It’s better to be the head of a rat than the tail of a lion.
—Spanish proverb
The couple tangoing on my hotel television confirmed that I had arrived in Buenos Aires. It was my first trip to Argentina and second trip to South America. I wanted to get this trip off to a better start than my last one, which had ended in my getting mugged in a Bogotá slum, so I headed to the hotel restaurant for a peaceful cup of coffee.
But it wouldn’t quite work out that way.
When I opened the heavy metal lid of an improperly assembled buffet warmer, it unexpectedly flipped back, kicking a Sterno tin full of flaming gel onto my chest. When I looked down to find that my shirt was on fire, I dropped the plate I was holding; it shattered, piercing the silence. I immediately whipped off my shirt and tried to stomp out the flames. When the room full of diners in suits and business attire turned to see what the commotion was about, they saw a crazy shirtless man dancing in the middle of their breakfast.
Luckily I escaped my breakfast unscathed. But it was a good reminder that life in emerging markets always comes with hidden risks.
I’d come to Buenos Aires to meet the pioneers of e-commerce in Latin America, founders of the firm Mercado Libre. The company first appeared on my radar in 2004, when Google flew me and several other international clients to the Googleplex for meetings and I met some of their marketing team members. Now I would get to see the Mercado Libre team on their home turf.
I stepped out of the hotel into a gorgeous day. Buenos Aires was living up to its name. I strolled across town through the leafy neighborhoods and admired the ornate colonial buildings that gave the city a European feel.
But these once-immaculate buildings were showing signs of wear. The last hundred years had not been entirely good for Argentina. During the prosperous belle époque period (1871–1914) that preceded World War I, Argentina was a magnet for European immigrants. In those forty-three years Argentina’s gross domestic product grew at an annual rate of 6 percent.1 Argentina was more prosperous than France, Italy, and Germany, enjoying one of the ten-highest incomes per capita in the world. Its per capita GDP was more than four times greater than that of its neighbor and rival, Brazil.2
Buenos Aires was the heart of Argentina’s prosperity, serving as a major international port from which Argentinian beef and other agricultural products were exported to the rest of the world. The country adopted technologies from other parts of the world, applied them to its industries, made the country rich, and saw its arts and culture scene boom.3
But after World War I external shocks rocked the Argentinian economy, and then the Great Depression and World War II exacerbated the country’s problems. To explain the struggles Argentina faced, economists today seem to agree that while the country was focused on exporting commodities, it failed to invest in education and, as a result, had no innovations of its own that might have led to more diversified industries. This made Argentina vulnerable to swings in global demand for its commodities, as well as those of its internal political pendulum.4
During my 2015 visit to the country, it was clear that isolationism was taking a huge toll. Currency controls had created a huge gap between the official and black market exchange rates. High tariffs limited the products that were entering the country. The government had defaulted on its debt in 2014, and the economy was shaking under the pressure of being an outcast in global financial circles. For young white-collar workers in the more prosperous sections of Buenos Aires, the upcoming election presented an opportunity to change the leadership and return to freer markets. E-commerce, which had been languishing in Argentina for several years, looked forward to a change.
Although Argentina was poised to grow again, its neighbor to the east, Brazil, was in the throes of a deep recession. For years the country and its population of 200 million—the world’s fifth largest—had enjoyed Brazil’s status as a member of the BRICS association of five major emerging economies (the others: Russia, India, China, and South Africa). As one large market, Brazil had also attracted the lion’s share of e-commerce investment in South America, giving rise to a healthy start-up community.
But despite Latin America’s 620 million people and large middle classes, its e-commerce development still lagged behind that in China. Argentina in particular had not seen e-commerce take off as quickly as in China, even though Argentina had a head start. In early 2000 it was estimated that 50 percent of Latin America’s start-ups were based in Argentina, which also had the fifth-largest number of registered Internet domain names in the world. So what happened?5
I’d come to Buenos Aires to talk with leaders of the one company that had pioneered e-commerce across the region and had a broad sense of the history of the industry as well as the form of its evolution in the region—Mercado Libre. It’s the only Latin American Internet company that’s gone public on the Nasdaq. I was in Buenos Aires to find out why the company was a shining exception rather than the rule.
MERCADO LIBRE
The headquarters of Mercado Libre (Free Markets) is a modern skyscraper with colorful art in the lobby. Located in the Vincente Lopez section of Buenos Aires, it offers sweeping views of Uruguay, from where many of the senior managers commute, because it has become more stable than Argentina in recent years. The team had organized a full afternoon of meetings with senior management, including Stelleo Tolda, the COO, who had joined the company in its first months, and Sean Summers, the Pepsi marketing executive Mercado Libre had lured to Buenos Aires to run its marketplace division.
Mercado Libre was founded by Marcos Galperin, an Argentinian born into a family that had made a fortune from Sadesa, one of the largest leather sellers in the world. After he graduated from high school in Buenos Aires, Galperin had headed to the Wharton School for undergraduate studies. He worked at an Argentinian oil company before returning to the United States for a master’s in business administration at Stanford from 1997 to 1999, during the dot-com boom.
Like so many of the early international pioneers of e-commerce, Galperin saw the rapid growth of eBay and became interested in bringing the eBay model to Argentina. Tolda, a classmate at Stanford, recalls running into Galperin at the library on a day off from class. “Marcos was not one to be found in the library. I asked, ‘What are you doing here?’ He told me, ‘I’m doing research for this company I want to start, researching US models that might work in Latin America.’”
