Business Breakdowns
· Matt Reustle, Daniel Wu
[00:00:00] S0: And then just on the competitive dynamics, e-commerce is incredibly competitive for periods of time where you will see aggressive land share grab oftentimes sacrificing economics to capture more of the market and then that oftentimes fades away as the industry matures in its respective country or cycles turn. Where would you put Latin America if you need to break it down by country, where would you put that just in terms of the stability of that market share? Maybe looking backwards and then thinking a little bit forwards about their ability to either maintain that share or to grow that share in the future? [00:00:00] S1: Yes, I think the market shares in LatAm, there was certainly a lot of competition during the COVID period, especially from, I guess you call them international e-commerce players that were trying to enter the market. So you've got Shopee, which is Sea Limited's e-commerce arm and you had Temu as well. Amazon's been in the market for a long time and they've got pretty stable market share, I guess you could say relatively negligible for how long they've been in the market for. And then there's a lot of, I guess longer tail e-commerce businesses of physical retailers and they have been the ones that have mainly lost share to the pure play e-commerce players.
· Daniel Wu, Matt Reustle
[00:00:00] S1: Yes, I think the market shares in LatAm, there was certainly a lot of competition during the COVID period, especially from, I guess you call them international e-commerce players that were trying to enter the market. So you've got Shopee, which is Sea Limited's e-commerce arm and you had Temu as well. Amazon's been in the market for a long time and they've got pretty stable market share, I guess you could say relatively negligible for how long they've been in the market for. And then there's a lot of, I guess longer tail e-commerce businesses of physical retailers and they have been the ones that have mainly lost share to the pure play e-commerce players. [00:00:00] S0: You mentioned the intense competition, particularly in the COVID period. What did that look like in terms of having any impact on the business and then thinking about some of that competition that still exists in the market? It's always very interesting to me that to see e-commerce in certain countries or regions and when they can be incredibly competitive and you see very low take rates versus when there is a little bit more stability and take rates come up. So what would you say happened then? And then where does it stand today?
· Daniel Wu
[00:00:00] S1: So in terms of the evolution of e-commerce competition, at least over the past few years, the best example is probably Shopee. The Shopee, which is Sea Limited's e-commerce business, entered Brazil in I think December 2019 as a cross-border marketplace and then it began to build out the local logistics and seller network in 2020. The business competed pretty heavily during those years and I think if you look at the app download data and the monthly active user data, Shopee actually exceeded Meli's monthly active users sometime in 2022. So you could argue that it had actually gotten more traction than Meli despite only being there for a couple of years. Then the business basically went to hibernation during the 2022 global rate hike cycle where Sea basically pulled out of all of their expansion markets except Brazil to focus on their Southeast Asia business. Over the past two years there's been a bit of a resurgence from that business and I think it's really caught the market's attention. When Sea announced that Shopee Brazil was EBITDA positive in the third quarter of last year. And since then, Shopee Brazil has been growing at a pretty healthy clip, taking market share while still remaining profitable. That's the background. Back in June this year, Meli lowered its free shipping threshold from 79 reais to 19 reais, which followed a reduction in their merchant fees in May as well. And this was perceived as a defensive move by the market to stave off Shopee's growing threat, particularly at the lower value end of the market. Now, we'd argue that this is more of a reinvestment decision to drive higher engagement frequency and ultimately longer term growth for the marketplace. Meli has lowered its free shipping threshold twice in the past since launching it in 2017, and each time has led to higher sales and greater logistics efficiency that mitigated much of the cost impact. So this is very much a page out of Amazon's playbook to pass on cost savings to consumers to drive greater scale and lead to additional cost savings. And I think that's generally pretty hard to argue against. Free shipping is a key value proposition for driving e-commerce penetration. So reducing the free shipping threshold and leveraging Meli's superior logistics network should further strengthen Meli's competitive position as the leading Brazilian e-commerce platform.
