Exponential Growth: Latin America promises to be a key new growth market for e-commerce

With a large urban population and widespread use of smartphones, Latin America is seeing a surge in e-commerce as the COVID-19 pandemic pushes up demand from both consumers and merchants.

SMART CHOICE: Nearly three-quarters of Latin America’s population will have smartphones by 2025.

Upon completion of a 10,500-kilometer subsea cable between California and Chile in April 2019, Google started running a 1,000-kilometer branch of the fiber-optic system to Panama to make it a hub for providing increased bandwidth and connectivity in Central America.

This is good news for Panama as it seeks to become the premier gateway to Latin America for trade – particularly including e-commerce, which has experienced exponential growth during the lockdown measures against the spread of the coronavirus.

“It will help our companies be much more competitive,” Panama’s president Laurentino Cortizo said of the cable. “The more connected our communities are, the more opportunities they have.”

E-commerce is growing in Latin America and the Caribbean, but it is still in its infancy, says Sean Summers, CMO of Mercado-Libre, the region’s biggest e-commerce marketplace.

“When we look at what we have done at MercadoLibre over the last 20 years, we can say, ‘Wow, that’s incredible!’” he remarks. “But if we look ahead over the next 10 years, we think that the potential is infinitely greater.” E-commerce as a share of retail sales was just 3.1% in Latin America in 2019. In contrast, its share of retail sales was about 10% in the U.S., 13% in Denmark, 16% in South Korea, 18% in the U.K. and 27% in China, according to research firm eMarketer.

Foundations for growth

Latin America and the Caribbean have what is needed to catch up. For starters, they have the fourth-largest economy in the world after Asia, North America and Europe, according to World Bank data.

Of their combined 650 million population, 80% is mainly concentrated in four countries – Argentina, Brazil, Colombia and Mexico. In this region, just two languages are used officially in their trade market – Spanish and Portuguese – as opposed to the multiple tongues spoken in Africa, Asia and Europe.

With more than 80% of the region’s population living in cities, it is the second most urbanized region in the world after North America, according to U.N. figures. And the penetration of smartphones in the region is expected to reach 73% of the population in 2025, up from 67% in 2019, according to GSMA Intelligence, a trade group for mobile operators.

The combination of a large urban population and widening use of smartphones is beneficial for e-commerce, as together they spur competition to drive down the prices of broadband and data plans and encourage banks and merchants to scale up e-commerce payments and sales services. According to Americas Market Intelligence, online retail sales are on track to increase at a 22% compound annual growth rate from $100 billion in 2018 through to 2021.

Challenges for the future

There are hurdles. One is to increase digital payments in a market with only 55% financial inclusion, according to World Bank data. MercadoLibre has created its own payment platform, competing with new entrants such as Brazil’s PagSeguro and the international apps Apple Pay and Google Pay.

But the largest challenge for e-commerce growth is improving logistics to cut delivery costs and times, says Summers.

Only a few years ago, online shoppers would pick up orders physically, even pay cash on the spot, because of costly, poor and untrustworthy deliveries and payments systems. To improve this, e-commerce companies are offering their own logistics services, from fulfillment and cross-docking centers to delivery hubs.

Brazil is the only market with enough domestic vendors to meet e-commerce demand. The rest rely on imports because of underdeveloped inventory systems. Many of the orders are carried out through Miami because of the scale and low price of moving products from U.S. factories or overseas suppliers via Miami International Airport.

But for the Latin American marketplaces – as well as Asian e-commerce powerhouses, such as China’s Alibaba and JD.com, which target Latin America – it makes sense to keep inventory closer to destination to speed delivery times, according to a study by DHL and Panama’s Ministry of Commerce and Industry.

The last mile

Other obstacles, such as traffic jams and theft, encumber the last stretch to consumers. Cornershop, Rappi and other courier services are speeding up the final leg of delivery with an Uber-like model that connects sellers with independent couriers to make deliveries by car, motorcycle or bike, helping to cut costs and transit times.

MercadoLibre is building its own fulfillment warehouses in the region. “They are faster,” Summers says. “With time and more scale, they are going to make it possible to reduce the cost.”

The transition to faster deliveries accelerated this year as the spread of COVID-19 pushed up demand for e-commerce during lockdown, boosting stay-at-home orders across the region and helping more people overcome their worries about shopping and selling online.

THE WHOLE PACKAGE: Latin America has all the ingredients necessary to become a growth center for e-commerce.

“Changes in consumer demand brought about by the pandemic have accelerated adoption of digital platforms significantly throughout the region,” MercadoLibre CFO Pedro Arnt said in a conference call with investors in August.

The amount of items sold over MercadoLibre’s platform doubled in the third quarter of 2020 as compared with the same period in 2019. The number of active users also surged by 92.2% to 76.1 million – almost twice the 2019 figure – the company stated in a press release for its third-quarter financial results.

Panama as a hub

Building on its geographic advantage in the center of Latin America and its streamlined logistics capacities, Panama wants to position itself as a hub for the region’s e-commerce growth. As well as its famous canal – the quickest, shortest connection between the Atlantic and Pacific – it also boasts the largest ports in Latin America – one of which is the second-largest free trade zone in the world – and an airport with direct flights to 90 destinations.

The startup Undercover Boots, for example, brings boots from China to Panama over the ocean, stocks them in a free zone and flies them to buyers overnight.

To make shipping even easier and faster, the government plans to build warehouses at the airport in Panama City. This is key in e-commerce, a 24/7 business with no days off and no tolerance for delays. And it is something that people in the business are increasingly confident can be achieved in the region, as more logistics infrastructure is built and people become more comfortable with shopping online after testing it out during the pandemic.

Mike Parra, CEO DHL Express Americas, indicates that the volume of e-commerce forecast for 2022 is expected to be achieved two years early – not least because merchants have had to market their products online while their shops were closed to the public, allowing them to build an internet presence, sometimes for the first time. “Everyone has used this opportunity to buy online while they are at home,” Parra says. “We are seeing a boom in e-commerce.” — Charles Newbery


Published: December 2020

Images: Sarah Pabst/Bloomberg/Getty Images; Andriy Popov/Alamy/mauritius images