Good afternoon, everyone. I hope you're hearing me. I'm Andre Baggio. I'm the Leading Analyst of JP Morgan in Latin American technology. I have the pleasure of having here, one more time, Pedro Arnt. Pedro is the CFO of MercadoLibre. He's been with MercadoLibre for 20 years. Pedro, thanks a lot for coming. I think I'd say maybe a great place to start would be just if you talk about your general priorities for the next 12 months. I think it's a good place because MercadoLibre has been always a changing company, it's good to know where you're focused these days.
Yeah. Great to be here again, as every year. I think we've never missed one conference since we've gone public. Lots of exciting and encouraging things going on in the company. Maybe one way to break it out is starting by separating different pieces of what is one ecosystem. I think to better understand it, if we look at the marketplace business and the retailing business, I would say there are probably one key priority for the next 12-month cycle is to continue the build-out of our logistics network. That implies the continued build-out of technology and operations in warehouses, sortation centers, distribution hubs, with a primary focus for the time being in Brazil, Mexico, and Argentina.
As we look to move more and more of the fulfillment and delivery volume on our platform away from the relationships we have with some of our transportation carriers, whereby they do the entire network. They pick up at the merchant, and they deliver at your doorstep. To be able to have more of our digital and technology footprint on that network through a combination of either fulfilling on behalf of our merchants, which in some markets where that's being very successful, like Mexico, already 20% of the volume being sold through MercadoLibre is fulfilled by us. Or even in instances where the merchant chooses to keep the inventory at his warehouse or store, where we are picking up, doing that first mile, then cross-docking over at a cross-docking station, sending that out in the long haul via either independent trucking companies, aircraft.
Having these last-mile hubs that receive the consolidated long haul and then distribute that out through multiple small 3PLs in the last-mile drive. That's a very different network design, where we're controlling service levels, cost, and have traceability of the package on these different players that comprise the managed network. We're trying to build that out for Brazil, for Mexico, for Argentina. We firmly believe that as we build that out, it gives us greater control going forward in terms of reliability of shipment, speed of delivery, and cost of delivery, which are three key components of sustaining our competitive advantage.
Staying on the marketplace very quickly, I think the other big area for focus going forward is continuing to expand the category mix that we have, so that we're able to continuously gain more share of wallet from consumers and drive up frequency of purchase. I think we highlighted in the last earnings call that our efforts to grow the apparel category, which typically is a very large category for most marketplaces globally, is going very well. Apparel is the fastest-growing category within MercadoLibre. The next one that we're going to tackle, which is in many aspects a more challenging category, it's at an earlier phase, is what sometimes is denominated as fast-moving consumer goods, sometimes CPG, which is a very high-frequency category for consumers.
That shift into a growing number of categories and more and more share of wallet is probably the second high-level strategic goal for the next 12-month cycle. If we move over to the fintech space, just we're incredibly excited about everything that's going on there. Really, that side is just about continuing to roll out and distribute the multiple financial services that we're trying to structure around our wallet and merchant service offering. That could be the distribution of our mobile POSs for merchants that want to be able to process credit cards. It's the overlay of merchant credit to facilitate those merchants' access to working capital loans so that they can sell more and sell better.
Shifting over to the consumer side, it's the issuance of prepaid cards and private label credit cards or co-branded credit cards that are tied to your credit history with us and your stored balance on our products. Perhaps most interesting and most exciting, the actual distribution of the digital wallets of Mercado Pago, from where a consumer can access credit, pay for utility bills, pay for transportation, top up his cell phone, and increasingly pay with that wallet in stores that accept our QR payment network. It's really a robust set of financial services that all allow for cross-selling and cross-monetization, and that we're trying to build out both sides of that network, the merchant network and the payer network. Again, Argentina, Brazil, and Mexico as priorities, eventually the remaining countries in which we operate.
Perfect. If we focus a little bit on the logistics. What are the challenges that prevent MercadoLibre to develop even faster its own logistics? Let's say, for example, getting merchants to put their products into MELI warehouses, getting new logistic suppliers to deliver each part of the business. What's the challenges involved in putting, let's say, a bigger chunk of the products into managed distribution.