As they studied for their MBAs in the heart of Silicon Valley, they watched the investment boom from a front-row seat. “We saw what was going on in the US. We were there for eBay’s IPO. Other companies were being launched and gaining traction,” Tolda said. “EBay was our early inspiration.”6 Three months after Galperin started Mercado Libre, Tolda joined him to help set up the company’s operation in Brazil.
Galperin had begun laying the groundwork for Mercado Libre as a student and had asked his finance professor, Jack McDonald, to introduce him to investors. His break came when McDonald arranged for Galperin to drive the venture capitalist John Muse to his private plane after a speaking engagement. In the time it took to get to the airplane, Galperin had convinced Muse to invest in his business. After graduation Galperin returned to Buenos Aires and set up shop in a small space connected to the basement parking garage of an office building. He also enlisted his cousin Marcelo Galperin to be the company’s chief technology officer and convinced Stanford classmate Hernan Kazah to come aboard. The latter would later become the company’s CFO.
Galperin and his team started their Argentina website in August 1999 and the next month expanded to Brazil and Mexico. To keep up with the many other eBay clones that were popping up throughout the region—they estimate there were more than fifty in Argentina alone—Galperin, Tolda, Marcelo, and Kazah soon had a website that was serving most South American countries, fueled by two rounds of investment totaling more than $50 million.
I asked Tolda why Mercado Libre had never faced any tough competition, and he quickly corrected me, showing me that I’d made a mistake a lot of others have made. “Because a lot of our competitors didn’t survive, everyone thinks that we didn’t have competitors,” he said, “but actually we had a lot of competition in the early days.” He described Mercado Libre’s major rivalry with DeRemate, another Argentina-based auction site. A team of Harvard Business School graduates led by Alec Oxenford had founded DeRemate. Oxenford and his team, mostly former colleagues at Boston Consulting Group, took the lead in gaining consumer recognition in the region.7
The rivalry between Team Stanford and Team Harvard became intense. As Oxenford explained in a Harvard Business School case: “We were both excellent management teams—very different, yet alike at the same time. We were from HBS; they were from Stanford. The story of our competition was plagued with face-to-face encounters at industry conferences, at potential investor’s offices—even on airplanes. Perhaps the most astounding and portentous coincidence in all of this was when we held our launch parties on the very same day.”8
DeRemate licensed technology from a European technology provider—this gave it a head start over Mercado Libre, which developed its own technology. But over time DeRemate found that being beholden to an inflexible technology was a disadvantage, while Mercado Libre was able to make localized modifications to serve its local market.9
When the Internet bubble burst in 2000, investment in the Internet slowed, but the battle to become the eBay of Latin America was still in full force. But another company was also interested in becoming the eBay of Latin America—eBay. In February 2001 eBay gained control of a leading auction site in Brazil, iBazar, when it acquired iBazar’s Paris-based parent company, which also operated several European auction sites. During the dot-com boom, iBazar was valued at nearly $500 million. But it sold to eBay for just over $100 million in stock, with iBazar’s CEO, François Grimaldi, telling the press, “We didn’t find bidders to propose better conditions … with what has happened to Internet stocks, we now have to be reasonable.”
After dipping its toe in South American waters, eBay was ready to search for a local partner by the fall of 2001. It came down to Mercado Libre and DeRemate. Given the pressure to find investors at the time, gaining a partnership with eBay was essentially a make-or-break proposition. For the winner it would mean vital funds and a partnership with the dominant e-commerce company. The loser would find attracting new investment difficult while facing an eBay-backed competitor in a down market.
The decision came down to a beauty pageant between Team Stanford and Team Harvard, which had a home field advantage because Meg Whitman, like Oxenford, is a Harvard Business School graduate. In the end Galperin was able to convince Whitman to switch sides in Latin America, even though Mercado Libre had fairly low transaction volumes. “With the volume we had at that time [2001], [eBay] told us that the decision was not about buying market share, that we were way too small for that. The decision was about which firm would be better positioned to capture the growing market in the future, and it was about fit with the management group—who eBay thought it could work with to be successful in Latin America.”10 As one executive told me, “Marcos is a great salesman.”
EBay acquired a 19.5 percent ownership interest in Mercado Libre for an undisclosed amount. The deal gave Mercado Libre, which was still in the red, important funding, control of iBazar in Brazil, and a partnership with eBay, which was to share its best practices. EBay gained a foothold in the region while agreeing to not compete with Mercado Libre there for the next five years.
The eBay deal was a knockout blow for many of Mercado Libre’s competitors. Mercado Libre began to swallow them, beginning with its 2002 acquisition of Lokau, a Brazilian auction site and strong competitor. Beginning in 2005 Mercado Libre acquired DeRemate in two stages at fire-sale prices.
In addressing the Latin American market, Mercado Libre found what other players in emerging markets also have found—the auction model did not fit developing countries at an early stage of e-commerce. Mercado Libre had set out to build an auction site modeled after eBay. But despite its best efforts to make auctions take off, Mercado Libre found that the majority of its clients were small entrepreneurs selling new products. Nobody wanted to wait around for the results of an auction. So Mercado Libre broke with the pure auction model and introduced a “Buy it now” feature. “We launched ‘Buy it now’ before eBay did because we thought it offered a better experience,” Tolda explained. “What we learned from our sellers, and they were smarter than us, was if you start your auction at your buy-it-now price, you essentially had a fixed-price sale. For quite some time we lived with three types of listings, with ‘auction,’ ‘buy it now,’ and ‘fixed price.’ At some point we did away with ‘buy it now’ and just did auctions and fixed price.” By 2004 auctions accounted for 67 percent of items sold on eBay, but only 14 percent of the items sold on Mercado Libre’s sites were auctioned; the rest were fixed price.11
Mercado Libre also faced a quandary about which revenue model to use. In the early days the company relied heavily on banner ads for revenues, but eBay’s model had been wildly successful in the United States because the company had found a way to charge both listing fees and transaction fees, achieving a “take rate” of about 7 percent on each eBay transaction. But eBay had a virtual monopoly. In Latin America the intense competition of the early days forced Mercado Libre and its biggest rivals to forgo listing fees. This meant they relied on transaction fees, most of which have low values, making the generation of money from these fees much more difficult. But when Mercado Libre began to acquire its competitors and see others die off, the company began to charge listing fees.
