Will Saudi Arabia's booming e-commerce transform supply chains?

As Saudi Arabia’s economy continues its re-emergence from the COVID-19 pandemic, companies and industries are operating in environments fundamentally different from the pre-outbreak timeline.

Accelerating digital transformation and subsequent alterations in consumer preferences have propelled markets into a new stage of evolution, one that brings both tides of good fortune and scenarios to consider or overcome.

This is particularly relevant for e-commerce. While retail operations have become streamlined and millions now revel in mass product and service accessibility, the market is still dependent on supply chains. Will they follow the e-commerce boom and ultimately flourish?

With higher connectivity rates, advanced infrastructure, and two-thirds of a largely tech-savvy population aged 29 and below, the e-commerce growth which Saudi Arabia was already experiencing is understandable — the market grew steadily from 2016 to 2019 at a compound annual growth rate (CAGR) of over 30 percent.

However, the pandemic instigated a CAGR rise to almost 60 percent between 2019 and 2020 alone, which is now projected to exceed $13.3 billion by 2025. As such, the Kingdom is favorably placed to capitalize by further developing an increasingly robust domestic market, although caution must also be exercised.

A booming e-commerce market in itself will not transform supply chains, with challenges sure to arise as the online shopping phenomenon scales new territory.

A further examination of the Saudi e-commerce industry highlights that the number of users will likely surpass 34 million within the next four years. This year alone, user penetration will exceed 80 percent and is expected to reach 92.5 percent by 2025.

While these figures illustrate the scale of growth in due course, they will also exacerbate current strains on domestic supply chains. Firstly, increasing consumer activity and expectations will place both heightened demands and limitations on supply chains.

Across Saudi Arabia’s vast territory are scattered urban centers, with considerable distances and challenging routes between distribution centers. Therefore, efficient planning and decisive action are required to ensure delivery timeframes are honored and customers remain satisfied.

Job creation to accommodate demands and successfully manage capacity is also essential as existing resources come under mounting strain. For example, rising e-commerce levels will result in the need for an influx of blue-collar workers in warehouses nationwide.

Although the pandemic temporarily caused a record 15 percent unemployment rate and social instability concerns were growing with more and more youths entering the employment market, the pandemic has created a mindset shift among younger generations, with many now taking blue-collar positions they may have passed on previously. This trend presents an opportunity to fill increasing voids in the wider e-commerce workforce.

The e-commerce community will also be tasked with minimizing complexity as the industry advances. With increased demands comes additional factors in several areas, such as inventory management, order processing and shipping requirements.

Integrating e-commerce with traditional distribution operations at the national level also entails challenges from a logistical standpoint, substantiating the need for supply chain enhancements.

Although these considerations demand attention, the e-commerce market can undoubtedly transform domestic supply chains, providing specific key enablers that improve related processes.

With geographical reach — a persisting problem in the Kingdom — prioritizing last-mile logistics enhancement would drive newfound supply chain efficiency. While same-day or next-day delivery is feasible in major cities, consumers based in rural areas do not currently boast this luxury.

However, incentivizing investment in new fulfillment and distribution centers via relaxed regulations and legislation is one way to overcome geographic barriers, ensure reachability to all and ultimately reinvigorate supply chains.

Another route concerns international shipments. Domestic channels aside, the overall supply chain network includes cross-border processes. Related procedures have become more reliable and faster in recent times, with import tax changes positively affecting the cross-border flow of products.

Yet this supply chain component can be further improved by easing international shipment processes that support domestic retailers. Striking a balance by levying import taxes solely to key segments, as well as effectively communicating regulatory changes, will help domestic players further build relationships with international investors and help transform supply chains for the better.

With the Saudi e-commerce market set to continue on its upward boom trajectory over the next five years, a robust, reliable and efficient supply chain network will be essential for accommodating unprecedented demands.

Should jobs be created, complexities minimized and last-mile logistics and international shipment processes enhanced, such a collective effort will transform the Kingdom’s supply chain network, resulting in a new phase of cross-border supply prosperity and heightened consumer satisfaction.

• Pablo Martinez is managing director and senior partner at Boston Consulting Group.

• Suha Haddad is director of Agencies and Ecosystem Development for MENA, Meta.