Buenos Aires — In the midst of the global inflation, rising rates and high market volatility, unlike some of the big tech companies that are freezing hiring or even making layoffs, Argentine e-commerce giant MercadoLibre (MELI) is continuing with its expansion plans, which include growing its fleet of electric delivery vehicles and introducing payments with crypto in Mexico, in what Ariel Szarfsztejn, the company’s executive VP of e-commerce calls “aggressive growth”.
MercadoLibre already has experience in navigating global, regional and local crises. “We have the right talent and we want to keep expanding it. We’re not thinking about cutting back and putting the brakes on,” Szarfsztejn said in an interview with Bloomberg Línea.
But that doesn’t mean a business-as-usual scenario either. For Szarfsztejn, crises like the current one - MercadoLibre’s market valuation today stands at $43.55 million, down from $100 billion in 2021 - are moments to “rethink priorities”, and also to adjust.
At this moment, those adjustments are coming in the form of scrutinizing “every line of the profit and loss” to maximize spending efficiency, and Szarfsztejn says logistics is the highest priority area.
“Every efficiency point we can capture there has a very, very big impact,” he says, adding that the company is also making efforts to optimize customer service processes, and “be more efficient in how we invest in marketing, how we buy traffic.”
While on the one hand it is borrowing from Goldman Sachs to finance the expansion of its credit business, the e-commerce unit aims to fund the investment with its own cash flow.
Record revenues reported this year seem to indicate that this strategy is on track, while the company is also looking to innovate in other areas such as crypto.
“MercadoPago today allows you to buy, sell and store some cryptocurrencies in Brazil, and now we are extending this to Mexico,” says Szarfsztejn.
The following conversation has been edited for length and clarity:
Bloomberg Línea: We are facing a global context of rising rates, which seems adverse for companies focused on growth. Do you see similarities between this scenario and what happened during the dotcom bubble, which also affected MercadoLibre?
Ariel Szarfsztejn: In 23 years, we have lived through cycles of all kinds and colors in every country, and governments with one political affinity, with another, with one economic vision, with another. There is a more secular trend behind our growth model that has to do with continuing to democratize commerce, finance, and how online purchases are becoming more and more important in the world of total retail, which are still small, very small. We always try to see the opportunity in complex contexts. This is not a different moment in that sense. We are still in such primary steps of what we believe can be the total potential, that in the end the change of macro context does not affect our long-term plans. Regarding the comparison with the dotcom bubble, MercadoLibre was very, very small, with a very niche business. And today it is a different-sized business. In that sense, it is not so comparable. It is comparable in terms of the need to rethink priorities, to adjust, to understand the context quickly and to act accordingly. The change in the context highlights a strategy that we have been facing for one or two years, which is how to find that balance of continuing to be aggressive in growth, but at the same time generating profitability and making our business move in a sustainable way, and not only at the cost of investing, investing, investing.
What did happen after the dotcom bubble is that there were fewer companies left. There were more e-commerce companies in Argentina. Do you think there will be a market concentration?
I don’t think there will be a concentration. I think we are at the moment of greater competitive intensity in the tech world in Latin America with Asian, local and US players trying to invest and capture their share in the region. But yes, as you say, it is true that in many moments crises unmask which are the business models that are sustainable and which are not and are simply sustained by investment or banknotes, right? Fortunately, we believe we have one of those businesses that fall into the first group.
In terms of concrete numbers for online retail growth in the next 10 years, what are the objectives?
In general, we don’t like to give guidance to our investors as to what our growth trajectory is going to look like. But from the concept thesis we talked about earlier, e-commerce as a percentage of retail in Latin America is coming from very, very low numbers. Single-digit in the last few years. When you compare that with numbers in the United States that were around 15-20%, and in Asia between 30 and 40%. Online penetration as a percentage of total retail. The pandemic clearly accelerated all those processes. And maybe we can think, there are no official numbers, that in Latin America we are already in the lower double digits. There is nothing structural that does not allow us to imagine a future in which online can resemble what is happening in the US, in Europe, or in Asia.
What is your interpretation of MercadoLibre being worth today, more or less, half of what it was worth in market cap in January 2021?
There are market valuations in general that exceed MercadoLibre in particular. If you look at the relevant global players in the technology industry, both e-commerce and fintech, all of them have had their valuation resets. Rather than obsessing about interpreting, justifying and understanding the logics of valuations, we are very, very obsessed with executing and continuing to build the fundamentals that are going to allow us to better serve our user, whether that is having a better logistics network so that shipments continue to arrive very fast and free to our users, continuing to create the best advertising platform so that more brands and sellers can advertise digitally on our platform, and continuing to innovate. I think that’s where our focus is.
You have been talking for a long time about concentrating more on the bottom-line, on taking more care of profitability. But at the same time, this year you reported record revenues. Could that lead to a relaxation?
No, on the contrary. This year we are redoubling our work in terms of focus to continue sustaining the high growth rates that we like, that we are used to and to which we aspire. To translate this into results in the profit and loss, and to generate the cash flow that will allow us to continue investing. Today we have the fastest logistics network in Latin America. But we understand that we have to continue investing in robotic infrastructure, technology, physical infrastructure, warehouses, etc. And all this requires cash flow. For that we also need to generate results. Rather than relaxing, we are at a moment where we are very, very focused on finding that balance.
Aside from investing in logistics, what other aspects of the operation are you working on to improve efficiency?
