Viva Mexico
What We Can Learn from Mercado Libre's Investments into Mexico
Mercado Libre is often characterized as the Amazon of Latin America. In reality, 95% of Mercado Libre’s revenues are from three just countries; Brazil, Mexico and Argentina, the region’s 1st, 2nd and fourth largest, respectively. Mexico is third in terms of revenues and a distant third in terms of gross profits generated, but the most interesting of Mercado Libre’s three markets to analyze. Why?
From north of 40% during 2012 - 2014, The Company’s Mexico segment margins plunged to a low of negative 109.2% and recently were 15.3% in 2022 and 20.6% in 2023. Since making huge investments into Mexico, segment revenues have CAGRed 96.8% through 2023, vs. 49.1%, and 44.3% for the Brazil and Argentina segments revenues, respectively.
My goals are in this short write-up are to answer: what investments Mercado Libre made, how much and why. And then, what those investments tell us about The Company’s future, and how they reflect on Mercado Libre’s leadership? I let the numbers and management tell the story in section one, starting with the big picture and then getting into specifics. I end with my takeaways in section two.
Table of Contents:
30,000 Feet and On The Ground - E-Commerce and Fintech
Learnings and Takeaway - Profit Muscle
Before getting into it, let’s actually see how the story ends. In August 2022, Osvaldo Gimenez, Mercado Libre’s President of Fintech, shared,
…five years ago, we engaged in a very aggressive investment cycle, confident that long-term, if we invested in Mexico, given the size of the market, the potential of the market, eventually scale would kick in and Mexico would become a profitable business at a much larger size. And additionally, it's allowed us to defend our leadership position where despite an incredibly competitive market, we still are market leaders
Scale. Mercado Libre decided scale was necessary to compete and win e-commerce market share in Mexico. Let’s see how they scaled.
1. 30,000 Feet and On The Ground - E-Commerce and Fintech
Mercado Libre launched e-commerce marketplaces in Argentina, Brazil and Mexico in 1999. Since going public in 2007, The Company reported each of the three countries as segments. Specifically, their revenues, direct costs, we’ll dig into these more, and the difference between revenues and direct costs, referred to as contribution, basically segment gross profits. Mercado Libre also has shared varying amounts of color and detail on each countries performance on conference calls and in earnings presentations.
In this section, I show (1) Company-wide and segment margins over time with the goal of framing the story, showing the large investment cycle Mercado Libre undertook in 2017 and why Mexico stands out. Next, we examine the investments themselves, into (2) shipping and fulfillment and (3) fintech. In each of sections (2) and (3), I both measure the investments made as well glean how those investments fit into Mercado Libre’s strategy.
Above, I show The Company’s definition of segments from their 2023 Annual Report. Mercado Libre’s segments are Brazil, Argentina and Mexico as well as Other Countries, which currently includes 6 more Latin American countries where The Company operates e-commerce marketplaces. Since 2010, Mercado Libre has attributed both e-commerce and fintech revenues as well as their direct costs to each segment and left certain costs unattributed. Let’s start with a 30,000 foot view of Mercado Libre’s cost structure:
