Business Breakdowns
· Matt Reustle
[00:00:00] S0: It's hard to separate I know each of these segments because they do have such an impact on one another. They're complementary and they're certainly complementary drivers. I'm curious on the logistics piece, as you referenced, there've been expansion, there's a fulfillment center footprint. How has that evolution gone again? I think sometimes it's overlooked how incredible what Amazon accomplished in the US is. And how would you categorize that for Meli in terms of their ability to expand that effort while also keeping the economics into consideration?
· Daniel Wu
[00:00:00] S1: Mercado Envíos is Meli's logistics operation and that sort of provides storage, warehousing and delivery to marketplace sellers. We can break that down into three levels of service. You've got Full, which is basically analogous to fulfillment by Amazon and that's where sellers store their inventory in Meli's fulfillment centers. And they're picked and shipped by Meli. There's Cross Docking where sellers deliver packages to a Meli cross docking operation center and then Meli sorts and delivers the packages. And finally there's Flex where the seller ships directly to the buyer using a Meli contracted courier. When Mercado Envíos first launched back in 2013, it was basically the latter Flex essentially. So where Mercado would contract with existing third-party carriers and get negotiated rates and then allow sellers to essentially use those rates, use those carriers and have a more consistent shipping experience. Over time, Meli has invested in broadening out its logistics network. So right now that logistics network in Latin America spans dozens of fulfillment centers, hundreds of smaller logistics hubs and thousands of pickup and drop-off locations. The transportation network itself includes dedicated aircraft, trucks and thousands of last-mile delivery vans. And that's predominantly owned and operated by third-party carriers.
· Matt Reustle
[00:00:00] S0: My impression based on that answer is that it feels like it's earlier stage of Amazon's larger logistics build out prior to having the air fleet and a lot of the trucking and vehicle fleet, which was some of the most capital intensive pieces of that logistics build out in my view. Is that fair to categorize that way? And then where would you put the capital intensity of the logistics effort today? And looking forward, is that something that they're investing a lot into? There's the operating expense line, but then there's also the capex.
· Daniel Wu
[00:00:00] S1: I think the difference between the way that Amazon builds out its logistics network and the way that Meli does it is probably going to remain so. Meli mainly leases its assets, whereas Amazon obviously invests billions and billions of capex into owning a lot of these facilities and also the transportation network as well. You look at Meli's ongoing investments into its logistics network, but realistically the business is still relatively capital light. And again that's because a lot of that logistics infrastructure is leased. I'd say that management's hyper-focused on maximizing the efficiencies of the logistics network and expanding capacity more on an as-needed basis rather than undertaking just heavy investment cycles ahead of demand, which is sort of what we saw with Amazon coming out of COVID. Now, having said that, the company's also announced plans back in September last year to double its fulfillment capacity in Brazil by the end of 2025. And that has contributed to some margin contraction in subsequent quarters because apparently it takes a few years for new warehouses to hit peak utilization. The other point that I'd make about the logistics business is that it's currently largely unmonetized. So if you look at what Amazon does, they monetize logistics beyond just the shipping fee that they charge. You've got the entire fulfillment by Amazon operation going on there. For Meli, the company in the last few years has said that they are essentially waiting for fulfillment penetration in Brazil to grow to Mexico levels before they start really hitting that monetization button. And Brazil is currently at about 60% fulfillment penetration and that's up from 50% last year, while Mexico is in the 70s. So we could potentially see monetization of fulfillment start happening at some point next year.
· Matt Reustle
[00:00:00] S0: That's interesting. Just in terms of future levers to pull. Touching on advertising, it became such a huge engine for Amazon. We've seen it elsewhere. Walmart, not traditional e-commerce. But where this becomes such a major driver of revenue and growth, where does it stand within Mercado Libre as being a key component of what the business is today, but also and more importantly what it's doing in the future.
· Daniel Wu
[00:00:00] S1: Advertising has been available on the Mercado Libre marketplace in some form or other for over a decade now. So it may perhaps come as a surprise that advertising revenue as a percentage of GMV is only 2% as of last year and that's up from 50 basis points in 2019. So I think it's not unfair to say that seller adoption has been relatively slow for this product over that same five-year period. If you look at Amazon's ad revenue that grew from under 4% of total GMV to 7%. And if we just look at Amazon's third-party GMV, the ad penetration is probably more in the 10% range. Now we think there's a few reasons why advertising uptake for Meli has been slower. It could be that the overall digital advertising adoption in LatAm is just lower and merchants are less sophisticated or less experienced with performance advertising compared to their US or their Chinese counterparts. Meli's ad offering itself has been pretty rudimentary for a long time. It wasn't until early 2023 that the company launched a full-stack solution with self-serve console and measurement and reporting tools. But we do believe that the company is very well aware of the size of the advertising opportunity. On their Q4 call earlier this year, management talked about the dense product roadmap for ads, the work that they're doing with brands and agencies to expand up-funnel, and plans to expand inventory beyond Meli's ecosystem. The way that we think about ads is that there's a very long runway of growth and while it might take some time to realize, there's no fundamental reason why ad penetration can't get up to 3% or 4% or 5% of GMV. And if we think about the margins for an advertising business compared to the e-commerce side, that can be a pretty meaningful earnings driver if not revenue driver.