Business Breakdowns
· 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.
· Daniel Wu, Matt Reustle
[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. [00:00:00] S0: Let's just get deeper into each segment. I have a lot of questions that I want to talk about on each one, but we'll start with commerce. What does the market share look like? You referenced in the early days there were a lot of competitors going after the same opportunity. Where does that stand today in terms of Meli specifically? And then would you highlight any key competitors, whether it's in LATAM broadly or country specific, that are top of mind when considering the market?
· Daniel Wu, Matt Reustle
[00:00:00] S1: Before I talk about Meli's market share, I guess it's good to just lay out the playing field in terms of e-commerce in LATAM. So e-commerce penetration in LATAM is still quite low despite the post-COVID step change. We've seen estimates in the sort of 13 to 14% range across the region and this year it's probably call it 15%. And that compares to US e-commerce penetration that's in the low 20s. And then if we go to the extreme, you've got countries China where penetration is into the 30% range in terms of Meli's market share of that market. That's a bit harder to pin down because of how fragmented the Latin market is and also the fact that the company doesn't report GMV by country. But we've seen sell-side estimates indicating that Meli's LATAM share is in the mid to high 20% range. And that spans from over 80% share in Argentina where Meli is completely dominant, to around 40% in Brazil and then negligible share in some of the other countries. But overall we understand Meli's LATAM market share is higher than the next 11 operators combined. So they are in a very strong position. But it also goes to show that e-commerce in that is still very fragmented market. [00:00:00] S0: And is there anything that artificially caps the e-commerce penetration? When you think about the drivers of that, what would you point to as stopping it from being at the same level as the US, let alone as some of the bigger players?