Business Breakdowns
· Matt Reustle
[00:00:00] S0: This is Matt Reustle and today we are breaking down the LatAm e-commerce giant Mercado Libre. My guest is Daniel Wu of Bristlemoon Capital and when Bristlemoon wrote a deep dive on Mercado Libre, it caught my attention. I was introduced to Meli about 15 years ago when it was still the eBay of LatAm and similar to a place that you revisit after a long time away, Meli looks a lot different than those early days. Just consider that with a $120 billion market cap, Meli is three times the size of eBay today and has clearly evolved since those early days. So Daniel walks us through the business as it stands today and how Meli paired this Amazon-like e-commerce approach with a complimentary but equally impressive fintech business to fuel the company. We get very into the weeds of the segment, so if you're into that business analysis, you're going to get a lot of detail in terms of all of the different engines that make Mercado Libre work. This was a fun episode for me. It's an incredibly interesting business with an incredible backstory and founder story. So please enjoy this breakdown of Mercado Libre. All right Daniel, we have Mercado Libre today, which is a business I know has evolved quite a bit since its origin story. I think a great place to start would just be to lay it out. However you would in digestible terms about what Mercado Libre does and who they are in the market just to level set us.
· Daniel Wu, Matt Reustle
[00:00:00] S1: Hi Matt. Yeah, thanks for having me on. I think the simplest way to think about Mercado Libre is that it is an amalgamation of Amazon Retail and Alipay in Latin America. Meli is the largest e-commerce platform by market share in LatAm, with major operations in Brazil, Mexico, Argentina and a presence in 15 other countries. It is also one of the largest fintech platforms in the region with its Mercado Pago digital wallet and Mercado Crédito credit business. The e-commerce operation is very similar to Amazon. The marketplace is predominantly third-party merchants with a small but growing first-party presence. There's a scaled logistics business that is largely unmonetized and a nascent on-site advertising business. Meli even has its own loyalty program called Meli Plus that offers free shipping, reward points and licensed entertainment content. So it's very similar to Amazon Prime. But Meli wasn't always built after Amazon's image, and we can discuss the company's evolution over time when we talk about the founding story. [00:00:00] S0: Yeah, I wanted to get to that because when I think of Mercado Libre, which is very much stuck in the past, it was eBay. I considered it as the LatAm eBay. Obviously it has evolved away from that and in that very popular Amazon versus eBay and how their ultimate fates diverged. They went with the right model certainly here. But bring us back to the beginning. Anything around the founding story, the founder and the evolution of the business that you would hit on because I think it is very unique.
· Daniel Wu
[00:00:00] S1: In many ways, Meli has a classic Silicon Valley founding story. The company was founded in 1999 in a Buenos Aires garage by Marcos Galperin and his two co-founders, Hernán Kazah and Stelleo Tolda. Galperin was studying his MBA at Stanford when he came up with the idea of Mercado Libre after witnessing the explosive growth of online marketplaces like eBay, as you mentioned, during the dot-com boom. So after the three co-founders finished their MBAs, they returned to Argentina to start Mercado Libre. The initial concept of the business was very heavily inspired by the eBay auction model, so it really wasn't that unique in any way. And we have to remember that this is the dot-com era and there was something like 80 e-commerce startups in LatAm all pursuing the same or very similar business models. And many of these competitors were growing faster and had more funding as well. And yet here we are on the podcast talking about Meli, so I guess why is that? Well, according to the founders, the difference between Meli and the other hot startups was that Meli was focused on building organic growth engines for the long term instead of chasing a big IPO by burning through capital on user acquisition with negative economics. In the early years, the founders were willing to let Meli grow at a pace that could be sustained by the existing infrastructure at the time rather than forcing a level of growth that was economically unsustainable. So when the dot-com bubble burst, Meli was one of the few survivors and that's allowed it to reap two decades of demographic, technological and economic tailwinds in the region.
· Matt Reustle, Daniel Wu
[00:00:00] S0: Yeah, it's quite interesting. They did not drop out, it sounds like, of their MBA program. So it's the Silicon Valley story, but with a finishing education. So I admire that the evolution away from that auction model. Was there a certain time period where that really took place? I admire the focus on underlying economics and not getting caught in that cash burning cycle that can leave you exposed to things like the dot-com bust. But when did they truly make the transition away from being the marketplace in terms of moving more towards what looks like an Amazon today? [00:00:00] S1: So I don't think that evolution necessarily happened at a point in time. The team pretty quickly realized that they needed to expand beyond just selling used items on a C2C basis via the auction model. And by the time of the IPO, fixed-price marketplace was already the main format, and through the 2010s, when the company used to report this metric, fixed-priced sales were I think 95% plus of GMV. [00:00:00] S0: And when did they actually IPO? [00:00:00] S1: They IPO'd in 2007.
· Daniel Wu, Matt Reustle
[00:00:00] S1: They IPO'd in 2007. [00:00:00] S0: Interesting. So at that point, yeah, you had already seen that take in place. And I certainly think that fixed price, I don't know what percentage of GMV it is eBay today, but much more common to see that out there as things have transitioned. It would be interesting to hear a little bit about the regional dynamics and how that might have differed from what was going on in the U.S. Was there anything unique about what Mercado Libre had to do or tailwinds that they were able to catch that would have differed from just the natural Amazon eBay e-commerce tailwinds that the US players benefited from?
· Daniel Wu
[00:00:00] S1: So there were several regional dynamics that provided tailwinds to Meli's growth through the 2000s. First and foremost, I'd say it was the rapid rise of Internet connectivity in Latin America. Between 2000 and 2007, the number of Internet users in LatAm grew from around 18 million to over 122 million, which far outpaced the growth of US Internet users. But even with this tremendous growth, LatAm Internet penetration was in the 20% range, compared to over 70% of the US population. So this explosion of Internet users in the region created a ripe environment to scale up an e-commerce platform. And then you had the demographic tailwinds as well. By the early 2000s, there was a rising middle class in countries like Brazil and Argentina that were seeking greater variety of products at better prices. In many LatAm cities, physical retail options were limited, so an online marketplace that connected buyers and sellers across the country or even across the region was appealing. And in the US people saw the success of eBay and Amazon, which really helped to validate the model for both investors and for users as well. Now I think it's important to contextualize that even with these tailwinds, we're still talking about an emerging market that was years, if not decades behind the US across many ease of doing business measures. As a first mover in LatAm e-commerce, the company had to solve multiple friction points to drive that initial online shopping adoption. And these include cultural skepticism towards online transactions, low credit card penetration and just an overall lack of secured digital payments infrastructure. There was patchy logistics networks and a diverse set of regulations across the region as well. So for example, to address the lack of payments infrastructure, Meli launched the Mercado Pago digital payment platform in 2003. To overcome the cultural skepticism and low trust in online transactions, the company introduced measures such as robust buyer and seller feedback system and escrow-like payment protections as well via Mercado Pago. So this is very similar to the role that PayPal played for eBay in reducing frictions and essentially low trust environment. And then to address the shipping pain point, Meli launched Mercado Envíos in 2013, which is their managed shipping service.