Mercado Libre differentiated itself from some of its counterparts in other emerging markets by concluding early that its revenue model would have to rely on innovations. In addition to the “Buy it now” feature, it introduced such features as allowing sellers to pay extra to highlight their listings or to use a boldface font for the item heading. It also allowed sellers to pay extra to have their product listings appear at the top of category lists and search results. These value-added feature fees accounted for 30 percent of Mercado Libre’s revenue and have an interesting parallel in the pay-for-performance keyword ads that Taobao created half a world away. The message appeared to be similar—e-commerce merchants in emerging markets like to display their wares at a minimal cost and then have the option of paying extra for value-added listings. You could argue that this approach fits the sale of new products as it more resembles traditional retail and gives cost-conscious small sellers the opportunity to calibrate their costs and promotions to find the right revenue formula. Still, Mercado Libre’s revenues were slow to take off. In 2002 the company generated only $1.7 million in revenue.12
By 2004, 57 percent of Mercado Libre’s gross merchandise value (GMV) was coming from Brazil, 19 percent from Argentina, and 12 percent from Mexico. Colombia, Venezuela, Chile, Ecuador, Uruguay, and Peru contributed the remaining 12 percent. Its website closely resembled eBay’s, down to the format, font, and colors. But Mercado Libre also made sure to introduce some homegrown features, such as buyer protection plans.13
It had initially seemed that the bulk of Mercado Libre’s market might be in Argentina, where the company was founded. Argentina originally was the regional center for start-ups, but Brazilian e-commerce managed to take off sooner, aided by a larger population, greater banking penetration, and more Internet penetration. In Brazil “people didn’t really see a start-up as something attractive ten years ago,” Tolda explained. “Many young people looked for stability more than anything else, and they were more after [jobs in] typical investment banking, consulting and multinational companies. Others were looking for perhaps something even safer, with a career in the public service. There were not so many risk takers. I think that has changed. There are alternatives for people who want to take risks. In the past, if you were a businessperson in Brazil and were unsuccessful, there was a stigma and it was hard to do away with that. [The] Internet became cool, and failure became more acceptable, changing the culture.”
Tolda added that the investment climate changed as well. “For many years it was safer for you to just buy Brazilian treasury bills and earn a nice return instead of investing capital in more risky ventures,” he said. “That also changed over time, and today you do have a VC [venture capital] community here that supports those businesses.” Despite its heavily regulated business climate, and interstate and intercity taxes levied on products moving from place to place, e-commerce did take off in Brazil, attracting investment and drawing in competitors such as online retailers Cnova and B2W and offline competitors such as Walmart. But Mercado Libre held its own and emerged as Brazil’s Internet marketplace leader.14
“One thing that I found not only in Brazil but in all countries is that competition has helped us more than it has harmed us,” Tolda said. “We are still at a fairly early stage of development, there is still enormous potential for e-commerce. As others, particularly those who have bricks-and-mortar businesses, identify the potential of selling online, they also drive new users to e-commerce. More than us competing with them for clients, what they have done is help in building this client base for e-commerce as a whole. I firmly believe that. If you look at e-commerce penetration for retail in Latin America, it ranges from 4 percent in Brazil to 2 percent in other countries. What Brazil has benefited from the most is that the retail sector as a whole caught on to e-commerce early on, and that has helped drive the business.”
Argentina and Chile have followed paths similar to Brazil’s. Other countries, particularly Mexico, have lagged. “The big question mark for us has been Mexico,” Tolda said. “If you look at the potential on paper versus realized potential, there is a much bigger gap in Mexico than any other country. Brazil is bound to be our biggest market because it is the largest country with the largest population, with more economic potential for e-commerce. Mexico would naturally come second, but it doesn’t—it’s not the case. Argentina is bigger than Mexico. I think retail has been more conservative in Mexico, telecom access has been more expensive, and banking services are less penetrated.”15
The remarkable thing about Mercado Libre is that it actually grew while its cousins Baazee (in India) and EachNet (in China)—other recipients of eBay funding—foundered. You could argue that because eBay only held a minority stake in Mercado Libre and never gained majority control, being independent of eBay’s operational control was a blessing in disguise for Mercado Libre. From 2002 to 2008 Mercado Libre’s annual revenues grew from $1.7 million to $135 million. This was when eBay was exerting operational control over its India and China subsidiaries only to see them sink. Meanwhile, Mercado Libre was able to customize its marketplace for the specific conditions of the emerging markets it served, innovating localized solutions to logistical and payment challenges. In 2003 it started Mercado Pago, a payment platform. It customized the service so that people could buy on credit and installments, a common consumer expectation in Latin American retail. It also grew its platform in a way that favored small B2C sellers using fixed-price sales rather than auctions, which simply didn’t work in developing countries.