This makes sense, right? We operate across a very large number of countries, the pieces of the managed network that are working better in some markets is different to other markets. I would say, I think I know what you're getting at, if we look at the countries where we fulfill on behalf of our merchants, that's actually working incredibly well in Mexico. I gave the data point previously. Roughly one in every five transactions are already being fulfilled by us. If you move over to Argentina, that's very recent. We launched a new warehouse in Argentina that will concentrate those fulfillment centers, only about two or three weeks ago. This week is the Hot Sale in Argentina, so it's the industry-wide event. We think that that fulfillment center will hold up very well.
In Brazil is where, if you look over the last two quarters, the percentage of packages being fulfilled by us has been fairly steady in the mid-single digits. Much less successful than in Mexico, I think we need to keep working on that. I think what we're doing is we're trying to give merchants certain cost advantages if they send the inventory over to us, acknowledging that there is incremental cost for merchants of doing that. They have to ship the inventory to us. They probably have to have deeper inventory to manage different sales channels. We're going to try to offset some of that with subsidies in getting the inventory over to us and also in lower transportation costs if it's fulfilled by us. We also eliminate the need for first mile, the overall cost to deliver that is lower.
We need to continue to work on the technology, on the tools. I think what we're hearing from our merchants is that if I'm going to give the inventory over to you, I need to have all the tools to be able to know exactly what's happening to my inventory, where it is, and how it's being sold, we still have some work to do there. I think we need to keep monitoring that over the next few quarters and see how that evolves. This is all fairly early. I think the fact that we are being very successful in one market typically means that eventually we're able to figure out how to make that apply for the different markets, we'll see.
What's working very well in Brazil, just to wrap up the question, is the way that we continue to have very rapid advance of our managed network in Brazil, despite the fulfillment efforts having been flat Q1 to Q, is that we see continued growth of what we call the cross-docking. Those merchants that are telling us, "Look, I don't want to send my inventory to you at the fulfillment center," at the same time, they're always telling us, "I'm absolutely okay, rather than sending it through transportation companies, having you guys pick up that inventory once or twice a day on a milk run, injecting it into your own network," which is what we call the cross-docking efforts. That's already up to about 17% of volume in Brazil.
We are being able to control more and more of the Brazilian shipments, deliver a better experience for users, both merchants and consumers. It's just not being done with the fulfillment alternative, but rather with the cross-docking alternative.
Perfect. Now moving on to the POS business. Can you talk a little bit about who are your main clients are? Are still mainly own sellers, or is more like a general sellers? The second is that we're seeing an explosion of growth in this market with many other companies also providing POS. At which point this market gets saturated with everyone in Brazil having a or Latin America having their own POS?
Yeah. Great question. When you look at what our execution has been on the mobile POS side is we've really approached it from the long tail of the merchant base. We've always identified that there are very large portions of the population in emerging markets that historically were not serviced by retail banks and even by merchant acquirers. Part of the reason for that is that these are obviously lower ARPU merchants. You have to have a very efficient, low cost of acquiring the merchant and then of servicing the merchant. Really, I think with the digital transformation we're seeing throughout the region, the cell phone and digital channels is the way to accomplish that.
For example, when you look at the average, and averages sometimes are misleading, histograms are better, but if you look at the average quarterly total payment volume of our merchant base, it still hovers around $1,000, below that actually, closer to like $800. On average, these are very small merchants. It's your gardener. It's your tennis instructor. It's your micro business more than even your small or mid-size business. Okay. Gradually we're moving up with new hardware launched this quarter and with new software into what we could consider a core SMB business. A small-sized business that historically had to do almost everything on cash, and now with our products, can start doing that with credit cards or electronic fund transfers. The interesting thing about that segment is that although it's lower ARPU, it's actually a very large TAM throughout the region, enormous, and historically underserved.
