MercadoLibre: An innovative star in international e-commerce

Recently, while on a trip to Buenos Aires, I attended a presentation from MercadoLibre, the largest and most successful ecommerce site in Latin America (NYSE: MELI). The MercadoLibre presentation was special because it not only provided a close-up view of a true internet power house, but also because it showed how the company's many successes are unmistakably traceable to a company culture centered on innovation. This vital characteristic -- innovation -- may seem at odds with the more popular notion that MercadoLibre copied the business models of more well-known names such as e-Bay or Amazon.com. But a closer look reveals a very different story and one worth keeping in mind while pursuing international business opportunities.

Company Background and Growth

MercadoLibre was founded in 1999 by Marcos Galperin, an Argentine national who was then studying at Stanford University's Graduate School of Business. Galperin's idea to start a leading e-commerce site in Latin America during the height of the Internet boom may not seem like a huge stretch of the imagination, especially considering that companies like eBay, Amazon and Yahoo had already started up to great fanfare. But, over 15 years later, the so-called "eBay of Latin America" is growing faster than its US-based counterparts. See chart below

source: YCharts

In the first quarter of 2015 alone, the company had 125 million registered users and achieved in-quarter sales of over $1.6 billion, ranking it well above any other e-commerce company doing business in Latin America with over 15% market share. See here

All of MercadoLibre's growth has even sparked speculation that it may follow the Chinese e-commerce giant Alibaba's footsteps by seeking to expand globally (see here for an article on Alibaba's recent comments on expansion). But, judging from the recent presentation, it appears that MercadoLibre continues to be laser focused on blazing a unique trail for e-commerce in Latin America.

Innovating Internationally

Indeed, MercadoLibre's spectacular success defies any assertion that it is a copycat of eBay or any other e-commerce site for that matter. In reality, MercadoLibre's secret to success is a series of innovations that were carefully designed to address the unique obstacles facing e-commerce in Latin America.

For starters, despite its nickname, MercadoLibre stayed away from online auctions made famous by eBay and opted instead to sell only new items at fixed prices in order to promote greater certainty and trust among its developing customer base. MercadoLibre's decision to steer clear from auctions proved to be a winning strategy and international start ups that remained loyal to the auction model eventually failed, including Deremate.com, MercadoLibre's one time rival which eventually sold out to MercadoLibre.

Also, unlike Amazon.com, MercadoLibre focused on selling only products owned by private sellers as opposed to delving into the riskier proposition of buying and warehousing its own inventory. Similarly, MercadoLibre also refused to enter into the shipping business for its first 12 years of existence due to the many operational complexities involved. It only recently changed course, launching MercadoEnvios, a robust shipping solution that is growing rapidly.

Finally, unlike its US counterparts that rely on credit card and Paypal solutions, MercadoLibre invested heavily in its own payments platform called MercadoPago which has grown to become the leading internet payments platform in the region..

Each of these innovations were driven by the need to address unique e-commerce challenges presented by Latin America, including costly logistics and customs duties, unstable currencies, and deep-seated distrust of online transaction. As the following table illustrates, MercadoLibre focused on resolving each of these obstacles systematically and, in the process, distinguished itself from the likes of AOL, Ebay, Yahoo, and Amazon, all of which failed in their own efforts to expand into Latin America.

And if there is any doubt that MercadoLibre's ability to innovate in the e-commerce space has been successful, take a look at its stellar stock price performance since 2009. See chart below. No doubt, investors are counting on continuing innovations from MercadoLibre's management in the years to come.

source: Stock Traders Daily

Lessons for International Startups and Pioneers

MercadoLibre's story provides many lessons for businesses involved in developing new business models or introducing new products in international settings.

• Catching a new business wave is just the beginning: While many observers may initially see MercadoLibre as a Latin American replica of more famous internet stars such as eBay or Amazon.com, that perception covers only the tip of the iceberg. It is true that Mr. Galperin saw the potential for e-commerce in an emerging market like Latin America, but this initial spark just got the company off the ground. MercadoLibre's subsequent and sustained success can only be explained as a feat of business genius based on repeated innovations seeking to perfect the e-commerce model in Latin America.

• Don't assume first mover strategies will work internationally: First movers in any industry -- particularly in fast paced internet businesses -- no doubt have an advantage over slower competitors. But when considering applying new business models overseas, a new type of race begins that involves adapting to new business models to the unique challenges present in international settings. MercadoLibre not only did not assume eBay's model would work in Latin America, it constructed a business that would work better than e-Bay's.

• Focus on resolving place-based challenges: While many other e-commerce startups stubbornly assumed that Latin America would, eventually, adopt their original formulas designed for their own home markets, MercadoLibre was laser-focused on resolving the obstacles that were preventing widespread adoption of e-commerce in the Latin-America. The solutions -- such as the payments platform and, more recently, a shipping system -- not only facilitate using the internet but also engender user trust and loyalty that are securing MercadoLibre's market leadership in the near and longer terms.

• Resolve to remain patient: MercadoLibre has also been very patient in many respects. On a general level, it had to withstand slow growth rates in its first few years of operations while e-commerce and broadband networks slowly took hold in Latin America. Also, it had to remain patient to launch key solutions until they had been fully developed and tested. Its most recent innovation, MercadoEnvios, is a good example of not rushing into a big area of the business -- shipping -- until the company knew that it had gotten things right.

We will continue to cover MercadoLibre's growth in Latin America, and perhaps one day in other regions with great interest.

For a downloadable pdf version of this article, please see here.

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Andres Snaider is a founding partner of Nextant, a consulting firm specializing in assisting companies expand their businesses in international markets, with a strong focus on Latin America. With a degree in law and experience working as an international attorney and businessman, Andres has advised clients on a range of commercial matters and investments across the Americas. He is a graduate of the Harvard Law School and currently lives and works in Boulder, Colorado.

Email Andres at : asnaider@nextant.com

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