Amazon.com (NASDAQ:AMZN) has reportedly abandoned its attempt to acquire Dubai-based online retailer Souq.com, according to Bloomberg. Souq.com, which sells over 1.5 million products to customers in the United Arab Emirates, Egypt, and Saudi Arabia, became the highest valued internet company in the Middle East with a $1 billion valuation after a $275 million funding round last February.
Souq initially hired Goldman Sachs to help it sell a 30% stake, but Amazon expressed interest in acquiring the entire company. Its earlier investors, which include Tiger Global Management and Naspers, were also considering selling their stakes. But Bloomberg claims that Amazon has now walked away due to disagreements over the final price, and that another suitor, Indian e-commerce giant Flipkart, was also no longer interested.
Why was Amazon interested in buying Souq?
Amazon currently ships its products to over 100 countries, including 20 countries across the Middle East and Africa. But it only runs "native" sites in about a dozen countries, none of which are in the region -- which limits Amazon's appeal and increases shipping costs. Souq is currently the market leader in the highly fragmented Middle Eastern e-commerce market. Other rivals include Adio.com, Letstango.com, and French retail giant Carrefour's (NASDAQOTH:CRERF) UAE site.
The UAE has one of the highest numbers of shops per capita in the world, with 4.7 million square meters of shopping centers in Dubai and Abu Dhabi alone. Shoppers in the UAE shifted over to e-tailers over the past few years, with 46% of shoppers making online purchases, according to a survey by Awok.com.
Frost & Sullivan analyst Haritha Ramachandran estimates that the total e-commerce market in the UAE will grow from $2.5 billion in 2014 to $10 billion by 2018. A survey by Network International found that 34% of UAE residents make online purchases between one to five times a week. Industry watchers believe that the rest of the Middle East and North Africa (MENA) region will follow the UAE's lead, making it a lucrative market for e-commerce start-ups like Souq.com and established giants like Amazon.
So why did Amazon walk away?
Amazon is clearly interested in extending its reach into new, high-growth markets. It invested billions in India over the past two years, making it the second largest e-commerce player after Flipkart. It also spent almost a billion dollars on Twitch to dominate the growing niche market of live game streaming and e-sports broadcasts.
Therefore, spending over a billion dollars to acquire the top e-commerce site in the MENA region makes perfect sense. Souq.com has been cagey about its actual revenue figures, but an estimate from 2014 pegged that figure at about $300 million. Last March, Souq claimed that it could grow its annual revenues "between 60 and 90 percent" during the year as more shoppers looked online for better deals amid an economic slowdown in the oil-dependent region.
$1 billion seems like a small price to pay for a company that potentially generates hundreds of millions of dollars in revenue. But we should remember that $1 billion is just its start-up valuation, and that companies often pay steep premiums to acquire high-growth unicorns. It's likely that Souq's asking price was so steep that Amazon decided that it would be cheaper to simply launch a native site for the UAE -- just as it did in India to challenge Flipkart. Doing so would also enable it to expand its Prime ecosystem and widen its network of AWS data centers in the Middle East.
But Amazon should make its move soon
It might have been wise for Amazon to walk away from the Souq.com deal, but other companies are already making big moves in the UAE. High-end brands like Burberry, Dolce & Gabbana, online jewelry retailer Blue Nile, LVMH's Sephora Middle East have all launched Arabic e-commerce sites for shoppers in the UAE. Carrefour could also ramp up its e-commerce efforts across the region, which could make it tougher for Amazon to gain ground.
Therefore, Amazon should plant some roots in the MENA region soon. If it expands across the region as effectively as it did in India, it could gain a new pillar of growth for its international marketplace business.