MercadoLibre’s success in capturing the digital inclusion structural growth opportunity in Latin America makes it a hidden gem according to Ninety One’s Emerging Markets Sustainable Equity Portfolio Manager Juliana Hansveden and Analyst Eduardo Gomes.
In Latin America, small and midsized enterprises (SMEs) account for 99% of companies and 60% of employment. However, Latin American SMEs have a larger-than-average productivity gap to larger companies, accounting for only a quarter of GDP. One reason for this is that they are deeply underserved in digital solutions such as enterprise resource planning, customer relationship management and supplier-customer management. They also often lack the means to sell their products online, which would expand their geographical reach, allow them to reduce transport and border costs and facilitate access to resources such as financing, This, in turn, would drive the increase of labour and asset productivity, which is at lower levels in SMEs. Consequently, online platforms play an important role in levelling the playing field between SMEs and large companies.
In addition, Brazilian SMEs face other obstacles, such as complex tax regulations and a lack of a reliable and efficient logistics network. Together, these issues contribute to Latin American e-commerce accounting for a considerably lower share of retail sales, at about 11%, compared to 30% and 34% in the US and China, respectively.
Since 2003, MercadoLibre, the largest online e-commerce and payments ecosystem in Latin America, has been leading a transformation in the region, providing more than 574,000 SMEs[4] with access to digital solutions. MercadoLibre is the main source of income for more than 1.8 million families in 18 countries across Latin America.
One of its notable achievements is the development of its own managed logistics network in Brazil, circumventing the unreliable and inefficient national postal service. Logistics are a significant challenge for many companies in Brazil, due to issues such as cargo robberies and costs related to sales, shipping and income taxes for the seller and the retailer. There are also taxes between states, increasing the complexity of logistics in the country, hence the small number of private independent Brazilian shipping providers.
MercadoLibre has largely overcome these regional difficulties, strengthening its competitive advantage. One example of the company’s superior technology is that, before an item is shipped, MercadoLibre, through digital invoice uploads, guarantees that all taxes are paid, eliminating potential issues when crossing states borders and improving delivery times. Also, merchants and buyers, who otherwise would have little to no information about the status of their orders, can have a higher confidence when purchasing goods online, which in turn has accelerated online sales. As shown in the chart below, MercadoLibre, through its fulfilment and distribution centres, delivered 407 million items in the last three months of 2023, with c.75% of shipments delivered within 48 hours across Latin America. Delivery times have improved significantly since 2019.
MercadoLibre’s logistics business: number of items shipped and % of shipments delivered in less than 48 hours[7]
In addition to driving digital inclusion in the region, MercadoLibre provides financial services including banking accounts and loans to the SMEs and families that sell through its marketplace. The company has granted more than 45 million loans to entrepreneurs and SMEs, and currently has a loan portfolio of US$3.8 billion. This is possible as the company can leverage the vast amount of data generated by its e-commerce business to price credit risk, giving it a competitive advantage relative to traditional banks. Consequently, MercadoLibre can extend loans, insurance and savings products to those that might otherwise have been excluded from financial services. This helps individuals and SMEs save, borrow to finance commercial ventures, and mitigate risks through insurance. Mercadolibre’s success in capturing the digital inclusion structural growth opportunity in Latin America, the building of competitive moats in a difficult and complex operating environment and the delivery of sustainable returns to shareholders, makes it a hidden gem.
This is not a buy, sell or hold recommendation for any particular security.
