What Does the Future Look Like for Ecommerce in Latin America? A Q&A with AMI’s John Price
“The next 15 years is consumption party time,” says the cofounder of Americas Market Intelligence.
From physical retail to travel to digital goods, ecommerce in Latin America is growing at a rate of 25 to 30 percent a year. In an interview with John Price, the co-founder and managing director of research firm Americas Market Intelligence laid out the factors driving the industry’s growth and the ones limiting it.
How do the prospects for ecommerce in Latin America compare to other regions of the world?
Until now ecommerce has been relatively minimal in its penetration of the total retail market in Latin America. When I say minimal, I mean that it’s probably around 2 percent or maybe 3 percent of official retail numbers. But when you take into account informal retail—cash-only retail that is not captured through registered, formalized businesses—that raises the size of total retail by another 40–50 percent in the region. So in actuality, ecommerce is probably closer to 2 percent of all retail. Compare that with 10 percent in the United States and 22 percent in China. China being exceptional and way ahead of any other country in the world in terms of the penetration level of ecommerce in all retail.
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What are the biggest barriers to the industry’s growth in the region?
So the reason ecommerce has been relatively weak in its penetration comes down to two key factors: payments obstacles and logistics obstacles. On the payments obstacles sides, up until very recently, the only payment instruments accepted were credit cards, which will give you access to about 15 percent of households in Latin America. The sense amongst Latin Americans of the potential for fraud when using their credit card online is quite high. Online fraud rates in Latin America nowadays are 6 to 7 times that of the United States. And even though networks and the banks are supposed to back you up and guarantee and refund your money, if a payment is made fraudulently using your card, the process to get that money back is very painful.
On the logistics side, the cost of fulfillment and the time allotments to fulfill a purchase, are also pretty painful. If you think about it, a lot of people in the United States live in such a home environment that a package can be left on their doorstep without any fear of theft. That is not the case in almost all Latin American household environments. That means that if you can’t deliver it the first time and you can’t leave it at the doorstep, so you come back a second time, every time they come back to deliver, these logistics companies lose money or drive up the cost.
Another issue for a lot of markets, particularly smaller and mid-sized markets in Latin America, there isn’t significant domestic inventories for websites like Amazon or Alibaba. So essentially the product ends up coming from a different country, crossing the border to get into the customer’s home. The whole cross-border, customs process is very burdensome, often corrupt, very slow, and not amenable at all to small purchases (anything under $1,000).
Why are we bullish as to the potential of ecommerce? The bullishness comes from the fact that on the one hand, there is a gap in traditional retail. The footprint of traditional retail—the amount of floor space that you find in all types of retail stores like supermarkets, convenience stores, or department stores—that footprint is 1/20th the size on a square meterage per capita basis versus the United States. It is also about 1/10th the size of the European traditional retail footprint. That means that if you don’t live in one of the top ten cities in Latin America, if you live in a second-tier city, then outside of your basic staple goods—food, clothing, appliances, etc.,—it’s hard to find products in traditional retail. If you live in Queretaro and want to buy rock climbing equipment, you have to get in a car and drive to Mexico City or you order it online.
So we believe that the potential penetration of ecommerce in emerging markets is actually higher than in more developed markets where retail penetrated the landscape to a much deeper degree.John Price
And that’s why the penetration levels seen in places like China (22 percent), is actually the threshold Latin America should be going towards rather than the 10 percent in the United States.
How long do you think it’s going to take the region to get there?
Right now physical ecommerce—the purchase of physical goods that are then physically transported—makes up about 40 percent of total ecommerce in Latin America. The biggest segment is travel: the purchase of air tickets and hotels. And then the other is digital services: Uber and Netflix. These are digital products that are consumed but not physically delivered.
Physical ecommerce is growing at around 20 percent. Travel is growing at about 10 percent a year. Other digital goods ecommerce is growing at 35–40 percent. Overall you get a total of about 25–30 percent annual growth and we foresee that growth being maintained. Travel, which was first embraced ecommerce and is the most mature segment, it’s still growing.
Next came physical ecommerce, which has payment and logistics hurdles, but is going to continue to grow because of this gap in traditional retail, plus solutions that now enable payment by debit card, payment by cash, and also there are now abilities to accept cards that were only enabled for domestic purchases, but can now be used internationally through an intermediary.
On the digital goods side, we know that Latin Americans are very healthy consumers of digital goods. Netflix sells in 190 countries around the world. The number one binge watcher is Mexico. And of the top 10 in the world, 5 are in Latin America. Mexico City is now the second largest Uber market in the world. Today 1 out of 6 Mexican adults is an Uber customer. That’s more or less the same penetration in the United States. In the U.S. it took nine years to get there, in Mexico it took four and a half years: they went from 20 cars to 500,000 Uber drivers today. So digital commerce, where you take away that logistics obstacle, is really growing quickly in Latin America. They’re the fastest growing market in the world for Airbnb, for Netflix, for Coursera online education. There’s really no category of consumer service that has an app-driven solution, that won’t work in Latin America. They will all work.
