Group Buying Websites Battle for Middle East Shoppers with Online Bargains
Shoppers in the United Arab Emirates (UAE) are among the wealthiest and most discerning in the world. Most major malls in Dubai, for instance, feature couture retailers usually associated in the United States with upscale fashion districts. It is not an uncommon sight to see shoppers with several large shopping bags, loaded into a cart just as a family buying groceries would, only the purchases being Gucci shoes and Louis Vuitton handbags. According to Business Monitor International, U.S.$31 billion worth of retail sales are expected this year in the UAE, and will top U.S.$41 billion in less than five years.
As there is more total retail space supply in the country than its entire population -- according to retail surveys, an estimated 5.75 million square meters by the end of 2014, or 1.27 square meters of shopping space for every UAE resident -- online retail has struggled to find room. Because of concerns about fraud, 45% of UAE shoppers said they would not buy online, according to a survey this year by MasterCard.
But that has not prevented the launch of a number of online group buying websites. The premise behind such websites -- offering vouchers for a discount on a product or service if there are enough willing buyers -- has struck a chord with shoppers here. In just a year, the UAE has become enough of a market that Chicago-based Groupon launched its own local website, while a local group buying startup was acquired by Washington, D.C.-based LivingSocial. Now, it is a race to corner the market, and claim regional dominance.
"The model is not overly complex, and there is space for local competitors who enter the market at least six months before the others," says Kartik Hosanagar, Associate Professor of Information and Operations Management at the Wharton Business School. "The first mover has a significant advantage in the daily deals space. The ideal player is a local first-mover that has carefully tracked Groupon but fully understands the local market."
A Proving Ground
The UAE is a proving ground for Internet companies in the Middle East because of its leading level of web penetration: Internet reaches 69% of UAE households, versus 32% in the Middle East as a whole. Also due to its wealthy local and expatriate population, the UAE is a tested market for adapting global trends into the region. The same MasterCard survey shows Internet commerce, while still small in volume, increased in the UAE by 42% from 2010.
The first group buying website to cater to the Middle East market was GoNabit, a local startup that launched last May. GoNabit first offered deals in Dubai, and then in Abu Dhabi a month later. Over its first year, the company claims hundreds of thousands of Middle Eastern users have saved more than U.S.$5 million. GoNabit has since expanded operational websites to Lebanon, Jordan and Egypt.
Second to the Middle East was another local startup, Cobone, launching last September in the UAE. The company is presently in Lebanon, Jordan, Egypt, Saudi Arabia, Bahrain and Qatar. Both Cobone and GoNabit have grown very fast and have hired many employees over the last year. Cobone claims monthly growth of up to 50%. According to its CEO, Paul Kenny, Cobone now has a 70% share market in the MENA region, and more than 500,000 Cobone users have saved US$10 million over 10 months. Cobone also prides itself as being part of the Jabbar Internet Group, which is currently owned by the same founders of the original Maktoob Group.
The small success of these startups attracted their Western counterparts to the Middle East. Groupon set up a UAE website with much fanfare in March, and then in June, Washington, D.C.-based LivingSocial, the second group buying leader after Groupon, bought GoNabit for an undisclosed amount. For GoNabit, this was the opportunity to be sustained by a larger company, a key factor enabling longer-term survival with this business model. In quick succession, the Gulf market now has close to a dozen competitors.
"The daily deals market has network effects and economies of scale," Hosanagar says. "So the larger players will have significant advantages over small players. Initially, the market is fragmented with lots of firms trying to grab market share. The early growth sustains these firms. But as the market matures, the growth slows down. As a result, a consolidation will occur."
The companies find themselves trying to distinguish themselves for the same pool of potential customers. "Our name might attract web-surfers," says Faisal Haq, general manager for Groupon Middle East. "Although, when we start in a new region, we face similar challenges as for any new business." Being first, they have learned, has its benefits. In Brazil and India, local group discount purveyors, such as Peixe Urbano and SnapDeal, are doing better than Groupon.
