The emerging markets e-commerce opportunity

Online shopping - Paper cartons or parcel with a shopping cart logo and smartphone on wood table top

While e-commerce giants such as Amazon dominate the headlines in the COVID-19 economy, the news can be deceiving. In much of the world, the giants have only a limited impact on daily life.

Amazon, for instance, runs online stores and warehouses in only 16 countries. If you live anywhere else, chances are that buying from Amazon implies costly and inconvenient international shipping—a last resort when products cannot be found in the domestic market.

For the e-commerce giants, a targeted geographic footprint makes sense. International expansion is costly—in monetary terms, but also in terms of allocating scarce attention from managers. Given uncertain returns, the giants therefore focus on the largest markets. This is where investments have maximum upside. While Amazon may only have fulfillment centers in 9 percent of countries, these countries represent 74 percent of global GDP.

But what about the other 91 percent of countries? Representing $22 trillion of global GDP, these markets have a combined economic size comparable to the United States, 1.5 times China, or 7.7 times India.

E-commerce as an economic development opportunity

Online markets are still shallow in many parts of the world. Yet, e-commerce may be a key opportunity for economic development. Online sales allow businesses to reach more customers, both at home and abroad. New jobs are also created in supporting sectors, such as technology companies, payment service providers, and logistics companies.

The COVID-19 pandemic has significantly swelled the ranks of online shoppers worldwide. But this is only the start. The latent demand for e-commerce in emerging markets remains large. Cross-country data suggests that online markets can take off rapidly, as incomes rise (Figure 1). The convenience of 24-hour online shopping and home delivery, combined with much greater product choice, is likely to become increasingly valuable to customers everywhere.

Figure 1. Across countries, e-commerce penetration increases rapidly with rising incomes

Homegrown entrepreneurs play a key role in unlocking the potential of e-commerce

Homegrown entrepreneurs are uniquely positioned to take advantage of the digital trade opportunity. A still shallow national online market may be of limited appeal for the e-commerce giants. But it can nonetheless leave plenty of room for the growth of low-cost local startups.

Though these young enterprises may start out with less established brands and a smaller product range than the giants, they can compete by offering a service better tailored to conditions in their home market. In India for instance, 83 percent of consumers prefer to pay cash-on-delivery—standard e-commerce business models relying entirely on electronic payments have limited reach. In Africa, e-commerce companies have built custom last-mile delivery networks to overcome weak postal address systems. Offering fast local delivery, accepting payment in local currency, and an online shop in a local language—all these can be critical competitive advantages, enabling the emergence of e-entrepreneurship even in small national markets such as in the Western Balkans.

In the first instance, local e-entrepreneurs can learn from more advanced markets and adapt established business models to their home country. However, in time, local ecosystems can also serve as a petri dish for true innovation. Chinese e-commerce companies such as Alibaba have already become giants in their own right, sparking new e-commerce trends, such as closer integration of online shops with social media, which are now influencing the rest of the world.

Don’t expect the international e-commerce giants to sleep

Over time, the international e-commerce giants are likely to face increasing pressure to expand their geographic footprint, as advanced markets mature and the giants seek new sources of growth. With rising incomes in developing countries, market entry will become increasingly attractive.

In many cases, we can expect fierce competition between local and international players. However, this is likely to be only one part of the story. Off-the-shelf international e-commerce solutions, such as, already power local online shops in many parts of the world. International technology platforms, such as Facebook, have become vital online marketplaces connecting local e-buyers and e-sellers even in markets as difficult as Afghanistan. In India, Amazon is partnering with existing physical store networks to offer more localized services such as in-store pickup. Expect the emergence of further symbiotic business partnerships between international and local e-commerce companies.

Governments need to take action

To unlock the full potential of e-commerce, governments need to play their part and establish a strong enabling environment for private sector initiative.

This starts with ensuring broad-based access to the internet. But it also requires nurturing crucial foundational economic sectors, including in online payments, logistics, and IT. A transparent regulatory, tax, and customs framework, adapted to the needs of the digital economy, can create the stable business environment needed to attract investment. A strong consumer protection framework can establish the basic layer of trust that encourages the adoption of online shopping. To galvanize reforms in all these areas, an e-commerce action plan—as adopted for instance by pioneers such as Egypt, Serbia, and  Vietnam—can be a key first step.

In the emerging markets e-commerce revolution, governments, homegrown entrepreneurs, and international e-commerce giants all need to play their part. If done right, online markets stand to create new jobs and benefit customers. By unleashing innovation and strengthening market competition, e-commerce may be just what is needed to unlock the emerging world’s next growth phase.