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Managing the challenges and opportunities of e-commerce platforms in the

Gulf region

Conference Paper · May 2018

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Managing the challenges and opportunities of e-commerce platforms in the Gulf
region
1
Benjamin Grab
2
Roxana Maria Gavril
3
Jörg Bothe

1
Bucharest University of Economic Studies, Romania
2
Bucharest University of Economic Studies, Romania
3
Bucharest University of Economic Studies, Romania
1
benny_grab@hotmail.com
2
roxana.gavril@gmail.com
3
joerg.bothe@gmx.de

Abstract

This study highlights individual aspects of doctoral research regarding sustainable market strategies in
the context of digitization, conducted by authors in the Research Centre of Business Administration,
Bucharest University of Economic Studies, Romania. The objective of this research paper is to identify
key elements impacting on the business opportunities of online retailers in the countries of the Gulf
Cooperation Council - with a special focus on the most economically dynamic: the United Arab Emirates.
Hence, evaluating the central issues to be managed by e-commerce market participants. The first part of
the paper provides an overview of the existing literature whereas the second part includes research
results and solution proposal.

Our study is based on a review of existing literature from recognized publishers and professional
associations, as well as market information obtained through published interviews by the CEO of the
main e-commerce platform. In this context, we have analyzed more than 60 publications and data sets
to provide for an inclusive picture on the market development potential of shopping websites and
studied the substantial challenges as well as the existing opportunities faced by these pioneer
companies in the United Arab Emirates along political, economic, social and technological lines.

On the one hand our research revealed that the main management challenges of online retailers in the
region center around three main issues: the lack of supporting infrastructure, the issue of an unbanked
population and the locally-embedded mall culture. On the other hand, large and growing numbers of
digital natives in the region, as well as the political pressure on local leaders to provide for non-oil
sector-related growth potentially have a stimulating effect on innovative online marketplaces. Against
this background, the Gulf region provides for an interesting case for the development of e-commerce
since social and cultural factors tend to play a significant role in the clash between traditional brick-and-
mortar stores and newly developing web-based marketplaces.

Keywords:
Business Management, Digitization, Online retailer, Gulf region, Innovation
Introduction

The role and perception of e-commerce has changed significantly over the last decade with global sales growth
figures continuing to grow in 2017 and beyond. According to the research firm eMarketer (2017), purchases
made online will account for one-tenth of overall retail sales worldwide - translating into an increase of 23% or
a total volume of USD 2.3 trillion. While China and the USA lead the way with a joint share of 70% of e-
commerce sales worldwide, the Middle East and Africa (MENA) are still at an infancy stage of developing a
thriving online retail sector. To this day, e-commerce in the MENA region solely accounts for only 2% of total
retail sales in the world. Projections further see inconsiderable room for improvement until 2021. Against this
background, the regional powerhouses Saudi-Arabia and the United Arab Emirates (UAE) experience signs of
business development in the online retail area - especially with regards to the activities of regional champions
such Amazon-owned Souq and recently established Noon.

According to ATKearney (2016), a reputable global management consulting firm, the UAE especially has
significant potential in the field of online retail expansion as showcased in securing the 7th spot in the 2016
Global Retail Development Index. The main question remains why the e-commerce section has not yet been
able to reach its full potential despite the promising fundamentals such as disposable income levels, smart-
phone coverage and overall stage of economic development. In order to provide for a thorough analysis a
modified DeLone and McLean IS success model - combining both the original internal, customer focused view
with a holistic, external business management component in the form of the P.E.S.T. analysis - forms the basis
of the local e-commerce assessment. This inclusive model captures a number of factors hindering the success
of online retailers in the UAE. From an internal point of view, partially unsolved issues along the value chain
include applying cost-efficient payment options as well as establishing stock facilities and delivery channels.
Considering the external perspective, additional matters arise in the form of political pressure for new growth
trajectories, an unbanked population, a deep-rooted and embedded brick and mortar retail culture and a
rising share of digital natives. Going forward, removing a number of existing online sales barriers through the
adoption of international best practise initiatives or the creation of locally bespoke solutions is likely to
positively affect the overall development of the e-commerce sector in the UAE.

