Only Complete Section 4 (Launch) & 5 (Leadership) 100 words maximum (each section) Bullet points (no long sentences) ?CaseAnalysisPoints1.pdfMercadoLibre.pdf

COB UE Course ‐‐ 1   

CASE ANALYSIS POINTS  NOTE: You will lose points if you only repeat the facts without your analysis. 

Point Allocation for Written Analysis 

500 words (one page); Bullet points preferred      1. Opportunity Evaluation …………………………………………………………………………………………………….. 3 

 Product/ Service strengths; weakness 

 Analyze market segment; potential 

 Evaluate competitive advantage: Direct/ Indirect Competitors 

 Analyze trends; regulations; other issues 

 Analyze proof    2. Business & Marketing Strategy …………………………………………………………………………………………… 3 

 Analyze the business strategy 

 Analyze the sales and marketing strategy 

 Analyze operations strategy    3. Financial Analysis ……………………………………………………………………………………………………………………. 3 

 How did they reduce needs? 

 How did they get internal financing? 

 How did they get external financing for growth without VC?    4. Launch …………………………………………………………………………………………………………………………… 3 

 Analyze pricing, including value added and margins 

 Analyze growth strategy 

 Analyze focus and pivot (if any)    5. Leadership ……………………………………………………………………………………………………………………… 3 

 How did they control? 

 How did they organize? 

 How did they build managers?    TOTAL ……………………………………………………………………………………………………………………………… 15   

CASE: IB-105

DATE: 04/04/13

Gary Mekikian prepared this case under the supervision of Professor William Barnett as the basis for class

discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Parts of this

case were excerpted from Stanford GSB case IB-19A, MercadoLibre.com, written by Andrea Higuera and Lauren

Pressman under the supervision of Professor William Barnett.

Copyright © 2013 by the Board of Trustees of the Leland Stanford Junior University. Publically available cases are

distributed through Harvard Business Publishing at hbsp.harvard.edu and European Case Clearing House at

ecch.com, please contact them to order copies and request permission to reproduce materials. No part of this

publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by

any means –– electronic, mechanical, photocopying, recording, or otherwise –– without the permission of the

Stanford Graduate School of Business. Every effort has been made to respect copyright and to contact copyright

holders as appropriate. If you are a copyright holder and have concerns, please contact the Case Writing Office at

[email protected] or write to Case Writing Office, Stanford Graduate School of Business, Knight Management

Center, 655 Knight Way, Stanford University, Stanford, CA 94305-5015.

MERCADOLIBRE

The company was doing great, but with growth and success came tremendous challenges. I sat

together with my manager of customer service, and answered calls in our call center to learn first

hand what our challenges are.

—Marcos Galperin, CEO and Chairman, MercadoLibre

As 2013 approached, Marcos Galperin and his team of MercadoLibre top executives were

meeting to celebrate the breathtaking growth of their company, and contemplate the challenges

ahead. Since starting the company with his Stanford Business School classmates in 1999,

Marcos had transformed the company from an internet auction site akin to eBay, to Latin

America’s leading online marketplace unique in its own right, and on par with Amazon. The

MercadoLibre team had not just cloned eBay and Amazon in Latin America; it had made a

number of key innovations in order to compensate for, and in some cases, take advantage of the

lack of commerce infrastructure in its markets. On the technology side, MercadoLibre had

started with a then state-of-the-art internet application based on an industrial-grade stack of

Oracle technologies. The application handled millions of transactions, provided a good user

experience, and facilitated the company’s growth and IPO in 2007. In 2008, Galperin had made

what he described as a “bet the company” decision to completely replace the company’s

technology by building and deploying a parallel system; not just another application, but a

sophisticated e-commerce platform based on Web 2.0 and the latest mobile web standards. The

gamble was paying off. The company’s transition was being hailed as another success for

Galperin and his team. But there was a larger challenge looming on the horizon.

In 2013, Galperin and his team watched as the biggest e-commerce company in the world,

Amazon, entered the markets that had been hitherto dominated by his company. MercadoLibre

had built a powerful brand and a significant footprint in Latin America through localization,

customization, and adaptation of best ecommerce practices. But competing with Amazon, with

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its huge stockpile of cash and sterling reputation worldwide, presented significant strategic

challenges.