Mercado Libre’s independence from eBay was not always a given. When making its initial investment in Mercado Libre, eBay was no doubt pursuing the model it had used in many markets—make a small investment in a market leader, watch its development, and then buy the whole company. And in fact eBay and Mercado Libre circled around this several times, but they could never agree on price. “We thoroughly enjoy what we are doing, and if we were part of a bigger company, that might not be the case,” Tolda said. “EBay used to be a golden standard, and it’s certainly not the case for us now. We even feel a twinge of sadness to think of what eBay is now, compared to what it was in the past. In hindsight we are happy with the decisions that we have made along the way. There’s a saying in Spanish: ‘It’s better to be the head of a rat than the tail of a lion.’”
When negotiations with eBay fell through, Galperin decided to flex Mercado Libre’s muscle and go another route—take the company public on Nasdaq. In August 2007 Mercado held its IPO, which doubled in price on the first day and reached a valuation of $1.6 billion. It was a major milestone for Mercado Libre and the Internet in Latin America, and it made the company something of a role model for entrepreneurs in the region. The company had shown that an Internet start-up in Argentina could go public and that a company from outside Brazil could become a market leader in Brazil’s notoriously insular market, one that marketing plans often skip because of Brazil’s language (Portuguese, not Spanish), culture, and protectionist barriers.
Since its IPO, Mercado Libre has weathered the global financial crisis, which saw its stock drop to a fraction of its post-IPO peak, then rebound and steadily rise during the past few years. The company has continued to expand through several acquisitions and started its AdSales platform as well as a logistics platform, Mercado Envios, further extending the company’s ecosystem.
The company sets as its mission “democratizing capitalism” and has taken the approach of building an “enhanced marketplace” that encompasses marketplaces, payment, and logistics. Mercado Libre rolls these different elements out in new markets when they are ready. For example, in Brazil the company has C2C for individuals, B2C for small retailers, and B2C for large retailers and brands. Its Mercado Pago and Mercado Envios logistics services complete the loop.
Sean Summers, who runs the marketplace, explains: “For everything we do, we have a platform that works across markets. The only thing that changes is the level of sophistication or development.”16 The one area Mercado Libre won’t go into—but its competitors do—is buying and selling its own inventory alongside the merchants in its marketplace.
One major new initiative for Mercado Libre is brand stores. Much like Tmall, Mercado Libre’s major goal is to attract new vendor segments such as brands, manufacturers, and large retail to create a premium, curated marketplace. The company didn’t feel the need to establish a separate environment like Tmall because South America does not have quite the problem of fake goods that China does. Rather, Mercado Libre wants to expand from a simple flea market to a shiny shopping mall within the same website.
As of 2015, Mercado Libre’s major priorities were to drive payment growth both on and off its marketplace, expand its services on mobile platforms, and drive adoption of the shipping services offered through Mercado Envios on the way to building a complete logistics environment. In addition, Mercado Libre building out a developer’s ecosystem on top of its open platform, with the goal of unleashing external innovation by third-party service providers who can innovate and sell additional services on its platform. Over time Mercado Libre plans to expand into markets that now are too difficult to serve because they are so small.
Because it operates a pure marketplace, Mercado Libre has a head start on payments in the region. Mercado Pago at first simply facilitated transactions on the Mercado Libre marketplace and then introduced services allowing third-party merchants to accept Mercado Pago payments outside of the Mercado Libre marketplace. They have been pushing more into mobile payments and offer mobile point-of-sale (POS) payment options. And as I noted earlier, Mercado Libre offers financing, an important feature in Latin America that includes installment sales. The company estimates about 65 percent of total Brazilian retail purchases are made using credit financing, whereas on Mercado Pago about 75 percent are made this way. These types of financed payments are particularly important in high-inflation environments. If it takes cues from PayPal and Ant Financial, Mercado Pago could grow into much more than a payment platform; it could become a large financial service business. “The vision for Mercado Pago is huge and it can be enormous,” an executive said.
Mercado Libre’s vision of its core business has been evolving from that of a marketplace to that of e-commerce facilitator. And the goods it carries have evolved from mostly electronics to a broad general selection of merchandise. At the same time it is bringing in more small and medium-sized businesses and large retailers, rather than just hobby sellers.
Mercado Libre estimates that about half of Latin America’s 600 million people are Internet users. Of those, two-thirds are online shoppers, showing a high penetration. About 50 percent of Mercado Libre’s revenue still comes from Brazil, but other Latin American markets are accounting for bigger percentages of its revenue, with Argentina accounting for 30 percent; Mexico, 8 percent; Venezuela, 7 percent; and the rest of Latin America, 6 percent. With 121 million registered users, Mercado Libre estimates that 28 percent of Latin American Internet users access Mercado Libre every month and that 155,000 people make a living by selling on Mercado Libre. Its key metrics of GMV are growing at the healthy rate of 25 percent a year.17
After my day of meetings, my impression was that Mercado Libre is run by a strong team. It reminded me of my days at Alibaba. Everyone seemed to be on the same page, had admirable goals, and the company had a friendly, down-to-earth culture. It was no surprise to me that Mercado Libre has won awards in the region for being a great place to work.
“I think I would have a hard time finding a group of people where I would enjoy the culture as much as I do here,” Tolda said. “We have a passion for what we do. We like changing the world. That sounds kind of trite and too big of a goal, but when we started sixteen years ago, the stuff we had to do seems very basic. It’s a new world and we’ve been a part of making this new world.… As a marketplace we have changed the lives of sellers tremendously. There are a number of entrepreneurs who got their first entrepreneurial experiences with the shops they started on Mercado Libre.”18
Mercado Libre’s assessment of why e-commerce hasn’t taken off in Latin America as much as it should made sense to me. But I couldn’t help wondering whether the company perhaps needed to inject e-commerce with a more urgent sense of innovation and revolutionary spirit. Compared with the websites of its Asian counterparts, Mercado Libre’s website seemed a bit stale, not really a reflection of the vibrant spirit of the small and medium-sized entrepreneurs it serves. It also wasn’t interactive, so people could not chat in real time, despite a culture mad for connectivity and a tradition of haggling. Whereas Asian e-commerce companies were allowing a rich graphic and multimedia branding experience for brands with storefronts on their sites, Mercado Libre offered little beyond the chance to post products with text. Although I had just parachuted into Latin America, it seemed to me their team was missing an opportunity.
