5 reasons why Amazon buying Souq.com is important

Amazon’s popular combination of direct retail and third party marketplace is poised to turn the existing retail landscape on its head.

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5 reasons why Amazon buying Souq.com is important Greg Wilson, group editorial director, ITP Business, ITP Executive & ITP Technology.
By  Greg Wilson Published  April 20, 2017

Greg Wilson, group editorial director, ITP Business, ITP Executive & ITP Technology, gives his top five reasons for why Amazon's acquisition of Souq.com will help both organisations enhance their respective delivery capabilities and customer engagement.

The customer is king

At its core Amazon has an almost maniacal focus on customers. Its customer-centric ethos translates into a relentless effort to offer site visitors the widest range of choice, with the best service at the lowest prices. After 22 years Amazon is so good at doing this that it's often cheaper to buy goods from the US or UK and ship to the Middle East than pop out and buy it in the mall.

So Amazon's arrival is great news for Middle East customers, and in all probability bad news for most, if not all, local e-commerce sites.

Despite high internet and mobile penetration across the GCC, e-commerce growth is stunted. According to a recent report from AT Kearney, e-commerce only contributed just 0.4% to the GCC's GDP in 2015 (or $5.3bn). However, that figure could grow to $20bn by 2020 with the ‘right' enablers.

Disappointing e-commerce figures are often attributable to low credit card penetration. While there is some truth to this, it is also worth mentioning that most local e-commerce businesses have limited product range, slow and expensive delivery and offer customers no real cost benefit.

At absolute minimum Amazon's arrival will tackle all three points. And potentially solves another issue-trust. There is a world of difference in handing over your credit card details to local online venture, and the world's biggest online retailer.

The everything store

From selling just books, Amazon has evolved into an ‘everything store'. In 2016 visitors to Amazon's US site could browse 480 million products.

The deal with Souq doesn't just ‘validate' the e-commerce model in the Middle East as one local commenter said recently - it totally reimagines it. Nobody else has anything like the product catalogue, nor the logistics operation to match. As such, ‘Amazon Middle East' has consequences not just for existing online businesses, but every retailer in the region.

The vast majority of local retailers have been glacial in their efforts to embrace the internet. It's a classic ‘innovator's dilemma'; after investing heavily in floor space, retailers are reluctant to embrace ‘disruptive' e-commerce models for the fear of cannibalising their existing business.

In reality a resurgent US dollar, lower hotel occupancy rates, high retail rentals and a younger internet-centric audience that researches and shops online regularly, are already putting local retailers under mounting pressure. While footfall in malls remains strong, evidence suggests that sales are slowing.

Amazon's arrival, combined with the tough macro operating environment, should act as a wakeup call for the local giants of retail.

But Amazon potentially also offers a solution.

Amazon Marketplace

Initially conceived as an answer to eBay at the turn of the century, Amazon Marketplace has evolved into an essential aspect of its retail offering. It has enabled thousands of ‘mom and pop' retailers to sell products and services, seamlessly alongside its own offerings, sometimes at a cheaper price. Amazon handles the transaction, makes a percentage and in some cases fulfils the order.

A localised marketplace will take time to gain momentum, but for local retailers it could offer a cost effective way to start their own e-commerce efforts. However, it could also be a major source of conflict for the digital retail giant; which may not be a bad thing for local consumers.

Local distribution agreements

Amazon's mission to offer the broadest range of products at the lowest cost puts it on an inevitable collision course with local distribution and exclusivity agreements.

There are numerous cases in the US where Amazon has been drawn into conflict with its suppliers because of third party sellers on its marketplace, offering products below the minimum advertised price (MAP).

While suppliers cannot the dictate the price that shops sell their products, it uses the MAP to set a price threshold across its distribution network.

In some cases Amazon has also dropped its price below the MAP in order to be more competitive - provoking the fury of its suppliers. Sony, Black and Decker and Dyson and have all yanked products from Amazon US at one time or another over the issue.

For its part, although reluctant to lose a supplier, Amazon assumes that they will return, findings its 310 million-strong active customers irresistible.

Even when a brand decides not to sell its wares on Amazon, marketplace sellers often pop up offering just those products; typically below the MAP.

The disputes over pricing highlight Amazon's commitment to the consumer to deliver the best prices. The firm has given short thrift to ‘inefficient' pricing agreements in the US and Europe.

The real question is what implications Amazon's disruptive business model has for existing distribution agreements, particularly those ‘exclusive' agreements that keep prices artificially high.

There will be fireworks. And lower prices. And free shipping.

Amazon is a technology company

The advent of Amazon Web Services (AWS) in 2006 and Kindle e-readers in 2007 established the firm's technology credentials. It's unknown whether Amazon's direct presence will lead to local AWS data centres, or an increase in the number of Arabic-language books in the Kindle Store, or the localisation website and its Prime membership programme.

Most consumers would probably settle for lower costs and free shipping associated with Amazon's colossal buying power and flexible logistics system.

Whatever tops the consumer wish list, technology will be the enabler. It is at the core of the company's ability to be a quick, nimble and fierce competitor.

702 days ago

This is really a nice blog and very well written about Amazon and e-commerce websites. This is a very informative blog and, it gives a wide knowledge about many things. I was very much impressed with your site. It will guide me more.
I also choose Amazon for online shopping and always review their offers.
Keep Posting.

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