Research Methodology

In order to attain the foreseen objectives, relevant research articles and literature were studied from renown
publishers as well as globally recognized research entities and professional organizations. Since the overall
research plan is still at an infancy stage, the focus was on a desk study comprising of the analysis of more than
60 publications and data sets to provide for an inclusive picture on the market development potential of
shopping websites. Ultimately the aim is to shed light on the substantial challenges as well as the existing
opportunities of online companies in the United Arab Emirates along political, economic, social and
technological lines. As a consequence, we have managed to detect common root causes, while at the same
time searching for potential, applicable solutions.

Theoretical Framework

E-commerce in the the MENA region or more specifically the UAE still lacks behind in size and scope comparing
to more advanced online retail markets like the USA or China. Research in this particular area has not yet
received significant attention, which requires a structured approach, in order to bring available information
from a diverse set of sources together - with the ultimate aim of creating a holistic picture of the current
situation. With reference to the reason for the mentioned infancy stage of the sector, the root causes from a
management perspective might be triggered by customer needs, external factors in the market environment
or a combination of the two. (eMarketer 2017)

In order to determine the individual elements impacting on the customer side, the updated information
systems (IS) success model by De Lone & McLean provides for a widely accepted framework for evaluating the
potential for business fortune of an integrated information system. On the one hand, it stems from the high
citation count, the model has received so far, while on the other hand most propositions outlining the success
of an IS are supported throughout academia. In this context, it has proven its usefulness through the
application of six, interrelated and interdependent, elements, as shown in Figure 1. (DeLone & McLean 2003;
Lowry et al. 2007)
Figure 1: Updated Information Systems Success Model (DeLone & McLean 2003)

According to Urbach and Müller (2011), the model allows for structured evaluation of an information system
along the lines of information quality, system quality and service quality. These key elements “affect
subsequent use or intention to use and user satisfaction. Certain benefits will be achieved by using the system.
The net benefits (both positive or negative) will be achieved by using the system”. In order to assess and
analyse the customer-related or internal root causes of the current e-commerce situation in the UAE, the three
key quality elements provide for a useful metric:

1) Information quality refers to the overall ability of a system to produce a designated outcome for the final
user. With reference to the e-commerce customer, the outcome may include storage of information and
data, delivery of such or its new production. Timeliness and trustworthiness of information provided
through e-commerce businesses is a crucial factor when it comes to the successful establishment of an
online retail infrastructure. This includes the availability of information in the language of choice.
Considering the melting pot of cultures to be found in the UAE, online retailer should be able to tailor
services to the needs of a heterogeneous group of customers. However, since the country can be
considered a late mover in this sphere, individual players can benefit from international best practise as
in the example of the largest regional e-commerce platform Souq, which has been acquired in early 2017
by global powerhouse Amazon (DeLone & McLean 2003; Sanyal & Hisam 2016; Turner & Wang 2017).
2) System quality is a common dimension which highlights the accessibility, stability and user-friendliness of
an available information system solution. In the context of the UAE, the country is the leading nation
concerning access to broadband internet which forms the basis for overall system quality. According to
the FTTH Council Europe (2017), 93% of households in Abu Dhabi, Dubai and beyond enjoy full
connectivity to high-speed internet. This allows e-commerce platforms to fully operate within the country
without suffering from major technical barriers. In addition to that, the UAE further leads the global
ranking of smart phone user penetration. A recent study conducted by eMarketer (2016) underlines the
countries’ prime position allowing 77% of cellphone users to access online retail stores anywhere and
anytime. (Urbach & Müller 2011)
3) Service quality strongly depends on the performance of an information system concerning the delivery on
promises. Given the direct link between user experience and usage intentions, online retailers are
required to set a strong focus on this particular dimension. Along the entire customer journey, e-
commerce players in the UAE are to provide solutions for the establishment of a well-functioning supplier
network to increase the number of products on offer, think of bespoke, secure payment options and
safeguard the timely and efficient delivery to the final customer. In a country with little experience in e-
commerce, this may create significant challenges. (Urbach & Müller 2011; Sanyal & Hisam 2016)
In order to provide for a holistic assessment of the e-commerce market in the UAE, the customer-focused or
internal assessment is complemented by an external analysis of the macro environment, in which the online
retailers are operating. In this context, an environmental scanning allows an organization to structure, monitor
and evaluate information regarding the specific country or region.

