COVID-19 and global lockdown scenarios have inevitably changed the way we look at retail experiences generally and, more specifically, the way we shop. In fact, it has changed the consumer experience and expectations entirely. Whilst we have seen a portion of the population return to the physical shops as restrictions on movement have eased, it is anticipated that the pre-COVID numbers may never return. This is especially the case in the UAE, where the retail sector relies heavily on the presence of tourists. Due to various restrictions, including social distancing and other health and safety measures, combined with the increase of retailers and service providers moving their offering online (to some degree at least, if not in its entirety) means that the stage is firmly set for e-commerce to grow over the coming months and years.
Our Dubai team of lawyers, across the technology, intellectual property, corporate and commercial sectors, have written a series of articles focused on e-commerce in the UAE to share their experiences and thoughts on the region's e-commerce landscape; now and moving forward.
In this article, members of our corporate team discuss the importance of logistics for e-commerce businesses in the UAE.
Suhail Mirza: Hello everybody. My name is Suhail Mirza. I am a partner here at Gowling Dubai. I am joined today by my colleague, Simon Elliott, who is going to talk to me and ask me about all questions relating to E-commerce and the distribution and logistics element of E-commerce in the UAE - so over to you Simon.
Simon Elliott: Thank Suhail. So, I think the first question is why are logistics and supply chain management an important consideration in the UAE?
Suhail: It is important because obviously it is the final leg of the customer experience so making sure that there is on time delivery at the doorstep as promised is a key component to the service. It is more challenging in the UAE because you are talking about a country with seven different Emirates so locating a place of residence is not always as easy as you would expect so clients are very demanding and they want delivery to be on time and to sometimes exceed expectations so that is why it is very important to have that piece of the e-commerce jigsaw sorted from the outset.
Simon: OK so what the advantages of using an outsource third party logistics provider, as we call it a 3PL, and the services they provide for last mile delivery?
Suhail: There are two aspects to it. I mean one is the very fact that outsource to a third party means that you avoid some of the investment costs of having to set up your own outsourcing rules, so I should say a supply chain element of it and therefore you avoid some of the costs associated with setting up as a new entity and licencing it etc. I think the other key driver is that you are able to tap in to the experience of a 3PL provider so there are some very sophisticated and very excellent 3PL service providers who know the UAE market very well and they have access to warehousing facilities and they know how to get the goods to the customer on time and in a very efficient and expedient way. So that is why you would actually go for a 3PL provider rather than incurring the investment time on your own part to effectively in my view reinvent the wheel.
Simon: OK. That makes sense. So if a client is looking to use and outsource a third party 3PL provider, what are the key contractual considerations when entering into that sort of arrangement that they should look out for?
Suhail: I think the key issue here is going to be around performance and what we call KPIs, key performance indicators so any well drafted 3PL contract would have a schedule of performance indicators which the provider has to meet so this would be around timing and delivery - obviously a key one, but also warehousing - making sure warehousing space is available where goods are kept in a warehouse facility on an interim basis and also if there is no warehousing facility but pick up from the manufacturer, a lot of e-commerce providers choose not to maintain an inventory which is fine because it alleviates the cost of having an inventory but the 3PL provider would have to have the wherewithal to be able to clear the goods from customs or to collect the goods direct from the manufacturer and then to supply it to the customer and that means that the contract you enter into with the 3PL provider has to be very specific around these sorts of the provisions to make sure that a delivery is always on a point. Beyond that there are other commercial considerations, obviously the pricing is a key issue. The supply chain and the deliveries are going to be a key overhead to you as an e-commerce provider. Therefore having the pricing fixed or any adjustments to be capped on an annual basis is key and also having a look at termination provisions. These are long term contracts and therefore anybody entering into these contracts needs to be sure that you can terminate these agreements and replace the 3PL provider with a third party. Sometimes not necessarily have it as an exclusive arrangement either to have two or more providers therefore giving you some flexibility around your commercial arrangements. Those would be my key points.
Simon: Sure. That's great. Thanks very much Suhail. We encourage you to read the article on our website for further detail.
In the past six months, we have seen rapid growth in the UAE's e-commerce industry and retailers embracing digitalisation and diversifying to offer online sales. The population of the UAE, both local and expatriate, is among the most digitally connected and the most active online buyers in the world. According to a Visa White Paper, the UAE's e-commerce sales are projected to hit US$27 billion in 2022.
Based on this appetite for online retail, if a customer orders a product online (instead of purchasing them at a mall or retail store), in order for it to physically reach the customer, the key aspects of e-commerce fulfilment (such as warehousing, inventory, packing, shipping/delivery and tracking) must be considered from the outset.
Logistics and supply chain management can be considered the backbone of e-commerce and essential for any retailer moving over to or further developing an e-commerce business, where the key focus is on ensuring delivery and, more importantly, timely delivery. Consumers want their product as quickly as possible and the supply chain of logistics providers must be capable of responding quickly to changing consumer demands (for example, faster order fulfilment, with next-day delivery evolving into 2 hour same-day delivery). Let us also not forget the return of goods - all e-commerce providers must also have a system in place to manage the challenges of 'reverse logistics'.
Those e-commerce providers who can afford and wish to invest in vertical integration have either started to acquire innovative and technology-enabled logistics providers or developed an in-house delivery and logistics network in an attempt to ensure reliable and timely delivery services to their clients.
Whether you have a local online presence supported by 'bricks-and-mortar' premises or whether you are a cross-border e-commerce provider, who relies on the importation of products into the Middle East, the outsourcing of logistics to a reliable, efficient and timely service provider remains a popular choice.
