The e-commerce industry has been undergoing enormous challenges lately. The industry experienced a massive boom two years ago amid the COVID-19 pandemic lockdowns. Today, that tailwind has become a headwind as most people resume their pre-pandemic lifestyles.

The reopening headwind affected every company in the e-commerce industry, including MercadoLibre Inc (MELI -1.18%). But that is still not the biggest threat that the company is facing. Shopee is.

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Image source: Getty Images.

MercadoLibre has always been the top dog in Latin America

MercadoLibre has been an e-commerce powerhouse. Since its IPO in 2007, revenue grew from just $52 million in 2006 to 6.1 billion in 2021 -- or 118 times. By the end of 2021, it had 140 million unique active users who bought more than a billion items from its marketplace.

MercadoLibre's success is remarkable since even the e-commerce juggernaut Amazon -- despite its success in many regions, including North America and Europe -- couldn't match its smaller peer in Latin America. According to Statista, MercadoLibre had 668 million monthly visits as of April 2021, while Amazon (the second largest company) had 169 million visits. The former also accounted for around a quarter of all e-commerce sales in Latin America.

The rise of Shopee in Latin America

Many companies have tried to unseat MercadoLibre's leadership over the last two decades, yet none came close to matching its scale and reach.

Enter Shopee, the e-commerce arm of Singapore-based Sea Limited (SE 0.76%).

Launched in Brazil in 2019, Shopee has become a serious contender that MercadoLibre hasn't seen the likes of for years. Sea's strategy in Latin America is brutally simple. It reinvests the profits from its gaming business into Shopee by subsidizing users and merchants.

So far, the strategy has worked well. According to Sea, Shopee Brazil already ranked first by downloads and total time spent in-app and second by average monthly active users (MAU) in the first quarter of 2022. It became the top app in Brazil by MAU in March and April of 2022.

While it's still early to say whether Shopee can retain its newly acquired users -- users come for the subsidies and discounts but leave when the freebies are gone -- investors should keep a close eye on this company. It overtook Lazada in Southeast Asia, even though the latter had many years of head start -- Shopee only launched its service in 2015 -- and access to significant resources from Alibaba.

What this means for the industry and MercadoLibre

Shopee's entrance into Latin America's e-commerce market would likely be influential.

It will spur competition within the industry, leading to better service, better infrastructure, and faster e-commerce penetration. Consumers and online merchants are the direct beneficiaries of this transformation. The former gets better products at potentially lower prices with better service, and the latter gets access to new business channels and opportunities.

For MercadoLibre, the effect would be both positive and negative. On the positive end, it will enjoy the tailwinds of faster online market penetration in Latin America. Besides, having a strong competitor can prevent the company from becoming complacent with its past success.

The downside is that competition may lead to lower take rates for MercadoLibre, since merchants have new avenues to sell their products online. It can also lead to higher marketing expenses -- via subsidies and discounts -- to retain users. All these can lead to lower margins and profitability in the coming quarters (and years).

Still, it is not the end of the world

While nobody likes to have a formidable competitor, investors do not need to get overly nervous.

The e-commerce market in Latin America is massive (and growing), and can accommodate multiple players. There are examples where a few major e-commerce players can co-exist profitably in a region. For example, there are three major players in China -- Alibaba, Pinduoduo, and In the U.S., there are Amazon, Shopify, and Walmart.

As long as MercadoLibre continues to delight its stakeholders -- merchants and consumers -- it will remain a significant player in this region.