Pakistan is a hard market to operate in, especially if you are trying to make a profit in e-commerce. There are numerous challenges, including depreciating currency, competition and trust perception. However, Daraz CEO is optimistic that Pakistan could double or even triple in e-commerce potential within the next decade.
Daraz CEO: e-commerce in South Asian nations could be scaled up 10 to 20 times
According to Daraz’s CEO, the potential for e-commerce in emerging South Asian markets is huge. The country’s population is largely affluent and the country’s internet penetration is above 50%. Its potential is enormous: e-commerce in South Asian nations represents less than 2% of the total retail market, but the country’s consumers are increasingly ready to use digital services.
However, a lack of infrastructure and payment support in some countries are potential hurdles. Political instability and less robust legal frameworks also pose a risk. Therefore, big-ticket investors must be bold to invest in these countries.
The success of e-commerce in developing countries is dependent on the availability of cheap and reliable internet connections. With a reliable internet connection, people can buy and sell products with the click of a button. As such, Daraz University is an educational and training programme for sellers. The aim is to establish hyper-localised ecosystems where products are offered based on proximity.
However, e-commerce in emerging markets is not easy and requires a lot of investment and time. There are significant challenges associated with logistics in South Asian countries. International logistics are expensive and complex, while a large portion of the population is poor, meaning that customers don’t spend a lot of money in a single purchase. Hence, it makes no sense to import products with low prices and hope that they will sell.
E-commerce has proved to be a great equalizer for small brands. However, traditional big brands still dominate the market in the region. By 2025, the total size of e-commerce in South Asian nations could reach $9 billion.
Competition in Pakistan
Daraz’s founder and CEO Bjarke Mikkelsen says Pakistan is a tough market to operate in. The country’s low trust in online retailers and a lack of seller education are two of the biggest challenges, he says. Daraz is the largest online marketplace in Pakistan, with a market value of $1.5 billion. It also operates in neighboring countries like Sri Lanka, Bangladesh, Nepal, and Myanmar, with a combined population of more than 500 million.
But the regulatory environment in Pakistan is transforming. In recent years, regulators have been increasingly interested in facilitating start-ups. While the macroeconomic picture in Pakistan remains bleak and balance of payments problems loom, the government is taking steps to ease the regulatory environment and help new companies grow. Some recent initiatives include the creation of special technology zones with attractive incentives for foreign investors.
Another barrier to start-ups is the lack of skilled labour. A recent report from the United Nations Conference on Trade and Development (UNCTAD) shows that Pakistan ranks 146 in terms of technology development. The lack of specialized training means that most startups and businesses compete for the same pool of managers and workers. Additionally, universities do not offer curriculum tailored to meet the needs of new businesses. As a result, companies end up offering higher salaries than they would have paid for a trained employee.
A second hurdle to illicit trade in Pakistan is the lack of adequate law enforcement and oversight. While there are laws in place to prevent such illegal activities, enforcement against these activities is still lacking. As a result, a lack of regulation has left the illegal market to fester under the radar. This has led to a significant decline in the bond between citizens and authorities.
Another major issue is cash-on-delivery. Cash-on-delivery is still the preferred method for online shopping in Pakistan, and the problems associated with it are well known. In addition to higher costs, cash-on-delivery also leads to higher return and cancellation rates. Further, the overall experience of the customer is less than desirable.
Currency depreciation
The depreciating rupee in Pakistan poses a huge challenge to investors, but at the same time it makes the country’s exports stronger and capital formation more robust. Despite this challenge, Daraz CEO Mohammad Khan said the company is determined to keep Pakistan’s currency competitive, even if it means lowering its prices.
Recently, the central bank of Pakistan announced a new program that requires currency traders to undergo biometric verification. This has reduced the daily trade volume from two to three million dollars to under half a million dollars. The move resulted in a significant outflow of US dollars from Pakistan to Afghanistan, and further depreciated the Pakistani currency. The US withdrawal from Afghanistan has also contributed to the weakening of the Pakistani rupee. While the government has promised to install the new system by Monday, there are concerns that exchange companies may not be equipped with the necessary equipment.
The Daraz Group is one of the largest ecommerce companies in South Asia. It has more than two million users per month, with approximately 200,000 sellers. It has invested over $100 million in its infrastructure and e-commerce ecosystem over the past three years.
In recent years, regulators in Pakistan have taken a more progressive approach to facilitating start-ups. They are keen on creating an environment that encourages entrepreneurs and innovators. While the macroeconomic picture doesn’t look good in the country, the government is seeing start-ups as an opportunity to break the cycle. Creating special technology zones with lucrative incentives for foreign investors is one of the latest initiatives.
Trust perception problem
The CEO of Daraz, a $1.5 billion ecommerce marketplace, has acknowledged that Pakistan has many challenges to overcome. He believes the biggest problems are a lack of trust and lack of seller education. As a result, he’s focused on addressing these problems.
The company is working hard to increase its seller base in small cities such as Daska and Hayatabad. It has a total of 329 sellers in Daska and 180 sellers in Hayatabad. It also has sellers in Mian Channu and Swat. It is currently the fourth largest platform in Pakistan, behind Google and TikTok.
Daraz has a strong backing from Alibaba and is continuing to be aggressive in the market. However, Daraz management says it is cautious about its $1 billion GMV goal and is more focused on growing the marketplace business and delivering a great customer experience.
The company’s founder, Bjarke Mikkelsen, has spent three years in Pakistan and travelled extensively in rural areas to learn more about the culture. He’s learned the ins and outs of e-commerce by trial and error.
In Pakistan, cash-on-delivery is the primary method of payment for online shopping. According to Ammar Habib Khan, an economist at Karandaaz, a venture capital firm, cash-on-delivery is plagued with four major problems: long cash cycles, higher returns and cancellations, and a poor customer experience.
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