Could it be that Mercado Libre’s growth was sandbagged by its closeness to the US market, that it clung too heavily to its US role models for inspiration, rather than designing more robust marketplaces that meet local conditions? Could being a public company and having the concomitant investor pressure have somehow diminished the company’s taste for taking bold risks? Members of its team alluded to a time when that was the case, and I couldn’t help but think they could be doing more.
The good news for Mercado Libre was that e-commerce was reaching a turning point. As in Asia, the mobile phone was providing the breakthrough that e-commerce needed in the region. By 2014 mobile purchases were accounting for 16 percent of the company’s GMV. Mobile was a powerful enough force to overcome the economic downturn in many markets by putting a new tool in the hands of shoppers and entrepreneurs alike. This was accelerating the growth of e-commerce and attracting new investors and competitors. Mercado Libre’s one-time partner, eBay, was growing in the market—expanding into the region without the limitations of a noncompete agreement with Mercado Libre, because it had expired several years before. Amazon also was beginning to grow in the region. Alibaba’s AliExpress was making inroads. And Galperin’s former rival, Alec Oxenford of DeRemate, had started the classifieds site OLX, which was expanding in the region.
Most important, up in Mexico City, another company was aggressively moving into the region and lighting a fire under Mercado Libre—Rocket Internet, with its Latin American e-commerce operation, Linio. Not since Mercado Libre’s early days had another company made such an aggressive attempt to build a region-wide e-commerce marketplace. Could Rocket take on such an established player? I headed to Mexico City to meet with the Linio team and see what I could find out.
MEXICO
I’ve visited quite a few markets in my time, but none quite like La Merced Market in the heart of Mexico City. One of several hundred in the city, the market has been in existence since the colonial period (1521–1810), catering to merchants who congregated on the edges of the city’s historic center to trade goods from around Mexico and the rest of New Spain. In the 1860s the government established a permanent market in the area, and in the last century and a half it has become the largest traditional retail food market in Mexico City.
I walked through La Merced Market to get a sense of how Mexicans have traded for centuries. Filling buildings that span the space of several football fields, the market is like a fireworks show of bright colors, sights, sounds, and smells. Vendors themselves are almost hidden, sitting behind their neatly stacked pyramids of limes and corn, with large Mexican flags hanging from the ceiling over their heads. Other sections of the market are home to piles and piles of green, orange, and red peppers. Anchos. Jalapenos. Habaneros. My mouth would have been watering if a peppery mist hadn’t been stinging my eyes—the revenge of peppers that had fallen into the aisles and gotten crushed by the feet of shoppers and the carts pushed by laborers.
Walk a full city block and you leave the produce section, then enter the meat and dairy section, where plucked chickens hang from hooks and men push wheelbarrows piled high with butchered cows’ heads. (This market is not for the faint of heart—or stomach.)
Next is the toy section, where vendors sell toy tarantulas, Christmas ornaments, and colorful Disney piñatas, some with smiles and others with scared expressions, seemingly aware of their fate. On the perimeter of the market, where the official market ends, small vendors hoping to sell to passersby tend makeshift stalls covered in brightly colored plastic tarps. Although officially not allowed, they are tolerated for the price of a small bribe to the officials overseeing the market.
The offline marketplaces in Mexico City all have the main characteristic of the floating markets in the Bangkok canals or the souks of Mumbai—a raw entrepreneurial energy. The vendors are driven more by the need to survive than a passion for building a business, but I have found this usually translates into a healthy and vibrant online marketplace.
So why have online marketplaces thus far been unable to tap the potential of Mexico’s 122 million consumers? With the US e-commerce boom just across its northern border, wouldn’t Latin America’s second-most-populous country be a natural place for e-commerce to grow? Although Mexico has one of the fastest-growing economies in Latin America, e-commerce accounts for only about $4 billion of the nation’s $200 billion in annual retail sales.19 That’s less than Alibaba sold in the first ninety minutes of its 2015 Singles’ Day sale. Might that be about to change?
