Going for growth: digital platforms

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There isn’t much sympathy for the losers in today’s digital economy. They’re often traditional industries with decades of dominance overtaken by upstart innovators who siphon off their customers with better, lower-cost products and services.

Sometimes they fight back. In Argentina last year, a consortium of state-owned and private banks complained to the competition watchdog. They alleged discrimination against their joint venture MODO, a digital wallet hastily created in response to super-disruptor MercadoLibre.

They claimed that MercadoPago, the payments arm of the ‘Amazon of Latin America’, was exploiting the lead it had built and wasn’t giving bricks-and-mortar competitors a fair crack in the payment options part of MercadoLibre’s virtual marketplace.

“Abusive conduct,” complained the consortium. Sour grapes, MercadoLibre replied, counter-complaining that the banks were forming a classic “cartel” against a nimbler competitor. “Perhaps [Argentinian] banks should compete with each other, innovate, develop products and pay off balances, as banks do in the rest of Latin America, instead of colluding and blaming MercadoPago,” its spokesman told Bloomberg.  

Beyond the irony of a Latin American banking oligarchy uniting to allege anti-competitive practices, the spat shows the hard reality of the digital consumption age. In today’s marketplace, the route to spectacular growth runs through the touchscreen and the keypad. Incumbency means next to nothing. Tomorrow’s winners are those with the technical and operational ability to create fast and frictionless user ‘journeys’ that delight new customers and retain existing ones. 

In payments, as in finance more broadly, in retail, entertainment, transport, logistics, food delivery, education and healthcare: it’s the companies that innovate fastest in anticipation of consumers’ needs and wants that build the widest competitive ‘moats’. 

For International Growth, the spectacular success of MercadoLibre, which we first bought in 2012, shows how quickly such customer-fixated digital platforms can overthrow the status quo. It’s particularly true in emerging markets with immature infrastructure. There, companies still unfamiliar in the west have exploited glaring gaps in provision, whether in retail banking or accessible shops, to make themselves ‘everything apps’, a far bigger part of daily life than, say, Amazon or Facebook are in the UK or US.

The rise of these digital platforms has led International Growth to devote a material portion of its portfolio to platform companies addressing chronic problems such as financial exclusion and lack of savings options to poor transport and last-mile delivery in countries with underdeveloped transport infrastructure. 

It’s also an example of how the new digital dynamics reward those who can scale their business fast enough to benefit from ‘network effects’ – the virtuous circle by which more users mean greater usefulness which means more people want to join, and so on.

In this dynamic market, there is much for our managers to stay on top of, including: 

• Assessing the value of customer experience and satisfaction and how that translates to loyalty and retention 
• Understanding how well a firm uses data analytics to anticipate consumer behaviour and optimise operations
• Judging how well a company builds and uses its supply chain and logistics to improve fulfilment speed and lower prices
• Analysing how well the firm deploys investment in AI technologies to accelerate progress in all of the above. 

MercadoLibre’s success is underpinned by the boldness of its innovations in these areas. Its logistics arm MercadoEnvios, for example, deploys a fleet of nine cargo planes to cross the vast expanses of Brazil. It also illustrates some of the characteristics possessed by the best digital platforms. 

The scale of the opportunity is key here. Latin America has relatively low internet penetration, young and mobile-savvy consumers, and an understanding of local markets and consumer behaviour that have helped the firm stave off strong challenges from giants such as Amazon and Alibaba.

Another company that has exploited such opportunities and has even challenged MercadoLibre on its own territory, is Singapore’s SEA Ltd, which International Growth first bought in 2021. It’s an even better example than ecommerce-plus-fintech MercadoLibre of the diversification that the low-friction cross-selling opportunity that digital consumption allows.
 
As well as Shopee, the dominant ecommerce marketplace in Indonesia, Singapore, Thailand and Malaysia, SEA also has a nascent payments and digital banking division called SeaMoney. However its expansion in these areas is partly funded by its success in a third area: gaming. 

SEA’s Garena games subsidiary was the origin of the business founded by Forrest Li in 2009. Its global hit game, Free Fire, has generated a healthy free cash flow that allowed the company to invest heavily in Shopee, expanding its geographical reach and marketing drive. 

There’s little obvious crossover between gaming and shopping but in practice, Shopee can promote itself within the digital universe of a game played by millions of (mainly young) people. And digital payments for Garena, like those for Shopee, are most seamlessly paid via SeaMoney, creating seamless transactions and a better experience for users.

SEA’s cross-selling between imaginary and real worlds is an example of a landscape which goes from wholly unfamiliar to taken for granted in the blink of an eye.  We’re still coming to terms with how much the connectivity allowed by consumer electronics has allowed such digital platforms to change the rules of business formation and growth, a process now turbocharged by the application of AI. 

There have been few parallels since the dawn of the industrial revolution for the speed and extent of how digital consumption’s weakening the power of incumbents and intermediaries, downgrading the importance of physical distance, transformation of work patterns, and commoditising of humdrum customer data. Small and medium-sized enterprises can compete with well-entrenched incumbents on this new level playing field. The challenge for International Growth is to hone our ability to spot and retain those capable of game-changing disruption, while thinking far enough ahead to avoid being disrupted themselves. 

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