For the most part, companies are not able to change these variables like cultural norms, demographic
developments or government interventions. Therefore it is extremely important for them to adapt to these
trends through the development of strategies, which allow organizations to seek benefits and minimize risks.
Companies try to match their capabilities to the opportunities offered by the external environment, in order to
achieve a strategic fit. Contrary, firms which do not possess a certain degree of strategic fit are more likely to
fail in reaching their overall objectives in the target market (Galbraith & Kazanjian 1986; Wheelen & Hunger
2002; Mellahi et al. 2011).

Figure 2: P.E.S.T. Analysis (Wheelen & Hunger 2002)

As highlighted in figure 2, the P.E.S.T. Analysis is a common way to assess the business setting of a chosen
country or region, as it takes the most important variables into account: political, economic, social-cultural and
technological. For further segmentation of the general environment, this analytical tool allows to add
additional dimensions such as legal, environmental, religious, demographic, or financial. Due to its flexibility, a
number of different versions exist. (Mellahi et al. 2011).

The P.E.S.T. analysis facilitates the structuring of the complex external environment through these variables,
while highlighting general tendencies and major developments, which are crucial for the company’s future
business strategy and risk consideration. Hence, the analysis should be seen as a broad framework to
understand the main characteristics of the macro environment and its factors of influence. Therefore it can be
used as a checklist to analyze how the different factors impact on the business in the specific market (Wheelen
& Hunger 2002; Mellahi et al. 2011).

The four variables each highlight an important dimension, which plays a significant role in the composition of
the macro environment in the UAE:
 Political factors include the vision, action and stability of the country’s leadership, in combination with
the main tendencies in terms of government policies and regulations. In addition to that, the involvement
in regional or global institutions have to be considered, especially against the background of a rising
degree of inter-connectivity between countries in recent years. Therefore companies have to take these
developments into account, when investigating the political environment. With regards to the UAE, the
overall assessment centers around three key components. Firstly, the relative stability of the domestic
political system, despite a foreseeable transition of power. Secondly, the continuous status of the country
as a safe haven in a region loaded with turmoil and instability. Thirdly, a stable and secure regulatory
environment which keeps inviting businesses from all over the world. (Mellahi et al. 2011; Economist
Intelligence Unit 2017)
Economic factors highlight the financial fundamentals of the country or region, in which the companies
operate. General economic growth tendencies are as important for the strategy of firms as other factors
like inflation, unemployment rate, disposable income or interest and exchange rates. Against this
background, the UAE features a number of interesting economic factors such as its 23rd place in the list
of countries with the highest per capita income (in the light of significant income inequality across the
country), its strong dependency on oil and gas revenues for balancing its annual budget as well the
introduction of VAT starting from 2018 which will negatively impact on the disposable income of its
residents. (White 2004; International Monetary Fund 2016; Economist Intelligence Unit 2017)
When it comes to the social-cultural horizon, lifestyle changes and demographic changes have to be
considered throughout the assessment. Main characteristic differences between societies, as well as their
attitudes, values and even climatic elements require further attention. Language, religion, the role of sub-
cultures or the general mode of social organization may create challenges for the companies and
therefore need to be considered. While the UAE is an Arabic and Muslim country with strong tribal roots
across the seven emirates, the majority of the population consists of expats coming from Southern Asia,
the Philippines or Western countries. This diverse mix of residents made up of numerous languages and
cultures shares a desert-like environment as well as an extremely hot and arid climate. (Wheelen &
Hunger 2002; White 2004; Mellahi et al. 2011; Economist Intelligence Unit 2017)
Furthermore the technological environment might have a major impact on any business endeavor. The
rise of knowledge-based economies and the gain of competitive advantages through sophisticated
technology have made more business participants aware of the potentials in this area. In order to gain
from technological trends, it is crucial for all players in the business environment to detect waves of
technological change. These waves have tremendous implications for all sectors of the economy, which
force firms to assess the impact of the changing environment on their overall objectives. The UAE - and
most openly Dubai - has been on the forefront of technological innovation and the adoption of new
scientific approaches. Not only has the cabinet reshuffle in October 2017 led to the installation of a
Minister of State for Artifical Intelligence, but the country invests significant resources in the
implementation of state of the art telecommunication, transportation and health technology. (Wheelen
& Hunger 2002; White 2004; Mellahi et al. 2011; UAE - The Cabinet, 2016; Economist Intelligence Unit
2017)

