E-commerce has boomed in Iran over the last few years. The careers of the Mohammadi brothers are the perfect example of how quickly the industry has evolved. When Saeed and Hamid Mohammadi founded digikala.com in 2007, their capital amounted to only $20,000 and all they had was a small office in Tehran. Now, Digikala owns a 10-storey building on Jolfa Street in central Tehran and is growing at an annualized rate of 200 percent, taking up 85 percent of Iran’s e-commerce market, according to an interview the brothers had with the Financial Times earlier this month. On top of that, the Alexa rankings show that Digikala’s website, mainly offering electronic devices, is the country’s most popular site.
Annual growth has been tremendous and the prime reason for this is Iran’s large internet-savvy, younger population. More than 70 percent of Iranians are under 35 years old and internet and phone penetration rates in the country are one of the highest in the Middle East, standing at 55.7 percent and 126 percent respectively.
The two other major countries in the region, Turkey and Egypt, are young too but they have lower internet penetration rates: 46.3 percent for Turkey and 49.6 percent for Egypt. Mobile phone penetration rates in those countries are also lower compared to Iran, standing at 107.3 percent in the second quarter of 2013 for Turkey and at 115.9 percent in the first quarter of 2013 for Egypt.
Iran’s e-commerce market has remained relatively small, however, when compared to the whole economy. Unofficial figures suggest that the industry constitutes at best 0.7 percent of the GDP. In contrast, the Turkish e-commerce market reached $15.7 billion in 2013, according to figures obtained by the Anadolu news agency. That would put the size of Turkey’s e-commerce market at around 1.92 percent of the GDP – more than double the size of Iran’s online commercial transactions.
However, the Iranian e-commerce market should be seen in perspective. The Turkish e-commerce industry attracts a lot of foreign investment, amongst others by major international retailers, such as Amazon and eBay. In contrast, international online payment systems such as PayPal are not allowed to function in Iran due to sanctions imposed by the United States. As a result of these sanctions, foreign investment in the e-commerce industry stands next to zero.
Currently, the only foreign investor in Iran’s e-commerce industry is Middle East Holding Internet (MEIH). MEIH, operating under the name Romak in Iran, is a joint venture between South Africa’s MTN Telecom and Germany’s Rocket Internet. MTN Telecom is famous for owning 49 percent of Irancell MTN, the largest mobile phone network operator in Iran. Mozando, an online shopping site, and Bodofood, a food delivery site, are both initiatives of MEIH.
Lack of foreign investment can be blamed for the tendency towards monopolization in Iran’s e-commerce industry. In Turkey, the most popular retail website, hepsiburada.com, competes with a range of smaller ventures, most of which are the recipients of foreign investment from the likes of Amazon and eBay. But in Iran, Digikala outpaces its competitors by a wide margin. Clearly, Digikala’s monopoly position has not damped entrepreneurship as there are an estimated 15,000 online shopping sites, many of which have popped up so recently and quickly that the state has so far not been able to grant licenses to more than one third of them. After Digikala, Takhfifan, eSam and Sheypoor are the largest online retailers; each with its own unique character and focus: Digikala assumes Amazon as its role-model, Takhfifan focuses on daily deals, eSam is an auction marketplace similar to eBay and Sheypoor offers free classified advertisements.
The Iranian e-commerce market has a significant growth potential and it is interesting to look at other e-commerce models to see what trajectory it might follow in the future. On the one hand, the e-commerce industry in a country like the US is already quite developed. US internet penetration rate stands at 84.2 percent and the country has witnessed the founding of many now global e-commerce companies. The total volume of e-commerce sales in the US represents about 6.5 percent of total retail sales. Although the US e-commerce industry is still expected to grow annually by around 15 percent, it should be seen as a much more mature market compared to those of the Middle East or China.
China in fact is another interesting case. The recent New York Stock Exchange debut of Alibaba has proven the huge potential of e-commerce in China and the vast resources that can be tapped from developing e-commerce markets.
Alibaba founder Jack Ma once famously stated that “in other countries, e-commerce is a way to shop, in China it is a lifestyle.” He may be right as China’s e-commerce market is expected to be larger in 2020 than those of the US, Japan, Britain, Germany and France combined, according to a report by KPMG, a professional services company. With regard to this background and with the company’s market share of around 80 percent, Alibaba’s record IPO of $25 billion last September seems more understandable. The Chinese e-commerce industry attracts more international attention compared to any other country at the moment. The industry combines high growth potential with a sound customer base. E-commerce in China is expected to reach 10 percent of all retail sales by the end of 2014, which is already much more compared to the US.
Chinese companies, like Alibaba, might in the near future start investing in Iran’s e-commerce industry. The US-led sanctions against Tehran over the latter’s nuclear energy program, even if relaxed in the future, make it harder for western companies to overcome technical and transaction hurdles. At the moment, however, Chinese companies have not drawn up any public investment initiative.
One reason that foreign investment will likely take place is that Iran’s e-commerce industry shares with China this huge potential for growth. Although shopping online has not yet become a lifestyle, one important improvement that has been behind much of the e-commerce growth in Iran has been the perceived safety and efficiency of its own domestic online payment system.
So will Digikala be the next Alibaba? In the Financial Times interview, Digikala’s founders argue that it is only a matter of time before competition, fuelled by foreign investment, becomes tougher. Outlining Digikala’s future strategy, Hamid Mohammadi explained that “from now on our strategy is going to be expansion, even if that means we will not be profitable, which is how Amazon is operating,” he says. “This market needs big risks.”