Early signs are good. Internet penetration is on the rise, a consequence of smartphone penetration. More than half of Mexicans older than six use the Internet, and 85 percent of those Internet users use social networks. However, only about a quarter of Internet users shop online.20
After strolling the markets, I headed to the regional headquarters of Linio, Rocket Internet’s answer to Amazon.com in the region. Rocket Internet started Linio in 2012 and has since spun it off into an independently run company. While Rocket remains the largest shareholder, Linio has attracted additional investors, including Kinnevik, J. P. Morgan, and Holtzbrinck. The company is focused on Spanish-speaking Latin America, and when I visited Linio in the fall of 2015, it had already expanded to eight Latin American countries with plans to enter four more markets in the region. Linio estimated that its combined addressable market constituted the fifth-largest economy in the world, and claimed to have become the “most-visited multi-category e-commerce company addressing major Spanish-speaking Latin American countries, namely Colombia, Mexico, Peru, Venezuela, Chile, Panama, Argentina and Ecuador.” Linio saw a revenue opportunity of $13 billion in the next five years, assuming it could capture 25 percent of the market.21
Linio claims to have 30 percent of all traffic to e-commerce sites in Spanish Latin America, just behind AliExpress. Not surprisingly, Mercado Libre disputes this ranking, saying that Linio is using a definition that excludes Mercado Libre. Sean Summers of Mercado Libre said, “It’s a lot of bullshit marketing.… I think it’s a lot of PR, which comes with the fact that they are raising a round of financing.” Summers described Linio’s approach as “Let’s just ignore that Mercado Libre exists and then say, ‘I am the biggest.’ [Linio] is the tallest midget.”22
It’s a growing rivalry that didn’t start off that way. Mercado Libre modeled itself after eBay; Linio started off, like its cousins Lazada in Southeast Asia and Jumia in Africa, as a small Amazon. Linio started as a pure online direct retailer, operating its own warehouses. Over time it has become what it calls a “controlled marketplace” with control of all aspects of the experience, including logistics and fulfillment. In a sense it is trying to mash together all the characteristics of various marketplaces in other countries. Like Amazon and Jingdong, it controls the supply chain. Like Tmall and Amazon, it allows others to sell on its platform. Like Amazon, it offers fulfillment. Like Alipay and PayPal, it offers financing. It controls every facet of the purchase and fulfillment process, and it sees this as differentiating itself from an eBay or Mercado Libre. And to extend its reach to new categories, it is even adding a grocery arm.
Linio’s headquarters is located in the leafy commercial district of Mexico City. Outside the company’s offices, steam rises from taco stands while guitar players serenade sidewalk diners. It’s a reminder that, despite the reputation for drug violence and kidnappings that Mexico has gained in recent years, life—and business—goes on.
Linio’s offices felt much more like those of a start-up than do those of its primary competitor, Mercado Libre. Aside from bright orange plastic “Linio” letters that fill up the office lobby, interior decorating seems to have taken backseat to moving and executing quickly in typically Rocket Internet style. In some ways it was a good sign—the team hadn’t gotten too comfortable.
I met with Andreas Mjelde, CEO of the company. Dressed in a white T-shirt, dark pants, and white tennis shoes, he looked more like the dot-com entrepreneur he had become than the McKinsey consultant he used to be. He fit the profile and pedigree of a typical Rocket CEO. I asked him how he liked the change from consulting to a start-up, and he told me, “It was amazing. Getting my hands dirty and doing real work and solving problems on a day-to-day basis. One exciting thing about e-commerce is that you see almost instantaneous results. That’s 180 degrees from a McKinsey project.” Mjelde joined the company in 2012 as a cofounder. He had originally intended to start an e-commerce company in the Nordic countries and got in touch with Oliver Samwer to discuss working together. Samwer convinced him to go into emerging markets, which offered more opportunities than the more mature Nordic markets. Oliver had asked Mjelde if he’d be interested in moving to Africa, Asia, or Latin America. Using consultant-speak, Mjelde explained how he arrived at his decision:
“For me, it was very simple logic. E-commerce is driven by retail. Retail is driven by the size of the economy and GDP, more specifically, disposable income. What was interesting about Mexico as a starting point for looking at Spanish LATAM [Latin America] is that it’s actually a really big economy. If you look at Spanish LATAM, it would be the fifth-biggest economy in the world and growing faster than the number three and four, which is Japan and Germany.”
Mjelde argued that the lack of physical retail in Latin America suggested that the potential for e-commerce in the region might ultimately be greater than in today’s leading e-commerce markets. “In the US you’ve got forty-six square feet built out per capita. China is about eleven and a half. In LATAM it’s two square feet per capita. So [the United States has] twenty times more retail … than what it is in LATAM. In terms of long-term potential, you should see that e-commerce should have a higher share of total retail.”
Perhaps, I said, but why has it taken so long to take off?
“People have tried e-commerce several times in Mexico. There was a first round of people trying in the late nineties. A second round seven or eight years ago. And now the third round started around 2011 to 2013.” With the first round, Mjelde said, the dot-com boom ended before Latin America had attracted much investment, so it never really got the support it needed. The second round was stifled by underdeveloped infrastructure, with one telecom company, Telmex, that was comfortable making margins of 60 percent to 80 percent as a national monopoly. Cell phones were not popular because cell phone service was a monopoly. But in 2012 the government broke the monopoly on fixed lines and cell phones. This led to greater penetration of the Internet as access increased and prices came down. As a result, “It’s quite affordable now to have Internet both on the phone and fixed lines,” Mjelde said.23
Another important front was logistics. Mexico had poor logistics coverage. But in recent years major players such as DHL and FedEx have gotten more aggressive there. The resulting competition has made logistics better.
Another factor, according to Mjelde, was a simple twist of the business model. “We went into the market and learned from what has worked in India and China and offered cash on delivery. I don’t know why, but others didn’t try to offer that before,” Mjelde said, adding that he surmises that perhaps the local companies were too focused on doing what had worked in the United States. Offering COD was a key breakthrough that not only overcame the lack of trust but also addressed the problem that few people in Mexico have bank accounts.
In addition to offering COD, Linio and its peers have helped bridge the payment gap by allowing payments at the convenience store chain OXXO’s thirteen thousand stores across the country. Customers print out a bar code, scan, and pay for the product at an OXXO market. While this is not a perfect solution, it’s helped bridge a gap and solved a critical problem in the ecosystem. “It’s important that the ecosystem around you is growing,” Mjelde said. “Now we can see that it is really happening.”24
One complaint I’d heard about Linio from a former country manager was that hardly anyone within the company ever spoke about values or a higher goal of some kind. Mercado Libre speaks in terms more familiar to Silicon Valley types, about a vision of helping change society. “Our mission is to democratize e-commerce” and “change the lives of millions of buyers and sellers in Latin America,” Galperin has said.25 I asked Mjelde what Linio’s vision is, and he offered something somewhat less poetic: “Our long-term vision is to be the biggest provider of products for retail in the region, both online and offline.”