How are Latin America’s demographics particularly favorable for ecommerce, specifically its urbanization rate and young population?
Latin America is relatively young but it’s also the fastest aging population in the world because as a region it’s gone from one wage earner and four kids per household to two wage earners and two kids per household in 30 years. It took the United States 6 years to make that transition. So yes it is relatively young and it is very urban, with the highest urban population in the world; Venezuela being the number one country in that regard. That’s part of it. Another part of it is that smartphone penetration took off much faster than people expected because of the introduction of low-cost phones, either white label or cheap Chinese labels, with smartphones costing $67 rather than $600 for an iPhone. And that has really enabled massification of smartphone usage and that has gotten people using these apps really quickly. Another factor is that traditional services—against which Uber, Netflix, and Airbnb competes—are terrible. Consumer services in Latin America suck. You walk in to any retail environment and the service is terrible, there’s an overpopulation of sales people sitting around doing nothing, which just drives up the cost of retail. Taxi services are horrible; in Mexico is unsafe. Uber adds a degree of transparency that traditional cabs never had. If you’re watching Televisa or Globo and your tired of 22 minutes of advertising per hour, you are quite happy to see the options available on Netflix. There’s just weak competition from the legacy players.
Another factor is Latin Americans pride themselves in publishing low unemployment figures but they are a complete falsification of the term. There is a huge percentage of underemployed people—people who work in the informal sector 20–25 hours a week and they would love to augment their income by renting out a room or driving an Uber. For instance, before the advent of apps and digital commerce you had multi-level marketing companies like Avon and Amway making a killing in Latin America because of all these underemployed women who were looking for extra sources of cash. So that’s a big driver.
How important are new payment methods to the industry’s future?
There is no question that there is a trend in Latin America right now among leading marketplace players (Amazon, MercadoLibre, Rappi). For example, Rappi just purchased the Mexican company Payit because Rappi recognized that they’re own brand is strong, they have loyal customers, and credit cards already on file. (For some users its a credit card, but there are others who load up their Rappi account with their debit card, and others that load it up with cash.) What Rappi is realizing—as is Amazon and Mercado Libre and possibly Uber in the future—is that they are so popular and people spend so much time on their platforms looking for goods and services, that their level of comfort, awareness, safety and security with that brand is as strong or stronger than users’ banks. Particularly amongst younger people. So why not leverage that and use that account to allow people to purchase elsewhere as well. And in the mean time they are holding on to the cash and gathering interest on it. So its not so much that payments are a way of getting new customers, but rather once you have the customers, it becomes an add-on that expands your opportunities to essentially bypass banks and become a payment network. And that allows you to charge fees in the future. It’s a real threat to the payment networks like the Visas and Mastercards and AmEx’s of the world.
How do you see the economic scenario in the region affecting consumption in the near future and farther down the road?
There are a couple drivers of consumption. One of them is the strength of the currency.
Currency strength is determined by two factors: the leading commodities that these countries export and another big factor is the cost of interest rates, i.e., the Fed rate. Why? Because most Latin Americans keep at least half of their savings overseas so they are constantly short of capital and they have to borrow from abroad, which means they have to service those loans in dollars so the U.S. Federal Reserve has a huge impact. If the U.S. fed goes up, these currencies lose value against the dollar. Plus people end up buying goods with some dollarized component.
The other factor is the availability of consumer credit and small business credit. Generally when Latin America was in its benevolent stage between 2003 and 2013 with high commodity prices and low interest rates, the expansion of credit was wild. It was expanding at 20 percent a year across Latin America. And it got to very high levels in Chile, Brazil and Colombia. That was unsustainable. Consumers in those countries became over indebted, interest rates went up, and they have been painfully paying down that debt in the last four years. Right now consumer credit penetration is relatively low again and widely available so that’s a plus.
And the third factor is demographics. If you go from a household of four kids and one wage earner to a household of two kids and two wage earners, that frees up a lot of disposable income to buy large ticket items, particularly items you buy on the internet: computers, consumer electronics, travel. Right now you have two of those three factors: consumer credit and demographics very much in favor of Latin America. In regards to the currency interest rates, we are in a less of an easy environment today than in the past.
I still see very aggressive growth in ecommerce going forward and even decent growth in traditional retail going forward.John Price
We are pretty bullish on the consumer side. How long will this last? In the older populations—Uruguay, Argentina—this demographic push is going to slow down in 10 years. In Mexico and Brazil, it’ll slowdown in 15 years. And in the rest of the region 20 years. And then on the other side of that, the population begins to look like Japan, with not a lot of kids and a bunch of people, and that brings a whole new set of cost to these economies that right now they are not prepared to absorb. But for the next 15 years, it’s consumption party time.
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