer.” Bain & Company: 2016. Available from: https://pdfs.semanticscholar.org/c103/309fe9643cbcabcaba842af673e8439be267.pdf
- Turner, Giles and Wang, Selina. Amazon Buys Souq.com as Middle East Online Market Takes Off. Bloomberg News. March 28, 2017. Available from: https://www.bloomberg.com/news/articles/2017-03-28/amazon-wins-battle-to-buy-middle-east-e-commerce-firm-souq-com
- Visitdubai.com. Dubai Shopping Festival 2017. Available from: https://www.visitdubai.com/en/dsf
