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Single Vertical Selling

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Jordan’s fast growing e-commerce sector has so far been dominated by a handful of big flash sales websites that have seemingly thrived through selling everything but the kitchen sink to eager buyers.

To say e-commerce is catching on in our part of the world would be a laughable understatement. According to a new study commissioned by Visa, the sector in the MENA region is the fastest growing globally, with its total worth having shot up from $10 billion in 2011 to $15 billion in 2012. This staggering growth rate shows no sign of abating, and has so far largely been driven by giant online retailers like Souq.com and, particularly here in Jordan, by flash sales websites such as MarkaVIP. The Amman-based company has been raking in millions since its launch in 2010 by selling everything from sun glasses to handbags to click-happy customers.

But does this necessarily mean these catch-all websites have the online retail market sewn up? Faisal Hakki, who recently established an online cosmetics startup Kohlah, thinks not. The 37-year-old venture capitalist, who has also worked in management accounting, equity research, and financial analysis, is adamant the e-commerce sector is still wide open for many more companies - big and small - to prosper. Kohlah is due to launch over the summer in Jordan and Dubai later in the year. If all goes to plan, he’s then hoping to spread his operation to other MENA markets.

“I’ve been intrigued with e-commerce and the massive growth that’s been witnessed (in the sector) over the past five or six years across the region,” he said. “The successful examples are either mega platforms for e-commerce or very specialized e-commerce portals or websites. I don’t have the funds to start something as big as Amazon, so I thought I might just as well look for a vertical that isn’t tapped electronically.”

LOFTY MARGINS

So why did he choose to focus on cosmetics? “It’s a very high margin industry and there isn’t anyone doing it in the region, and even globally, it’s not a very popular vertical with e-commerce websites because logistically it’s very difficult,” he explained. “Businesses usually shy away from these products because they’re difficult to handle, it’s not easy to ship them and you won’t find a lot of people who are willing to partner up with you and do this on a cross-border basis.”

While he remained tight lipped about his company’s sales projections, he did say the cosmetics market in Saudi Arabia was worth around $2.5 billion annually; the UAE around $1.5 billon; in Egypt approximately $1.2 billion, and slightly over $400 million in Jordan. He said any emerging online niche or vertical would usually grab anywhere between 1 to 3 percent of the existing market. But this rule typically applies when you have a fledgling group of websites competing with one another – something he believes has yet to happen in the region’s cosmetics sector. “My competition is based mostly in the clothes and accessories vertical. So there’s Marka VIP, Sukar, and Khazanati. They sell flash sale products, some of which include perfumes or skin creams. But these can’t really be considered competition,” he said, adding he expects the online market in the four aforementioned countries over the next three years to easily be worth around $300 million.

Hakki plans to source and sell locally within each country. He conceded this would mean he would be restricted to selling products provided by distributors that are already available in shops, and that his margins would take a hit because of this. But on the flipside, he believes his business will have a very light balance sheet. “I’m sort of a virtual middleman,” he explained. “I won’t have any inventory, I won’t have to invest in warehousing, in delivery and logistics.”

Furthermore, he said he will be dealing with products that are more or less already well branded, which means he won’t have to do much marketing, and that the high-end industry is basically “awash” with ad money. “If you can create a position in the market where you’re the premier or go-to beauty cosmetics website, I’m pretty sure the ad money will start flowing,” he said.

Will his products be cheaper to buy than those on the high street? The chances are they won’t be. “More or less, I’ll sort of be constrained by what the suppliers offer me…The price will sort of be dependent on the margins given by the suppliers,” he explained. “You have to keep in mind that most of the high-end brands are very protective of their pricing. So they’ll set a price floor on whatever product they’ll allow to sell on the website and you can’t go below that as they need to maintain that price point in the market for their brands.”

KING OF CONVENIENCE

Because he can’t stand out on prices means he’s going to have to work very hard on delivering his USP – convenience. He’s going to be aiming for next day delivery through one of three delivery companies he’s currently in talks with, which includes Aramex. And rather than splashing out on developing his own website, he opted to buy a fully-functional e-commerce portal off-the-shelf. He’s now busy customizing it with a host of features he hopes will offer a more personal and immersive buying experience, such as review sections and short makeup tip videos.

The main challenge he faces, much like other online business in the conservative region, is how to move past customers’ preference for cash on delivery. Hakki said the ratio at the moment is somewhere between an 80 – 20 split between cash and online payment options. He’s going to accept both, but may at some point attempt to either de-incentivise cash on delivery by charging a premium for it, or conversely make paying for products through the likes of PayPal or credit cards cheaper.

Hakki’s e-commerce business isn’t the only one in Jordan focusing on a single vertical. Moe Ghashim is the CEO of ShopGo.me, which offers plug and play solutions for merchants to create their online stores. The company has been operating for over a year, and over this period he said there’s been a 15 percent month-on-month increase in orders. Moreover, he said 70 percent of these orders are from companies focusing on a single vertical.

A notable example of one of these single vertical companies is Hijabik.com, which was founded by Amy Kyleen Lute and Fouad Jeryes about a year ago. Jeryes said they sell “hundreds” of locally and regionally designed hijabs each month to women in Jordan and across the rest of the world.

Even though Jeryes admits there aren’t a great deal of Jordanian e-commerce retailers focusing on shifting one single product at the moment, he’s adamant this will soon change. “Is it a trend? I think the natural evolution of the market will go in that direction for sure,” he said. “If you look at the States, at the beginning, you had the eBays and the Amazons, you had the guys that sold everything. Years after, you started seeing these niche concentrations – people that were just selling microchips, or shoes, or cosmetics.”

LOOMING THREAT?

It’s going to be interesting to see how established online merchants who have their fingers in more than one vertical will react to the rise of these new retailers. Some might try to match their product range, or just try to buy them out. Last year, Souq.com acquired a majority stake in the now-defunct online sports apparel retailer Run2sport, for a hefty $2.5 million.

This threat from larger companies doesn’t seem to be greatly concerning Nur Alfayez. She joined Fahed Farraj in setting up the online musical instrument retailer Feesheh.com in February last year, and business appears to be brisk. Even though the Oasis 500 company is very young, AlFayez said it’s clearing a more than respectable $7,000 a month in sales within Jordan with a minimal monthly burn rate.

AlFayez, a self-confessed musical obsessive, said there’s always the risk of a big player entering the market with the threat of stealing customers away. However, she strongly believes in the added value offered by niche start-ups such as Feesheh, with their expertise and flexibility to constantly adapt to the changing needs of their individual market. “Our whole operation is dedicated to serving musicians,” she said. “Unlike larger companies, we would go the extra mile to serve this market with full understanding of their needs.”

Nader Museitif, who writes Venture’s regular The Strategist column, is upbeat about the prospects of these single-vertical companies. “Like in the brick and mortar world, there is no reason why focused online stores shouldn’t spring up. Such stores bring variety within a single product, higher expertise, and economies of scale to their customers,” he said. “As more shoppers switch to online, e-commerce entrepreneurs will have access to more customer segments to which they can provide niche services and products.”

As for possible complications, Museitif sees customer acquisition as particularly tricky for these young companies, as it’s still a rather expensive undertaking depending on the product or service on offer. Then there are supply chain challenges as businesses attempt to sell beyond geographical boundaries, with customs and shipping restrictions unique to each territory. But as far as Museitif is concerned, the “million dollar question” remains whether such product and service segments are large enough to generate sustainable online demand.

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