To be fair, successful companies don’t always start with an altruistic, world-changing ideal as their original goal, so I kept an open mind as he went on. “Latin America is characterized by high prices, because of high taxes. Also, if you talk to any brand out there, the price they set [for] LATAM is … higher … than the one they set for Europe, the US, and Asia. This has been a bit of a milking ground for many manufacturers. Prices are traditionally quite high, and then the second thing is that there is very little availability of products. You have decent availability in Mexico City, [but] the moment you go out to a tier-two city the options for shopping are very poor. And that’s where we see the excitement of Linio. There is absolutely no reason why a person living in Vera Cruz should pay more than a person living in Miami, and you should be able to get the same products.”
Linio’s business model has shifted over time. “We held on to [a retail model] a bit too long,” Mjelde said. “We always knew that marketplace would be important. But we thought it might be a fifty-fifty business.… I would expect that the business could one day be 80 percent marketplace or even 100 percent.”
The company’s expansion in the region proceeded in typical Rocket fashion—throw what you can at the wall and see what sticks. Mjelde said he thinks Rocket may have moved into too many new markets too quickly with its all-out strategy, without enough prioritizing. “We went quite aggressive in all of them. I think you also sometimes have to accept that some markets have a much higher growth potential than others. It’s a huge region,” he said. “To fly from here to Argentina is an eleven-hour flight. While people all speak the same languages and have roughly the same culture, there are a lot of nuances. In Mexico they have a brand culture. In Colombia they are not brand oriented, but they are deal oriented. In Peru there is no logistics industry, so there are fewer opportunities to push and scale the business up from scratch. In Argentina the market is more mature, so rather than focusing on every vertical out there, we needed to focus on certain product categories,” such as books, which, surprisingly, have been a market underserved online. Buenos Aires has more physical bookstores per capita than anywhere in the world, which highlights the demand for books in the city and might suggest that there is an opportunity for online booksellers to undercut their physical counterparts by selling books online at a discount.
So why did Linio stick to Spanish-speaking Latin America and not enter Brazil?
Mjelde cited several reasons. The Brazilian market is much more mature, with more competition from strong local players, such as B2W. Taxes and regulations are complex with many different tax regions. And logistics are tough.
When I asked Mjelde about the differences between Latin America and other parts of the world, one thing that stood out was the importance of financing. “One thing that is very important in LATAM, maybe more so than in both Asia and Africa, is to have a financing arm. When you see the traditional retailers, you’ll see that their financing arm is extremely strong. That might be as important a competitive edge as the stores themselves or product assortment or pricing. And that’s something most e-commerce companies don’t have as a core part of their value proposition. That’s something we didn’t initially plan to do, but it’s becoming a core part of the business.” To help serve this need, Linio introduced cobranded credit cards, and Mjelde expects the financing arm of the business to keep growing.
Does Linio see a big opportunity in moving into online financial services? “You have to take baby steps.… I don’t know if that’s where we’re going to go,” he said. “But I think we have to keep those options open.” In fact, retail operations in the region often own a bank, so I expect online retailers in Latin America will make big moves into online banking.
So how about competition in the region?
“I’m not losing my sleep for the local retailers moving online. But the international players are tough competition. Not so much for the fact that they are going to move into the markets here.… We are seeing that Amazon and eBay already have operations on the ground in Mexico. It’s not that easy for them,” Mjelde said. “They are a big monster, and this little team they have in Mexico does not get that much attention or IT resources.… Since both of them entered the market, if anything, we have been innovating faster than they are.” But the real issue is competition from cross-border trade, that is, Mexicans who buy products from overseas online retailers. “The [tax] legislation is not in favor of local companies [such as Linio]. The legislation is in favor of Amazon,” Mjelde argued.
But Mjelde conceded cross-border trades also offer Linio an opportunity. Cross-border trade has become an important niche for the company, perhaps showing signs of being a new trend. Cross-border trade is one reason that AliExpress has become an important player in Latin America, one of the most used marketplaces in the region. “Now almost 20 percent of the business is international marketplace,” Mjelde said. “We are finally in the position that we can offer you the Chinese price of the product, and we can soon offer you the same assortment. And that’s a big game changer for people.”
Mjelde didn’t say much about Mercado Libre. Either he doesn’t view it as a direct competitor or prefers not to point out the publicly listed elephant in the room. But the Mercado Libre folks had no reservations about taking a jab. An executive at Mercado Libre told me that, at Linio, “I see a very smart bunch of guys. They are incredibly aggressive and I respect that. I respect their determination. But they haven’t proven they can build a sustainable business in the region.”26
The trash talking could be a sign of things to come, as the two companies’ business models merge. Mercado Libre has the benefit of being a publicly listed company with a long track record. But it also has the disadvantage of being a publicly listed company with a long track record. Linio can benefit from being able to build a platform from scratch without the encumbrances that come with a legacy business.
There can be no doubt that Linio and Mercado Libre will butt heads, and other competitors will join the battle soon as e-commerce accelerates. And as it does, large markets that have been off the radar, such as Mexico, will increasingly be in the spotlight.
Another market to watch is Colombia. Although Brazil has struggled in recent years and Venezuela is coming apart at the seams, Colombia is proving to be a bright spot in the region. Two years after I was mugged in Bogotá, I returned to the country, again as a guest of the government, this time the Ministry of Commerce. It was exciting to see the change there. On my first visit I was told that “we don’t have e-commerce here, people don’t really trust each other.” Now the story was entirely different.