I don't think that for those segments, it makes sense just yet to start talking about market saturation or mature markets. There's still significant run room to grow there. Incrementally, what we're also trying to do as we move more and more of the overall percentage of those merchant sales from cash to the mPOS is when you talk to them, those $800-$1,000 still represent a small portion of their overall sales. Right? As credit card adoption on the buyer side of the network and the distribution of our digital wallets grows, that should also increment those quarterly ARPUs on the merchant side. I think for our segments, there's still significant amount of market to grow into, and it also happens to be a less disputed market because the servicing model is different, and historically, it really wasn't a focus for the merchant acquirers.
Perfect. Talking about the POS in the SMB business. First of all, do you think it's important to have a comprehensive offer of software together with the POS? The second, in the same POS, I think we have seen in the last few months, a lot of movements from other players in the market, which made the market more competitive in Brazil. How do you think that can or may or may not affect MELI's strategy or distribution going forward?
Yeah. Let me just start with the second question first. I think the best way to indicate this is look, if you look at what we've done in terms of changes to our pricing in Brazil, since a lot of these announcements from the larger merchant acquirers that primarily operate in a different segment, is we haven't changed anything yet. Far we haven't seen the need to react to those changes in pricing. Now it's a dynamic and it's a constant situation, I think the best indication I could give of how we're seeing those competitive pressures is in the fact that we've done nothing yet.
The software question is a great question, again, it goes back to the segmentation of merchants. Obviously, the more sophisticated the merchant gets, the more interested he is in rather than just being given a dumb box that processes credit cards, to be given something that actually helps him manage his business. As we move up market and we start targeting larger and larger merchants, I think the software that helps them manage payments and manage their business becomes more important. If you look at the segment where we're strong today and that generates almost all of our volume, these again, like I said before, it's a gardener, it's a plumber, it's a micro business. They probably wouldn't even use the software unless it was very basic, like the one we offered tied to your cell phone. That's a capability we will have to develop.
I think our vision on that is that we're not really sold on whether we will be the best builder and provider of ERP. There are many people who do that very well. Part of what we need to decide as we move up market is how much of that do we want it to be our own payments ERP, and how much we will just strive to make our digital devices and mobile POS devices compatible with many other payment ERP companies that are out there and actually build interesting software. That's something that we'll see as we move more and more upmarket. We're not there yet.
Can you talk a little bit about the credits for the POS, because that's something that you're doing now, I think that's in Mexico. Can you talk about this business because it's kind of a new business that you're doing a credit before getting the payments.
Again, I think like I was saying before, we view our fintech efforts as a efficient distribution platform, combining our existing merchants and consumers from our very large retail business, plus all the new consumers that we're acquiring to distribute multiple financial services. If you just focus on processing payments, I think we would argue that long-term, that's not such a fantastic business to be in. I think the tendency that we see going forward for core payment processing is probably a business where you see a commoditization of the actual capacity to process a payment and margins compressing. Now, it is a very important business for you to be able to cross-sell and overlay other financial services where we think the profit pools will be. One very important profit pool there will be credit.
Latin America is a region that has chronically had very limited access to credit, especially for small and mid-sized businesses. There's a very large pent-up demand that through the data we have on our users, because all of their data is flowing through our payments processing and the technology we have, we think that we can score and then process and serve very efficiently. When we think of the merchant credit business, first we started extending loans to the merchants on our own marketplace. Those are the merchants we had the most touchpoints with, and that we had the richest data on. Very quickly, we realized that the merchants that were processing through our mPOSs, we had nearly as much data on and nearly as deep as a relationship.
That's an obvious extension of who else we extend credit into, and it also allows us to have very competitive pricing on the actual payment processing because we can monetize on the credit overlay. That's the way we're also approaching the asset management products, where additionally, that stored value that merchants have from the sales that they're carrying out, rather than having them quickly withdraw that money and take it out, what we're saying is, "Look, we can build some asset management products for you. They will give you a better yield than what your traditional savings account gives you." Additionally, it keeps float within the system that we share with the merchant, but also allows merchants to then start using that float to pay for things through Mercado Pago without using credit cards, which is more important for us and more lucrative for us.
