Decoding China’s “New Retail” + Giant Internet Ecosystems LatAm Retail and Internet Sector Note - May 2018 Fabio Monteiro Luiz Guanais [email protected] [email protected] btgpactual.com /BTGPactual /BTGPactual +55 11 3383 2006 +55 11 3383 2755 Summary 03 China trip: Internet DNA as a driving force of retail revolution 04 A few thoughts about Chinese e-commerce …and our reading for Brazil and Mexico 07 Delving deep into Chinese ecosystem 15 China snapshot - The O2O experience 22 The main players in China’s booming e-commerce LatAm Retail and Internet BTG Pactual Affiliate Research - Banco BTG Pactual S.A. Fabio Monteiro [email protected] +55 11 3383 2006 Luiz Guanais [email protected] +55 11 3383 2755 of the BTG Pactual Equity Research team LatAm Retail and Internet - Equity Research 2 China trip: Internet DNA as a driving force of retail revolution Napoleon once said: “Let China sleep. When China (41% of global total by market value), such as Didi wakes up, the world will be shaken.” Of course, (US$50bn valuation), mostly supported by at least China woke up many years ago to become the one of the giant ecosystems. world’s second largest economy (so far), with GDP of US$11.2 trillion. All eyes on China and its secular growth trend… but it isn’t a copy-paste trend! We herein provide our feedback from our recent trip The secular growth trend in the Chinese market is to China, where we met leading Chinese and global set to persist in the coming years, with a burgeoning companies in the e-commerce ecosystem. Our initial presence of mobile commerce and payments, takeaway was that, from a retail and e-commerce impressive digitalization of people’s daily lives, and perspective, China is changing global dynamics. market consolidation by players who have created a bona-fide ecosystem to attract consumers and sellers Our 1-week trip focused on internet and technology to their platforms. and the main goal was to form an initial view on what internet players (to differing degrees of scale Meanwhile, looking specifically to Brazil and Latin and success) are doing and the main technology America, although e-commerce in the region is still at its trends, hopefully giving us an initial reading on early stages, there are already a few successful players, Brazil, Mexico and the rest of Latin America. with market share ranging from 10%-25%, but that already hold relevant organic traffic and a fulfillment More than bringing definite answers, decoding structure to support growth in the coming years. China’s ecosystem means diving into “New Retail”, which will eliminate the boundary between offline Yes, companies such as B2W (BTOW3 - Buy), Magazine and online commerce, with integrated channels, a Luiza (MGLU3 – Buy) and MercadoLibre (MELI - Buy) seamless consumer experience and an increasingly have all invested (or have plans to invest) in logistics cashless and card-less society. Chinese “New Retail” and payments solutions to increase buyers’ and seller’s harnesses convenience, a personalized experience stickiness (such as the Chinese titans did), which, like a and big data analysis, focusing on consumer déjà vu experience with China’s case, should lead to a experience - a trend we expect to spread (to differing consolidation of the online market in the hands of a few degrees) around the world in the coming years. potential winners in the region. Favorable ecosystem created a competitive However, we do not expect that this consolidation edge to succeed. will lead to the creation of complete ecosystems that China is already a global e-commerce leader, with dominate consumers’ daily lives, such as in China, GMV of US$1 trillion, accounting for 23% of total given these Latin American companies should face retail sales, which compares to 9.0% in the US, competition from players in different segments (such 2.2% in India, 1.7% in Mexico and 4.3% in Brazil. The as Cielo and PAGS in the payments front), while there is Chinese e-commerce market grew 24% in 2017, still a high dependency of Brazil Postal Service (Correios) as per Euromonitor, and 2017-20 growth should to deliver e-commerce purchases (and private players be 14% p.a. The drivers of China’s success are: (i) still do not have the capacity to absorb this pent-up the country’s massive base of young consumers, demand). Thus, Latin American e-commerce should (ii) significant investments in infrastructure, (iii) be a history of consolidation but not full integration of open source technology, which allows for fast services under the same platform. technological advancement and (iv) a physical retail sector in its early stages. Meanwhile, Latin America isn’t an easy environment Over time, China has created a favorable ecosystem for a foreign player to start operations from scratch, dominated by Alibaba, Tencent and (to a lesser