The rise of Iran’s e-commerce industry

The rise of Iran’s e-commerce industry

The internet is often a boon for business, breaking down transaction costs and creating market opportunities. This is especially true in Iran, where the online market has expanded significantly over the last three years.

Two politico-economic decisions have exerted enormous influence on the growth potential of the Iranian e-commerce sector, somewhat mitigating the risk of investing in the industry. The first is the product of internal Iranian deliberation; the second is the result of externally-induced circumstances.

First, the introduction of an easily accessible 3G network in Iran has quickly accelerated widespread penetration of the internet. Allowing high-speed internet connectivity has in itself been a highly politicized decision, with clerics and political hard-liners opposed to the purported immorality of online content. Clerical establishment figures initially issued fatwas outlawing Rightel, Iran’s third mobile operator, which had exclusive control over the country’s 3G network until 18 months ago.

Because most people first experience the internet through their smartphone, the Rouhani government’s recent decision to grant 3/4G licenses to two additional mobile broadband companies has lead to large increases in internet usage and a country-wide reduction in the digital gap between urban and rural areas. Nevertheless, the Iranian e-commerce sector still lags roughly 25 years behind that of the United States.

It has since become apparent that the underlying logic for e-commerce in the country is strong: the offline market is fragmented and is dominated by distributors who play with prices. E-commerce has managed to bring some transparency with it, allowing customers to circumvent shady offline retailers and identify what the actual market price of a given product should be. The fact that Iran’s population primarily consists of online youth – over 60 per cent of Iranians are under 30 years old – is also likely to play a role in the industry’s success. Given that gaining access to a variety of different products at a reasonable cost can be quite challenging in the Persian market, buying products online has proved increasingly popular.

Second, the Rouhani government’s agreement to the Joint Comprehensive Plan of Action (JCPOA) – or nuclear deal – has had an important impact on Iran’s internal business climate. The weak Iranian market has actually increased the visibility of existing e-commerce firms for newly interested financiers. According to a managing director at Bamilo, one of two major Persian e-commerce players, investor interest in the company has noticeably increased since the nuclear accord was signed last year.

Yet the fact that sanctions relief has not yet trickled down (market perception is negative) has meant that consumer demand for the products that e-commerce firms distribute has not yet increased dramatically. With high visibility and still unrealized growth potential, the liberalizing process driven by the Rouhani government is therefore likely to greatly benefit Iran’s existing e-commerce companies in the medium to long term.

Iran’s e-commerce firms have had another decisive advantage. Because many international providers have been (or are still) effectively shut out of Iran, Bamilo and Digikala have been able to capture the lion’s share of a promising sector in an important emerging market. It remains illegal for American companies like Amazon to invest in the country. Investor interest, space for expansion and limited competition by major foreign distributors are potential ingredients for continued success.

Yet a significant caveat exists. Even with the recent suspension of proliferation-related sanctions, prospective financial rewards still involve significant risks for investors. Foreign financiers remain spooked by the difficulty of doing business in Iran. The omnipresence of the Islamic Revolutionary Guards Corp (IRGC), Iran’s biggest economic heavyweight, has made the Iranian economy somewhat difficult to navigate. Continuing political tensions with the United States have left a variety of complex American legal regulations in place, causing European banks to be fearful of being fined for facilitating illegal activity.

A number of emerging markets exist, which are therefore significantly less difficult to penetrate: India, Turkey and even Pakistan are spaces that remain less fraught with challenges for e-commerce pioneers.  

About Author