It's the beginning of the stored value through which we're looking to disintermediate credit card usage and just have stored value on our wallets be used to pay for things. It's a very interesting opportunity.
Perfect. Can you talk a little bit about how you think that you can monetize that opportunity? Like say, it's great to have a lot of people using your wallet, but in a sense, even if you don't use the credit card, you're still not charging it for use of the wallet. how you-
It's a similar approach for the consumer side to what I just walked you through on the merchant side. When you look at the payer side of the business, right? Payment processing, again, is not where we think the profit pools will be long-term. We do think the payment processing is what you need to have the data on the consumers and to own the consumer. Where you monetize is when you start cross-selling similar products for consumers. We've already launched consumer credits. I think it's something we're doing slowly and gradually. If you look at Q1, we issued about 12,000 consumer credits as a first test of that going forward. The monetization on the wallet side will be very similar. As consumers start using our wallet to pay, we can cross-sell the consumer credit. We can start offering them asset management products.
Eventually, we can try to distribute other financial services like insurance, and that's really where the profit pools will lie.
Perfect. Now, moving away of the fintech, going back to the marketplace. So far, at least in our largest market, which is Brazil, you've been growing faster than the markets. Do you think that it's something that's your target is to keep gaining market share? You think it's doable for the next few years?
I think we still have a retail market that is in its early stage. I think Brazil is probably the most advanced market, and it's like 5%, maybe 6% of retail. It's still relatively fragmented if we compare it to the U.S. or to China. I think there is room to grow faster than the market and to continue to consolidate market share. I think the other thing we said is that we hope that the first quarter of this year was growth that we will be able to accelerate from going forward because it really is a number that we're not happy with. I think we had a very strong quarter, but one number we were very open in saying this is not a good number was 18% GMV growth in Brazil.
Now, fortunately, we exited the quarter growing faster than that, and we hope that that rolls over into the second quarter. As more and more data from competitors has trickled out, I think it also shows that even at 18%, we're probably growing at market or slightly above market. That's a number that we look to improve on, certainly.
Do you think that a cross-border marketplace would help, let's say, selling things from Brazil, Argentina, and other markets, would it help? Do you think this is something that you have in your horizon?
Yeah. The efforts that we are rolling out and working on in the cross-border space are encouraging for us, and we do think there's an interesting business to be built there. In some of the Pacific Rim countries like Chile or Colombia that are more open economies, cross-border actually represents, we don't disclose it, but a nice part of our GMV. It's not intra-Latin America.
Okay.
We don't see a supply base, for example, in Argentina of products that you don't have in Brazil or Mexico. Most of our cross-border efforts are focused on facilitating access to the Latin American consumer, where we have by far the largest platform in the region to Asian and North American merchants. We're trying to facilitate those two channels, which are the largest channels in terms of cross-border volume.
Perfect. Are you doing, let's say, a catalog listing? Let's say, is it helping? How is that categorization of items?
Yeah. The challenge with a lot of marketplaces is that because we don't own the inventory that's being listed, not always do we know exactly what that product is, right? An iPad isn't just an iPad. It has all sorts of features. What's the memory? What's the color? What's the year? That merchants aren't always very good at uploading all of that information. Typically, we know that a listing belongs to merchant X, and we have a general sense that it's an iPad because he was able to tell us all of that. If you get down into the specifics, it's harder for us.
The catalogization efforts are a combination of how do we build the appropriate UI and set in place the appropriate incentives for our merchants to give us as much information as they can about an item without having disimprovements in the conversion of listings. How can we, through machine learning and other efforts, figure out what the merchant hasn't told us. If at one point I'm able to know exactly what the SKU the merchant listed is, that really strengthens my ability to recommend listings, to create something like a buy box, and to really improve conversion and offer a better buying experience for users as if I were a 1P merchant. We've made a lot of strides in this front.