thus creating further opportunities for Brazilian (and extent) Baidu, ranging from payments to logistics, LatAm) companies to partner up with Chinese players. which now paves the way for innovation that However, given compelling opportunities in other translates into growth (and what growth!). A great Asian markets, we believe China’s focus (in the case of LatAmexample Retail is theand numberInternet - ofEquity unicorns Research in the country the online channel) is still a long way from Latin America.3 A few thoughts about Chinese e-commerce …and our reading for Brazil and Mexico 4 LatAm Retail and Internet - Equity Research One of the objectives of this report is to share Based on the above-mentioned highlights for the our main thoughts about e-commerce in China Chinese internet ecosystem, an easy conclusion is and have a reading for Brazil, Mexico and the rest that Latin American countries are not even close of Latin America. We present below our main to China in terms of e-commerce development, thoughts, considering the meetings, store visits and it should take a long time to catch up in the and overall experience we had in China (which will e-commerce, payments and logistics businesses. be explored in details along the report): This is an opportunity for the players that are more capable to occupy the space and gain share in a E-commerce is a high growth market with supposedly high-growth market. increasing penetration: China is connected, from taxi drivers to large supermarkets, e-commerce Most of the large e-commerce players in Latam represents 23% of retail sales, much above were originally large retailers that moved into American and European average, and, despite the e-commerce. In Brazil, for example, B2W, a high penetration, prospects for e-commerce Magazine Luiza, Via Varejo, Walmart, which are the growth are still high. largest players, are all linked to large retail groups. Only B2W has double digit market share (19% of Huge ecosystems dominating the e-commerce’s GMV in Brazil) and launched its e-commerce market: E-commerce is dominated payments platform (Ame Digital) a month ago, by three groups – Alibaba, Tencent and Baidu, which still with limited number of services and products. have morphed into huge ecosystems, comprising Magazine Luiza has much superior growth and businesses such as e-commerce, mobile payment, above-average service levels (per Reclame Aqui), logistics, ride sharing, games, video, search, news but still have not launched its payments platform. and social media. These three groups have a The other players need to catch up given many combined market cap of over US$1 trillion. internal and/or governance issues. Mobile payment is impressively penetrated Very few players are pure online players. in all types of business: two players – Alipay and MercadoLibre (29% of e-commerce’s GMV in Brazil) WeChat Pay – dominate the market, with market started as a pure marketplace, with technology share of 88%. These players are linked to Alibaba DNA. Amazon, which has less than 1% of and Tencent, the main ecosystems in China. e-commerce’s GMV in Brazil, is still in the early stages of its strategy in Mexico and Brazil, and should have Strong support for startups and unicorns, difficulties to understand the specificities of taxes, especially those focused in sharing economy, consumer finance and logistics (Inditex, Walmart AI (artificial intelligence), and content: Tech and many other successful international retailers environment in China with strong support from are struggling in Brazil for a long time…). the whole ecosystem helps the creation of startups and the development of unicorns, such as Didi (ride E-commerce penetration: In Latin America, sharing) and Sensetime (AI / facial recognition), e-commerce penetration is increasing, but still valued at US$50bn and US$4.5bn, respectively. representing a much smaller part of retail sales compared to China, south Korea, the UK and the US. Cross boarder commerce in China is growing Brazil has a 4.3% penetration as a % of retail sales, the significantly: Cross boarder commerce jumped to largest in Latin America, and we think it can reach US$100bn in 2017 from US$54bn in 2015, bigger high single digit penetration in 5 years. Mexico and than the whole e-commerce in Germany and in Argentina have 1.7% and 2.7%, respectively, with line with the UK. Alibaba (Tmall Global) and JD good potential to grow as well. This is, by the way, (JD Worldwide) are expanding their businesses to one of the main reasons behind our secular growth almost all the countries in the world. call for e-commerce in the region. LatAm Retail and Internet - Equity Research 5 Winner ecosystems: We do not believe LatAm countries will have a dominant player in e-commerce with a similar scope compared to Alibaba or Tencent.