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MercadoLibre Is Beating Amazon at Its Own Game

By Danny Vena - Jul 26, 2017 at 7:36PM

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Every successful company is taking steps to ensure it doesn't become a victim of the Amazon Effect. What better way to ensure a level of success then taking lessons directly from Amazon's own playbook?

MercadoLibre, Inc. (MELI 1.05%), the e-commerce leader in Latin America, was for a time referred to as the "eBay (NASDAQ: EBAY) of Latin America," and with good reason. The company was originally modeled after its North American counterpart, connecting buyers and sellers on an auction-type platform. eBay encouraged MercadoLibre to create a payment system -- MercadoPago -- modeled after PayPal, which has been key to the company's recent success. eBay even owned a stake in its Latin American counterpart until recently.

MercadoLibre has evolved over the years, becoming more like, Inc. (AMZN -0.35%) by allowing merchants to sell goods and services on its site, and offering a variety of other fulfillment services. Recently the company has taken even more pages straight out of Amazon's playbook by providing technological infrastructure and offering logistics services and even small-business loans.

A woman, surrounded by fresh food in a kitchen and holding a wooden spoon in her hand, looks down at a tablet at the countertop.

MercadoLibre offers services business owners can't get anywhere else. Image source: Getty Images.

Fulfillment by...

MercadoLibre has been working to build out its cross-docking capabilities, a system in which products are received from a supplier on an inbound truck to its warehouse and loaded directly on an outbound truck for shipping to the customer, often overnight. The company calls this "Fulfillment by MercadoLibre," a name strikingly similar to the logistics services Amazon offers.

Currently, about 20% of MercadoLibre items shipped in Argentina are cross-docked, and the company is expanding similar operations in Brazil and Mexico. In other cases, items are stored at its warehouse awaiting shipment, and MercadoLibre handles the storage, picking, packing, and shipping with no additional cost to buyers or sellers. 

The company has already gained a significant advantage with MercadoEnvios, its shipping solution, in a market that was notoriously unreliable when it came to package delivery. MercadoLibre added shipping services directly to its platform and acted as the intermediary between sellers and shipping companies to ensure that products were delivered, and it gained significant cost benefits as a result of volume discounts. It has since launched free shipping for select purchases meeting certain requirements, such as a $40 minimum, or items sold by a partner.

Loans on a digital handshake

Latin America is a region that has numerous idiosyncrasies not present in other parts of the developing world. Many of its residents lack a bank account or credit cards -- the result of a cash-based economy -- and as such have no credit history, a particularly prevalent problem among small-business owners. As a result, many small businesses in the region find it difficult, if not impossible, to obtain loans from traditional banks.

Sellers on the MercadoLibre's site who use its MercadoPago payment solution will be eligible to apply for working capital loans for amounts representing up to two months of sales. The company is using the information it has accumulated from 18 years of operations and applying algorithms and data analysis to gain insight.

Puzzle forming MercadoLibre logo of two hands shaking.

MercadoLibre offers small-business loans on a digital handshake. Image source: MercadoLibre. 

Having knowledge of each company's sales, records of dispute resolution with customers, and data regarding cash flow and sales provides MercadoLibre with sufficient information to determine creditworthiness. The company is also eliminating the "loan process," and sellers won't have to sign documents or submit financials to obtain a loan from MercadoCredito, MercadoLibre's credit arm. The company has already launched loans in Argentina and plans to offer them in Brazil and Mexico this year as well. Ignacio Caride, general director of MercadoLibre Mexico, stated:

We know what they sell, how they've grown their sales in recent years, how they treat their customers, how they resolve conflicts. No bank has that kind of granularity. ... We believe MercadoCredito could make MercadoLibre 100 times larger than it is today.

Hometown advantage

Considering the idiosyncrasies in Latin America and MercadoLibre's 18-year head start, the company is not only holding its own against Amazon but is also taking a few lessons from the e-commerce juggernaut to thrive on its home turf. Thus far, MercadoLibre has been able to leverage its hometown advantage to maintain its competitive position.

Evidence of this advantage is seen in the company's most recent financial release. Registered users grew by 20%, items sold increased 39%, and payment transactions jumped 60%, all year over year, resulting in revenue that increased 79% over the prio- year quarter and net income that grew 60% year over year. 

Amazon is a worthy adversary and should not be taken lightly. Using the internet behemoth's own playbook to establish a strategic advantage is a stroke of pure genius.

Danny Vena owns shares of Amazon, MercadoLibre, and PayPal Holdings. Danny Vena has the following options: long January 2019 $18 calls on eBay and short October 2017 $34 calls on eBay. The Motley Fool owns shares of and recommends Amazon, eBay, MercadoLibre, and PayPal Holdings. The Motley Fool has a disclosure policy.

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