We should be launching a buy box-driven navigation in certain categories that are the ones where we have the greater ability to identify SKU down to the SKU level, sometime either this quarter or next, and then we need to see how that performs going forward.
In the products that you already identified as SKU, do you see that you have a better traction with the clients, with the buyers?
No, because we haven't really. Having the data is just step one. Step two is how do you build in that deeper understanding of the data into the user interfaces, right? Buy boxes we haven't launched yet. That's one of the key benefits if you look at other retailers. That's something that'll happen over the next few quarters. The other thing that tends to improve our recommendations, and we do see a higher percentage of our GMV coming from our recommendation carousels, and also our ability to say users who bought this, bought this other thing. The classical ways that you try to do on-site merchandising. That is improving as we improve our cataloging ability.
Perfect. Talk a little bit about the countries, like say, we have seen some volatility in Latin America. You live in Argentina, that should be easy to talk about. In Brazil, we have some hiccups. Can you talk a little about how this is affecting MELI specifically?
Sure. I think from the retail business, and we've said this throughout a lot of the Brazilian recession in the previous years. It's always been a positive surprise at how resilient the marketplace has been. For those of us that follow us, this is probably the 100th time you're hearing me say this, but we've seen that many times when macro gets difficult, the marketplace really doesn't get affected that much. There's a tendency on behalf of consumers to become more price sensitive, to look to trade down, and typically marketplaces perform very well. I think it's playing out in Argentina again. You look at the Q1 results from Argentina. Argentina had the strongest growth for that country of the past five quarters. Clearly the macro in Argentina and consumer sentiment has been dis-improving or getting worse over those five quarters.
I think we've grown pretty confident that we're not that affected by macro on the marketplace business. The fintech business is, I think, a little bit more impacted by macro, primarily because of cost of capital and just how that flows through either to the cost at which we're extending credit or what our spreads are. As the Argentine cost of credit has gotten volatile, yes, that has forced us to slow down a little bit the rate of growth of the credit offerings, and it's affected a little bit the growth of TPV. I think on the other markets, we've seen enough stability in our cost of funding that it hasn't really affected the business as much.
Perfect. Now that you're moving more into fintech, I believe that you are now subject to more regulations than you were in the marketplace era. First of all, one measure that we saw is that in Argentina, we saw that the government mandated a reduction in this payment from 18 days to 10 days. What's the impact on your business of this?
Of such measures?
Yeah. I'll take that one specific and then just broader on regulation. Most of these changes in the speed at which merchant acquirers need to pay actually benefit us because we're not a merchant acquirer. It means we get paid faster. Now it does have a negative impact in that if everyone is paying faster, then one monetization source we have, which are the advances on coupons, right, becomes less necessary because money in the entire payment cycle is getting compressed.
Sure.
The actual impact to our P&L of the changes in Argentina, we were doing the numbers recently, is negligible.
Okay.
It's irrelevant. Okay? It's in the hundreds of thousands of dollars per Q. It doesn't affect our business at all. I think more widespread on regulation. I think we're fairly comfortable with the direction the regulatory environment is taking place for fintech throughout Latin America. Most central banks have understood that there's a space that lies between no regulation and a full deposit-taking banking institution, and that neither extreme is good. The regulation that's being outlined throughout the region for fintechs, I think is the right measure of regulation by and large. They like some countries more than others. In general, it's nothing that we feel will excessively stifle innovation. More importantly, given the size and the scale that we already have, for us, taking on most of those regulatory constraints is 100% doable.
I think it's questionable the very small guys, how it could potentially impact them. For us, I actually think it's healthy, and in no way is it affecting the way that we are moving forward with the business. The third piece, just to wrap up on regulation is, I think we've also been very intelligent about the way we attack this. If there are areas that we want to participate in, where we feel the regulatory constraints are not the right thing for us to focus on business-wise at this point in time, what we've typically pursued is partnerships. For example, in Brazil, to extend a loan, you need to be a fully licensed bank. We don't do that ourselves.