I think we look at every line of the profit and loss and try to make sure that we are efficient in how we spend, and that where we are spending has to do with serving our users better. But not by that leaving value on the table. Logistics is the most obvious point, because if you look at MercadoLibre’s income statement, one of the biggest expense lines clearly is logistics. Every efficiency point that we can capture there has a very, very big impact. Our logistics grew very fast in the last three years. So now, it’s our turn to be able to adjust and calibrate all of that in a more efficient way. We can be even more efficient in the way that we invest in marketing, that we buy traffic. We look at the best way for our customer service center to operate and try to streamline processes.
How do you explain the consumption phenomenon in Argentina in a context of such high inflation? In the second quarter you reported a growth in dollar invoicing in Argentina that surpassed that of Mexico.
As we talked before about cycles and how MercadoLibre tries to position itself and provide opportunities, in this moment of high inflation, the user becomes more sensitive to prices and MercadoLibre is a great platform to allow users to compare and look for better alternatives. This is a lever. The same happens with sellers in challenging and difficult contexts. They want to be able to reach more users and not just the customers that pass by the block where they have their stores. Our business is one of a network of externals. It is at times like this that that whole network starts to become more valuable, because we generate options for one side and for the other.
You took on debt with Goldman Sachs, mainly for the fintech operation. Is there a possibility of seeing a similar debt incurrence for e-commerce investments?
Today we are not thinking about that first, because we have a business that is self-sustaining. We generate in the business the cash we need to invest in logistics and in our everyday operation. We feel comfortable with the aggressiveness we have. Today we do not see the need to go out and look for third party financing. It is very different from the logic of a credit business, where at the end of the day cash consumption has to do with being able to generate more originations.
What are the main areas in which to invest in the e-commerce operation going forward?
Logistics is still a main area and we want to do more same-day and next-day shipments. We want to do more free shipping, robotize. Or to technologize more warehouses in our region. We are expanding Gol’s aircraft network in Brazil, and in Mexico we have our air operation, too. We want to continue to leverage new verticals in Brazil. We launched our supermarket offering that includes fresh produce last year. We launched it a few months ago in Mexico. There are opportunities to serve that demand, and potentially in more places in the region. We want to improve our ability to sell household appliances and large, bulky products, for which today our infrastructure is a little bit more limited. Obviously, continuing to hire talent is a top priority. This year we announced that we were going to hire 14,000 people, many of them in technology, because we understand that our developers and our technologies are what will generate all the future value of growth and innovation. The Mercado Ads example is tied to this. Many developers are focused on creating a platform for sellers and brands to channel their digital advertising investments in MercadoLibre. Today in Latin America they don’t have so many options to invest. If you look at what happens in Asia or the United States, 40% of the digital investment of brands or sellers goes to Alibaba or Amazon. In Latin America that is very small. The opportunity to generate diversity in options is great.
You mentioned hiring talent. Every week we are seeing big tech companies and startups around the world announce new staff cuts or hiring freezes. Isn’t that trend coming to MercadoLibre?
We believe that we are where we need to be, that we have the right talent and we want to keep expanding it. We’re not thinking about cutting back and putting the brakes on. These are things that are happening in other markets, or in other companies. But we are very proud of the talent we have and we have the ambition to keep growing that pool because at the end of the day, that is what is going to allow us to keep growing and developing our business going forward.
In Brazil you are innovating in two areas: logistics, with MeLi Air, and crypto, with Mercado Coin. Is there a plan to launch them in other markets in the region?
We realized that if we didn’t invest in logistics, that was going to be our bottleneck for our e-commerce business to keep growing. And that is why we see a super aggressive investment plan, to build our own network and above all, to build the technology that makes it work in a synchronized way. The country where we have seen this most developed is Brazil, where we have many large fulfillment stores, but also last-mile stations, and where we built our network of airplanes. In Mexico we are doing the same thing, and in Chile, we just opened a warehouse that is going to be 100,000m2 to replicate our strategy of storing the vendors’ products, operating 24/7 and dispatching fast. And we just moved our warehouse in Colombia, as well. Today we should have the largest hybrid vehicle fleet in Latin America, and 300 or so electric vehicles operating in the region. We believe that by the end of the year we can reach 1,000 electric vehicles because our commitment is to continue mitigating the impact of the carbon footprint of what we generate. But our ambition is much greater, to acquire thousands of electric vehicles. And unfortunately for Latin America it is still an evolution that is more contained from the supply side of vehicles than from the demand and vocation side.
Regarding crypto, on the one hand, MercadoPago’s wallet today allows buying, selling and storing some cryptocurrencies in Brazil, and now we are extending it to Mexico. And eventually we will follow our roadmap to try to expand it to other countries of the region. Our users demand this type of asset. Mercado Coin is a pilot that we launched very recently in Brazil, and it has to do with incorporating into our loyalty program a cash-back for purchases made in MercadoLibre, which are automatically saved in the MercadoPago wallet. Then they can use them to buy again in our marketplace and eventually they can sell them outside using MercadoPago’s wallet, too.
In Argentina, Banco Galicia tried to launch crypto, and the next day it was cancelled by the central bank. Is that something that stops you from thinking about launching crypto in Argentina?
We always analyze the regulations and we try to put in each market those things that we believe fit the user’s needs. We still have a large roadmap of countries where we want to launch it and eventually we will evaluate and define what we have to do with Argentina.
We have elections in Brazil on Sunday, and in Argentina next year. Does this potential for volatility affect your projections?
No. In 23 years in Brazil, in Argentina and in all the countries of the region, there have been governments with different ideologies, with different ways of looking at politics and the economy, and fortunately, I think we have been able to be successful and execute in all those contexts. So, our vocation continues to be long-term, to invest in order to do the right thing. And our big plan for the future will not change. Whether one candidate wins in Brazil or the other wins.