One of my hosts in the country was effusive in discussing how e-commerce has changed her whole life. “I buy everything online now,” she said. “Clothes, groceries, tickets. It’s so fun. And saves me so much time.” She walked me through her favorite app, Rappi, developed by local entrepreneurs who also happened to be her friends. It was one of the most innovative and fun shopping apps I’d seen. You shop for groceries and other items on the app by lifting products to add to your virtual shopping basket, the best replication of the actual shopping experience that I’d ever seen. Choosing from colorful mangos, soursops, and coconuts piled in nice virtual stacks and dragging them to the scale felt more like shopping at the Merced Market than on a somewhat boring and dry Amazon platform. The homegrown app had done so well that Rappi has been exported to other countries, even for use in Spain.
Even more interesting is that it was solving the security problem in the city, finding opportunity in the face of problems. “When I’m in a rush or don’t want to go out to use an ATM at night, I even order cash on the app,” which is hand-delivered by a courier, my host told me. Yes, you could pay digitally for a stack of pesos to be delivered to your door (by someone dressed discreetly, of course, so as not to attract attention from muggers).
Can it be that Colombia is ready to unleash its e-commerce potential? After a long wait, it seems the revolution is finally beginning to happen.
TRENDS AND PREDICTIONS
Latin America is (finally) on the verge of an e-commerce boom
It’s hard to believe how slow Latin America’s e-commerce development has been, considering that the region sits at the doorstep of the United States. You would think that Latin America’s proximity to Silicon Valley would have sparked a greater degree of e-commerce growth, if only from the cross-fertilization of ideas. But e-commerce’s golden era in emerging markets started across the oceans in Asia.
With the exception of Brazil, where e-commerce has enjoyed its own miniboom, Latin America’s e-commerce has been held back by several factors. Government regulations and industry protectionism mean the Internet has not become as widely available and affordable as in, say, China and Southeast Asia. Latin America has also suffered from a more conservative investment culture in regard to start-ups, because many of the large investors are conglomerates or traditional businesses that apply “old economy” metrics to “new economy” businesses.
An additional factor is the lack of diversity at Silicon Valley companies. Although Asians make up 30 to 40 percent of the employee base of the tech giants in the United States, Hispanics account for only 4 to 5 percent of the employee base at such companies as Google, Microsoft, Yahoo, and LinkedIn.27 The sharing of US know-how and tech experience by the Indian, Chinese, and Southeast Asian diasporas is largely responsible for the e-commerce boom in Asia. Without strong Hispanic representation in Silicon Valley’s tech management ranks, ideas have taken longer to spread from the US tech giants to the local start-ups throughout Latin America.
These problems will be overcome in the next few years as e-commerce finally reaches its potential in Latin America. As in Asia, smartphone penetration will be the key driver, putting a shopping mall in the hands of Latin Americans for the first time. Entrepreneurs will continue to study new business models from Asia and adapt them to Latin America, creating a better fit for developing countries than models taken from the shelves of the United States. Seeing the potential, the tech-oriented venture capitalists and private equity funds will at last give Latin America’s entrepreneurs the resources they need, fueling investment that will drive the ecosystem.
E-commerce will power through Brazil’s recession
If we learned one lesson in China, it is that e-commerce is resilient in the face of macroeconomic headwinds and generally outperforms the broader economy. Yes, strong economic growth provides a nice tailwind for e-commerce. But it also breeds complacency, as traditional retailers fail to innovate while consumers are spending. But when tough times come, consumers start looking for deals as a way to stretch their budget, and the best deals are always online.
Even major crises, such as the spread of the Zika virus, create needs and opportunities for entrepreneurs to fulfill. When SARS hit China, people were afraid to do business face-to-face, and e-commerce accelerated as buyers and sellers moved their shopping activities online. So, while Brazil has seen its fortunes rise and fall with the volatility characteristic of emerging markets, e-commerce should continue to grow steadily over the long term.
Mexico has emerged as the most exciting e-commerce opportunity in Latin America
Whether you are building an e-commerce platform, looking to extend a brand beyond traditional retail channels, or are an entrepreneur looking for a new market, Mexico is the country to watch for the next few years. With 122.3 million largely untapped shoppers gaining access to the Internet through their smartphones for the first time, the country is a bright spot, despite the question marks about the impact on its economy of a Trump presidency in the United States. Mexican shoppers will be easier to reach than ever before, through cross-border platforms such as Amazon.com or local platforms such as Linio and Mercado Libre.
Argentina is a close second for e-commerce opportunity
With a new government in place that advocates business-friendly reforms, Argentina’s fortunes look like they are about to improve, and e-commerce should be one of the greatest beneficiaries. For years currency controls and tight regulation of imports have hampered e-commerce there. But with the pendulum now swinging toward the pro-business side of the spectrum, Argentina’s e-commerce industry has a chance to bounce back and catch up with its neighbor and rival across the border, Brazil.
Colombia is an early-stage e-commerce powerhouse on the verge of liftoff
Latin America’s third-most-populous country is at last poised for an e-commerce boom following the peace deal between the Colombian government and FARC (the Revolutionary Armed Forces of Colombia). If the peace holds, a more stable Colombia could bring economic stability and attract more venture capital. With a highly entrepreneurial culture and consumers hungry for a better life after years of stagnation, new ideas may take hold in Colombia faster than in other Latin American countries. And, yes, the security issues in Colombia can be overcome, so long as entrepreneurs embrace the opportunity to come up with localized solutions rather than wait for someone else to address security problems.