FOUNDING MERCADO LIBRE, 1999

In the spring of 1999, Marcos Galperin, then an MBA student at the Stanford Graduate School of

Business, had a vision: to build an e-commerce company focused on serving the nascent but fast-

growing Spanish and Portuguese-speaking markets in Latin America. While many U.S.-based e-

commerce companies were beginning to think about international expansion, Marcos felt

strongly that a home-grown company built from the ground up to serve Latin American markets

could compete against the foreign transplants and win. Galperin’s goal was to identify a

business model that had proven successful in the United States and could be easily transferred

and adapted to Latin America (see Appendix A). During the spring of 1999, he had been

thinking about selling cars or real estate over the Internet when he had an epiphany. Why not

sell everything? That day, the idea of an online auction site for Latin America was born.

Before his graduation in June 1999, Galperin had secured angel funding and recruited his cousin,

Marcelo Galperin, to be the company’s chief technology officer. After graduation, Marcos

Galperin returned to Argentina, and in the spirit of a Silicon Valley start-up, he and Marcelo

began working out of a small garage in Buenos Aires. They quickly recruited Hernan Kazah, one

of Marcos’ classmates from Stanford, and on August 2, 1999, Marcos’ vision became a reality.

MercadoLibre launched its first country-specific C2C and B2C online auction website in

Argentina.

MercadoLibre was well received by consumers in Latin America. Aggressive marketing and

promotions campaigns drove users to the site and transactions grew quickly. By October of

1999, less than three months after launch, MercadoLibre had over 15,000 users in Argentina who

had completed more than 6,000 transactions worth over $2 million in value; but MercadoLibre

was not the only company with a flag rushing to claim Latin American e-commerce markets.

Galperin and his team knew they needed to move quickly to play in the largest of Latin

American markets, Brazil, and move quickly they did. Shortly after entering the Argentine

market, Galperin launched a site in Brazil, and within a few weeks, more than 4,000 Brazilians

had registered as users on the site. With Brazil and Argentina showing great promise for the

upstart auction site, Galperin knew he had a winner, and pushed himself and his team to fulfill

their mission―“to build a Latin American company where users get together to socialize,

browse through items, and buy and sell almost anything in an efficient, easy, trusting and fun

environment.”

Regional Organization and Marketing with Local Feel

From the company’s early days, Galperin and his team thought about the organizational structure

that would best support their strategy of becoming a dominant player throughout the countries in

which they wanted to do business. It was obvious that a uniform technology platform could

handle the needs of all markets and scale across borders as the company grew. Not so obvious

were the localization and customization of its marketing efforts that would be required to project

an image of a local e-commerce company doing business according to local customs and needs.

It did not take long for Galperin to decide that he needed to hire local country managers, and to

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build around each a local sales and marketing organization. This alone, he thought, would

ensure that every country’s needs would be well understood and met.

He also believed that developing a strong, well-recognized and unique brand perceived as cool,

irreverent and fun, would serve three key objectives: 1) to bring sellers and buyers to the site by

attracting current web users; 2) to position the brand in the minds of millions of people who

would become web users in the near future; and 3) to increase the loyalty of current users.

Galperin recognized that buyer and seller acquisition could be very time consuming and

expensive, if done in traditional ways. He spent significant effort evangelizing about his

company in the press, and when MercadoLibre launched in Argentina and Brazil, he worked

with a PR firm to make sure that the company received significant press coverage in local

newspapers and magazines. Even the U.S. press, including publications such as the Wall Street

Journal, the New York Times, Industry Standard and Red Herring, took notice of Galperin and

his company, which provided much-valued credibility in the eyes of internet-savvy Latin

Americans who follow the American press for the latest advances on the web.

Partnerships

Galperin developed partnerships with major Latin American portals to help acquire users. He

believed that portals would drive traffic to the site and help capture customers, and at the same

time, burnish the image of MercadoLibre as a major player on the Latin American internet scene,

both in the minds of the public and international investors.

Argentina’s Ciudad internet portal was MercadoLibre’s’s first partner, followed by StarMedia

and (an impressive feat for a start-up) AOL Brazil, an internationally recognized and prized

brand that dominated the Internet in the late 1990s. An important component of the company’s

partnership agreements was non-exclusivity. Anyone that partnered with MercadoLibre could

and did post MercadoLibre’s auction site as an option in their sites’ shopping channels. This

arrangement drove user acquisition while keeping costs to a minimum.

Technology

MercadoLibre believed that in order to succeed in the auction space, it was crucial to have

control of its technology. Initially, MercadoLibre used an “off-the-shelf” technology platform in

order get to market as quickly as possible. From the outset, however, the company hired an

internal IT team, led by Marcelo Galperin, to develop a robust, scalable, proprietary technology.

