By Jack Ehlers, Director of Product, Payment Networks and Business Development at PPRO
Being home to richer nations such as Uruguay and Chile whose GDP per capita parallels those of mid-ranking EU countries, alongside poorer states such as Peru and Colombia which have a GDP per capita lower than the poorest EU member state, it is unsurprising that Latin America is universally known for being one of the most economically diverse areas in the world.
Once again, Latin America’s economy is on the rise. 155.5 million people in the continent are expected to use online platforms to buy goods and services in 2019 – a staggering increase from 126.8 million in 2016. Despite Latin America’s e-commerce market remaining small, recent figures show that in comparison with Asia Pacific or North American, the region’s retail e-commerce sales are predicted to rise to $79.7 billion U.S, dollars in 2019 from just $49.8 billion U.S. dollars in 2016.
With a population of 386 million, there is an abundance of potential opportunities for e-commerce success in this region. However, the economic environment in Latin America also presents some challenges. But this is not a reason to shy away from it. After all, the value of online commerce is estimated to be worth $41.22 billion US dollars. What’s interesting however, is that the booming e-commerce growth in recent years took place against a backdrop of a struggling economy. While many wouldn’t expect a growth in e-commerce during economic unrest, this surge mostly came from the rise in internet and smartphone usage which provided access to goods from abroad that were previously out of reach.
The e-commerce explosion
Latin America’s economy has traditionally been dominated by primary commodities. Low value raw materials and intermediate goods make up the overwhelming bulk of exports. Latin America’s abundance of, and thus reliance on, raw materials worked to its advantage in the early-to-mid 2000s. Between 2002 and 2007, Chinese consumption of commodities exported from South America increased, on average seven-fold.
155.5 million people in the continent are expected to use online platforms to buy goods and services in 2019 – a staggering increase from 126.8 million in 2016.
The growth in the commodities trade crowded out other economic activity. From the 1970s up until the late 1990s, South American economies diversified and become less reliant on a small number of exports. However, in the early 2000s, this process went into reverse. This not only left private prosperity highly dependent on a narrow range of economic activity, it did the same for state revenues. Before oil prices began to decline in 2014, for instance, 47% of Venezuela’s public revenue came from taxing the commodities trade, primarily oil.
By 2008, with the financial crisis already in full swing, commodity prices were falling. After this period, a normalisation of commodity pricing in the post global financial crisis period between 2010 and 2016 translated into significantly lower growth rates. But this all changed in 2016, helped by the explosion of e-commerce in the region. Now, Latin America looks to be on a recovery path and the region generates better results, with e-commerce at the forefront of this growth.
Defeating logistical challenges
Latin America still has much to overcome, especially when it comes to payment processing. In Latin America, access to secure, credit card-based payment methods are limited. In fact, many people in the region do not use a formal banking system. Amongst the logistical nightmare of a cash-based society for ecommerce providers targeting the region, merchants have found ways to manage this reality. eShopWorld reported that 36% of online consumers prefer to utilise PayPal, and 35% use Cash on Delivery.
Interestingly, in the region’s largest markets – Brazil and Mexico – consumers’ preferred payment method is via credit card. These two markets hold enormous potential for e-commerce in Latin America. There are currently 66.4 million e-commerce users in Brazil, with an additional 28.2 million expected to be shopping online by 2021. Four years from now, these 94.6 million e-commerce users are anticipated to spend an average of 307 USD online. By comparison, in Mexico, there are 59.4 million internet users, accounting for just under half of the population, leaving room for substantial growth. The number of Mexican internet users is equivalent to the entire population of the UK.
in the region’s largest markets – Brazil and Mexico – consumers’ preferred payment method is via credit card
However, it isn’t all plain sailing even when targeting the most affluent populations in Latin America. Logistics, traffic and infrastructure are a major issue for the region and has a detrimental impact on sales, where logistics alone can amount to 15% of the cost of what’s sold. Many online retailers have put logistics on the back burner for years, focusing on the user experience through purchase, and as a result it can take weeks for a purchase to arrive at a customer’s door. In order to remain successful in the booming e-commerce era, investment in this area could result in more e-commerce sales in smaller regions.
A return to growth, even if it’s still in its early stages, provides a better environment for retail than the economic stagnation and contraction of recent years within Latin America. The region’s consumers want premium products and are willing to pay for them. But that doesn’t mean they are not price conscious — 79% say that they are changing their shopping behaviour to save money on their purchases.
Although Latin American consumers are also willing to purchase digital goods and services using the internet, there is still a high level of openness towards the idea of shopping online for physical goods. Figures have shown that nearly 40% of consumers would be prepared to buy takeaways, beauty products and toys through their smartphone.
Today in Latin America, there is an increasing demand for e-commerce after years of recession. However, any merchant hoping to take advantage of available opportunities will need an extremely localised and directed approach to earn consumer acceptance, as customers are still extremely price conscious.