Thursday, 19 July 2012

E-Commerce in the UAE: Part 3

This is a multi-part blog post on my views on E-Commerce in the UAE.  To read the earlier parts click below:

Whatever thoughts I have on this topic are my own.  They aren’t to be linked to my company or anyone else so if quoting me, please don’t quote me in my professional capacity as this has been written in my personal capacity.

Installment 3: Government Regulations
 The question of who governs the Internet and what is on the Internet has always been difficult to answer.  Does it need governing?  Is it always a case of buyer beware?  If it is governed, should the same rules apply online and offline?  There’s always been stories popping up in the press about Amazon battling the government as several states feel they’re being cheated out of sales tax.  Locally, we’ve seen stories appear recently in The National about group buying sights coming under the radar of government officials (click here for the story).  Where do we draw the line, if indeed it needs to be drawn and what should consumers be aware of?
The Agency Law

In the UAE, we’re subject to something called affectionately as “The Agency Law.”  The Agency Law basically stipulates who the authorized agent is for a brand and says that he should be the legal importer of the brand into the country.  Anyone who imports a product from a particular brand and isn’t the registered agent, may be in trouble.  A lawyer could probably tell you the ins and outs of this better but this is the Cliff Notes version of The Agency Law.  
What does this mean for retailer and e-commerce players in the UAE?  
As a retailer, it means we’re bound to buy all of our products through authorized agents if we’re not the registered agent ourselves.  In most cases, the authorized agent is one legal entity only which means, we’re restricted to buying from one entity and then selling the good or service onto the consumer.  As you can imagine, this can make negotiating the best deal a little more challenging when the agent knows he’s in a sense protected by the government and as a retailer, we’re bound to buy the products at the prices dictated, irrespective of what margin the agent keeps for himself.
When the same retailer then decides to sell online within the UAE, then he is technically still bound to source the products from the same channels he is dealing with for his physical stores, which in this case is the authorized agent.  Will an agent sell to a retailer a product cheaper because he is selling it online?  In most cases, he doesn’t care.  A sale is a sale.
So what then happens when a pure play UAE-based e-commerce player starts selling in the UAE?  Technically, he is obliged to buy his products from the authorized agent and in most cases, I’d assume his buying price would be in the best situation on par with that of the retailer as they both would be buying from the same source.  The difference in pricing should then come in the form of what retail margins they both decide to work on.  However, in most cases, most pure play UAE-based e-commerce players aren’t acquiring the products from the authorized agent.  They’re buying the product from wherever they can source it and selling it onto the consumer.  These goods are often referred to as “Grey Goods.”  In a sense, many of them have an advantage over many UAE-based retailers and this in part due to the fact that many of them aren’t moving in line with the laws of the land.  
It could be argued that the authorities have decided to keep one eye shut when this happens or that the volumes are not significant enough for them to take notice but this then opens up another can of worms with regards warranties, refund policies, etc. which I’ll elaborate on further.
Aramex's Shop and Ship service has spread its wings
to countries like China
There is another scenario here though that also has to be considered with regards to The Agency Law.  The internet is global and as a customer, you are free to visit any website, in any part of the world, including most e-commerce websites.  Some may ship to the UAE directly and for some others, you can get goods shipped here more creatively using services such as Aramex’s Shop and Ship service.  So when you’re buying a product from an international e-commerce player and importing it yourself to the UAE, are you breaking the law?  The common consensus tends to be that if you’re importing one unit for your personal use, that is generally OK but if you starting importing products in larger quantities for the purpose of resale or products that are banned, you can end up in hot water.  In such cases, it is then assumed you know the risks of importing these from a non-UAE based entity and as such as a buyer, you’re aware that there may be little legal recourse if the product is not what you ordered or defective. 
Grey Goods

