Business Breakdowns
· 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.
· Daniel Wu, Matt Reustle
So rather than leaving it up to the buyer and the seller to figure out how a package would be delivered, Mercado Envíos basically allows sellers to print off shipping labels and use Meli's negotiated carriers for a more consistent delivery experience. And as Meli continued to invest in its logistics network, that delivery experience has only improved for both the buyers and the sellers. [00:00:00] S0: And me saying they were a copycat in any way would be massively downplaying the execution of what they accomplished. But it's interesting to hear all of the examples from eBay to Mercado Pago looking quite similar to PayPal to the logistics network. Was there anything that they did that was innovative that was then copied elsewhere? I am curious. It certainly helps investors appreciate what you're doing when there is an example elsewhere in the world. But just from your perspective, was there anything that they really innovated in this broader model before some of the global competitors did it?
· Daniel Wu
[00:00:00] S1: So if you listen to the words of the founders themselves, they would admit that they weren't particularly innovative. Essentially they just took the idea that eBay presented. I think if you look at the evolution of the business, what Amazon did and then what Mercado Libre did, you could probably say that, yeah, they definitely took a lot of inspiration from Amazon over time as well. But Meli of course has some of its own homegrown innovations as well. For example, Meli delivery day, which lets buyers set a fixed day of the week to receive their slow delivery orders. The slow delivery layer of the logistics network essentially stages a buyer's non-fast shipping packages to a single day, which increases delivery route density and the number of packages per stop. This is what allows Meli to provide free shipping on orders below 79 reais. Overall, I'd say Meli has succeeded largely by bringing existing innovations into the LATAM market at scale and then just executing better than other competitors in the region. And that includes Amazon itself. So even though Meli may not have led any particular initiative on a global basis, that doesn't mean they can't do really well in their own region.
· Matt Reustle
[00:00:00] S0: Absolutely. Yeah, there's proof of that. I attribute it to them finishing that education. It allows them to study and then implement. So plus one there for taking a different route. Let's talk about the business model today. I think you referenced it in the first answer, but how do you think about the segments and just categorizing them whatever way they either report or you would view the business? Explain that.