· Daniel Wu, Matt Reustle
Shopee opened its first Brazilian fulfillment center in September 2024. Meanwhile, Meli expects to finish 2025 with 22 fulfillment centers. So the network scale and service quality is incomparable. [00:00:00] S0: You mentioned just a little bit in terms of Shopee's inflection. In terms of being positive EBITDA on Brazil, is there a way to comp that against Mercado Libre's EBITDA numbers in Brazil? I know they don't break it out, but do you have a sense of profitability in that particular segment, in that particular region? [00:00:00] S1: Yeah. So as I said earlier about the geographic split, the contribution margin in Brazil bounces around 20 to the high teens range, depending on whether the company is reinvesting or not. It's hard to know how much of that is coming from fintech and how much of that is coming from commerce. And Shopee at the moment really only has an e-commerce business in Brazil. We can talk about the potential margin of fintech when we get to that segment. Deep dive. But I think I would say that most of the margin is probably coming from e-commerce at the moment. So you can call it in the mid teens maybe if you allocate the corporate costs to that country as well. [00:00:00] S0: Yeah, quite interesting. And then just going through some of the segments, the marketplace itself, third party versus first party, anything that you can share there. And if there's noticeable difference versus what you've seen with Amazon, which I have some type of mental model. Can you describe a little bit about that segment within the segment?
· Daniel Wu
[00:00:00] S1: Yeah, it's probably worth just at a high level outlining how we think about the composition of the business. Obviously there's two reported segments. You've got commerce and you've got fintech. But within those segments there's distinct business lines that the company doesn't report on. But they do provide enough disclosures in their filings for us to sort of estimate revenue buckets with some reasonable degree of confidence. And I think this is also just the best way, I guess, bottoms up, to think about the drivers of revenues and earnings for the company. So just decompose the commerce segment into the Mercado Libre marketplace, which includes a third party and the first party sales, the Mercado Envios logistics business and then Mercado Ads, which is the retail media advertising business. And then just quickly on the fintech side as well, I categorize that segment into Mercado Pago merchant acquiring Mercado Pago digital wallet and the Mercado Crédito credit business. So I'll go through each of these business lines and then we can tie it together with their revenue contributions. But back to your question about the marketplace. Specifically, the marketplace is the core platform that sort of connects the buyers and sellers. For Mercado Libre, there was over 100 million unique active buyers in 2024 and the marketplace generated $51 billion in GMV. That unique buyer number has more than doubled since before COVID and yet still represents less than 40% of the adult population of Meli's three core markets. Now you asked about how does the Meli marketplace differ to Amazon or where it might be similar? It is pretty similar. So on first party sales, where Meli acts as a merchant, this is still a relatively new initiative from COVID and that was just over 6% of GMV in the most recent quarter. And you compare that to Amazon, who's been doing first party sales for a lot longer and that's probably more in the, call it 30 to 50% range. Meli basically uses its first party sales as a way to just sharpen pricing in categories where third party pricing might not be sufficiently competitive. So categories such as consumer electronics. And then more recently they've also used first party sales to expand into grocery and supermarket categories where the economics currently don't stack up for third party merchants.
· Daniel Wu
If we exclude first party sales from total GMV, the reported third party take rate has crept up to 21% of GMV in the first half of this year and that's up from a reported 13% in 2021. It looks like a pretty big jump optically, but there's been some changes to how Meli calculates and reports that take rate. So I think the equivalent 2021 figure by our estimate is more like 17%. In terms of the actual fee structure, it is very similar to other online marketplace platforms. If we take Brazil as an example, Meli charges a final value fee on successful transactions and that ranges between 10 and 14% depending on the category. There's a fixed fee per unit for any products that are sold under 79 reais which is $15 USD. And then if sellers want to offer interest-free installments, there's an additional 5% fee. So we estimate that the core seller final value fee is just under 13% and that's up from 12% in 2021. So that means substantially all of the take rate expansion that we just talked about has come from value-added services such as logistics and advertising. And that's what you want to see as a shareholder, right? Take rate expansion that comes from driving adoption of value-added services rather than from squeezing merchants on core fees. And I think that's also very similar to what's happened to Amazon as well. Their core final value fees have stayed relatively stable and then they've layered on top FBA, they've layered on top, which is fulfilled by Amazon. They've layered on top advertising, they've layered on top various other services to merchants to drive that take rate higher.