The 'Shoppertainment' Factor
One factor that every Internet retailer will have to overcome in the UAE and elsewhere in the Middle East is the reluctance on the part of shoppers to make online purchases. The UAE is by far the best market for any Internet retailer to succeed; according to a survey done by Effective Measure and Spot On Public Relations, 4 out of 10 Internet users in the Gulf used e-commerce in 2010. Whereas in the whole MENA region, it is less than one out of three. Gulf residents have been reluctant to buy products online for years.
One reason is that in the Gulf, going to a mall is, as locals have dubbed it, 'shoppertainment.' Massive air conditioned malls provide relief from a blazing desert sun, and Dubai's malls famously provide distractions that no American mall would -- such as indoor skating rinks, amusement parks, or shark-filled aquariums. "In a mall, not only can you shop, you can eat, let your children play, or go to the cinema," says Sana Toukan, research manager at Dubai's Euromonitor International. "The shopping experience lets you touch, feel, and try on the items. This is a whole experience, and a barrier for online shopping. However, the hectic life people live now means less time to go to the mall, and makes online shopping more attractive."
There is also the question of fraud and logistics. Commercial websites in the Middle East, even banking sites, have been hacked, and the public remains wary of parting with financial information online. Also, many residents do not have shipping addresses -- so packages are usually delivered after someone is reached by mobile, and cash is paid on delivery. "This is the reason why Jabbar Internet Group, our partner, launched CashU.com nearly 10 years ago," says Cobone's Kenny. "For people who don't want to use a credit card for online shopping, we offer the opportunity to pay with cash."
Regional retailers too were slow to embrace e-commerce. According to marketing research done by professors from the Al-Ain University of Science and Technology in 2008, only a third of local online shopping websites accepted payments through their websites. Now retailers are expanding their online presence, the largest being French supermarket retailer Carrefour, which only announced this spring that some of its consumer electronics inventory could be purchased online in the UAE.
Euromonitor International forecasts a modest yearly growth of 6.5% for UAE Internet retail in 2011, and between 11 % and 15% per year over the next five years. "In these figures, coupon buying remains a small fraction of e-commerce. It's growing, but still new," Toukan says. The companies agree. "Some people still do not know the concept of group buying," says Groupon Middle East's Haq. "Sometimes we have to open a pathway for online shopping, such as in Lebanon, which lacked the Internet legacy for e-commerce," adds GoNabit's Stuart.
What has helped the rapid growth of group buying websites in the Middle East has been the use of social networks to promote deals, and expand membership, Toukan notes. In the UAE, Facebook penetration is almost 50% of the population, compared to only 8% for the entire Middle East. "Word of mouth and social networking are the success keys for group buying, according to our survey," Stuart says.
The model for Middle East group buying websites exists elsewhere in Asia, Wharton's Hosanagar points out. "Lessons can be taken from India, where online shopping is limited, but people love a deal," he notes. "In addition, daily deals cater to a smaller set of users with some familiarity with the Internet and credit cards. Similarly, in the Gulf, daily deal sites might appeal to a smaller segment of users, but they might be very active to recurring visitors."
Luxury Spend, And Coupon Clipping?
The premise of group buying websites still remains at odds with the traditional retail scene in the Gulf, where shoppers often pay a premium for exclusive items -- such as designer shoes or Italian sports cars -- to ensure they have it first, and the summer brings shopping festivals for tourists that offer outstanding markdowns on even the highest-end labels. But in a market that accommodates numerous customers of U.S.$20,000 Vertu mobile phones, for instance, where is the appeal for coupons?
Groupon and its competitors have found their first customers in the large expatriate communities, that are often more used to e-commerce, and looking to try something new. A number of offers available within these Middle Eastern group buying sites are for trips and cultural experiences. But some expatriates welcome the coupon option, because Dubai is an expensive city. "The economic crisis has made deals on group buying websites more appealing, than a small discount in a mall on luxury products," Toukan notes.
