There are few ecommerce markets as exciting as the Middle East. The area contains some of the wealthiest people on earth, and a market likely to experience consistent growth due to technology becoming a focus as natural resources (oil) diminish.

Souq might be one of Amazon's best acquisitions

(Source: Souq PR)

Although the ecommerce industry is still in its infancy in the region—credit card penetration is still low as customers still largely use cash on delivery to purchase products—as trust grows and credit use increases, ecommerce will become more mainstream. At that point, the large population of wealthy consumers looking to spend their disposable income on the latest technology and fashion provides any ecommerce business with a huge opportunity.

Souq: The Amazon of the Middle East

Founded by Ronald Mouchawar in 2005, Souq was initially an auction-based platform linked to Maktoob, the largest internet portal in the Middle East. Maktoob was acquired by Yahoo! in 2009, in the first real acquisition in the Middle East internet space. This acquisition provided the capital for the formation of one of Souq’s earliest investors, Jabbar Internet Group. The Jabbar Internet Group was led by one of Maktoob’s founders, and I believe he understood the value that Souq would have long term.

Souq received investment from prestigious emerging market investors Naspers and Tiger Global, which highlights the opportunity seen by investors. Souq moved to the marketplace model in 2011, and currently generates between 35 and 40 million customer visits in the Middle East.

According to SimilarWeb:

Over the past year, received an average of 39M global monthly visits, 68% of which were on desktop. This figure represents an increase of 21% since February 2015. Egypt provided the greatest amount of traffic to at 47% over the past year, followed by the United Arab Emirates and Saudi Arabia, with 22% each.

In the following six years, Souq would attempt to recreate Amazon’s infrastructure (logistics, third party selling, and mobile commerce), a play that led to a huge moment: the acquisition of Souq by Amazon. This acquisition delivered the region’s largest ecommerce transaction, one that could lead to even more investment into ecommerce.

Amazon’s changing acquisition plans

Prior to purchasing Souq, Amazon had only acquired vertical-specific marketplaces (books, diapers, and shoes). Amazon generally believes that they can enter a market and then use their capital resources to impact competitors, which will then lead to an acquisition. But by purchasing Souq for $580 million, Amazon essentially became the market leader in the Middle East without having to spend time battling Souq, which most probably have adversely affected Amazon’s perception in the Middle East market.

To Amazon’s advantage, the acquisition price was considerably lower than Souq’s valuation ($1 billion) during their last round of funding. I believe that prior to the acquisition talks, Souq had generated interest from Amazon to become either an investor in Souq. This was before the last round of funding, which was done by a mix of new and existing investors. While Amazon and Souq were in the midst of their acquisition talks, Souq received an unsolicited offer from eMaar Malls for a reported $800 million. But Amazon ensured that they had first right of refusal to any outside offer from another potential acquirer and a 30-day window to purchase Souq from investors.

The impact Souq will have on Amazon

Souq provides Amazon with direct access to a market that has huge upside ($20 billion by 2020) without Amazon having to battle any local competitors. Souq has also created a trusted brand that customers love, and I don’t see any reason why Amazon would rebrand Souq.

Amazon will likely invest capital into Souq to ensure that the business can grow their efforts outside the United Arab Emirates. Secondly, Souq already has ensured that they have gone through all the various legislation found in the various countries which will allow them to deliver packages and take payment in the correct manner. As Souq is now part of Amazon’s footprint, I would not be surprised if more investment is seen into logistics into places like Bahrain and Abu Dhabi to ensure that Souq covers a larger part of the Middle East.

The Middle East does pose cultural challenges for ecommerce businesses as deliveries are not to be received by women based on religious dictates.This provides logistics solutions with another potential blocker to ensure that products can be delivered to customers. But at the same time, Amazon also gains a group of executives that understand Middle East ecommerce, so they will save capital and avoid making mistakes based on incorrect assumptions and ideas that won’t work in the region.

Finally, Souq will also be able to leverage Amazon’s technology and have access to best practices in terms of third-party sellers. Souq also provides local insight for Amazon to leverage in-house which will only lead to more Amazon growth in a region in which they previously had limited in-house expertise.