The rise Of e-commerce in the Middle East

In the realm of commerce, the U.S. is frequently the experimenter and trend-
setter for new ways of doing business. One of the most “disruptive” developments
has been the rise of e-commerce. For the last few years, more Americans than
ever are opting to do their buying and selling online.

Alberto Cavallo, an economist at the Harvard Business School, recently argued in
a much touted academic report that the “Amazon effect” is having a big impact on
the behemoth that is the American economy.

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Cavallo contends that the rapid growth of e-commerce is keeping inflation at
unexpectedly low levels, and causing greater price changes as traditional “brick-
and-mortar” retailers compete with online sellers. This means that prices for
items are becoming more consistent across a range of online and traditional
sellers. And with competition rising—given the rapid growth of the sector as well
as Amazon’s huge market presence—the trend has thus far translated into lower
prices for consumers.

“In the past 10 years online competition has raised both the frequency of price
changes and the degree of uniform pricing across locations,” Cavallo wrote in the
report. “The transparency of the web imposes a constraint on brick-and-mortar
retailers’ ability to price discriminate across locations.”

Analysts are now wondering if economic conditions are ripe for a similar effect in
the Middle East, where e-commerce has been on the rise.

For example, Amazon has been consideringand Saudi Arabia. In the UAE, the company has already launched a website
called Souq, an English-Arabic language e-commerce platform geared to
local consumers.

To gauge demand in Israel, Amazon is currently offering free shipping on certain
items totaling $70 to buyers in the country. One catch is that products must be
purchased from Amazon Global and not from other sellers using the company’s
platform. Another is that if consumers stay below $75, they do not have to pay
Israel’s value-added tax (VAT), also known as a tax on goods and services.

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As more shoppers in the Middle East familiarize themselves with online buying,
they can begin to compare prices on products sold in other markets. If online
retailers like Amazon can establish a foothold in the region, consumers might be
enticed to buy through them if their prices are more competitive than what the
local market affords, although they might not be willing to wait lengthy amounts
of time for products to arrive by mail.

Dr. Alex Coman, a researcher at the Interdisciplinary Center Herzliya’s Adelson
School of Entrepreneurship, told The Media Line that in Israel “we have big
players basically charging monopoly prices.”

He explained that Amazon is currently looking for a location to build its logistics
center in Israel, which, he contented, will make shipments much cheaper and
more rapid. The “Amazon effect” would be felt in Israel, Coman added. “It
introduces very welcome competition into the market. Many bad players who are
used to very hefty margins will now have to cut them down.

“We see that shopping malls are in trouble in the U.S., but in Israel as well. Part
of that is because many people, especially younger people, have discovered that it
is advantageous to buy online, and so brick and mortar business find it necessary
to reduce prices, otherwise they’ll be in big trouble.”

Coman concluded that there has been significant push-back from Israeli retailers
against Amazon’s plans. “There has been lots of lobbying which has failed.
Basically, apparel companies first starting lobbying the government, arguing that
it’s not fair that brick and mortar stores must pay the 17% VAT while imported
products bought online are not subject to the tax.”

They argued that they would have to fire salespeople as a result. “This makes
sense to some degree. They put forth a strong argument, but to no avail.”

Dr. Eitan Regev, an economist and research fellow at the Israel Democracy
Institute, told The Media Line that Israel is a relatively expensive country due to
trade barriers, tariffs, quotas, and customs.

“In this sense, it is practically an island economy, and as such there is not much
competition for among local industries. Israeli businesses are protected by
lobbies, laws, and all kinds of tailor-made standards designed to keep
competition out.”

Amazon’s entry into this market, Regev added, will reduce prices massively.
“We’ve seen this before with IKEA [the Swedish home accessories store] which
opened up the import market for furniture or other products, and we saw that
prices dropped significantly.

“On the other hand, within markets that remained relatively closed to imports,
like the food industry, prices rose.”

Regev concluded that Amazon still must contend with Israel’s tax policy on
imported goods. “It remains to be seen whether Amazon can reach agreements
with the state that will reduce the tax burden on the company.” But, he added,
“Amazon has enough leverage and market power to negotiate favorable terms
with the government.”

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