mercadolibre
E-Commerce Solutions

MercadoLibre: Argentina's eBay

The eBay phenomenon does not operate in Latin America but it’s hard to miss the company often dubbed the eBay of Latin America. The US-headquartered eBay bought 19.5% of Latin America’s largest online ecommerce site MercadoLibre (“free market” in Spanish) in 2001, and signed an agreement (now expired) not to operate in the same markets as the company. As part of this agreement eBay sold its Brazilian subsidiary iBazar to MercadoLibre.

MercadoLibre, headquartered in Buenos Aires, Argentina, works like eBay with buyers and sellers trading goods at a fixed price or by auction. The company operates distinct websites in all of the countries where it operates, most in Spanish, two in Portuguese. One reason for that is to make sure that goods offered for sale in those countries are sold only to people who are located in that country. It would not do much good for a buyer in Bogotá to search for, say, a used iPhone and then find that it is available in Peru instead of Colombia. Cross-border commerce is difficult in Latin America because of shipping, regulatory, and tax issues.

As of the end of 2012, MercadoLibre operates in Argentina, Brazil, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, Mexico, Panama, Peru, Portugal, Uruguay and Venezuela. It is by far the dominant player in all but a couple of these markets, where it has only recently entered.

MercadoLibre got its start when the Argentine national Marcos Galperin wrote a business plan while attending the MBA program at Stanford. One of his professors found his idea viable and helped him find funding.  That effort to raise money was wildly successful as JP Morgan, Goldman Sachs, GE Capital and various venture capital funds poured money into Galperin’s new business.

Anyone who follows investing the Warren Buffett way knows that the best way to learn about a company is to download a copy of its annual statement, skip right over the financial results, and read the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” located at the end. Buffett says this is where a company has to be frank about its market, financial condition, risks and outlook. 

In that section, Mercado Libre says the following:

“We offer a complete technological and commercial solution that addresses the distinctive cultural and geographic challenges of operating an online trading platform in Latin America.” [With $5.7bn in gross merchandise passing through its systems, $374m in annual revenues to February 2013 and healthy profits], MercadoLibre has “the largest e-commerce platform in Latin America.” It says that the Latin American market includes a potential 584 million people to serve and has “one of the fastest-growing internet penetration rates in the world.”  Growth continues to be in the strong double digits.

Its revenue split is 48% from Brazil, 24% Argentina, 15% Venezuela, 7% Mexico, and the rest from the other countries where it operates. This Argentine company is registered in Delaware and sells its stock on the tech-laden NASDAQ exchange in dollars and not ADRs (dollar equivalents), which makes one wonder whether they are in fact American or Argentine. The company’s stock price has risen in an almost straight line from $15 in 2009 to $105 as of January 2014 (it has touched almost $146), making many early investors very rich indeed and giving the company a market cap of almost $4.7bn. By comparison, the ‘real’ eBay is valued at $70.2bn at the same point in time. But it’s still a remarkable rise that has won the company laudatory coverage in the usual places together with obligatory breathless narratives (Galperin started the company on the back of an in-car pitch while chauffeuring mega-investor John Muse to his private jet, or so the story goes).

The company credits some of its success to its heavy investment in technology to build out its platform, listing software vendors as Oracle, SAP, Salesforce.com, MicroStrategy, Radware, Juniper Networks, Cisco Systems, F5 Networks and NetApp, which suggests its e-commerce engine is a combination of software they wrote themselves and packaged software. (The Argentine government gives a 60% tax break to companies that operate as software companies.)

The company has grown, and is growing rapidly still. Merchandise sold on the site is up by 42% from 2010 to 2011 and another 18% in 2012. Expansion has been fueled by buying up the competition everywhere. Some of the sites it took over include Tucarro.com (vehicles), Tuinmubela.com (real estate), deRemate.com (“Remate” is Spanish for “auction.”), vehicle trading site Autoplaza.com.mx and property buying/selling site Homeshop.

MercadoLibre does not sell vehicles or real estate, but people wishing to do that can place ads there and placed ads is one way that MercadoLibre earns revenue.  The largest source of revenue, of course, is the fee it charges sellers to list their products. This is roughly 6.2% when you divide their revenues by merchandising volume (that is, amount of items listed on their site).

MercadoLibre’s other sources of revenue come from offering their e-commerce platform to other companies who want to sell online and their PayPal-like system of making payments called MercadoPago (Payment Market). MercadoPago pays the seller by debiting the buyer’s checking account or charging their charge card to pay for items sold on MercadoLibre. Other companies can use Mercado Pago to collect payments in Brazil, Mexico, Venezuela, Argentina, and Chile, thus expanding MercadoLibre’s revenues. By contrast, credit cards in Latin America operate in an odd way. Banks let users pay for items charged on cards in installments at a low rate of interest or no interest, often subsidised by the retailer but if the user doesn’t pay the installment, the interest rate zooms to 50% or more.

Since MercadoLibre sells stock in the US, it is required to do its accounting using GAAP (generally agreed accounting principles). This leads to some interesting issues, as GAAP requires it to report its results in Venezuela in dollars due to hyperinflation there. Elsewhere MercadoLibre operates in the local currency.

You would think that a company headquartered in Argentina would have much to say about their difficulties of operating in a country where there are restrictions on selling pesos for dollars. (Argentina recently piled on more obstacles to doing that, assessing a 50% fee for credit cards used abroad, trying to keep its dollar reserves from drying up, and having to devalue the currency.) Instead MercadoLibre writes in several lengthy paragraphs of its struggles to convert Venezuela Bolivares to dollars, having gone around the official currency markets there, as have many companies do, to obtain dollars at a slightly higher rate by buying and selling bonds instead of simply exchanging one currency for another.  MercadoLibre says one reason for bending over backwards like this is the official government market operates too slowly.

MercadoLibre says it does have some competitors, especially in Brazil, and it worries about Facebook, Google, and other social media sites that allow sales on their sites. But for the moment, and perhaps for the long run, MercadoLibre is the undisputed leader in Latin American e-commerce.

 

Walker Rowe is a US citizen living and working in Santiago, Chile. There he edits the online magazine SouthernPacificReview.com and is currently writing a book about the pollution of the coast of Chile.

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Walker Rowe

Walker Rowe is a US citizen living and working in Santiago, Chile. There he edits the online magazine SouthernPacificReview.com and writes the blog "The Avocado Republic" about life in rural Chile.

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