Business Breakdowns
· 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?
· Daniel Wu
[00:00:00] S1: So I said earlier that there's two distinct businesses in there. There's the digital wallet for the consumer and merchant acquiring for the merchant. So within the merchant acquiring business there's two sources of revenue. One is the payment processing for off-marketplace merchants, and then two is prepayments, which is also known as anticipation of receivables for both on and off-marketplace merchants. And the reason I'm calling out on and off-marketplace merchants is that the payment processing for on-marketplace transactions is incorporated within the seller final value fee. So Meli doesn't explicitly earn any fintech revenue on that piece. Total payment volume for 2024 was $197 billion. And that excludes peer-to-peer transactions, which is free. There was $55 billion of on-marketplace volume, $88 billion of off-marketplace acquiring volume, and then $54 billion of digital wallet volumes where Meli wasn't the acquirer on the payment processing side. And we'll focus on that because that's where most of the revenues are. The merchant acquiring business is pretty standard. Meli charges merchants a fee, which is known as a merchant discount rate, to basically accept and process their digital payments. A portion of that is going to be interchange that goes to the card issuer. A portion of that is the network fee that goes to the card network and then the remainder is gross profit. For Meli, the merchant discount rate for Mercado Pago is pretty much industry standard and that ranges from 1% to 3% for debit cards, depending on the payment channel and the settlement time, 4% to 5% for credit cards and 0% to 1% for instant payments such as Pix. In Brazil, these fees tend to be on the higher end because Pago mainly serves micro and small merchants with limited payment volumes and negotiating power. But overall the merchant discount rates in LatAm have been structurally declining over time as competition for payment processing has intensified. And specific to Meli, we also know that strategically management is actively trying to push up the merchant size spectrum, which is another headwind for the merchant discount rate, but should be more than offset by higher processing volumes and revenue dollars.
· Matt Reustle, Daniel Wu
[00:00:00] S0: And is this something that could expand outside of what's happening within the Meli ecosystem? [00:00:00] S1: Yeah, they've already taken that outside the Meli ecosystem. So in 2009 I believe is when Mercado Pago launched as a merchant acquiring service for digital merchants that were not on the marketplace. And then I'm not sure exactly when, but sometime later they also expanded into physical point-of-sale for off-marketplace merchants as well. So as I mentioned previously, $88 billion of GMV last year came from merchants that weren't directly on the marketplace. And that has been the main driver of growth for the payment processing business. It's just that expansion off-marketplace because then you've got a massive TAM there versus just the GMV of the marketplace. And we'll see that when we talk about the credit business as well, that there will be even further expansion off-marketplace just through products like the credit card, which can be used anywhere. [00:00:00] S0: On the processing side, who are they competing against in that region?