Latin America is the World Leader in eCommerce Growth Despite Serious Challenges
eCommerce in Latin America is booming, and with the number of people using the internet and social media growing by the day, there is plenty of opportunity for companies selling online, also known as “eRetailers”. In fact, online sales are expected to grow 19% in the next five years – well above the global average of 11% – and are foreseen doubling in value to $118 billion in 2021. Two of the three fastest-growing eCommerce markets in the world are in Latin America: Colombia and Argentina.
Despite these impressive statistics, eRetailers face many challenges in Latin America, including online payment security, low banking services usage among citizens, and serious logistics issues, according to Patricia Galina of IEBS. The World Bank highlights some key areas where Latin America lags behind other regions as “lack of adequate roads and railways and port and airport efficiency”. It also cites corruption and cumbersome customs as major concerns. Lower purchasing power and tricky government regulations present yet another major roadblock. In addition, there are challenges related to trade and financial structures, such as the aforementioned banking penetration rates, along with low levels of confidence in electronic payment systems and lack of free flow of data. Analysts believe that companies must find a way to overcome these barriers to realize their full potential in this very promising market.
Next year, eMarketer forecasts that 155 million of the 650 million people in Latin America will shop online, an impressive increase of 40 million over 2015. This is thanks in part to a rise in internet and smartphone usage, especially in urban areas. Statista reports that in 2016, 27% of internet users made a purchase on their mobile phones and 40% of those people did so monthly.
Not only will the number of online shoppers increase substantially in the next three years, but the average revenue per user is expected to grow from $275 to $330. Brazil leads the pack in online spending, with nearly $17 billion worth of purchases in 2016. Mexicans bought $7 billion online in the same year, and Argentinians spent $5 billion. A study conducted by América Latina Business Review, found that, “87% of people who made an online purchase felt that the transaction was secure, which lead 97% of them to say they would buy online again.” That said, the average number of online transactions per person per year in the region was the lowest in the world at just 9.2 in 2016, as reported by eMarketer. The challenge for eCommerce companies is to tap into this market by making it easier and more appealing to buy online.
The booming eCommerce growth of recent years took place against a backdrop of a struggling economy. Now that the region is on healthy recovery path following the recession in 2016, it seems the sector will continue to see impressive results. A Consensus Forecast of economic analysts projects GDP growth of 2.3% this year, nearly a full percentage point above 2017, and sees it reaching 2.7% in 2019.
At the same time, inflation is moderating. “Regional inflation excluding Venezuela is seen coming in at 5.5% at the end of 2018. In 2019, inflation is seen ending the year at 4.8%” says Angela Bouzanis, Senior Econoimst for Latin America at FocusEconomics. In a variety of countries, growth in retail sales are forecast to nearly double in 2018 and pick up further in 2019, with continued growth through 2021. In the biggest economies, Brazil and Mexico, retail sales are seen picking up this year and next, while consumer confidence is expected to remain steady.
A Look at the Major Players
Some of the key players vying for a bigger stake in this exciting eCommerce market are MercadoLibre, Amazon, Walmart and Alibaba. MercadoLibre is by far the most popular online retailer in the region, with operations in 18 markets. With more than 50 million unique visitors per month in 2016, it outpaced Amazon and Brazilian B2W. Mateo Valdivieso of SeekingAlpha says that one of MercadoLibre’s strengths is that it, “offers technological and commercial solutions that address the distinctive cultural and geographic challenges of operating an online commerce platform in Latin America.” Billy Duberstein of investing site The Motley Fool concurs: “MercadoLibre has strong roots in Latin America and knows the idiosyncrasies of the culture, for now at least, this offers it a clear advantage over Amazon.”
MercadoLibre’s strong market position has not fazed the competition. Latin America is seeing somewhat of a gold rush from international players looking to cash in on its impressive growth. Amazon is breathing down MercadoLibre’s neck: When the U.S. giant entered Brazil in October 2017, the regional leader saw a 10% stock selloff shortly thereafter, although it has since recovered. Alibaba is also trying to get a foothold, as is Walmart, both of which are aiming for a strong position in Mexico, among other countries.
Additionally, within each country, there is fierce competition from local players. Often these companies have found ways to overcome some of the key challenges such as logistics, yet they will have an uphill battle competing against multinationals with money to burn.
Formidable Challenges Must be Overcome
The challenges these and other eCommerce companies are up against are daunting. Logistics, traffic and infrastructure are major issues in Latin America, where logistics alone can amount to 15% of the cost of what’s sold, well above other regions. Many online retailers have put logistics on the back burner for years, focusing on the user experience through purchase, and as a result it can take weeks for a purchase to arrive at the customer’s door, according to Bloomberg and Simpliroute.
Adding to logistics issues are a myriad number of regulations and rules, which are different in each country. The International Development Bank states that, “among other factors, [is] the much-needed updating of many of the legal underpinnings for commercial transactions. […] payment mechanisms, dispute settlements, and devices to ensure that contracts are upheld are all areas in which the legal structure of trade needs to adapt to the new ways of trading that this revolutionary technology has brought.”
Another barrier occurs at the time of payment. Access to secure, credit card-based payment methods is limited, and, while card use is growing, it is relatively uncommon in the region because many people do not use a formal banking system, according to an article by Jason Harvey. Those who have a debit card are often not permitted to use it for online transactions. Retailers have found ways to manage this reality. eShopWorld reported that 36% of online consumers prefer to utilize PayPal, and 35% use Cash on Delivery. That said, in the largest markets – Argentina, Brazil and Mexico – consumers’ preferred payment method is in fact via credit card. This is just one of the many indications of the disparity between the largest economies in the region and their smaller neighbors.
Who will come out ahead in eCommerce in Latin America? Will Amazon dethrone Mercadolibre, or will the Latin American giant hold its ground? Can local players step up and fill the needs of consumers and meet challenges they best understand, keeping global players at bay? Only time will tell.
Written by Miriam C. Dowd
5-year economic forecasts on 30+ economic indicators for 127 countries & 33 commodities.
Date: March 22, 2018
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