A Latin American Paypal, eBay, Amazon? That’s a lot to live up to; fortunately Mercado Libre (MELI) is keeping up with the Joneses as the dominant e-commerce player in Latin America. MELI has copied or in management’s words idea arbitraged the best ideas from the previous mentioned companies and tailored the experience to the Latin American market. eBay has given MELI its vote of confidence owning 18% of MELI, their non-compete agreement expired in 2006.
According to Deutsche Bank MELI has 22% of the online market
in Latin America. This market share is larger than Amazon’s (AMZN) in the US at
19% and eBay at 12%, though it should be noted that Amazon does not have a
local Latin American site.
Amazon not in the
Amazon?
The risk is that AMZN opens a local site in Brazil, MELIs largest market. This rumour has been around for over a year and was recently given as a reason to stay away by Barrons in May earlier this year. As seen in the chart below AMZN is the 3rd largest e-retailer with no Latin American operations. Investors need to keep this in mind though this risk is somewhat minimised by the availability of infrastructure. In my opinion one of the reasons for AMZN’s success has been logistics, it owns warehouses and with free shipping options has created an integrated and consistent buying/shipping process for the customer. Obviously this strategy will be much harder to implement across Latin America.
The risk is that AMZN opens a local site in Brazil, MELIs largest market. This rumour has been around for over a year and was recently given as a reason to stay away by Barrons in May earlier this year. As seen in the chart below AMZN is the 3rd largest e-retailer with no Latin American operations. Investors need to keep this in mind though this risk is somewhat minimised by the availability of infrastructure. In my opinion one of the reasons for AMZN’s success has been logistics, it owns warehouses and with free shipping options has created an integrated and consistent buying/shipping process for the customer. Obviously this strategy will be much harder to implement across Latin America.
I believe the real short term risks are with Argentina and Venezula. They are approximately 33% of MELIs
revenue so any currency devaluation will impact MELI sales. Like I have mentioned before this is all
relative, currency risk is a risk all around the world (thought I would never
say that) and not just Latin America.
Learning from big
brother (eBay)
MELI has been able to take advantage of seeing how the US e-commerce market has evolved through competition between AMZN and eBay. MELI has followed eBay into fashion positioning themselves as the online second store for offline retailers while also adopting AMZNs fixed pricing rather than an auction system.
They also have their own Paypal called “Mercardo Pago” which has been bundled into their merchant services. This is at such an early stage that they are not currently monetising this product but driving adoption for future growth. As can be seen below Mercardo Pago is used to finance 33% of purchases on MELI's main site and if adoption continues to grow like Paypal it can be used to drive transactions on other online sites and eventually offline.
MELI has been able to take advantage of seeing how the US e-commerce market has evolved through competition between AMZN and eBay. MELI has followed eBay into fashion positioning themselves as the online second store for offline retailers while also adopting AMZNs fixed pricing rather than an auction system.
They also have their own Paypal called “Mercardo Pago” which has been bundled into their merchant services. This is at such an early stage that they are not currently monetising this product but driving adoption for future growth. As can be seen below Mercardo Pago is used to finance 33% of purchases on MELI's main site and if adoption continues to grow like Paypal it can be used to drive transactions on other online sites and eventually offline.
Big brother vs little
brother
As you can see above MELI still has a long way to grow and
this is compared to eBay which is still showing high mid-teens earnings growth! According to Internet World Stats Latin
American internet penetration is only 40% much lower than the US at 78.6%. EBAY has seen this game play out before that's why they own 18% of MELI, investors would do well to follow their game plan.
Disclosure: Decisive is long MELI
The material in this article is for
informational purposes only and in no way constitutes a solicitation of
business or investment advice. The material has been prepared without regard to
any client's or other person's investment objectives. Before making an
investment decision you should consider the assistance of a financial adviser
and whether any investment or service is appropriate in light of your
particular investment needs.
