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Amazon Makes a Big Bet on This $20 Billion Opportunity

By Harsh Chauhan - Apr 11, 2017 at 11:21AM

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Amazon is buying its way into the Middle East's online retail market with the acquisition of Souq.

Amazon (AMZN 2.07%) wants to dominate almost every big retail market across the globe. The e-commerce giant is already pouring billions of dollars into fast-growing geographies like India, as well as testing physical stores in the U.S.

Given Amazon's growth ambitions, its move into the Middle East with its latest acquisition isn't surprising at all. The e-tailer has decided to shell out an undisclosed amount to buy  Souq.com, one of the leading e-commerce players in the region. TechCrunch puts the deal at around $650 million.

Why Souq could unlock a big opportunity for Amazon

Consulting firm AT Kearney forecasts that the Middle Eastern e-commerce market could be worth $20 billion by 2020 as compared to just $5.3 billion in 2015. It's not surprising that Amazon has decided to move fast with an acquisition rather than taking the time to build its presence organically.

Souq.com CEO Ronaldo Mouchawar. Words on the image take people a "note" from the about the purchase by Amazon.

Read the note here. Image source: Souq.com.

Souq has an estimated 75,000 merchants who sell 8.4 million products spread across 31 categories, giving Amazon ready-built access to an e-commerce market that's growing partly because of lack of variety in brick-and-mortar stores.

Souq has taken advantage of this trend, as it gets over 45 million visitors on its site every month, with the CEO saying last year that it was growing between 60% and 90% per year. Amazon will allow Souq to continue operations under its own brand, but will be working with the company to expand. "We're looking forward to both learning from and supporting [Souq] with Amazon technology and global resources," Amazon Senior Vice President Russ Grandinetti was quoted as saying in a company press release. Souq.com CEO and co-founder Ronaldo Mouchawar was quoted as saying in the same press release, "By becoming part of the Amazon family, we'll be able to vastly expand our delivery capabilities and customer selection much faster, as well as continue Amazon's great track record of empowering sellers."

What Amazon can do with Souq

Amazon expects to close on the acquisition this year, after which it could start leveraging Souq to push services such as Amazon Prime, a $99-a-year program that offers free, two-day shipping and perks such as unlimited streaming of movies and TV shows and a Kindle lending library. Amazon Prime makes money for the company so it has an incentive to sign up more members. Members in the U.S. are estimated to spend around $1,200 a year, compared to around $500 a year for non-members.

Souq customers can already order from Amazon, but a UAE news site, The National, noted that having products closer via the Souq network would make shipping faster. That could make Prime an option there. Amazon Prime Video is already available in the region that Souq.com serves as a standalone product, but it could also be an enticement to get people to sign up for Prime if that is made available as digital video viewing is reportedly on the rise in the Middle East. 

Amazon could upsell Souq's existing customers to the Amazon Prime platform and ensure a steady revenue stream. The video-streaming service and Amazon's content variety would give it an edge over local and well-funded e-commerce start-ups such as real estate baron Mohamed Alabbar's Noon.com.

Alabbar is reportedly soon going to launch Noon.com with more than 20 million products on its platform, and has ambitious plans to take over the Middle East's online retail market. It is rapidly developing its infrastructure thanks to a $1 billion investment, part of which has come from the Saudi Arabia Public Investment Fund. In fact, Noon has already built a sprawling 3.5-million-square-foot fulfillment center in Dubai, and could prove to be a tough competitor for Amazon given its region-specific knowledge.

Souq, however, has already proved itself in the market, as its business has grown rapidly, and it could grow further with Amazon's help, paving the way for the American retailer to tap the flourishing Middle East e-commerce market.

Harsh Chauhan has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.

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