Reflections: MercadoLibre’s llama mile

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At 3,775 metres above sea level and 1,386 kilometres northwest of Buenos Aires lies San Antonio de los Cobres.

The Andean town is home to 6,000 people and earned its name from the surrounding mineral-rich mountains, Sierra de Cobre, or Copper Mountains. As well as mining, weaving local llama wool has been at the heart of the economy for several decades.

Perhaps surprisingly, San Antonio de los Cobres provides a good proxy for some of the structural changes we believe will drive growth in the Long Term Global Growth portfolio for decades to come.

Llama wool continues to be a popular textile. The llamas it is sourced from, however, have found themselves playing an unlikely role in the digital revolution sweeping Latin American commerce, by serving as the rural ‘last-mile’ delivery service of Mercado Libre’s logistics network.

Starting in the Buenos Aires garage of Stanford graduate Marcos Galperín in 1999, Mercado Libre (familiarly known as MeLi) has become Latin America’s largest ecommerce platform. Its mission? To democratise commerce and financial services in the region.

Over the last 25 years, the company has grown to generate approximately $13bn in net revenue. It has 120 million users across its platforms, and $1.9bn in operating income. But success has not come easy. Instead, it is the product of a leadership team that continues to prioritise innovation and adaptability to achieve long-term strategic goals.

Its early years in the boom and bust of the dotcom bubble exemplified the importance of capital discipline. The company reached profitability and generated cash ahead of its 2006 IPO, off a base of just $50m in revenue. In fact, MeLi was a textbook capital-light business. And it wasn’t long before returns to scale meant operating margins climbed to 30 per cent.

But as competition mounted and share gains shifted from being a function of greater product selection toward greater convenience, MeLi was forced to reprioritise. It realised that logistics would be a critical piece of the user experience, so in 2015, the company went all in. It took a very neat software solution and pivoted to build hard infrastructure. At the time, the short-sighted would have struggled to see beyond deteriorating financials.

Today, MeLi runs the most efficient logistics network in Latin America. Achieving 80 per cent of deliveries within what was once an unimaginable 48-hour window. And it’s not stopping there, with its sights set on 24-hour and even same-day delivery. We expect it will soon be able to leverage this asset and monetise it as other companies look to outsource their delivery to MeLi.

This accomplishment comes from not settling on the best available existing solutions. MeLi stuck to its technology-focused heritage, opting to build in-house systems for route optimisation, warehouse management, and more. Having entrenched its competitive position, the costlier capital environment is now making it less feasible for competitors to catch up.

It is through this same innovative spirit that MeLi is looking to continue unlocking the shift from offline to online in Latin America. With roughly 11 per cent ecommerce penetration, Latin America is significantly behind the US, the UK and China, all of which are closer to 30 per cent.

In a region with a population of 650 million, the opportunity is undeniably huge but not without complexity. Other LTGG portfolio holdings Amazon, China’s PDD Holdings (with Temu), and Singapore’s Sea (with Shopee) are also looking to gain momentum in this market. In order for MeLi to stay ahead, onboarding more merchants and inventory, as well as continuing to invest behind improving logistics, technological interfaces, and user experiences, will all be necessary.

MeLi, however, has recognised that the interaction between payments and commerce is much more relevant in emerging markets. So, expectedly, half of MeLi’s business is now centred on fintech: spanning payments, credit, savings, investments, and loans.

The incumbent financial systems in Latin America are among the most profitable in the world, despite offering an inferior customer proposition. Brazilian banks, for example, achieve a return on equity that is more than double that of US equivalents by operating with some of the highest interest rate spreads in the world, neglecting customer service, and charging a variety of egregious fees. This has left hundreds of millions without a bank account or access to credit.

MeLi’s digital solutions have not only lowered the cost of service, making it possible to drive financial inclusion, they offer a radically better product. This opportunity, therefore, is not just about disruption but also about a growing market. With MeLi only commanding 1 per cent of those existing markets, we view this as an exciting source of future growth and upside.

In 1999 disrupting the Latin American commerce and financial landscape appeared a daunting challenge. Political volatility, currency fluctuations, hyper-inflation and high interest rates have cast several doubts on MeLi’s capabilities, overwhelming the share price on multiple occasions. Over the last five years alone, it has endured four drawdowns in excess of 30 per cent. The most recent of which (in 2022), a precipitous 70 per cent, provided an attractive entry point for Long Term Global Growth.

These risks raise valid concerns and are admittedly not intuitively conducive to growth. What is astonishing is that over this same time horizon, MeLi’s gross merchandise volumes have quadrupled, payments have grown ten-fold and so too have revenues. This highlights how exceptional companies can navigate and triumph in even the harshest environments. And MeLi continues to go the extra mile to drive technology-enabled progress.

Past performance is not a guide to future results. Changes in the investment strategies, contributions or withdrawals may materially alter the performance and results of the portfolio.

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This communication was produced and approved in February 2024 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.

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