11/04/13

Latin America's leader looks ahead

MercadoLibre dominates e-commerce in Latin America, and, with heavyweight competition looming, it's raising its game. By Don Davis

Don Davis , Editor in Chief

Any discussion of e-commerce in Latin America must begin with MercadoLibre Inc., the operator of eBay-like marketplaces in 13 countries that accounted for more than 15% of the region's e-commerce sales in 2012.

Founded in 1999 by Marcos Galperin, then a 27-year-old graduate student at Stanford University's business school, the company serves 81.5 million shoppers and 7 million sellers, handled $5.7 billion worth of sales on its platform in 2012 and booked revenue of $373.6 million. What's more, despite steady investments in technology, MercadoLibre has been consistently profitable, producing net income of $140.2 million in 2012, a year when Amazon.com Inc. lost $39 million on $61 billion in revenue.

Add in the potential for growth—online sales account for only about 3% of retail sales in Latin America, versus 5.5% in the United States—and there's little wonder the company's stock price on the Nasdaq exchange has doubled in the past year, giving MercadoLibre a market value of $4.7 billion.

Galperin has benefited from being a big fish in a relatively small pond. Latin America's e-commerce sales in 2012 were $36.74 billion, or 3.4% of the $1.089 trillion global e-retail market, says U.S. market research firm eMarketer Inc. One reason why MercadoLibre has flourished, Galperin says, is Latin America's relatively undeveloped retail industry. "The more inefficient retailers are, the more attractive an online marketplace becomes," he says.

Another reason is that Amazon does not operate a full-blown marketplace anywhere in Latin America. Plus, MercadoLibre's most logical competitor, eBay Inc., has owned a stake in MercadoLibre since 2001, and—until now—has held off competing against the Buenos Aires, Argentina-based marketplace operator. That, however, is about to change. EBay plans to launch an e-commerce site in Brazil within a year, Luis Arjona, eBay's head of operations in Brazil, said last month in announcing eBay's launch of a mobile fashion shopping app.

Galperin has been anticipating greater competition. "We believe there will be a lot growth in this market over the next few decades," he says. "Other people see this as well, and they will compete with us."

Indeed, with some of the world's biggest names in e-commerce investing in Latin America, Galperin is moving aggressively to extend his lead. As he does, he's addressing some of the major pain points that make it hard to sell online in Latin America, notably fulfillment and payment, as well as wooing large brands and retailers to his platform. If he succeeds, it would make MercadoLibre an even more attractive partner for retailers and consumer goods manufacturers from the United States and elsewhere seeking to break into Latin America.

Galperin doesn't have to look hard to find big rivals in Latin America—the list reads like a who's who of global web retailing. Most are targeting Brazil, the region's biggest market, which has an economy that has more than tripled in size over the last decade, according to the World Bank.

Amazon.com Inc., No. 11 in the Internet Retailer 2013 Latin America 400, in December 2012 launched its Kindle Store in Brazil, its first e-commerce site there, selling the electronic book reader as well as e-books for the Kindle. Then there is Wal-Mart Stores Inc. Brazil is one of four major markets Wal-Mart is targeting for e-commerce expansion—along with the United States, United Kingdom and China. The world's largest retailer says sales on Walmart.com.br grew 40% in the first quarter of 2013 over the previous year. Walmart.com.br is No. 8 in the Latin America 400, which ranks e-retail leaders in the region by their web sales.

Another potential competitor is eBay, which took a 19.5% stake in MercadoLibre in 2001 in exchange for IBazar SA, an online marketplace in Brazil that eBay owned. (EBay's stake was diluted to 18.4% when MercadoLibre went public in 2007.) The deal included a five-year non-compete clause, which lapsed in 2006. "We are a completely independent company from eBay," Galperin says. "EBay doesn't sit on our board."

Although eBay does not yet operate e-marketplaces in Latin America, the two companies are starting to butt heads. In 2011, eBay acquired Argentina-based online classifieds company alaMaula, a rival to MercadoLibre's classifieds business. And eBay's online payment service, PayPal, handles transactions in the Brazilian real and Mexican peso, putting it in competition with MercadoLibre's similar MercadoPago service. What's more, eBay.com, the company's U.S. site, now detects visitors from Brazil and shows listing from merchants willing to ship there. In 2012, eBay registered a shopper from Brazil buying a women's handbag on eBay.com every four minutes on average.

In addition to those U.S. rivals, Japan-based e-commerce operator Rakuten operates its own online marketplace in Brazil, ranking Rakuten No. 56 in the 2013 Latin America 400, and in 2011 it bought Ikeda, a Brazilian e-commerce service provider.

Nonetheless, MercadoLibre still dominates e-commerce in Brazil, which accounts for 48% of the company's sales. MercadoLivre.com.br attracted 25.2 million unique visitors in June 2013, accounting for nearly half of the 52.6 million Brazilian consumers who visited retail web sites that month, web measurement firm comScore Inc. says. Because of the stiff competition, MercadoLibre's e-commerce percentage market share in Brazil is only in the "high teens," the company's chief financial officer, Pedro Arnt, said in a May 2013 presentation to analysts of U.S. bank JPMorgan Chase & Co. Elsewhere in Latin America, Arnt said, "our market share can vary anywhere between mid-to-high 20's to low 30's."

