I caught the final part of a CNBC interview with the CEO of a European private equity firm* who was concluding his words by saying that 2014 is the best year to invest in Turkey. It attracted my attention not because of the affirmative investment case made for Turkey, but because of the timing of the statement. The last 10 years of growth and dynamism in Turkey is no new story at all; however, the country started 2014 not only with increasing political turmoil, but also with upward revisions in inflation expectations (market consensus is now at 8% for 2014) and downward revisions in economic growth forecasts (market consensus is now at 2.4% for 2014), all of which signal an economic cycle that is turning south. So why now, in early 2014, make such a statement?
I found the interview online and listened to it from the beginning. “It is,” the interviewee said, “when the economy slows down, e-commerce adaptation grows.” It is when traditional retailing suffers, he said, that digital retailing glows. So, it was the digital economy he was talking about! He especially favored Turkey among other regional emerging economies because, he said, there is less competition and there exist good opportunities.
This is when I decided to compare Turkey’s digital investment case with that of Italy:
Turkey has 37 million internet users, slightly higher than Italy’s 36 million. Considering that the average age in Turkey is 29, versus 44 in Italy, Turkey’s internet users will likely increase at a higher rate than Italy’s.
Turkey’s e-commerce penetration (internet users who made an online purchase) is estimated to have been around 25% in 2013, very low compared to Italy’s 44%. E-commerce penetration in developed markets such as the USA, the UK, France, and Germany is above 70%. In some developing markets like Russia, Brazil, and China, this rate is between 35%-50%. Turkey’s low e-commerce penetration rate indicates ample room for growth.
Smartphone users in Turkey are estimated to have reached 26 million, with a penetration rate of around 35%. In Italy, the number of smartphone users is 27 million, with a penetration rate of 41%. More importantly, though, Turkey’s smartphone penetration rate rises to 50% at the 18-24 age group.
The number of credit card users in Turkey is 54 million, with 70% credit card penetration rate, second only to the UK in Europe. In Italy, less than 40 million people hold credit cards and the penetration rate is 55%. Having a credit card almost always is a prerequisite to making an online purchase.
Turkey has already been the fastest-growing B2C e-commerce market in Europe for the last two years. It grew by 75% and 40% respectively in 2012 and 2013, reaching an estimated size of €8bn, 1.3% of the country’s GDP. The Italian B2C e-commerce market, on the other hand, grew 29% and 20% respectively in 2012 and 2013, reaching a market size of €15bn, representing 1% of the country’s GDP. Accordingly, the Italian B2C e-commerce market today is almost twice as big as the Turkish. However, looking at the comparative outlook, it is possible to say Turkey may soon close the gap.
Turkey has already produced admirable success stories in digital entrepreneurship. Online marketplaces, private shopping clubs, gift stores, ticketing services, food-ordering services, as well as content portals and social gaming platforms grew significantly and became targets for acquisitions. 2011 and 2012 witnessed a peak in global capital flowing to Turkish digital companies, resulting in M&A deals with an estimated total size of half a billion dollars. Among the buyers were industrial investors such as Amazon, eBay, and Naspers, as well as tech-focused private equity funds and venture capital firms. On the other hand, 2013 was pretty much a consolidation period.
From 2014 onwards, we should watch out for 1) new sectors going online, 2) new business models created for the Turkish market, and 3) new business models that have already succeeded elsewhere cloned for the Turkish market. One thing is for sure: business models that have good prospects of succeeding in Turkey will not have a hard time finding new capital as private equity funds already allocated for the Turkish market are waiting for the next big idea.
I checked to see how many Italian entrepreneurs so far have made a bet on Turkey’s digital economy, and I found some. Yet the total size seems negligible. Considering the very strong trade and business relations between these two countries (Italy is Turkey’s 4th-biggest trading partner), it seems to be only a matter of time until the strong economic relationship will be reflected in the digital economy.
One other reason why Turkey seems to be a good destination for Italian digital investors or entrepreneurs is that, compared to Italy, Turkey is at an earlier phase of the financing life cycle of digital investments. Let’s see what I mean:
Today there are 407 publicly listed firms trading in Istanbul’s Stock Exchange, which has a total market capitalization of €157billion, representing 26% of the country’s GDP, and there still are no publicly listed digital companies, neither in e-commerce nor in other digital segments. In Italy, on the other hand, we have become quite accustomed to trading digital firms in the last 10 years. We have digital public companies in B2C e-commerce (Yoox), digital services (Dada), digital media (Reply), digital games (Digital Bros), digital insurance and loan brokerage (Mutuionline), B2B e- commerce (Esprinet), digital incubators (Digital Magics), digital marketing (Softec), and so on. In the investing world, private equity and venture capital are usually attracted to very high growth firms that may realize even three-digit growth rates, and their investment gives a firm the boost necessary to make the big jump. It is usually only when the growth rate stabilizes at more predictable levels, like lower double digits, that it makes sense to go public. Italy already seems to be there, whereas Turkey does not yet seem to be close.
So, 2014 actually may be the best year to invest in Turkey!
And, of course, I need to say a word about the recent Twitter access ban in Turkey: it looked kind of like Don Quixote tilting at windmills, didn't it?