Brazil: Opportunities For Growth In E-Commerce

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Includes: BRZU, BZQ, EMQQ, EWZ, FBZ, MELI, UBR
by: Kevin Carter
Summary

Brazil just elected a far-right conservative as their new president.

The Brazilian economy is slowly emerging from a deep recession.

The new president's preference for privatizing businesses may lead to a restoration in confidence for Brazilian companies.

E-commerce has the potential for growth in Brazil.

Brazil just elected their new president, a far-right conservative. How his policies will play out in the future and the effect on the economy remains to be seen. However, the economy is slowly emerging from a deep recession. With the distractions of the election over, hopefully, the country can continue with the recent economic momentum.

In the meantime, e-commerce shows the potential for strong growth. Although a large market, only a small fraction of the population purchase goods online, creating the potential to attract more business. The newly elected president’s advisors have already displayed a penchant for privatizing business which has the potential to restore confidence in many companies following the recent political scandals.

Exposure to the burgeoning e-commerce sector in Brazil is available through holding shares of MercadoLibre (NASDAQ:MELI), which is the leading e-commerce company in Brazil. Alternatively, investors can hold shares of EMQQ – the Emerging Markets Internet and E-commerce ETF – which held MELI as of 11/19/18.

Brazilian Election Results

On 10/28/18, Brazil elected Jair Bolsonaro its new president. Bolsonaro is a far-right conservative who made safety and security a focus of his campaign, vowing to make the punishment for crimes harsher while loosening restrictions on gun ownership. He has also made sexist and racist remarks and is anti-abortion.

He has been less clear, however, on his plan for Brazil’s economic recovery. According to his presidential platform, he has a vague plan to streamline the healthcare and education systems, which includes “doing more with the current resources, according to Vox. His economic adviser, Paulo Guedes, is a free market ideologue who has called for privatizing state firms and reducing government spending, according to the same Vox article.

We don’t pretend to know what Mr. Bolsonaro will do on the economic front and how his election may impact the economy. However, we wanted to review the current economic environment in Brazil and, more specifically, the potential for internet and e-commerce companies in the country.

Brazilian Economy – Slow Recovery

According to the CIA World Factbook, as of July 2017, Brazil had a population of 207 million, making it the fifth most populous country in the world. After shrinking 3.6% and 3.5% in 2015 and 2016, respectively, GDP grew 1.0% in 2017. Business investment, at a -1.8% rate in 2017, remains a drag on the economy.

However, it was -13.9% and -10.3% in 2015 and 2016, respectively. Industrial production and retail sales grew 2.5% and 2.1%, respectively in 2017, their first increase in several years. However, the unemployment rate remained high at 12.7% at the end of 2017. These statistics paint a picture of an economy that is recovering from a deep recession but hardly appears robust (all data from CIA World Factbook and FocusEconomics).

Brazil’s economy has also been affected by recent political scandals including the imprisonment of its former president on corruption charges and the fallout from sanctions on Brazilian companies involved in the scandal. Additionally, there was the distraction of a contentious election between Mr. Bolsonaro and his opponent, Fernanco Haddad, a polar opposite politically. Hopefully, with the election decided the country can get back to business.

E-commerce In Brazil – Strong Opportunities

Despite the fact that only recently is Brazil emerging from a deep recession, e-commerce still offers much potential. According to PagBrasil, Brazil is the largest e-commerce market in Latin America and the fourth largest in the world. According to Statista, retail e-commerce sales hit nearly $18.8 billion in 2017 and are estimated to reach $31.7 billion by 2022, a 10.7% compound annual growth rate (CAGR). However, retail e-commerce only represents 2.7% of total retail sales in Brazil, well below the 23.1% of China and the 9.0% of the United States, according to Statista. This gap represents untapped potential for e-commerce in Brazil.

Brazil is a well-connected country with an internet penetration rate of 57% in 2016, that is expected to hit 62% in 2022. Mobile penetration is roughly similar.

MercadoLibre – Leader In Brazil

Mercadolivre.com is one of the largest websites by visitors in Brazil according to market intelligence firm SimilarWeb. Additionally, Statista showed Mercadolivre as the most popular online retailer in Brazil, logging 27.7 million unique visitors as of January 2017.

An article in ZDNet identified MercadoLibre as the leader in the Brazilian e-commerce market. According to the survey conducted by website Mobile Time in partnership with polling firm Opinion Box, the company - which operates locally as MercadoLivre - is the first choice by Brazilians when it comes to buying online.

The article went on to note that MercadoLibre continues to thrive despite Amazon's (NASDAQ:AMZN) presence in large Latin American markets such as Brazil and Mexico over the last few years. The article also noted a separate study by comScore that showed 47% of consumers in the region who made online purchases did so on MercadoLibre, compared to just 17 percent for Amazon.

Summary

Despite a tepid economy, e-commerce may offer substantial potential for growth. Over half the country has access to the internet. E-commerce as a percent of sales if well below other countries, so may offer the potential for growth. MercadoLibre is one of the leading e-commerce companies in Brazil.

EMQQ – the Emerging Markets Internet and E-commerce ETF – held MercadoLibre as of 11/2/18.

Disclosure: I am/we are long MELI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.