Marcos Galperin took a wrong turn that ultimately put his company on the map. It was 1999 and the 26-year-old business-school student had scored the meeting of a lifetime: an audience with John Muse, co-founder of billion-dollar private equity firm HM Capital Partners. Galperin was asked to chauffeur Muse to the investor's private plane, and hoped to use the drive time to sell Muse on his idea for a Latin American e-commerce site.
But two classmates who tagged along had similar intentions, and Galperin hadn't been able to get a word in edgewise by the time they neared the airport. So he veered off course to buy time for pitching Muse on his brainchild, MercadoLibre (MELI). Online auctioneer eBay (EBAY) had sold shares the prior year for a 197% premium on its $18 offer price. And Latin America, with a rapidly growing online population and large number of remote villages without major shopping centers, presented an unprecedented opportunity for an eBay-like site where merchants could sell goods directly to shoppers, for a fee.
Muse agreed to fund MercadoLibre on the spot. "He dropped his suitcase and said, 'I would like to be an investor,'" recalls Galperin. "That was incredible."
So far, the investment has proved sound. Since its launch a few months after the fateful drive, MercadoLibre has become the biggest e-commerce site in Latin America when ranked by sales conducted on the site. Its 22 million registered users bought and sold more than $656 million in goods in the first half of 2007 alone, generating profit of more than $1.6 million. More than 20% of the 104 million people online in South and Central America shop on MercadoLibre's pages.
MercadoLibre's revenue and influence are likely to increase along with the growth of Internet use, much of it at high speeds, across Latin America. Since 2000, Internet usage has increased more than sixfold in Latin America and the Caribbean, according to InternetWorldStats.com, a market research site. Yet, only about 21% of the region's population is online, compared with more than 70% in North America. Broadband has reached only about 2% of Latin America's 548 million residents.
Finding other investors hasn't been hard either. In 2000, Galperin closed a $46 million round of funding led by Goldman Sachs (GS). In September, 2001, eBay took notice, acquiring a 19.5% stake.
Perhaps the easiest sell of all has been to Wall Street. Since the initial public offering on Aug. 10, MercadoLibre's stock price has climbed 148%, from $18 to $44.59, as of Oct. 29. "There is tremendous e-commerce opportunity in Latin America," says Tim Boyd, an analyst at American Technology Research. "Look at what happened [in the U.S.]."
Indeed, Galperin has modeled MercadoLibre on U.S. e-commerce pioneers, especially eBay, which has been closely involved in its development for six years. "From day zero, we looked at eBay as a role model," says Galperin. "But we always knew that we needed to change stuff to make it work in Latin America."
EBay's influence is clear in MercadoLibre's design, which bears a likeness to eBay's yellow and white site and is similarly organized. Like eBay sellers, MercadoLibre merchants deal directly with their customers via message boards and are responsible for promoting, selling, and arranging delivery. That setup differs from, say Amazon.com (AMZN), where third-party dealers sell goods under the Amazon brand name. MercadoLibre users also have individual feedback ratings based on customer reviews, similar to those on eBay.
Learning from Others' Mistakes
Seeing the success of eBay's payment service PayPal (BusinessWeek.com, 6/15/07), MercadoLibre launched its own payment service, MercadoPago. A new version of MercadoPago, now being tested in Chile, enables off-site payment processing. That formula that has proven successful for PayPal, which receives a little less than half its business from off-eBay transactions.
While Galperin has imitated many of eBay's successes, he also has learned from the site's failures. As the dominant player in online auctions, eBay has only recently come to terms with the fact that many consumers shop online for the convenience of buying items immediately and don't want to deal with bidding. In the past, the company tried to encourage sellers to list more items as auctions by increasing the fees for putting items in fixed-price stores. During eBay's third-quarter earnings call, CEO Meg Whitman indicated that eBay would no longer try to get sellers to offer items for auction rather than a fixed price. "It's the fastest-growing part of the market," Whitman said.
Although MercadoLibre started off mimicking eBay's auction model, it quickly followed Amazon's lead on pricing. More than 90% of the items on MercadoLibre's sites are sold at set prices. "MercadoLibre is actually just as much the Amazon of Latin America as it is the eBay of Latin America," says American Technology Research's Boyd. "It's both."
The Amazon comparisons are helping fuel investor interest. In part due to the popularity of the fixed-price approach, Amazon's net revenues have risen dramatically each quarter and its stock has followed suit. On Oct. 23, Amazon said third-quarter net sales rose 41%, to $3.26 billion. Amazon's stock has increased from a two-year low of $26.32 on Aug. 1, 2006, to more than $90, as of Oct. 29. Meanwhile, eBay's stock has risen from a two-year low of $22 on Aug. 2, 2006, to only $36.65 on Oct. 29, despite regularly posting revenue growth of 30% or more.
But is all the excitement over MercadoLibre rational? Some analysts are starting to worry that the stock may be rising a bit too quickly on promise, rather than results. In a September note to investors, RBC Capital Markets, an underwriter along with JPMorgan (JPM), Merrill Lynch (MER), and Pacific Crest Securities, initiated coverage with a "sector perform" rating. RBC analyst Jordan Rohan said in a recent report the company's stock price already reflects expectations for significant returns. The company is trading at more than 46 times its projected 2009 earnings. "Wait for a pullback to initiate new positions," he wrote.
There are threats to MercadoLibre's business. For one, MercadoLibre's minority owner could decide it wants in on the Latin American market. So far, there's little indication that this is in the works. EBay decided to partner with the site rather than compete when it grabbed a stake in exchange for the Brazilian subsidiary of iBazar, a French e-commerce site eBay had acquired earlier that year. (The subsidiary is now part of MercadoLibre's Brazilian site, MercadoLivre, which means free market in Portuguese.)
The biggest potential downfall is that MercadoLibre could fall victim to some of the same problems that have plagued eBay, which has seen declining U.S. growth over the years as users have become frustrated with rising fees and a small number of fraudsters who exploit the site. There are already signs this is happening to MercadoLibre, judging from posts on its off-site community blogs. On Usuariosdemercadolibre.blogspot.com, MercadoLibre users complain about buying cheap goods that turn out to be worthless, such as a used phone with faulty wiring, and make allegations of identity theft similar to the kinds eBay users have experienced. MercadoLibre user Clave74 said he was disappointed with the site when, after about 20 successful transactions, a seller didn't follow through on a delivery: "The system is not very trustworthy," wrote Clave74 on the blog.
MercadoLibre says in regulatory filings that cases of fraud are few and far between, and it has methods in place to deal with them. Less than 0.05% of items sold on the site were confirmed as fraudulent in 2007 thanks to monitoring and filtering on the site both by computer systems and the user community. Also, the company has a buyer protection program that covers losses up to $600.
Despite the threats, Galperin considers the path to success to be clear. And if he keeps following eBay's example, and learning from its mistakes, he's likely to avoid at least inadvertent wrong turns.