How MercadoLibre emerged as ecommerce titan

Captured on camera at a New Year’s Eve party at the turn of the millennium, Marcos Galperín confidently declared that the dotcom start-up he had co-founded just five months earlier would become the biggest company in Latin America.

Almost 21 years later, he has been proved right. MercadoLibre, Latin America’s answer to China’s Alibaba, is now worth $63bn on Nasdaq, more than doubling its value over the past year as it powered past old-economy Brazilian giants like Vale and Petrobras to become the region’s biggest winner from the coronavirus crisis.

“This pandemic has moved us forward maybe three to five years,” the 49-year-old Argentine chief executive of MercadoLibre (or “free market” in Spanish) told the Financial Times. He predicted that his ecommerce business, which has benefited from this year’s boom in online shopping, will keep growing for at least another decade, “if not more”. 

Such optimism is based on the fact that Latin America remains at an early stage in the digital transformation of retail. In the third quarter of this year, MercadoLibre’s net revenues jumped by 85 per cent year-on-year to $1.1bn. Meanwhile total payment volume was up by 92 per cent to $14.5bn.

Line chart of Market cap ($bn) showing MercadoLibre's valuation has shot up this year

Before the pandemic, ecommerce had penetrated about 5 per cent of the regional economy, and is expected to reach almost 10 per cent by the end of this year.

But that is still far below levels in the world’s most digital economies including the US, the UK and China, where ecommerce represents at least 30 per cent of transactions.

“MercadoLibre is an incredible story of entrepreneurship and resilience. It’s not like it was an overnight success. It went through difficult times and got stronger after each test,” said Francisco Alvarez-Demalde, managing partner of Riverwood Capital, a private equity firm based in Silicon Valley.

“It’s a force of positive value creation for the Latin American tech sector for sure, although there is a question mark around how small retailers adjust to the new reality,” he added.

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Mr Galperín — who is worth $4.2bn according to Forbes, making him the second richest Argentine — stepped down as MercadoLibre’s chief executive in Argentina earlier this year but remains in charge of the company in the region.

He said he believes that the fintech arm of his business, MercadoPago, a digital payments system now used far beyond his online marketplace, has even further to go.

“Almost everything remains to be done in terms of fintech in Latin America,” he said, pointing to insurance, asset management, loans to the unbanked, and enabling payments with mobile telephones. 

The long game

Since its founding in Mr Galperín’s parents’ garage in a leafy neighbourhood of Buenos Aires, MercadoLibre’s heady growth is all the more impressive given the particular difficulties of starting an internet company in Latin America.

“We had to solve payments and logistics from zero . . . And we had to solve it for many countries that were fragmented — and that makes it much, much harder,” he said, pointing to the 18 countries where the company operates, all with different currencies and regulations.

Asked what he would have done differently, he replied that he “would have built a larger and better technology team. Because at the end of the day, that is what determines the pace of execution [and] progress.”

Morgan Stanley estimates that MercadoLibre controls 28 per cent of Latin America’s ecommerce market, up from 19 per cent in 2015. But it is faced with increasingly stiff competition from the likes of Amazon, whose market share in Latin America has doubled over the past five years to around 4 per cent.

Mr Galperín said that his biggest challenge is to grow his team of some 4,000 web developers and engineers, which the company plans to double in size over the next year. 

“It’s a huge challenge . . . that’s what keeps me awake at night,” he confessed.

Column chart of Revenues, rolling 4 quarters ($bn) showing Sales at MercadoLibre have lept strongly

MercadoLibre is working to build up its logistics infrastructure to fend off the growing competition, but this has hit the company’s profitability. “Five years ago we had no idea how to do logistics and infrastructure and warehousing and today we are doing it all in the region,” he said, admitting that “we are not even close to where we want to be.”

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Now with around 100m people either buying, selling or paying through MercadoLibre’s platforms — out of a population of nearly 650m in Latin America — another challenge will be to expand the company’s presence beyond its core markets of Brazil, Mexico and Argentina, which account for 60 per cent of the region’s inhabitants but 95 per cent of the business’s revenues.

“We aspire to be the leading player in all of Latin America, not just in the largest markets,” said Mr Galperín, who is encouraged by an “unprecedented” performance this year in Chile, where revenues more than doubled in the second quarter.

‘A company of builders’

Andrew Ruben, an analyst covering Latin American retail and ecommerce at Morgan Stanley, argued that thanks to the “aggressive” expansion of MercadoLibre’s logistics capacity in Brazil, what was once a “headwind [can become] a competitive advantage”.

“Competition remains a persistent challenge, and MercadoLibre will need to continue to invest to drive growth across Latin American countries in both its commerce and fintech operations,” said Mr Ruben, noting that growing its logistics network and technology team remain key challenges.

Mr Galperín is tight-lipped about whether that growth will be fuelled by acquisitions, despite rumours that the company may be interested in buying the Brazilian state postal network, Correios, for its logistics infrastructure.

“We are much more a company of builders than of buyers. We have typically built our way into MercadoLibre: we built our logistics platform, we built our payments platform, we have written the code and developed the software for each one of these things,” he insisted. “We don’t believe in shortcuts.”

Line chart of Gross merchandise value at MercadoLibre, rolling 4-quarters ($bn) showing Latin America's digital transformation

Some have raised the concern that MercadoLibre could run into trouble if it amasses too much monopoly power at a time when countries like the US and China are waking up to antitrust issues. This is an especially sensitive problem for MercadoLibre, given its mixture of retail and banking activities. 

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“Is it sustainable to run the largest marketplace in the region at the same time as forcing people to transact on MercadoPago if they want to buy on MercadoLibre?” asked a senior executive at a rival of MercadoLibre in the region, pointing out that the division of commerce and finance is standard practice in the US. Mr Galperín dismissed this concern, given the “highly competitive environment” faced by MercadoLibre.

Others have warned against the danger of complacency — but Mr Galperín assured that he is not resting on his laurels. He has seen too many examples of tech companies that shot to stardom and then sank into irrelevance after a couple of years.

“The only way to continue to be relevant five years from now is [to stay] very, very focused — not [too much] on our competitors — but on where our users are going, and where technology is going,” he said. “That is the key to success.”

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