(Bloomberg)—When Amazon.com Inc., No. 1 in the Internet Retailer 2019 Top 500, announced it was rolling out its popular Prime delivery subscription service in Brazil last month, shares of local e-commerce competitors tanked. Investors also got jittery in 2017, when the world’s largest online retailer launched a marketplace to sell electronics. In both cases, the shares recovered quickly once investors reminded themselves of a durable truth about Brazilian ecommerce: Local firms have a firm igrip on the market and are in little danger of succumbing to the American interloper.
So it goes for Amazon in Latin America’s largest economy. Seven years after entering Brazil, the Seattle-based company is battling to gain traction against a handful of local competitors with extensive delivery networks, strong brands and a deep understanding of Brazilian shoppers.
With only two distribution centers and a more limited selection than Brazilian players, Amazon can’t compete head to head with the likes of MercadoLibre Inc. and Magazine Luiza SA. So it has chosen instead to lure customers with Prime, which offers subscribers free shipping, music, movies and games. Earlier this month, Amazon also announced it would start selling gadgets powered by the Alexa digital assistant, which has been tailored for Portuguese speakers and can sing soccer team anthems—a gesture to the nation’s ardent fans.
The bet is that if Brazilians get addicted to Alexa and Prime’s entertainment offerings—also tweaked for local consumption—they’ll start shopping on Amazon, too.
“It’s an important market for them to succeed,” says RBC Capital Markets Analyst Mark Mahaney. “It’s one that they recently made a major initiative into, and it’s a bit of a test on how globally receptive consumers are to Amazon’s value proposition.”
Amazon is counting on its international operations, which last year generated 28% of revenue, to help offset slowing sales growth in its home market. On Thursday the company posted its first year-over-year quarterly profit decline since early 2017 after acknowledging that it was spending more than expected on an ambitious effort to speed up deliveries.
Its international efforts have been spotty. Amazon failed to build a major business in China, where Alibaba Group Holding Ltd. and JD.com Inc. outmaneuvered it on their home turf. So Amazon instead has focused on India, pledging to spend more than $5 billion to take on local heavyweight Flipkart Online Services Pvt, acquired last year by Walmart Inc. In the last few years, Amazon has also pushed into Mexico, Turkey and Australia.
Mahaney says Brazil, the world’s sixth most populous nation, is probably Amazon’s second-most important international outpost. Like India, the country has large pockets of rural poor but is also home to millions of middle-class urbanites who have become comfortable shopping from their smartphones. In fact, mobile shopping represents 43% of online purchases, compared with 5% five years ago, according to Nielsen’s e-commerce researcher Ebit.
Ecommerce is relatively well established in the big cities. In Sao Paulo, contract workers on motorbikes, bicycles and scooters weave through the traffic delivering everything from smartphones to beer. But outside the cities and the more developed South and Southeastern regions, drivers must contend with rough roads and bandits bent on stealing their cargo. In some remote areas, it often takes more than two weeks to get a package ordered online and delivery fees can exceed the cost of the products.
Such conditions tend to favor local companies.
The largest—and only pure ecommerce player—is MercadoLibre. Founded 20 years ago in Buenos Aires, the company has a sprawling logistics operation, online payment services and 12 million-plus vendors selling more than 260 million items. “If you talk to any company that delivers all over Brazil, it has a network that it developed with a series of partners,” says chief operating officer Stelleo Tolda. “We’ve nailed it.”
Not that he’s taking his 33% market share for granted. MercadoLibre plans to spend more than 3 billion reais ($748 million) next year on financial services and opening more distribution centers that will let it expand next-day delivery to at least 16 cities.
The three other main local players rely on their own bricks-and-mortar operations and have converted sections of their stores into pickup centers for online orders—a major plus in a country larger than the continental United States. Magazine Luiza, which started out selling televisions, has more than 1,000 locations across the country where shoppers can retrieve appliances and shoes and will soon be able to pickup diapers, makeup and other products purchased on the website.
Amazon has few of these advantages and offers a more limited array of merchandise; of the more than 20 million products it sells in Brazil, 13 million are books. Its two distribution centers are located near Sao Paulo, meaning even Amazon Prime members can count on shipping in two days or more only for about 500,000 products and in 90 cities. The company says deliveries in other urban centers will take three days or more.
Instead of fighting a ground war, Amazon appears to be trying to engage consumers with Prime and the range of entertainment options bundled with the $2.50-a-month subscription. The company is already starting to tailor the content to local tastes; coming soon is a documentary on Brazil’s soccer team.
“Netflix and Spotify have already taught this type of consumption to [Brazilians],” says Alexandre Van Beeck, a partner at consulting company GS&Consult. “With Prime, Amazon will learn that I like a certain type of movie, that I read a certain type of book in the Kindle. And with this data, it will be able to offer me certain products with more assertiveness and less costs.”
Perhaps, but matching the delivery prowess of local players won’t be easy. “Stringing together a network of individual carriers is pretty complicated,” says Bloomberg Intelligence senior analyst Julie Chariell. She notes that it took local e-commerce company B2W Cia. Digital as much as 10 years to put together its shipping network. The company is already testing delivery drones, evidence of its growing sophistication.
Could Amazon acquire a local delivery startup? Chariell says it’s possible but that these companies have plenty of backing from venture and private-equity firms and so have little incentive to sell out to a U.S. company. Even if Amazon did manage to acquire a mid-sized outfit, the company would still need to fold it into existing operations and then extend its geographic reach. “It’s not necessarily an instant solution,” Chariell says.
Amazon doesn’t need to dominate Brazilian ecommerce to succeed there. Online spending is expected to grow 87% to 128.7 billion reais by 2023, according to Euromonitor International. That means Amazon can generate new international revenue even if it doesn’t take share from rivals. So long as spending is shifting from stores to websites and smartphones, Amazon stands to gain simply by being a prominent option.
At an industry event in August, Amazon’s Brazil chief Alex Szapiro evinced little urgency. “We’re in no hurry,” he said, echoing his employer’s well-known penchant for strategic patience. “What happens in the United States today took 25 years. We want to do it fast, but doing it right is more important than doing it fast.”