Business Breakdowns
· 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.
· Matt Reustle, Daniel Wu
[00:00:00] S0: Absolutely. And you mentioned loyalty within this broader commerce segment. Is there anything to touch on there? Common strategy almost of any business now, but is there anything that stands out about what Meli is doing and how it's actually impacting their business? [00:00:00] S1: The company provides no disclosure around Meli Plus, so it's quite difficult to determine the impact that it has on marketplace performance. But just taking a step back and summarizing what Meli Plus is, it began I believe as a tiered points program where you collect points and get some perks from that. But it was relaunched in late 2023 to be more like Amazon Prime. So for $2 USD, Meli Plus members receive lower free shipping thresholds and cash back on the marketplace, cash back on Mercado Pago spend and some other benefits. And then for $5 a month members also get access to Disney+ and discounts on some other streaming services. Now given the recent relaunch, we think adoption is probably still quite early for this program. But we also think that it's reasonable to believe that Meli Plus will ultimately achieve the stated goal of increasing ecosystem engagement and reducing churn. And that's largely just based on what we have seen from other membership programs, particularly Prime. Whether it can spin the flywheel to the same extent as Prime can, I think that remains to be seen. In large part, I think it's because Meli doesn't offer free shipping without minimums. There's still a, I believe, 19 reais minimum to get free shipping there.
· Daniel Wu, Matt Reustle
[00:00:00] S1: The company provides no disclosure around Meli Plus, so it's quite difficult to determine the impact that it has on marketplace performance. But just taking a step back and summarizing what Meli Plus is, it began I believe as a tiered points program where you collect points and get some perks from that. But it was relaunched in late 2023 to be more like Amazon Prime. So for $2 USD, Meli Plus members receive lower free shipping thresholds and cash back on the marketplace, cash back on Mercado Pago spend and some other benefits. And then for $5 a month members also get access to Disney+ and discounts on some other streaming services. Now given the recent relaunch, we think adoption is probably still quite early for this program. But we also think that it's reasonable to believe that Meli Plus will ultimately achieve the stated goal of increasing ecosystem engagement and reducing churn. And that's largely just based on what we have seen from other membership programs, particularly Prime. Whether it can spin the flywheel to the same extent as Prime can, I think that remains to be seen. In large part, I think it's because Meli doesn't offer free shipping without minimums. There's still a, I believe, 19 reais minimum to get free shipping there. [00:00:00] S0: You answered my follow-up question there. So just going through each of these, if you were to compile them all together and attribute whatever you might to each bucket, how would you lay that out or think about that?
· Matt Reustle, Daniel Wu
[00:00:00] S0: You answered my follow-up question there. So just going through each of these, if you were to compile them all together and attribute whatever you might to each bucket, how would you lay that out or think about that? [00:00:00] S1: Yeah, sure. I will just caveat that these are all our estimates because the company doesn't report any of this directly. They do provide a few tidbits here and there, but you do have to make some assumptions to get to these numbers. But by our estimates, commerce revenue, which was just over $12 billion for 2024, we believe $6 billion of that comes from the third-party marketplace fees and $2 billion from first-party sales. And then we estimate that approximately $3 billion comes from net shipping revenue, which is essentially the shipping piece of Mercado Envios. And finally there's about a billion dollars of ad revenue. So you take all of those numbers and you divide it by the $51 billion of GMV and you can get the approximate contributions to the overall take rate of 24%. [00:00:00] S0: Interesting. And then to transition into the fintech segment, maybe we start with Mercado Pago, the digital wallet merchant acquiring, payment processing. Straightforward description that you gave before. Can you go into a bit more about the strategy there and then what's ultimately happening?