Sea Limited's (NYSE:SE) Shopee, the e-commerce leader in Southeast Asia, is mulling an expansion of its operations in Brazil, according to a recent Reuters report. Shopee initially launched a small division in Brazil in 2019 to test out the market, but it is now reportedly recruiting dozens of employees to expand the business.

An expansion would be a bold move against MercadoLibre (NASDAQ:MELI), the largest e-commerce company in Latin America. But can Shopee possibly succeed in Brazil while many other challengers, including Amazon (NASDAQ:AMZN), have struggled to gain ground against the market leader?

A tiny parcel with a Brazilian flag on a laptop.

Image source: Getty Images.

Why does Sea want to expand into Latin America?

Sea splits its business into two core segments. Its e-commerce and other services segment, which mainly consists of Shopee and its payments platform SeaMoney, generated 40% of its revenue in the first nine months of 2020. Its digital entertainment business, which generated 47% of its revenue, houses its video game unit Garena.

Shopee doesn't have a major presence in Latin America yet, but Garena does. Garena's self-developed battle royale game Free Fire, which was launched in late 2017, is currently the highest-grossing mobile game in the region, according to App Annie. Therefore, expanding Shopee across Brazil and Garena's other top markets -- which include Argentina, Chile, Colombia, Mexico, and Uruguay -- could complement that growth.

Free Fire's popularity boosted Sea's Latin American revenue 218% year over year to $507 million, or 18% of its top line, in the first nine months of 2020. By comparison, its Southeast Asian revenue rose 101% to $1.78 billion.

Can Shopee succeed where others have failed?

Shopee's platform in Brazil, which currently provides cross-border purchases from Asia, already serves more monthly active users in the country than Amazon, according to App Annie. But both platforms are tiny compared to MercadoLibre, which controls about half the e-commerce market in Latin America.

Packages in a warehouse.

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MercadoLibre operates across 18 Latin American countries, and its top markets are Brazil, Argentina, and Mexico. Its registered users more than doubled from 144.6 million at the end of 2015 to 320.6 million at the end of 2019, and another 46.8 million users registered in the first nine months of 2020.

MercadoLibre's revenue from Brazil rose 43% year over year to $1.47 billion, or 56% of its top line, in the first nine months of 2020. In local currency terms, its revenue rose 85%.

MercadoLibre dominated Brazil and other Latin American markets because it established a first-mover's advantage, secured funding from big investors like eBay, gobbled up smaller competitors like DeRemate, attracted merchants with free listings, expanded its fulfillment network, and tethered shoppers to its Mercado Pago payments platform.

Those strengths prevented Amazon, which initially entered Brazil in 2012, from catching up to MercadoLibre -- even after it finally launched Prime for Brazilian shoppers in 2019. However, Amazon also failed to throttle Shopee's growth by launching Prime in Singapore back in 2017.

Shopee enjoys many of the same advantages as MercadoLibre in its top markets. It moves fast, sells cheap products, aggressively subsidizes purchases, and locks users into its payment ecosystem. Those strategies already helped it fend off Alibaba's Lazada across Southeast Asia, but challenging MercadoLibre on its home turf could be a much more daunting task.

The road ahead

It's unclear how serious Sea is about expanding Shopee across Latin America, but investors shouldn't underestimate its disruptive potential. Sea could launch cross-promotions on Free Fire to build Shopee's brand awareness across the region, or subsidize Shopee's loss-leading strategies with Garena's profits -- as it does in Southeast Asia and Taiwan.

There could also still be plenty of room for Shopee to expand without being trampled by MercadoLibre. E-commerce sales still only account for about 3% of Latin America's total retail sales, according to Statista, but the firm expects the market to grow at a compound annual growth rate of 8.3% between 2021 and 2025 as income levels and internet penetration rates rise.

Sea's investors shouldn't worry too much about Shopee's plans for Latin America for now. It represents an interesting growth opportunity, but the company will still generate most of its revenue in Southeast Asia and Taiwan for the foreseeable future.

 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.