COVID-19 Boosting Mercadolibre’s Growth

COVID-19 has drastically shifted consumption to online platforms. Just in the last few weeks, Mercadolibre registered 1.7 million new customers. Overall, the number of deliveries also reached a record high, averaging more than 1.1 million orders per day.

Company Background

Mercadolibre Inc. (MELI [1]) is the largest online marketplace in Latin America. Products are offered mainly by third parties and MELI owns only a very small portion of the inventory. The company makes money by charging commissions to vendors, which range from 8 to 20%, depending on the vendor and the country. MELI also offers online payments (MercadoPago) on its market place, as well as outside such market place. These services also include giving credit to customers and vendors.

The company’s main competitors are other online market places, mainly Amazon, and payment platforms, mainly Pay Pal and Pac Seguro (Brazil). Of course, traditional brick-and-mortar merchants and traditional banks are important local competitors, which vary country by country.

The shift from brick-and-mortar to online shopping is on the rise in Latin America. The reasons are twofold. A large portion of the population has now access to smartphones, facilitating access to e-commerce. In addition, fintech has been a driving force in getting people to shift from cash-based transactions to using credit cards. MELI is well-positioned to seize this opportunity.

First, the company has, by far, the largest assortment of products relative to other online marketplaces in the region –i.e. MELI has 4 million vendors and Amazon has significantly less in Latin America. What is more, MELI’s assortment is more-tailored to the local preferences of customers across different countries in Latin America. Amazon’s assortment in the region is supplied mostly by global vendors. For example, compare the number of options of suntan lotion that you get in MELI.br vs amazon.br. Or try to buy a scapular of the Virgin of Guadalupe in amazon.com.mx. MELI follows a sophisticated process to select and rank local merchants that has been perfecting over the last 20 years. This is something that even the most well-endowed companies have found difficult to imitate.

Second, logistics are tricky in Latin America due to poor infrastructure [2] MELI has its own distribution network that fills the voids of poor logistical infrastructure. When compared to other platforms that have to rely on third-party logistics, the company can operate at lower costs and, more importantly, can deliver within shorter timeframes (which is a critical feature for consumers). Another advantage of controlling its own (regional) delivery network is that MELI can reduce other ‘transaction costs’ related to running delivery in Latin America, mainly the theft of merchandize –i.e., believe it or not, Latin America is the region where the costs of organized crime to businesses are the highest [3].

Impact of COVID-19 in MELI’s business

Despite a bear market and the threat of recession looming over world economies, some businesses actually stand to benefit from the COVID-19 pandemic [4]. COVID-19 has drastically shifted consumption to online platforms. Just in the last few weeks, MELI registered 1.7 million new customers. Overall, the number of deliveries also reached a record high, averaging more than 1.1 million orders per day. Similar to the US, the date for an official lift of the lockdown has not yet been defined in most Latin American countries. In Mexico, for example, the uptake of COVID-19 has been slower than in other parts of the world. Some experts predict that the peak will come about in June. Hence, reopening is expected to happen sometime mid-summer. This means that MELI will continue to benefit in the next months.

What is more relevant, the company reports marked shifts in consumption patterns. When the spread of COVID-19 began, most of MELI’s customers used the platform to procure health related products (e.g. head masks or sanitizer). Subsequently, consumption moved towards food, personal care products, and other items purchased more regularly. There has also been a steady rise in demand for entertainment and fitness products. These trends suggest that MELI has the potential to become ‘the’ market-place for customers to carry out a large portion of its purchases post COVID-19.

One tactical challenge to enable MELI to retain the new customers has to do with avoiding that their experience is negatively affected by issues prone to happen in the current environment, which do not occur regularly. Namely, due to supply-chain disruptions, some of the vendors registered in the platform have experienced problems with fulfilling orders on time. The problem with situations like this is that consumers attribute vendors’ faults to MELI. If I am a new customer in the platform and experience delays in my orders (due to the supply-chain shocks originated by COVID-19), I may form a long-lasting impression that MELI’s services are unreliable. Thus, methinks that it is highly recommendable for the company to (1) do a careful sorting of vendors on the basis that their response capacity is affected by COVID-19, and (2) work closely with vendors and customers to provide assistance when vendors drop the ball.

Another recommendation for MELI is to take advantage of the shutdown of traditional sales channels to attract vendors that generate heavy traffic, but that have not been interested in joining MELI. These are vendors that offer well-known, semi-premium, products, such as Adidas or Disney. The outlets where these products are traditional offered are currently closed due to the lockdown or are experiencing delays in delivering merchandize because they do not operate their own logistical networks. In the past, MELI has not been attractive for these vendors because the platform is perceived to be an outlet for lower-cost items or for those that are purely functional. Now that so many customers are shopping in MELI’s platform, it is time to approach popular vendors and establish strong partnerships. The availability of these popular brands is likely to help MELI keep increasing traffic once the disruptions of COVID-19 fade out.

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References:

[1] “Overview.” MercadoLibre, Inc., April 22, 2020. http://investor.mercadolibre.com/investor-relations.

[2] “Competitiveness Rankings.” Global Competitiveness Index 2017-2018. Accessed April 29, 2020. http://reports.weforum.org/global-competitiveness-index-2017-2018/competitiveness-rankings/#series=GCI.A.02.

[3] “Competitiveness Rankings.” Global Competitiveness Index 2017-2018. Accessed April 29, 2020. http://reports.weforum.org/global-competitiveness-index-2017-2018/competitiveness-rankings/#series=EOSQ034.

[4] Quast, Jon. “How the Coronavirus Shutdown Is Boosting MercadoLibre’s Growth in Latin America.” The Motley Fool. The Motley Fool, March 26, 2020. https://www.fool.com/investing/2020/03/26/how-coronavirus-is-boosting-mercadolibres-growth.aspx.

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