By: Ezequiel Minaya
The Buenos Aires-based company is investing heavily in logistics and payments infrastructure to deliver packages quickly and reliably in a growing e-commerce market where many customers lack bank accounts or credit cards, and have yet to be convinced that online transactions can be secure.
Expenses linked to running the business have more than doubled for MercadoLibre since 2016, reaching $1.51 billion in 2018, according to regulatory filings. During that time the company introduced subsidized shipping and discounts on mobile point-of-sale devices such as smartphones and tablets—all with the goal of winning more customers.
Mercado, whose website serves 18 countries, plans to spend $2 billion on costs tied to operations in 2019, according to Pedro Arnt, the company’s finance chief. Mr. Arnt said rising expenditures now are necessary for long-term success.
“We are focused on disrupting two large industries: retail and the financial industry,” he said in an interview with CFO Journal.
Investors appear to have bought in. Shares of the company, which trade on the Nasdaq , closed at an all-time high of $503.93 on Wednesday. The stock, which is up 66% this year, closed at $484.97 on Monday.
Finance chiefs of young companies often find themselves balancing the dual needs to invest in future growth and generate short-term profit. That tightrope act is trickier in Latin America, due to political uncertainty, swings in currency values and lagging infrastructure.
Those factors also can be barriers to entry for competitors, which is why MercadoLibre might have an edge. “Our strategy has been building on what is our lead,” Mr. Arnt said. “We are the incumbents in Latin America.”
Amazon has a limited presence in Argentina, Mexico and Brazil, the three countries that accounted for 94% of Mercado’s total net revenue in 2018.
But the threat of Amazon’s possible expansion into the region is a potent fear. In 2017, news that Amazon was recruiting in Brazil contributed to a 10% selloff of Mercado shares. The Seattle-based company has been building warehouses in Mexico and last year struck a partnership with local convenience-store chain Oxxo to provide pick-up locations for packages.
A representative for Amazon declined to discuss the company’s long-term plans in Latin America.
China’s Alibaba Group Holding Ltd., another e-commerce giant, also has a limited presence in Latin America. A representative at Alibaba declined to discuss specific company strategy.
An emerging middle class and increasing access to the internet throughout the region have fueled the bounding growth of internet retail sales, which have tripled on an annual basis since 2013 to $43.6 billion last year—still just one-tenth the size of the e-commerce market in the U.S., according to Euromonitor.
Over that period, MercadoLibre has more than doubled market share. The company overtook Brazilian discount chain Lojas Americanas SA and French retailer Casino Guichard-PerrachonSA to claim the top spot in 2018 with a market share of 15%. Amazon, the only other purely online retailer in the top five besides Mercado, ranks fifth with a market share of 3%.
“The most important thing to learn about e-commerce in Latin America is that it is still early days,” said Amanda Bourlier, a consultant at market-research firm Euromonitor. “Most of the major e-commerce players are making investments to be able to reap the advantages four or five or six years down the line. Everybody is playing the long game.”
MercadoLibre’s investments have eaten into the company’s profit. Since 2010, sales have risen each year, reaching $1.4 billion in 2018, according to regulatory filings. At the same time, gross profit margins have tumbled, settling at 48.4% in 2018, compared with 78.5% in 2010, filings indicate.
Shrinking margins are an expected part of the growth strategy, Mr. Arnt said.
“We are not in this to deliver profit in three to five years. We are looking to build the largest retailer in Latin America and largest [financial] services company in Latin America,” Mr. Arnt said, adding: “Even if it means losing money in the short term.”