Expatriates have also been more amenable to the idea of using traditional coupons for services in the Middle East. Before the advent of group buying sites, some publishers were publishing voucher books for the expatriate population -- a popular brand is The Entertainer, which offers coupons for dining and family attractions in Dubai and Abu Dhabi.
Attracting the local Arab population to the group buying concept has been more challenging. Kenny, the CEO of Cobone, admitted that only 45% of its clients are Arabic speakers. But there is no method to distinguish the nationalities of Arabic-speaking consumers from the UAE, other Gulf nations, or other countries from the Middle East or North Africa. Still, Cobone as well as GoNabit websites are in both Arabic and English.
Obviously, the coupon model won't work for luxury handbags. "From a marketing perspective, a coupon is the wrong method for the luxury market," says Utpal Dholakia, associate professor at Rice University's Jones Graduate School of Business. "An exclusive product does not offer 50% off. Strong brands barely give a discount." Groupon's Haq adds that fashion retail does not make up the bulk of their business. "Food and beverage, personal care, and leisure are the best drivers for deals," he says. "We are very lucky these three markets are very developed in the UAE."
Euromonitor's Toukan suggests a good niche for the group buying market to develop is the travel and leisure sector, already the fastest growing type of product sold online. For instance, airlines get 20 % of their business from online channels in the Gulf, and 35% in mature markets. GoNabit, which has already a separate section, 'Getaways', specializing in travel and leisure products, claims it has started well. The biggest deals GoNabit has sold were 7,000 passes for Ferrari World, an Abu Dhabi amusement park devoted to the exotic car, and a night at a Banyan Tree desert resort, which brought US$400,000 in three days. Cobone's record for the fastest-selling vouchers is when, in only 13 hours, it sold U.S.$100,000 worth of brunches at the Madinat Jumeirah resort in Dubai. Usually, voucher prices are under the equivalent of U.S.$100, but could be more; the priciest deal sold was a U.S.$30,000 Cobone coupon to buy a Nissan Pathfinder.
Don't Call Us Cheap
Small deals for a discount on pizza or ice cream are extremely popular, the group buying sites report. "In America, coupons and price promotions are common and often used. Even a U.S.$1 deal for a package of potato chips, consumers will use it," Dholakia says. "Americans who use coupons are considered as smart shoppers. But in Eastern countries, people sometimes do not want to seem cheap by using coupons."
In the Gulf, consumer perception and behavior deeply influence the coupon business model. For expatriates, a strong motivation to purchase a discount voucher is to try a new place. Whether they will come back later to buy a product at a regular price, is another matter. "By definition, consumers are attracted by discount or price promotion," Dholakia says. "It is psychological. Though it is hard to evaluate the return over the long term. According to my study, the average of repeat consumer behavior at full-price is only 20%." Dholakia adds restaurants in particular might not gain consumers from an e-promotion, because diners often chose the eatery only because of the promotion. Moreover, offers are extensive in the UAE, so new 'restaurant bargains' seem to always be available.
"The business has to decide in which target it is interested," Dholakia continues. "It doesn't make sense to offer a deal if the company is already established. On the contrary, a startup could gain many new clients from a promotion." This is why a freshly installed beauty salon can be interested in offering deals, while an exclusive brand might not be willing to participate in a deal.
Dholakia's extended study on many group buying websites points out than less than half of the businesses are enthusiastic about running another daily deal in the future. Moreover, only 18% businesses reached a break-even with the promotion, while 26.6% lose money on the group buying effort. Cobone's CEO insists he has a long waiting list of businesses willing to do a deal on their website. The group buying model is a promotion for local businesses with free advertising included. This could be more appealing to businesses in fast-growing environments such as the Gulf.
"In the Gulf, the challenge is that the market in each individual country is small, and so the key is to have a MENA presence as opposed to being in only one or two countries," Wharton's Hosangar concludes. But Dholakia estimates that even in proportional terms, the UAE group buying business won't meet North American levels of success. In the U.S., the sector's revenue is expected to grow from US$1 billion last year to US$4.5 billion in 2011.
Source: Arabic Knowledge@Wharton