We have banking partners that do that part of the value chain for us, and we focus on where we bring value, which is scoring the merchant, collecting from the merchant, and having the merchant interface. In Argentina, it's inverse. In Argentina, you can extend credit to merchants off of your own balance sheet, even if you're not a bank, but you can't offer asset management products. In Argentina, we have banking relationships that are the actual asset managers, and all we do is the fronting with the merchant, the communication with the merchant, the low-cost distribution, and then we share the revenues with the actual asset manager. Even in the highly regulated pieces of the value chain that we want to play, we only focus on where we add value, and we partner with banks where we don't.
Perfect. I believe in Argentina for your wallet, it's easier to put the money or to get the money into the wallet than it is in Brazil. Are there any initiative on that front? Because would be helpful.
Yes, there are. I think the context there is as we begin to roll out our digital wallets on cell phones, the funding for the wallet payment becomes very relevant, right? If the user chooses to pay from his digital wallet with a credit card, so kind of like in the U.S. with Apple Pay, there's more cost for us because we're paying MDR. I think even more importantly, we would argue there's nothing very disruptive about that, right? I'm still using a credit card. It's just a more streamlined user experience. Really what we strive to build is a digital wallet where, yes, you might have your debit card or your credit card on record, but more importantly, you have stored value there, and every time you pay with your digital wallet, it's not even going through credit card rails.
That's really disintermediating the existing pipes for credit card payments. That's working very well in Argentina because Argentina is a country where we are very plugged into the clearing houses, and you can use debit cards to fund your wallet. Other markets, we still need to build that out. Either there are regulatory issues that need to get sorted out, or simply we need to integrate into TEF houses or clearing houses to make it very easy for a user to send money from his bank account, from a cash payment that he makes at a bank teller, or other mechanisms into the money. We're working on that in Brazil. We should have something launched this quarter that will facilitate the speed up of our digital wallet in Brazil.
Perfect. Sorry, is there any question from the audience? Okay, if not, let me just continue. In Brazil, there's also some talks that there could be a change in the regulation of the POS payments, so that it would be payment in the day zero, so immediate payments. Is this something that you envision? Would it make any change for your business model?
I think very similar answer to before. It benefits some of our revenue streams, and it hurts others. Obviously, if the entire industry moves to merchants receiving funds from credit card receivables in T plus zero, then you wouldn't really have much of a business advancing payments to them. On the other hand, it would mean that because, again, we are not an acquirer, we are a merchant of record for the acquirers, we would have to securitize a much smaller portion of our receivable base because we would be receiving from the merchants T plus zero. Our marketplace business would see improvement in profitability, portions of the payments business as well, and on the other hand, we would lose those revenue streams that we get from the cash advances. I think in our case, net-net, we would actually come out better-
Okay
short term because the overall size of the retailing and the coupon business is still smaller than the cash advances, which is, for now, a small business, but a very rapidly growing business. Maybe long term it wouldn't be positive. Short term, it actually works to our advantage.
Perfect. Just to finalize, I remember last year, when I asked you to compare the marketplace opportunity with the fintech opportunity, I remember you saying that the marketplace already more established and the fintech would be bigger, but with more challenges, with more execution risks. Now that 12 months has passed by, what's your thoughts? What's your updated thoughts on these two opportunities for you?
Yeah. I think we continue to see, and I think at least the last 12 months have proven my thesis right, that there's an enormous opportunity in fintech. There's a very, very large TAM. There is a Latin American population that is still highly underbanked and not well served by retail banking, and that's the opportunity that we're going after. Now, I just want to end on one note. I think it's still very important for us that these things aren't seen as two separate businesses. I think the biggest competitive advantage we bring to the table is the fact that we bring these as one single ecosystem. That's cross-selling opportunities, it's cross-subsidy opportunities, it's access to multiple merchants and consumers on the retail side that we're offering the payments business, and vice versa.
Let's not think of these as separate silos, but really as one very large platform. I think what we're seeing globally is that the real power of these large retail plus payments platforms is that they just bring tremendous touch points with consumers and relationships with consumers that they can use to distribute different products. This is really part of one very large ecosystem.