Latin American E-Commerce Boom
In 2016 the average number of online transactions per capita in Latin America (LATAM) stood at 9.2, the lowest of any region worldwide. Despite this e-commerce sales stood at US$49.8 billion in the same year and by 2019 this figure surpassed $70 billion.
With over 50% of all Latin Americans lacking a bank account and 68% being mobile subscribers, a figure forecast to reach 78% by 2025, the scope for growth in LATAM is huge. The cost of acquiring a cell phone with 1GB of mobile data in LATAM accounts for 5% of the annual median income compared to 1% in Europe and the USA. This difference is mainly due to shortcomings in the availability of fixed broadband infrastructure. An increase in broadband revenues of 16.5% and subscriptions of 41.9% in Brazil, Mexico, Argentina and Colombia combined in the past 4 years along with forecasts of a doubling in revenue by 2027 make sustained investment to correct this likely.
The spread of digital banking is integral to ecommerce success. Poor coverage in its oligopolistic banking system along with heavy concentration and a high mobile adoption rate has made Latin America an attractive place for digital banking solutions. This has driven a growth in fintech funding from below $50 million to over $2.1 billion in the last 6 years.
There is still significant scope for further growth with cash accounting for around 80% of all transactions and the credit-to-GDP ratio at around 35%, constraining credit expansion. Furthermore, the government is undertaking a series of measures designed to encourage the general population to eschew cash for credit. These include supporting partnerships between new fintech start-ups and existing banks which already possess the required operating licenses, accelerating the rate at which digital banking is able to launch into new markets. Confidence in growth potential is indicated by the amount of venture capitalist funding flowing into Latin American fintech start-ups. From US$600 million in 2017 to US$1.4 billion in 2019.
E-commerce is set to grow in sync with digital banking as not only does the latter increase the size of the market for the former (having a bank account is a prerequisite for being an e-commerce customer), but the two are regularly offered by the same provider. For example, the largest e-commerce firm in LATAM is MercadoLibre with a market value of $50 billion. The firm provides both an online sales platform as well as a fintech platform Mercado Pago.
The coronavirus epidemic has expedited the shift from brick and mortar to online shopping. Fast-forwarding it by as much as 5 years according to MercadoLibre’s finance chief Pedro Arnt. It is estimated that 10.8 million Latin American consumers will make their first digital purchase this year, bringing the total digital buyer count to 191.7 million. Forced closure of physical stores has the added benefit of driving heightened competition within the e-commerce industry as traditionally physical retailers are convinced by covid-19 of the importance of building online networks and foreign e-commerce competitors like Amazon seek to cash in. The current e-commerce leader in LATAM, MercadoLibre, was founded by Marcos Galperin in 1999. Over the years it has headed off much foreign competition. That may change. Although Amazon entered the Latin American market 7 years ago and still posts sales less than half of MercadoLibre’s it possesses an advantage in the diversity of services it offers.
Whereas MercadoLibre and Mercado Pago provide only e-commerce and digital banking, Amazon also offers the Alexa technology platform, AWS cloud services and entertainment services. It is using these branches to provide package deals like Prime and entertainment options to sway consumers. Attempts to gain loyalty can be seen in attempts to tailor content to local tastes such as a soon to be released documentary series on Brazil’s national football team. Another issue is that MercadoLibre is modelled on Ebay and thus has greater specialty in servicing small and medium-sized merchants. With retail giants like Walmart, GPA and Carrefour already having established strong presences they may push their own online shopping services. However, given the capabilities of existing ecommerce platforms like MercadoLibre and B2W and the huge investments in their infrastructure, both in extensive delivery networks and logistics, physical retailers are unlikely to be able to compete. A more likely scenario is the emergence of partnerships where traditional brick and mortars use existing ecommerce platforms to sell their goods or if they do build their own platforms, negotiate for use of existing delivery networks and logistics. Either way LATAM’s existing e-commerce enterprises benefit. SMEs account for over 99% of all enterprises in Latin America and provide around 70% of all employment. Even before the crisis they faced severe problems, two in particular. The first is the myriad of small businesses that maintain outdated operations such as cash-only. The second is an oligopolistic banking system overly reluctant to provide credit access. The result is dangerous spiral where small businesses are unable to modernise due to a lack of credit and banks refuse credit access to old-fashioned businesses. This lack of dynamism among SMEs has made them particularly vulnerable to the ravages of covid-19, even those offering essential goods like food staples and health care expect a negative impact on revenue and earnings. A BCG survey found that as much as 80% of Spanish speaking Latin Americans plan on reducing household consumption in 2020. There is, however, light at the end of the tunnel. Consolidation among SMEs to weather revenue collapses through synergy will become widespread. Among retailers we should see a fall in independent small business and a growth in large-chain presence. This is likely to be of benefit to e-commerce as larger retailers will put heightened pressure on consumers to use mobile payments, potentially via QR codes. Even more so considering the prospect of cash as an infection risk. This pressure comes alongside added security with new payment entrants leveraging local databases and machine-learning capabilities to improve anti-fraud technology.
Source: World Economic Forum The ultimate dictator then of how much Latin American e-commerce will grow is how much the Latin American economy will grow. LATAM’s e-commerce growth potential is evaluated by comparison with other regions. The value of merchandise traded in 2019 on MercadoLibre averaged per person stood at $30 in LATAM whereas the figure for Amazon in America, Europe and Japan stood at $405. Pre-2019 forecasts showed a narrowing in this gap with growth in Latin America outstripping more developed rivals. The outlook now however is worrying, even relative to the rest of the covid-stricken world. In 2018 LATAM grew by 1.6% and in 2019, 0.6%, falling short of the forecasted 2.1%.
Prior to the pandemic, Argentina was already in recession and the largest economy Brazil had China as its largest export market. With China’s growth slowdown unlikely to reverse as its corporations come under increasing American scrutiny and the OECD forecasting a record contraction in Argentina’s economy (10% this year), growth prospects are worrying. While e-commerce will no doubt grow, strain on the rest of the economy will act as a brake.