MercadoLibre believed that having a proprietary technology would be a key competitive

advantage for several reasons: 1) it would give flexibility to launch in any market without the

restrictions that most license agreements impose; 2) it would allow for continuous upgrades in

response to users’ feedback; 3) it would allow the company to offer customized solutions to its

business partners. To ensure reliability and scalability, the technology architecture was being

built on best-of-breed systems: Oracle database, Sun Microsystem servers, the Unix operating

system, and Exodus hosting. The decision to rely on big technology names and proprietary

systems and software to deploy its application seemed logical in the early days of the Internet.

Reliability and scalability were of paramount importance, and large technology companies such

as Oracle were safe bets.

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Ecommerce Infrastructure

There were many reasons why Latin America was considered virgin territory for internet

companies at the turn of the century, not the least of which was lack of infrastructure on all

fronts. Low internet user penetration rates, high access costs, and inferior technology were

among the infrastructure challenges that threatened MercadoLibre’s ability to grow rapidly and

gain the necessary scale to exploit the benefits of the online auction model. Online commerce

relies heavily on physical infrastructure for delivery of goods once transactions are completed.

Historically, the official postal systems in Latin America had been unreliable, even though they

had improved dramatically in several countries, such as Brazil and Argentina. At the same time,

companies like Federal Express and DHL shipped goods internationally, but did not offer

affordable, domestic delivery services. To grow his company in spite of these seemingly

insurmountable obstacles, Galperin decided that he could innovate to address these issues. One

such innovation would be MercadoPago, an online payment system, which would become a

MercadoLibre crown jewel.

KeyCompetitor

Another start-up with Ivy League pedigree, DeRemate.com, opened its site for commerce in

Argentina only a few weeks after MercadoLibre’s launch. DeRamate.com was founded in July

of 1999 by 11 cofounders, some of whom were classmates from Harvard Business School, Yale

School of Management, and Kellogg School at Northwestern. The formidable cofounders, under

the leadership of CEO Alec Oxenford, invested $50,000 each in a seed round of financing, and

committed another $50,000 to be invested in the next round.1 In what would become

DeRamate.com’s hallmark for focusing on speed, Oxenford and his team decided that they

would purchase the auction site software, rather than build it, and rushed to market on August

31, 1999―a mere six weeks after their founding. They gave Aucland, a French firm running an

auction site in Europe, 10 percent equity in exchange for the right to use their software in Latin

America. Oxenford thought that he could quickly adapt the Aucland software platform to the

Latin American market because it was built to handle multi-currency transactions, and had been

tested in live sites for a number of years. He was half right.

The software was quickly translated to Spanish and deployed, and DeRemate.com went live on

schedule, with Argentinian television channels providing extensive coverage for the launch of

the site on shows devoted to teenagers. The launch was such a tremendous marketing success

and generated so much traffic that the DeRemate.com site promptly crashed.

While the team worked to stabilize the Argentinian site, it was hard at work identifying a suitable

strategy to enter the Brazilian market quickly. Since the Brazilian market already had a number

of e-commerce players, Oxenford and his team decided to trade more equity for speed to market

and growth. They convinced the Brazilian founder of E-Bazar, Mr. Andrade, to sell the site to

DeRemate.com for $50,000 plus 2.4 percent equity. Within two weeks, E-Bazar was rebranded

and re-launched as Arremate.com, and this was only the beginning.

1 Harvard Business School, “DeRemate.com: Building a Latin American Internet Auction Site,” January 24, 2002.

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Meanwhile, cash was running low, so Oxenford embarked on a fundraising trip to New York and

Miami, hoping to raise enough cash to carry the company to IPO within a short time frame.

After being shunned by traditional VCs (most had no interest in Latin American markets),

Oxenford negotiated a $12 million Series-A financing at $15 million pre-money valuation from

Citigroup, Merrill Lynch, eQuest, TPG, and SLI.

With $12 million in the bank, Oxenford pushed forward with his expansion plans. Since the

founders of the company were from different Latin American countries, each founder opened a

local office, and coordinated with Oxenford to deploy the software and marketing in order to

start generating traffic and demand. Oxenford also tagged Sergio Grinbaum and Alejandra

Herrera, a former Boston Consulting Group administrator, to develop a formulaic approach to

opening offices. As rapid growth accelerated their cash burn rate, Oxenford convinced

Terra―one of the leading European internet portals owned by Spain’s Telephonica phone

company―to invest $45 million at post-money valuation of $150 million. For a brief moment, it

seemed Oxenford’s eight-month-old start-up was speeding to exit in the summer of 2000, with

underwriters JPMorgan and Merrill Lynch predicting a multi-billion dollar IPO. In April of

2000, a month after receiving the checks from Terra, the internet bubble burst, and the market

crashed, effectively foreclosing DeRemate.com’s IPO hopes in the near term.

