While shopping in a mall is one of the most popular GCC leisure activities, the same cannot be said for shopping online. Although the GCC’s young population is increasingly media-savvy, computer literate and eager to purchase the latest technology, regional internet shopping remains under-developed.

Some industry sources claim that 45-50 per cent of GCC residents have made purchases online, with transactions in 2007 exceeding $1bn in the UAE and $3bn in Saudi Arabia. However, Ronaldo Mouchawar, managing director of Souq.com, an online auction site similar to Ebay, says the true figures for online shopping are much lower.

“There is no way this is an accurate indication of the volume of online shopping,” says Mouchawar. “The figures include premium-cost SMS [short-message service], online gaming and mobile downloads.

“At least half of this spend comes from online bookings to airlines. Shopping for goods online probably makes up barely one-third of these sums.”

So why is online retail yet to take off in the GCC? One reason is low credit card penetration. While about 60 per cent of UAE residents have a credit card, penetration averages barely 5 per cent across the GCC, says Martin Waldenstrom, general manager of Cashu.com, part of the Dubai-based Maktoob Group.

Low penetration

Another factor is low levels of internet use. “Online shopping is still limited in the Arab world because of low internet penetration,” says Karim Saikali, founder of Buylebanese.com. “In the US, it stands at 70 per cent, compared to just 20 per cent across the Middle East. There is still a long way to go.”

Meanwhile, many GCC customers do not trust either credit card or internet security, says Waldenstrom. Customers worry that their card details will fall into the wrong hands. Loopholes in conventional retail mean that regional credit card fraud is relatively high.

GCC stores often print sales receipts containing the customer’s full details – card number, date of issue and expiry date – he explains. If receipts fall into the wrong hands, criminals can use the information to shop online, giving internet retail a bad name in the Middle East.

“When it comes to selling products, the Gulf is still a cash-on-delivery market,” says Waldenstrom. “There is still huge reluctance to use electronic payment.”

The figures are borne out by research from US firm Symantec, which in a recent survey of 400 UAE internet users found that 75 per cent did not shop online, saying they felt it was unsafe or too risky, and citing fears of hacking or credit card fraud.

Of the minority who do shop online, 78 per cent do so without protection.

Credit card companies are tightening up their cards’ security, says Saikali. “Visa and Mastercard have taken steps to make online transactions more secure,” he says.

“Visa has launched the ‘Verified by Visa’ system and Mastercard the ‘MasterCode’ system, so that customers enter a password along with their card details.”

But while online retailers are struggling with issues of consumer access and confidence, one of the biggest barriers to growth in online shopping comes from competition from conventional stores, and from the attitudes of mainstream GCC retailers.

Many GCC retailers are actively hostile to online retail, says Waldenstrom. “Most consider online retail a threat, not an opportunity,” he says. “Nobody wants to be the first one in. The biggest brands’ approach to online sales is lousy. They do not want to display prices online because it allows customers to shop around.”

Bartering culture

Overcoming the GCC’s bartering culture is something that Techsouq.com, the online retail arm of Dubai-based Blaze Computers, is working to address. Its strategy is to sell goods online that are not available in local stores.

“Every city in the Gulf has a computer street, with a concentration of showrooms,” says Ahmed Pervez, founder of the company. “Hit-to-buy conversion rates are very poor in the GCC. The hit-to-buy conversion rate is 2-2.5 per cent of browsers making a purchase in the US and Europe. Here it is probably 0.1-0.2 per cent.

“We receive about 2,000 hits daily on our site, translating into two to four purchases a day. People do still browse for prices online, then visit the stores on computer street to barter down a lower price.”

Buylebanese.com was founded in 2000 to sell homemade foodstuffs and products to the 14 million-strong global Lebanese diaspora. In 2007, it achieved sales “in six digits”, says Saikali. However, the GCC is one of the company’s smallest markets, simply because so many stores stock Lebanese products.

One option for GCC online retailers is to target the international market. But here, too, there are obstacles. Cashu.com launched in 2002 as the Middle East’s answer to online payment service Paypal. The company sells $1m worth of internet payment credits every month in the GCC, but most of this is used for online gaming, internet dating and VoIP (voice over internet protocol) – Cashu.com sells credits for internet telephone service Skype in the Middle East.

When courting overseas retailers, the company has encountered widespread suspicion over internet payments made by customers in the Middle East, says Waldenstrom. It has approached several major global online retailers – from bookseller Amazon to lingerie store Victoria’s Secret – to allow its customers to shop online using Cashu.com credits, but talks invariably stall.

“There is huge regional demand for overseas goods not available in local malls,” says Waldenstrom. “So initially these companies’ sales teams are enthusiastic – they know all about the GCC’s demographics and purchasing power and low penetration of credit cards, and are actively looking for alternative payment methods. But reluctance always sets in during the legal assessments. These firms are extremely reluctant to accept electronic payment out of the Middle East.

“Banks in Europe and the US have stringent ‘know your customer’ procedures. But producing acceptable documentation from the Middle East is a problem.

“We have had cases where we produced account holders’ passports or identity cards but these were not accepted as they were written in Arabic. This does not affect our online gaming business, which is based on transactions of $10 or $20 a time, but it becomes an issue for transactions over $50.

“Yet there is a huge, untapped market for foreign goods and services. Every time an online gaming product is translated into Arabic, sales rise twentyfold. If a company like Amazon produced an Arabised service, there would be a huge response from consumers.”

Expansion plans

Amazon refuses to discuss its strategic approach to the region. “We never talk about what we might do in the future. We are a publicly quoted company,” says a spokesperson. “Obviously, we do have some exports to the Middle East, local laws and customs permitting. But whether we have any expansion plans, we are not prepared to say.”

Techsouq.com sells mostly on a cash or cheque-on-delivery basis in the UAE. It has sold internationally, in the GCC, Africa and Eastern Europe, but red tape is holding back its growth in these markets. “When the GCC countries launch unified customs, it will benefit our business,” says Pervez.

Obstacles aside, Souq.com’s Mouchawar is optimistic about the future of GCC online shopping. “In the US, most of the top 10 online retailers are conventional retailers who have moved online,” he says. “The internet is an opportunity to diversify the clientele. It is a way to offer different pricing to sell slow-moving items. It is an opportunity to build closer relationships with existing customers, with lower overheads.”

Souq.com receives 250,000 monthly UAE hits – 150,000 from regular buyers and sellers. Mouchawar says 5 per cent of his customers run virtual retail businesses through the site.

“In the GCC, real estate is now so expensive that retail space has huge overheads,” he says. “Demographic factors are on our side too. About 65 per cent of nationals are under 14 and a whole generation has grown up with the internet. I believe that online retail in the GCC will come to match penetration levels in the US and Europe.”

Key fact

$3bn: The value of online shopping in Saudi Arabia.