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How to Build a Dominant Business in the Midst of Hyperinflation

By Danny Vena - Jan 10, 2021 at 1:00PM

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Prices trapped in an inflationary spiral might spell trouble for some companies, but not this one.

An environment of rapid and excessive price increases within an economy has been a death knell for many successful businesses. The rising cost of living and the general erosion in the value of currency make it difficult to run a company with any degree of success, but that isn't necessarily true for all businesses.

On this episode of Fool Live that aired on Nov. 23, Motley Fool co-founder David Gardner and Fool.com contributor Danny Vena were joined by Federico Sandler, MercadoLibre's ( MELI -6.75% ) head of investor relations. Sandler gave insight into how the company has thrived even as countries in its region suffered debilitating hyperinflation.

David Gardner: Let me just go back to questions real quick, and I want to mention we have about 13 minutes left so time is fast running out but we're going to get to as many of these as we can. Brandon Fung says, "Hello, Mr. Sandler. Could you please explain how hyperinflation plays a role in MercadoLibre's finances and how MercadoLibre can grow despite hyperinflation?"

Federico Sandler: The reason why we can we can continue to grow is because most of our business is commission-based. In the commission, we capture that incremental price as a consequence of hyperinflation, so usually, our cost structure and revenues move in parallel because we're able to capture that price increase.

Usually, what happens in periods of hyperinflation is obviously, purchasing power of people declines, but that doesn't necessarily transmit in a deceleration of our business because we have such a deep marketplace and people can trade down. I don't have enough money to buy an [Apple ( AAPL -1.17% )] iPhone, I might buy Huawei or an HTC phone. There's people who try to compliment income selling on the side.

So hyperinflation, it's an issue, but for the most part, it's less of an issue for us. One, because we have a commission-based business that captures that increase in prices, but two, because we are matched in terms of costs and revenues in local currency. There's not too much of a distortion when there is inflation or devaluation. I don't know if that helps answer the question.

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Mercadolibre, Inc. Stock Quote
Mercadolibre, Inc.
MELI
$1,052.95 (-6.75%) $-76.27
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Apple Inc.
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