Business Breakdowns
· 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.
· Daniel Wu
[00:00:00] S1: Today, Meli's business consists of two segments: commerce and fintech. Total revenue was nearly 21 billion in 2024 and that's up from 1.4 billion in 2018. So the commerce revenue is just under 60% of total revenue. And that mix has stayed relatively consistent since 2018, except for the period immediately post-COVID where commerce growth did see a sharp spike. Within the Commerce segment, we've got the marketplace, the logistics business and the advertising business. And I'll go into detail on these when we get to the segment deep dives. And then on the fintech side, the two main businesses are payments and credit. From the consumer perspective, Mercado Pago is a digital wallet that can be used on and off marketplace. From a merchant perspective, Pago is a merchant acquirer that processes payments and handles installments and we'll get to that later as well. And then the credit business just offers personal loans and credit cards to consumers and working capital to merchants. So as you can imagine, these two complementary segments join together to form the Mercado Libre ecosystem. Consumption on the marketplace drives payments and then adoption of consumer credit and digital wallet drives consumption in the marketplace. So there's that flywheel effect going on. And perhaps surprisingly, in practice, these two segments have also been quite countercyclical. So when one segment is weak, the other segment has been able to outperform and carry the overall top line growth. And I think this is actually one of the key reasons why Meli didn't experience a post-COVID growth hangover other pandemic darlings, which includes Amazon as well. When commerce growth slowed sharply in 2022, fintech growth accelerated to offset much of that commerce drag.
· Matt Reustle, Daniel Wu
[00:00:00] S0: What would you attribute that to? It's not logical to me why that would actually happen. Was there something specific driving? [00:00:00] S1: Yeah. So I think in 2021 they launched the credit card business in Brazil and that has been the main driver of the credit business, which has been the main driver of the fintech business. So that happened at a time just as commerce growth in Brazil and Mexico was starting to taper off from the initial very strong growth of 2020 and 2021. [00:00:00] S0: So idiosyncratic. That makes more sense. And then LATAM exposure from a geographical perspective, what are the big countries and is there a way to isolate the weightings of those countries? [00:00:00] S1: Yes. So if we just look at the business from a geographic split, Brazil is the largest geography at 52% of last revenue, followed by Mexico and Argentina at 22% each and then the rest of LATAM is just 4%. So it really is these key countries that make up the majority of the revenue. The mix of commerce and fintech also differs across these markets. Argentina has the highest fintech mix at 65%. Mexico is the opposite. And then Brazil shakes out closer to the group average. You can also see this mix impact in the contribution margins as well. Argentina has by far the highest contribution margin in the mid-40s. Brazil is at less than half of that and then Mexico is even lower in the high teens.