Inspired by eBay, Galperin initially launched MercadoLibre as an auction site, but quickly found consumers preferred buying at set prices. And the established retailers the marketplace attracted over the years preferred selling new items at fixed prices. Today, 95% of transactions are fixed-price sales and 80% of the items sold are new, he says. MercadoLibre charges listing fees and a commission on sales that ranges from 1% to 10% depending on which of three options a seller chooses.

About 40% of transactions on MercadoLibre's marketplaces are settled with MercadoPago, the company's online payment service, which processed $1.79 billion in 2012, roughly seven times its volume in 2008. MercadoPago is also accepted on thousands of other e-commerce sites, MercadoLibre says, and those sites account for more than 10% of its payment volume.

Two-thirds of consumers fund their MercadoPago accounts through credit cards, with the rest using local ways to pay that MercadoPago has linked to in the six countries where it operates. Those localized payment methods are important for Latin America's growing middle class who, in many cases, are just starting to shop online and may not have international credit cards, says Kent Allen, principal of U.S. consulting firm The Research Trust who specializes in cross-border e-commerce. "They want to pay as they do at home," Allen says.

MercadoPago also guarantees shoppers refunds if the merchant doesn't deliver the goods, an important reason Latin American consumers like it, says Mauricio Salvador, an e-commerce consultant and president of the Brazilian Ecommerce Association. It also provides fraud-prevention services to merchants who accept MercadoPago. That is why, Salvador says, many smaller e-retailers are willing to pay its higher fees—which he estimates at roughly 5% to 6% for MercadoPago versus 3% for credit cards.

MercadoLibre has launched several other services in recent years. One is MercadoClics, which lets retailers and brands bid for pay-per-click ads that appear next to search results on MercadoLibre sites. Another is MercadoShops, which hosts retailers' off-MercadoLibre online shops; a basic site is free and enhanced services are available for a monthly fee.

Much more is in the works. The company is creating subsections of its marketplaces for specific verticals. It started with real estate, then automotive, and in early 2013 introduced pages customized for apparel retailers. These pages allow shoppers to filter by color and size, and let retailers post higher-quality pictures, Galperin says.

A further step that would make MercadoLibre more attractive to global brands would be to let those big-name companies establish shops on the marketplace that they can customize, following the lead of marketplace operators like eBay in the United States and Alibaba Group Holdings Ltd.'s Tmall in China, says Forrester Research Inc. analyst Zia Daniell Wigder, a specialist in international e-commerce. "If I were a brand, I'd be asking, 'How can you enable me to stand out from the competition on your site?'" she says. "'How can I as Nike compete against smaller sellers selling my brand?'" Galperin responds that MercadoLibre has created a program called eShop to allow for a separate store within the marketplace, and that the company has "a lot of other features in the pipeline to allow for increased brand presence. This is one of the areas we are working on aggressively as we are now increasingly focused on working with larger retailers."

In another major move, in October 2012 Mercado Libre made it possible for outside developers to link to its marketplace sites with new features. The idea, Arnt told analysts, is to let outside companies offer services, such as the kind of price-optimization technology that ChannelAdvisor Corp. and Mercent Corp. offer eBay and Amazon sellers in the United States. MercadoLibre plans to launch a $10 million fund to invest in these ideas, Galperin says. "We were a web site," Galperin says. "Now we're a platform."

Also on the agenda is helping MercadoLibre sellers handle fulfillment, one of the thorniest problems for direct-to-consumer retailers in the region. MercadoLibre has created a program that lets marketplace sellers connect directly to major delivery services to obtain volume discounts that can lower the cost of shipping up to 30%, Galperin says.

In discussion is a broader program in which MercadoLibre, or a company it partners with, would operate central warehouses where shipping services could pick up goods from marketplace sellers. Galperin demurs at the suggestion that this would be like Fulfillment by Amazon, in which Amazon holds goods for sellers and delivers the orders they receive. "I wouldn't say it's like FBA or not, but having a central warehouse where thousands of sellers send their packages and the shipping carrier goes to one place rather than thousands of different places makes sense for bringing down the overall cost of logistics."

Doing so many things at once hasn't been easy for MercadoLibre, says David Bernardo, an e-commerce consultant with LITS e-business consulting and a professor at the Nova School of Business and Economics in Mexico. "They're having growing pains," he says. "They're in a lot of markets. They have to manage growth, compete for people [and] update their platform." But, he adds: "They're a great company with a very smart top management. They built e-commerce in Latin America. They're not sleeping at all."

don@verticalwebmedia.com

@dondavisIR

Topics:

Brazil e-commerce, David Bernardo, eBay, Ikeda, Kent Allen, Marcos Galperin, MercadoLibre, MercadoPago, November 2013 Magazine, Rakuten, Walmart.com, Zia Daniell Wigder

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