The majority of logistics providers can be categorised as:
- first mile: freight forwarders and shipping companies to ensure that imports are managed (e.g. customs and clearance are facilitated) and delivered to your warehouse based on agreed terms;
- third-party logistics providers (3PL): the coordination of people, products and facilities - use companies other than the purchaser and the e-commerce provider to complete an online transaction; and
- last mile: couriers and delivery houses which ensure the customer orders are picked up from the retail store stockroom or warehouse and delivered to the end purchaser.
The 'drop shipment' business (i.e. where the retailer does not keep goods in stock but instead transfers its customers' orders and shipment details to a manufacturer/retailer/wholesaler, who then ships the goods directly to the customer) is also becoming more popular and there is no longer a requirement for an e-commerce business to hold inventory in the UAE, the sale can take place without physically having the goods in the UAE. The products may be stored in local hubs (for example a warehouse in a free-zone facility) or in the country of manufacture and when the sale occurs, the item is shipped from the hub directly to the customer.
Outsourcing and 3PL
Outsourcing to a 3PL offers a number of advantages in terms of the services available:
- Supply chain management: inbound freight deliveries are the responsibility of the 3PL.
- Warehousing :an e-commerce business may not have a physical store, however physical goods need to be stored somewhere. A 3PL provides the space and technology required to run a warehouse efficiently.
- Consolidation: e-commerce providers may send a number of small goods to the same location, however a 3PL consolidating all of the small goods into one shipment (from a number of providers) reduces the overall shipping charges incurred.
- Order fulfilment: ensures that the right goods reach the buyer on time and in good condition.
- Inventory management solutions: keeping track of inventory and its location in the supply chain to ensure that an e-commerce provider is never behind on its orders.
Below we have set out some key contractual aspects to be considered when entering into any contractual agreement with a logistics provider:
- Products: are there any parameters for the storage/movement of the goods? If so, these should be included in the 3PL contract, for example, temperature, humidity, movement, storage time etc.
- Term: if the 3PL provider is making substantial changes to their warehouse infrastructure or sourcing a dedicated storage area or shipping facilities, then they may request that the term of the agreement be a fixed for a specific period of time (e.g. 3 years or more). Ensure the inclusion of a post-termination clause, which sets out how the remaining obligations will be dealt with by each party.
- Statement of work: the agreement will generally consists of a 'master agreement', which sets out the standard terms and includes a statement of work. The statement of work summarises the services that the 3PL will provide (such as inventory management, order picking/fulfilment and returns processing from customers). If the business has a specific process that it wants the supply chain to follow, particularly in the last mile, then ensure the statement of work expressly includes that obligation.
- Price increases: set out how price increases over the term of the agreement will be agreed, e.g. when and how much and whether one or both parties must agree before a new pricing model is applied.
- Performance standards: the required standard of services is expressly set out, for example, order fulfilment cut-off times for processing same day order and return processing including customer credits.
- Termination: identify the circumstances in which the e-commerce business can terminate the agreement, for example, if the error rates exceed those set out in performance standards.
- Liability and indemnity: set out the circumstances in which the 3PL will be liable to the e-commerce provider and when such liability will be reduced or excluded.
- Intellectual property: specify the existing intellectual property rights of each party, especially where the services provided by 3PL are technology-enabled and where the goodwill of an e-commerce brand needs adequate protection.
- Insurance: set out which insurance policies must be in force for the duration of the contract.
- Force Majeure:: set out the circumstances outside of the parties' control which may prevent the 3PL provider from fulfilling their obligations and which ensures that the e-commerce provider's obligations also cease to apply if such a force majeure event occurs.
Regulatory (including VAT and Tax) Considerations
It is important to take specialist advice on VAT and tax considerations in order to ensure the e-commerce business has the most efficient structure. This may include consideration of using a free-zone structure and the application of customs duties on the import of products into the UAE.
For e-commerce business that maintain control of the delivery channel to customers, the business will need to maintain licences from UAE regulators in order to operate lawfully in the UAE. This will mean consultation with the relevant authorities (such as the Customs and Ports Authority and the Department of Economic Development) to ensure all licences and consents are in place.
Obstacles and Opportunity: COVID-19
The increased use of e-commerce platforms amid the disruption to the global supply chain caused by the COVID-19 pandemic has highlighted the importance of partnering with logistics providers who have implemented cutting-edge technologies such as algorithmic routing, real-time visibility and order updates driven by IoT ('internet of things') and data exchange over APIs (application programming interfaces).
Restrictions on the movement of individuals and goods across borders has increased the number of obstacles to successful fulfilment of an online order.UAE 3PLs who specialise in managing the supply chain through the use of big data, AI and machine-learning are able to automate multiple tasks and mitigate some of these obstacles. For example, e-commerce providers can identify the ideal courier partner for each delivery through the use of an algorithm rather than relying on human decision-making and identify potential delays in delivery before they occur using an AI-driven logistics management system.
Disruptive technologies and the Logistics Supply Chain
Disruptive technologies are set to shake-up the supply chain, reduce costs and potentially change how products are delivered. The three technologies to watch are: (i) Internet of Things (a network of objects that have sensors to collect, exchange and transmit data which provides employees with access to real-time information, allowing every aspects of a supply chain to be monitored); (ii) driverless vehicles; and (iii) drones.
We would be delighted to speak to you to find out more about your business and its operations and how we can support in the UAE.
Read our other instalments of e-commerce in the UAE:
E-commerce in the UAE: Is it the new normal
E-commerce in the UAE: Establishing an e-commerce company in the UAE
E-commerce in the UAE: Intellectual Property considerations