Oxenford quickly regrouped and reduced its cash burn rate by 70 percent, but did not roll back

expansion plans. By August of 2000, DeRemate.com had around 1 million users, transacting

auctions in eight Latin American countries, plus the United States, where the company was

targeting the vast Spanish-speaking population. Oxenford’s goal was to reach profitability

without additional capital by 2003. But this was easier said than done. DeRemate’s founding

was based on the assumption that a quick IPO would provide liquidity to the 11 or so co-

founders who had left very lucrative positions to help build an internet start-up with a multi-

billion dollar exit opportunity.

When the tech bubble burst and the U.S. stock market crashed in 2000, the dream of a quick exit

through public offering or outright sale evaporated, and along with it the incentives of the

original team that was sprinting to an exit. Oxenford updated his business plan to target cash

flow breakeven by the middle of 2002. But reinventing the company around the new market

realities would be too big a challenge, leaving a huge opening for MercadoLibre to leap ahead,

and eventually acquire DeRemate.

GROWTH AND IPO OF MERCADOLIBRE, 2007

Meanwhile, by 2006, MercadoLibre had achieved what even Galperin could not have dreamed a

short five years prior. The company hosted the largest online trading platform in Latin America,

and had established itself as the market leader in e-commerce in Argentina, Brazil, Chile,

Colombia, Ecuador, Mexico, Peru, Uruguay and Venezuela, respectively, based on unique

visitors and page views measured in 2006. Additionally, Galperin had launched online trading

platforms in Costa Rica, the Dominican Republic, and Panama. With a market of over 550

million people and a region with one of the world’s lowest but fastest-growing internet

penetration rates, the company provided buyers and sellers a state-of-the-art online trading

environment that fostered the development of a large and growing e-commerce community.

Most importantly, the company offered a technological and commercial solution designed to

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meet the distinctive cultural and geographic challenges of operating an online trading platform in

Latin America.

As of December of 2012, the company offered users two principal services:

The MercadoLibre marketplace: The MercadoLibre marketplace was a fully automated,

topically arranged and user-friendly online trading service. This service enabled both businesses

and individuals to list items and conduct their sales and purchases online in either a fixed-price

or auction-based format. Additionally, through online classified advertisements, the company’s

registered users could list and purchase motor vehicles, watercraft, aircraft, real estate and

services. Any internet user could browse through the various products and services that are

listed on the website and register with MercadoLibre to list, bid for, and purchase items and

services.

The MercadoPago online payments solution: To complement the MercadoLibre marketplace,

the company had developed MercadoPago, an integrated online payments solution akin to

PayPal in the United States. MercadoPago was designed to facilitate transactions on the

MercadoLibre marketplace by providing a mechanism that allowed the users to securely, easily

and quickly send and receive payments online.

MercadoPago went beyond PayPal’s service template by introducing key innovations. Credit

cards and bank accounts had only recently begun to penetrate the vast populations of Latin

American countries where the company operated. This created a unique challenge for

Galperin―inventing a process whereby buyers and sellers could exchange goods for cash or

check. MercadoPago solved this problem by creating an ingenious escrow service, interfacing

with a network of collection agents, who acted as payment goods intermediaries. When a cash

buyer completed a transaction online, she was instructed to make the payment to a local

collection agent. Once the payment was made and registered by the local agent in the system,

the seller would be notified to send goods to the buyer.

By 2006, MercadoLibre users paid approximately $87.9 million for items bought through

MercadoPago, which represented 8.3 percent of the gross merchandise volume for that year.

Buyers were charged an additional commission when paying via MercadoPago. The

commission rates averaged 8.0 percent of the sales price of a listed item, and varied depending

on whether a buyer made payments through MercadoPago by credit card, debit card, check, cash

or bank transfer. Argentina was one exception, where as of May 2006 the company charged a

flat 6.49 percent.

For cash, bank deposits, checks and electronic transfers, MercadoPago’s commission rates

ranged from 1.99 percent to 3.99 percent depending on the funding method and country, with a

minimum of approximately $1.00. For credit card payments, the commission rates ranged from

6.49 percent of the payment amount for a single lump-sum payment, up to approximately 43.99

percent of the payment amount (which included any applicable interest charged) for an 18-month

installment plan.

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