Research Contribution

Against the background of the theoretical framework, the research effort is based on a review of existing
literature from recognized publishers and professional associations, as well as market information obtained
through published interviews by the CEO of the main e-commerce platform. In this context, more than 60
publications and data sets were assessed and analyzed to provide for an inclusive picture on the market
development potential of shopping websites and e-commerce in the UAE. In order to reach this key objective,
the internal, customer-centric perspective of the quality dimensions presented by the updated information
systems success model were complemented with external elements provided by the P.E.S.T. Analysis tool. This
allows for a comprehensive framework to assess the overall risk profile associated with the e-commerce
market in the country. On this basis, influence factors were identified, clustered and assessed with the aim of
identifying the key questions demanding particular management attention.
Figure 3: E-commerce risk assessment framework

The overall risk assessment framework of the UAE e-commerce market, as showcased in figure 3, highlights
the chosen clusters of the in-depth desk research. In the following paragraphs, the main drivers - for the
analysis of both internal and external or a combination of the two - will be presented. While individual key
influence factors may address more than just one framework element, the chosen parameters allow for an
inclusive assessment of the e-commerce market. Given the nature of any business activity, those aspects
considered critical for further expansion naturally require particular management attention going forward:

Supplier networks and the last mile problem: e-commerce is often perceived as the most convenient shopping
experience given that purchased products and services are either transmitted electronically or delivered to the
customers’ doorstep. In order to provide for such as seamless process, a wide and well-functioning logistics
network needs to be in place - including intelligent warehouses, inter-connected delivery systems as well as
interfaces to the relevant e-commerce platforms. This can be regarded as a precondition for the 24/7
customer experience. Concerning the online retail business in the UAE, a number of barriers exist which lead
to issues for the supposedly seamless process. Primary logistics systems which are often taken for granted
across more advanced online retail markets are not yet available across the country. This includes the
existence of postal codes which facilitates orientation for delivery personnel, especially in unfamiliar
residential areas. This is the essence of the last mile problem for e-commerce companies. Since the delivery to
pick-up points does not fully satisfy the demands of convenience shoppers, e-commerce companies may either
set up their own in-house delivery infrastructure or collaborate with logistics companies to improve the overall
delivery service experience. Going forward, the use of Geo-locating software may help to improve this end of
the value chain. (Taki et al. 2016; The Payers 2017)

Against this background, ongoing issues with the existing supplier network as well as the persistent last mile
problem significantly impact on the business opportunities of merchants in the e-commerce sector. With
reference to the the risk assessment framework both the internal side concerning service quality as well as the
external side concerning to the technological environment are negatively affected.

