MercadoLibre: The eBay of Latin America

Since going public in August, its stock price has shot up 148%. The e-commerce site has copied eBay's successes—can it avoid the U.S. site's mistakes?

by Catherine Holahan

Marcos Galperin took a wrong turn that ultimately put his company on the map. It was 1999 and the 26-year-old business-school student had scored the meeting of a lifetime: an audience with John Muse, co-founder of billion-dollar private equity firm HM Capital Partners. Galperin was asked to chauffeur Muse to the investor's private plane, and hoped to use the drive time to sell Muse on his idea for a Latin American e-commerce site.

But two classmates who tagged along had similar intentions, and Galperin hadn't been able to get a word in edgewise by the time they neared the airport. So he veered off course to buy time for pitching Muse on his brainchild, MercadoLibre (MELI). Online auctioneer eBay (EBAY) had sold shares the prior year for a 197% premium on its $18 offer price. And Latin America, with a rapidly growing online population and large number of remote villages without major shopping centers, presented an unprecedented opportunity for an eBay-like site where merchants could sell goods directly to shoppers, for a fee.

Muse agreed to fund MercadoLibre on the spot. "He dropped his suitcase and said, 'I would like to be an investor,'" recalls Galperin. "That was incredible."

Successful Sales

So far, the investment has proved sound. Since its launch a few months after the fateful drive, MercadoLibre has become the biggest e-commerce site in Latin America when ranked by sales conducted on the site. Its 22 million registered users bought and sold more than $656 million in goods in the first half of 2007 alone, generating profit of more than $1.6 million. More than 20% of the 104 million people online in South and Central America shop on MercadoLibre's pages.

MercadoLibre's revenue and influence are likely to increase along with the growth of Internet use, much of it at high speeds, across Latin America. Since 2000, Internet usage has increased more than sixfold in Latin America and the Caribbean, according to InternetWorldStats.com, a market research site. Yet, only about 21% of the region's population is online, compared with more than 70% in North America. Broadband has reached only about 2% of Latin America's 548 million residents.

Finding other investors hasn't been hard either. In 2000, Galperin closed a $46 million round of funding led by Goldman Sachs (GS). In September, 2001, eBay took notice, acquiring a 19.5% stake.

EBay's Influence

Perhaps the easiest sell of all has been to Wall Street. Since the initial public offering on Aug. 10, MercadoLibre's stock price has climbed 148%, from $18 to $44.59, as of Oct. 29. "There is tremendous e-commerce opportunity in Latin America," says Tim Boyd, an analyst at American Technology Research. "Look at what happened [in the U.S.]."

Indeed, Galperin has modeled MercadoLibre on U.S. e-commerce pioneers, especially eBay, which has been closely involved in its development for six years. "From day zero, we looked at eBay as a role model," says Galperin. "But we always knew that we needed to change stuff to make it work in Latin America."

EBay's influence is clear in MercadoLibre's design, which bears a likeness to eBay's yellow and white site and is similarly organized. Like eBay sellers, MercadoLibre merchants deal directly with their customers via message boards and are responsible for promoting, selling, and arranging delivery. That setup differs from, say Amazon.com (AMZN), where third-party dealers sell goods under the Amazon brand name. MercadoLibre users also have individual feedback ratings based on customer reviews, similar to those on eBay.