The bigger questions of grey goods then arises.  In a free market society, we should all be able to buy from where we want and sell to where we want.  That doesn’t mean though that as a retailer or e-commerce player we violate the sanctity of current trading patterns that exists but rather we allow them to become more efficient.  A lot of the responsibility for imbalances in pricing that exists from country to country lies with the brands themselves.  If a brand serves their customer (in this case, the agent, distributor, retailer or e-tailer) properly, then they may not look to source from other countries and circumvent The Agency Law.  
The difficult part for most consumers buying online today, is that they can’t distinguish between what products are coming from the authorized agent and what is being sourced from the Grey Market.  Why does this matter to the consumer?
It is assumed that a product procured from the authorized agent carries an official warranty which will be honoured by the authorized agent at their service centre on behalf of the brand owner.  If there is a complaint that is not being attended to, then matter can be escalated to the Consumer Protection Department at the Department of Economic Development or the Ministry of Economy who will intervene on behalf of the customer with the said retailer and agent where required.
You can't talk about Grey and not
mention this, can you?
Buying a product from the authorized agent also ensures that the product comes with right language manuals and user interface for the region.  It should also conform to the standards put forward by the UAE authorities.  In short, it is authorized for sale and service in the UAE.
For example, in the case of any devices that include a WIFI connection, wireless or wired modem of any sort, they need to be authorized by the Telecommunications Regulatory Authority (TRA) for sale in the UAE.  For books, music or movies, they need to be authorized by the National Media Council.  For many home appliances, they need to be authorized by the Emirates Authority for Standardization & Metrology (ESMA) to ensure that they conform to certain standards set forth by the UAE government.  In the case of food or medicines, they would also have to be approved by the relevant authorities in the UAE to ensure they’re safe to sale.
With a Grey Good bought from an e-commerce site, you are on your own.  There is no retail store you can run into to make a fuss or police you can call to the scene.  Even where an e-commerce player says they will provide their own warranty, there is no guarantee that said website will be in business a few months from now or what quality of warranty service you will get.  There may also not be a government department that may be willing to support you as in some cases, many e-commerce businesses that operate in the UAE have their legal roots outside of the UAE.
Sale or No Sale. Festival or No Festival?

As a retailer in the UAE, you need to take permission for just about everything.  To go on sale, you have to apply for permission from the Department of Economic Development (DED).  To have a special offer, you need to take permission from the DED.  To run a competition, raffle or contest, you need to take permission from the DED.  To participate in events such as the Dubai Shopping Festival or Dubai Summer Surprises, you may need to pay a participation fee to the Dubai Events and Promotions Establishment (DEPE).  

While I’m not going to talk about the need for why we pay and if is it justifiable, what this has ensured is that when as retailers we do advertise a markdown or a discount, these are genuine discounts.  The penalties for misleading the consumer are quite hefty and the DED is swift in their actions here.  So the question therefore arises, how genuine are the discounts you see online since many of the offers are largely unregulated?
I have seen many cases where discounts have been advertised that are misleading.  With electronic products, the price of a product varies depending on the lifecycle of the product.  When a product is approaching the end of its life, it tends to be sold at a lower price.  Prices may in fact change several times during the course of the product’s life so when a price comparison is made, should it be against the last selling price or the launch selling price?  I’ve seen cases where certain websites advertise the “retail” price as the launch price of a product, which may have been the price retailers were selling the product for a year earlier and using this as the benchmark for comparison.  This is something that many retailers wouldn’t get away with but we see this happen all the time online.  Just as you shouldn’t believe everything you read on the Internet, you also have to throw caution to the wind and look at an e-commerce players reputation before believing that all price discounts are genuine.  
Concluding Thoughts on Government Regulation

If there differentiating factor between retailers and e-commerce players comes down to where you source products from (i.e. authorized agents versus grey market), then this may be something for the government to look into.  The Agency Law by their very nature are archaic and many of the benefits that the agent system today provides can still be implemented but it would mean that many of the responsibilities that today sit with an authorized agent would shift to that of a distributor or a brand themselves.  Even for e-commerce players to grow, they need support of the brands.  Many work against the brand in this region and just like retailers who are heavily on brand support, e-tailers would need the same.  Amazon for example works alongside most of their major suppliers.  There are promotions, offers and a supply chain that is managed in conjunction with that of Amazon and the brand suppliers.  The same needs to happen in this part of the world if e-commerce is to grow.  At the same time, The Agency Law has to be re-looked into if efficiencies have to be achieved in terms of supplying goods to a consumer competitively.  Protectionism is an era that passed us several decades ago but is a concept that still exists somewhat in this part of the world.
In the next and final installment, I’ll talk about: Sustainability of an E-Commerce Business