MercadoLibre
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The Amazon of Argentina, The PayPal of Peru, the Shopify of [El] Salvador…I could go on. Besides appeasing my attempt at alliteration, MercadoLibre’s business really does have a lot of optionality.
HISTORY
Started right as the dot-com bubble was picking up steam, MercadoLibre was originally pitched as an eBay for Latin America (see, there were metaphors right from the beginning!). Marcos Galperin grew up wealthy in Buenos Aires; his family ran one of the largest leather companies in the world. After studying at Wharton and working at his family’s company for a few years, Galperin went to get his MBA at Stanford.
In fact, MercadoLibre was born out of a project at GSB. While Galperin was formulating his thoughts for his Latin American e-commerce company, he confided in a professor named Jack McDonald. One day, a guest speaker, a private equity partner named John Muse, came to give a lecture. What Galperin didn’t know was that McDonald had promised Muse that a student could drive him to the airport after class. That student, yep you guessed it, was Marcos Galperin.
So, as the story goes, Galperin pitched Muse on his idea and had his first bit of funding. MercadoLibre went from an idea to a reality. Just about a year later, eBay itself actually bought a 20% stake and in return, MercadoLibre became its exclusive Latin American partner.
BUSINESS
MercadoLibre has adapted to the rapid changes in commerce over the years. It started out as an auction-based site just like eBay. After a while, it moved to more of a pure 3P, Alibaba model, taking a cut of each transaction. The company had 65% gross margins and 25% EBIT margins. Life was good. But Latin America is tricky. Runaway inflation, political instability, and an extremely underbanked demographic made sustainable growth difficult. That’s not to say MercadoLibre ever really struggled to grow. Rather, it had to make proactive decisions to lay the foundation for the type of leader it is today.
One such decision was to get into the payments industry. Called MercadoPago, the company created its own payment gateway around 5 years after its inception. This would allow merchants and consumers to transact online even without having a bank account. In Latin America, about 70% of consumers are unbanked or underbanked. For example, only about 115 million out of a 625 million population have a credit card. That’s just the way it is. But this difference allowed MercadoLibre to make important strides in the payments ecosystem. Today, gross payment volume exceeds gross merchandise volume by a factor of three.
You might be wondering how that’s possible if MercadoLibre is simply an online marketplace. How could payment volume be so much higher than GMV? Well, it’s because the company isn’t just a marketplace. Around 2014, the company launched a mobile point-of-sale system to give offline merchants a seamless checkout experience. Think of this as a Square card reader. Pago was also rolled out to other SMB websites, enabling them to take online payments. Think of this as a PayPal wallet rather than just a MercadoLibre dedicated gateway. Now, off-platform volume exceeds on-platform volume by a fair margin.
But the revenue tells a different story because of the different take-rates. The company keeps about 3% for itself on payment transactions but the marketplace rate is between 3-4x higher because of a bundled fee structure. In 2013, MercadoEnvios launched, helping merchants with fulfillment and warehousing. It doesn’t yet act as a vertically integrated logistics offering as Amazon does in a lot of cases but rather connects merchants to other last-mile providers. These days about 90% of items sold go through Envios. What’s interesting is that Envios is only available in 6 out of the company’s 18 locations (Argentina, Brazil, Mexico, Uruguay, Colombia, and Chile). It goes to show you how concentrated MercadoLibre is in its top markets. In fact, just Brazil, Argentina, and Mexico account for 95% of revenue.
Surprisingly that’s not all MercadoLibre does. We haven’t even talked about its credit arm, MercadoCredito, its asset management business, MercadoFundo, its online store solution, Mercado Shops, or its online listing service, MercadoLibre Classifieds. And I don’t think we will. While these businesses don’t make up a ton of overall sales yet, each one acts a lever to increase customer retention in the company’s ecosystem.
Imagine you’re a small merchant that started on the marketplace years ago. You don’t have to worry about taking payments, shipping, demand generation (as you can buy ads on the marketplace) and now you start taking loans from MercadoLibre. You’re making a good living! But where to put that extra cash? How about transferring it right into a set of index funds, all through a digital wallet. If you’re doing all of that through MercadoLibre, your lifetime value is immense.
CONCLUSION
Probably the most interesting thing about MercadoLibre is that it doesn’t quite fit in the metaphor box that is so easy to put it in. I started out with the alliteration joke because of this. Throughout the company’s evolution, it went from eBay to Alibaba to Amazon to PayPal to Square to Shopify and it will continue adapting. That’s what is special. Each of these comparisons is accurate to a degree but it’s clear that the company is uniquely created to serve the problems that Latin American merchants face. At the same time, MercadoLibre hasn’t been shy about tearing pages out of popular e-commerce/fin-tech companies over the years. In my opinion, it’s the best of both worlds; an ability to see what works in other places while keeping the customer’s interests in mind.
MercadoLibre is the MercadoLibre of Latin America. And that’s good enough.
Infuse Partners LP and Investing City Inc. maintain a position in MercadoLibre.
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