Finding Opportunity Amid Crisis
Like in many parts of the world, the pandemic has taken an immense health and economic toll in Latin America, upending the balance of social, political, and business dynamics. While the secular shift towards digitalization was nothing new to the region prior to COVID-19, the strict government lockdowns enacted to prevent a total collapse of national health systems exposed long-standing inefficiencies across several aspects of everyday life.
As a result, the crisis accelerated the digitization of customer interactions as individuals and businesses were left with no choice but to adapt to the “new normal” quickly. With consumer behaviors altered seemingly overnight, digital solutions—such as e-commerce and fintech—were no longer perceived as a luxury. Instead, they had turned into a lifeline, especially for those segments of the population most vulnerable to the virus.
Technological Innovation: Unlocking Latin America’s Growth Potential
Two years after the onset of the pandemic, we believe there are reasons to be optimistic about the outlook for Latin America. While the digitalization of the region’s economies can’t reverse the losses already suffered, the great degree of innovation and disruption taking place even across low-technology sectors appears as a bright light at the end of the tunnel. In our view, secular forces such as younger demographics, a rising middle class, and a relatively untapped addressable market are priming the region for a technological renaissance likely to reinvigorate the region’s economies.
Despite our constructive outlook and enthusiasm for the opportunity present in Latin America, caution is warranted when navigating the investment landscape given elevated uncertainty around policy, regulatory, currency, and economic shifts. This fact underscores why, at Polen Capital, we’re not just going after the fastest-growth companies in the market. Instead, our objective is to invest our clients’ capital only in what we view as competitively-advantaged businesses capable of thriving under different economic and market scenarios.
MercadoLibre: Reshaping the Way Latin Americans Shop and Pay
In our opinion, MercadoLibre1— the most popular e-commerce provider in Latin America2— is a clear example of a business with durable competitive advantages which is well-positioned to continue growing even after the pandemic. The company—which operates in 18 countries, including Argentina, Brazil, Mexico, Colombia, and Peru—has developed a dominant position in its major markets.
Part of the firm’s success story can be attributed to its management team. We believe a key strength of management at MercadoLibre lies in its forward-thinking mentality and ability to address shifting customer needs rapidly. Management has continuously invested for the long-term when making capital allocation decisions, opting for technology-based asset-light business models to benefit from economies of scale. In return, this allowed the business to grow with limited capital requirements while also providing a degree of insulation from economic headwinds such as inflationary pressures and elevated interest rates commonly seen across the region.
Nevertheless, MercadoLibre faced several structural challenges on its path to becoming the regional giant it is today. Amid Latin America’s lack of technological infrastructure, the company had to build its entire ecosystem foundations from scratch. However, MercadoLibre capitalized on this opportunity and expanded its offerings to financial services in a region where a large segment of the population doesn’t have a bank account and relies primarily on cash to transact (see Figure 1). Other investments, such as developing a logistics network from the ground up, paid similar dividends. More than 85% of the items sold on MercadoLibre’s platform are now shipped with their managed network solutions, up from basically nothing only seven years ago.
These investments helped MercadoLibre build one of its most powerful economic moats: bringing trust to the merchant-customer relationship by allowing online consumers to shop easily and safely while giving them the confidence to share sensitive personal and financial data. With internet availability and smartphone penetration projected to expand in Latin America over the next decade, we believe that MercadoLibre is well-positioned to continue growing for many years ahead.
Figure 1: Share of Population with Ownership of a Debit Card
Source: MercadoLibre. As of September 2021.
1 MercadoLibre is held in the Polen International Growth and Polen Global Emerging Markets Growth portfolios (as of Q4 2021).
2 By number of users. Source: Statista (2021).
This information is provided for illustrative purposes only. Opinions and views expressed constitute the judgment of Polen Capital as of February 2022 may involve a number of assumptions and estimates which are not guaranteed, and are subject to change without notice or update. Although the information and any opinions or views given have been obtained from or based on sources believed to be reliable, no warranty or representation is made as to their correctness, completeness or accuracy. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice, including any forward-looking estimates or statements which are based on certain expectations and assumptions. The views and strategies described may not be suitable for all clients. This document does not identify all the risks (direct or indirect) or other considerations which might be material to you when entering any financial transaction.
This information should not be construed as a recommendation to purchase, hold or sell any particular security. Holdings are subject to change. There is no assurance that any securities discussed herein will be in the portfolio at the time you review this post or that any securities sold have not been repurchased. The securities discussed do not necessarily represent the entire portfolio. It should not be assumed that any of the securities, transactions or holdings discussed were or will prove to be profitable or that any investment recommendations we make in the future will equal the investment performance of the securities discussed herein. For a complete list of Polen Capital’s past specific recommendations for the last year, please contact [email protected]. Past performance does not guarantee future results and profitable results cannot be guaranteed.