The Logistical Challenges Slowing Amazon’s Conquest of Latin America

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To be “Amazoned” is to suffer the profit-killing and market cap destruction of Amazon.com competition in your industry or national market. In October 2017, when a BTG analyst announced that Amazon already enjoyed high market share in the Brazilian online book market and was now expanding its Brazilian presence. Brazilian retailer Lojas Americanas SA lost 5% of its market cap in same-day trading, Casino Guichard-Perrachon SA’s Via Varejo SA dropped by as much as 12 percent and Magazine Luiza SA went down by as much as 11 percent.
But is Latin America’s retail sector so doomed by Amazon’s entry? It is our belief at Americas Market Intelligence (AMI) that the logistical complications of online fulfillment in Latin America—combined with payment, legal, other operational issues—will conspire to slow Amazon’s regional ambitions. The same holds true with the expansion plans that Alibaba is developing within Latin America. Here’s what we see as the major challenges, market by market, to Amazonian dominance of LatAm’s e-commerce market.

Limited Local Footprint in Brazil

Let’s begin with the fact that Amazon only has domestic operations for its retail and marketplace division in Brazil and Mexico. While Amazon offers web and cloud services in Colombia, Chile, Mexico and Brazil, the company only sells products in Mexico and Brazil.
In Brazil, the largest market in the region, Amazon began to sell electronics, video games, home appliances, construction tools and other items in October 2017. The launch created much fanfare, but Amazon only offers its marketplace model in Brazil, where third partner providers manage their own inventory and distribution. Amazon still does not own a fulfillment center in Brazil but according to Reuters’ reports, Amazon plans to rent a 50,000-square-meter warehouse in the outskirts of São Paulo in 2018. The warehouse will be four times the size of Amazon’s physical book business, which leads many to speculate the Amazon will begin stocking many other products in Brazil.

Tricky Rules and Tough Competition

Many assumed that Amazon would stock its best-selling products in Brazil a lot sooner, but few appreciate the logistical challenges of Brazil, where taxes differ from state to state, internal transportation costs are prohibitive and imports are heavily taxed and slow to clear customs. Amazon’s largest Brazilian competitors—Mercado Libre Inc, B2w and Magazine Luiza—store and ship goods appearing on their websites even when offered by third-party sellers to ensure speed and customer satisfaction…and thereby raising the bar to a level that Amazon has not yet reached in Brazil. Moreover, nearly 20 percent of reviews on Amazon’s Brazilian marketplace are negative, double the rate in Mexico and quintupling the complaints of customers in the US, according to e-commerce analytics firm Marketplace Pulse. Unless Amazon can conquer the challenges of efficiently storing inventory in Brazil and fulfilling quickly to customers, its sterling customer reputation earned in the U.S. may never be replicated in the land of samba.

Grow or Buy

At this juncture, Amazon has two strategic options in Brazil. They can continue their greenfield expansion by investing heavily in fulfillment infrastructure and customs brokerage. Doing so would require partnering with multiple last mile delivery companies in a country with a notoriously fragmented trucking sector. Amazon will also have to invest heavily in warehousing operations in one of Latin America’s most challenging labor environments, overpriced commercial real-estate and the plethora of administration, legal and tax costs, otherwise known as el custo brasileiro that so often befuddle foreign investors. Plan B would be a Brazilian acquisition. Some speculate that B2w is the most exciting target since it is indirectly controlled by partners of private equity group 3G Capital and they might be ready to cash out. Magazine Luiza and Grupo Netshoes are other probable nominees. None cover the breadth of products and services offered by Amazon USA, but they provide an experienced corporate vessel through which Amazon can accelerate its Brazilian market expansion and do so with fewer costly reputational errors along the way.

Good Growth in Mexico

Mexico has proven an easier market for Amazon. In 2015, Amazon launched both its third-party marketplace and fulfillment operations. Mexico’s more mature logistics industry and superior (versus Brazil) infrastructure facilitated Amazon’s relative success. Two years later, in March 2017, Amazon launched its Prime service, offering same-day delivery in Mexico City, Guadalajara, Puebla, and Queretaro.
In October 2017, Amazon launched a cash payment service in Mexico so that customers could deposit cash (through a bank or retail POS) into their Amazon account and make online purchases against their credited account. Not only does such a service broaden their viable market (<30% of Mexican adults have a credit card), by building cash deposits, Amazon is halfway there to developing a digital wallet, widening its future strategic options.

Thanks to its larger logistics footprint and shorter delivery times, Amazon revenues in Mexico grew to $502 million in 2017, up 106% year-over-year (YoY), according to a Euromonitor report, making it the online market leader, ahead of Mercado Libre and WalMart (online). To sustain its triple-digit growth rates, Amazon will open its third warehouse with almost 1 million square feet offering fulfillment services by Q3 2018. The new distribution and fulfillment center will more than double its existing warehouse capacity, enabling Amazon to ship more than one million products per day.

Amazon’s Next Move in Latin America: Mid-Sized Markets

Amazon is a success in Mexico because the company learned from its early mistakes and adapted both its payment and logistics approach to the local market reality. Some of those lessons learned will serve Amazon as they aim for the region’s medium-sized markets like Argentina, Chile, Colombia and Peru.

Amazon set up its Web and Cloud Service offering in Chile and Colombia in 2017 and Argentina is set to follow in 2018. Thus far, Amazon has chosen not to open domestic operations, offering only cross border shipments. In mid-sized markets, less product variety is available to consumers and often at higher mark-ups. Therefore, customers turn to Amazon—even when they must wait 15 and 20 days to receive their international order and pay import taxes. But Amazon can only get so far with this purely cross-border model because less than 10% of ecommerce in these markets is cross-border.

Key Challenges

It is not a question if Amazon will establish local operations in Colombia, Chile, and Argentina, but rather, when. Argentina ought to be their next move given the explosion of consumer activity after a decade of weak currency policy that taxed consumption. But Argentina is home court to Mercado Libre, Latin America’s greatest online retailer, with an estimated valuation of over $13bn USD.

In all three countries, distribution is challenging. In Argentina, trucker unions are both cantankerous and costly, complicating fulfillment. In Chile, delivery outside of Santiago is costly because of the lack of back-haul opportunities. In Colombia, poor infrastructure, a scattered population, a fragmented and multi-layered trucking industry and continued security issues outside urban centers combined to drive up delivery costs to as much as 3-4 times that of the U.S. on a per-mile basis. In all three markets, GPS mapping is still an unfinished exercise thanks to confusing address systems, missing postal codes and weak internet signals.

Chile May Be the Best Bet for Amazon

In spite the consumption growth in Argentina, the Chilean market may be better prepared for an Amazon domestic inventory approach. Chile has a robust logistics industry and some of the highest levels of online retail sales versus total retail. Though Colombia and Argentina both have active trade agreements, the efficiency and transparency of Chile’s customs operations is light years ahead of Colombia and Argentina and most of Amazon’s product offering will be imported.

However…

Will Amazon push into one of these three markets domestically before they first resolve all their profit-draining challenges in Brazil? We may live in a flat earth e-commerce world, but most business leaders like to conquer new markets in a region like military commanders, one battle at a time.
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Diego Rodríguez

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