Will Amazon KO Mercadolibre?

By Danny Vena - July 29, 2012 | Tickers: AMZN, BBY, EBAY, MELI, WMT | 0 Comments

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When Amazon.com (NASDAQ: AMZN) was founded as an online bookstore in 1994, the world had no idea how this company would revolutionize retailing as we knew it and become the heavyweight champ of online retail.  Fast forward 18 years.  Look at their two largest competitors in the book market.  Borders, out for the count, filed for bankruptcy and liquidated in 2011.  While Barnes and Noble reaps the short-term benefit of Borders demise, they too are on the ropes.  They must be wondering to themselves how much longer before they are down for the count. 

Competitors in the electronics arena have not fared much better.  Ultimate Electronics and Circuit City have both suffered TKO’s, no longer able to compete and Best Buy (NYSE: BBY) has suffered a serious body blow and is in the process of reorganizing.  With no physical storefronts, Amazon has been able to offer lower prices than most competitors.  Reports indicate that Best Buy has become a victim of “showrooming.”  Customers do their window shopping at Best Buy, and then order their chosen electronics from Amazon for a discounted price.  Reports indicate that Best Buy plans to increase their online presence, close stores and refocus to smaller Best Buy Mobile Stores, as investors watch the blow by blow.

In the path of the juggernaut that is Amazon does any competitor stand a fighting chance?

An article published in Barron’s reported that Amazon's recent help-wanted ads show that it's staffing up in Sao Paulo, Brazil preparing to enter Latin America to provide its unique cloud-computing web services to Latin America's merchants.  This is also the biggest market for Mercadolibre (NASDAQ: MELI).   Mercadolibre’s investors are understandably concerned and wonder if they should just sell now and avoid being on the canvas later.

In a previous blog, I posted my thoughts on Mercadolibre.  But that was then and this is now, you say.  Surely, this scrappy Latin American contender can’t contend with the likes of this retail behemoth?  Perhaps a short review of Mercadolibre is in order.   

Mercadolibre, which means “free market” in Spanish, is often referred to as the eBay (NASDAQ: EBAY) of Latin American. The similarity between some of the services offered by each are striking: Each offers online auctions and a secure online payment service – PayPal for eBay and Mercado Pago for Mercadolibre. One might think that Mercadolibre is copying eBay’s model for success or that eBay might want to compete in this market. However, if you go to Mercadolibre’s homepage and click on the US link, it will take you directly to eBay! While they may have started out as competitors, after failing to make significant gains in Latin America on their own, eBay bought an 18% stake in Mercadolibre. Since eBay has a vested interest in Mercadolibre succeeding, they now act as a mentor. In this way, Mercadolibre can benefit from eBay’s experience – without making some of their mistakes. The one greatest example of this is Mercado Pago – Mercadolibre’s version of PayPal – which is one of the most successful and highest growth areas in eBay’s toolbox.

Mercadolibre also offers retail sales like Amazon.  Brazil provides a large percentage of Mercadolibre's revenue – more than half in the most recent quarter.  This seems to be the prize that Amazon seeks.  What chance does Mercadolibre stand against the reigning internet retail champion?

The good news is that Mercadolibre has a couple of things going for them.  The first is home field advantage.  Mercadolibre has been doing business in Latin America since 1999.  They were founded there, trained on those mean streets and have a unique understanding of the culture and business environment that outsiders like Amazon may lack.  Many high profile American companies have failed miserably in their attempts to infiltrate the Brazilian market.  Wal-Mart (NYSE: WMT), Dell and KFC are just a few of the household names that found they were leading with their chin in Brazil.

Reports indicate that Wal-Mart’s initial failures to successfully enter international markets extend beyond Brazil, to Korea, Japan and Germany.  They discovered that its formula for success elsewhere — low prices, zealous inventory control and a large array of merchandise — did not translate to markets with their own discount chains and shoppers with different habits.  Some of Wal-Mart’s problems stem from hubris, a uniquely powerful American enterprise trying to impose its values around the world.  If you are like me, you likely see the similarity between Amazon and Wal-Mart here.  If Amazon does not immerse itself in local customs, they could suffer a similar fate in Brazil.   

A recent seminar hosted by the Economist Intelligence Unit and Business without Borders detailed some of these challenges.  One of the panelists was Jerry Haar, director of the Pino Global Entrepreneurship Center, and associate dean, International Business, College of Business Administration at Florida International University.  Haar is the author of several books on international business including Winning Strategies for the New Latin Markets (2003), and Can Latin America Compete?  He probably knows a thing or two about achieving success in Brazil. 

Haar notes that one of most notable challenges is “Custo Brazil” – the extra, hidden costs of doing business because of Brazil’s poor infrastructure, impenetrable bureaucracy and inefficient regulatory regimes.  This is recognized as one of the impediments to doing business in Brazil.

Another key to navigating Brazil’s complex business landscape, said Harr, is to find a local partner. “Unless you have a product or service that is so unique that people will be running after you to handle your goods, you have to have a local partner.”

That person, agent or distributor should know the lay of the land – the operational ways of doing business, the distribution systems, product pricing, and be politically savvy in order to manage the ever-changing rules and regulations in Brazil.

But publishers and online retailers warn that when Amazon expands its retail offerings, it will struggle to replicate its efficient business model in Brazil, where labor costs are high, taxes complex and less than 20 per cent of roads are paved.

Another consideration is that Mercadolibre has eBay in their corner.  As I noted above, eBay has been Mercadolibre’s mentor and 18% owner.  eBay was founded in 1995 and operates the largest online marketplaces in the world.  They have continued to prosper, even in the shadow of their internet sibling and reigning champion.  eBay’s stock price has recently been hitting new 52-week and post recession high’s and is one of the best performing large caps stocks so far this year.  They continue to exponentially grow their flagship PayPal payment service.  What better trainer and ring man than eBay to guide Mercadolibre through this latest bout?  As I mentioned above, eBay initially competed with Mercadolibre, but failed to make significant gains against our Latin American upstart.  With these two former competitors as allies, the odds of surviving an onslaught from Amazon increase.

All this is great information for Mercadolibre investors to have.  But what they really want to know is this:  Will Mercadolibre be knocked out? No one really knows how the battle for internet sales supremacy will play out (My crystal ball is out for repairs).  I believe that Mercadolibre is ready to rumble.  However, there is an important point many investors miss.  The mentality “There can be only one” does not necessarily apply here.  eBay has not yet been knocked out by Amazon.  Coke has their Pepsi.  McDonald’s has their Wendy’s.  Sure, Mercadolibre offers retail sales, same as Amazon, but they offer so much more.  In addition to online auctions and Mercado Pago, they offer real estate listings like your local MLS, and classified ads like Craigslist. They have consistently added additional revenue streams, increased transaction volumes, improved their user platform, and increased their user count.  There is room for more than one successful internet champion – perhaps in a different weight class.

I have no reason to believe that Mercadolibre will find themselves on the mat any time soon.  While the situation in Brazil bears watching, there is simply no reason for Mercadolibre investors to throw in the towel. 

Tell me, was that one too many boxing metaphors?

(Acknowledgement and thanks to Starrob on the Rule Breakers Mercadolibre boards for contributions regarding competing in Brazil, links and consenting to share!)

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