Role of the unbanked population: the UAE is well-known for its oil-fueled economy, extravagant architecture
and luxurious lifestyle. In contrast to this shiny surface, the country is home to a large number of low-or
middle income earners. While comparably high income per capita figures might portray an overall stable and
balanced economic environment, the issue of income distribution plays a significant role in the country.
According to a study conducted by the World Bank in 2014, financial inclusion is a significant problem. 43% of
the local population must be considered as unbanked given that they do not meet the minimum salary
requirements imposed by local financial institutions to open a bank account and obtain a credit card. Given
these limitations, it is hardly surprising that e-commerce platforms struggle to serve a larger share of the local
population through electronic payment solutions. 80% of online retail customers therefore prefer cash
payments above others which increases both costs as well operational risks for the e-commerce merchants
involved. With larger numbers of the population naturally excluded from the formal financial sector, the issue
of affordable scalability becomes a key question for e-commerce market participants which require significant
investments in bespoke local sales channels. On the retailers side, in-house solutions such as selling
purchasing vouchers or the issuance of pre-paid credit cards may provide for solutions. In addition to that,
start-ups like Dubai-based NOWMoney aim to tackle the issue of the unbanked population through an app-
based service. (Taki et al. 2016; The Payers 2017)

In the context of a substantial unbanked population with limited or no access to the formal banking system in
the UAE, the economic environment requires particular management attention. Since the growth trajectory of
e-commerce in the country strongly depends on viable solutions for scaling up business opportunities to reach
the mass market.

Embedded brick and mortar culture: Dubai and Abu Dhabi are effectively mega cities built on sand. Their
development and progress is the consequence of investments made through oil windfall which turned a
hostile environment into a home for millions of people from all over the world. The extreme climate in
combination with the role of the UAE as a prime tourist destination led to the construction of countless
shopping malls across the country. In terms of shopping space per person, Dubai and Abu Dhabi are among the
top 10 cities in the world with the former securing the prime spot, according to Colliers International (2017).
The fact that these real estate projects are not only white elephants without catering to the needs of
customers is underlined by research among UAE residents. Six in ten people pay a visit to a nearby shopping
mall at least once a week. In this context, PricewatherhourseCoopers states in his Total Retail Survey 2016 that
visiting “the mall is an integral part of the region’s culture and character”. As such shopping centers both serve
as a social gathering place as much as an entertainment venue. With opening hours from 10am to 10pm with
service provided 365 days a year, shopping centers are available around the clock. Hence, online retailers are
more likely to improve their position only if three preconditions are met: good prices, solid brand reputation
and better product range. (Maceda 2015; Taki et al. 2016)

In the light of this strong mall culture in the UAE, the country’s physical stores are much more resilient to the
competition posed by e-commerce merchants. This key characteristic of the local market strongly affects the
the social environment requiring particular management attention to address the issues outlined above.

Conclusion

Based on the available information and data drawn from a diverse pool of sources which set the stage for the
conducted desk research, we consider three factors to be the main causes hindering e-commerce growth to
unfold its full potential at this point. The lack of supporting logistics infrastructure requires substantial
investments on the merchants’ side, in order to provide customers with a seamless experience. In this context,
viable in-house solutions or co-operations with specialized logistic firms should lead to an improved cost
position going forward.

In addition to that, e-commerce players in the UAE have to improve ways to tap upon the huge market of
currently unbanked people in the country. Serving this large customer segment will add additional traffic to
the online retailers’ websites and turn individual platforms into go to places for the masses. Providing suitable
modes of payment - which are both secure and fast - will be crucial in this matter, in order to reduce
operational risks and costs involved with currently favoured cash on delivery.

Lastly, e-commerce players need to be aware of the strongly embedded mall culture in the country. Shopping
centers are ever present in the UAE and serve both as gathering points as well as entertainment destinations.
In this context, its purpose goes beyond what can be experienced in Western economies. Based on current
research, online retailers should work on three criteria to gain additional market share from brick and mortar
merchants: good prices, solid brand reputation and better product range.
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