Latin American Internet start-ups have received considerable attention. In the last eighteen months they have captured over $1.84 billion dollars of private funding. However, many of these "flash-in-the-pan" companies are struggling and will soon fail. Some will give way to their clicks-and-mortar counterparts that can leverage their less glamorous, but difficult to replicate, capabilities such as fulfillment and customer management. The first wave of US copycat business models may soon be replaced by superior business models that reflect and adapt to regional market differences. Some high fliers will simply run out of cash due to high cash-burn rates and an increasingly profit-focused investment community. Recently, private investors have become more demanding as they face the need to participate in a second or third round of finance before realizing their IPO nirvana.
Moving forward it may be the Latin American bricks-and-mortar companies that successfully use the Internet to create and to capture the billions of dollars of value that will ultimately be created. Many of these incumbents are moving aggressively in hopes of leveraging their significant scale, assets and industry experience to develop winning clicks-and-mortar business models. In the end the winners will be the companies that most effectively incorporate the Internet into their business processes while adapting their strategies to Latin American market place peculiarities.
It's Not Just the US All Over Again: Over the past year the Latin American Internet market's evolution has mirrored that of the United States, only at a highly accelerated pace.
In other words, what happened in the US between 1995 and 2000 has happened in less than a year in Latin America. The first wave of Internet startups were basically US copycat models that aimed to tropicalize or import successful US business models such as portals, online retailing and auctions. These ventures were typically started by US trained Latin Americans who sought to create the next Amazon (Submarino), Yahoo! (Starmedia, El Sitio) or Ebay (Mercadolibre, Deremate). While these companies may have at some point been darlings of the investment community, many are now struggling to satisfy the demands of the post-NASDAQ crash "new new" investor. In fact, the stocks of three prominent public Latin American Internet companies have fallen an average of 71% from their February peaks and many Latin Internet IPOs have been postponed. Clearly the answer is not always to copy blindly what has happened north of the Rio Grande. This is not to say that there are no lessons to be learned from what has happened in the US. In fact, many of the same advantages which have driven clicks-and-mortar successes in the US will also drive success in the Latin American market.
Latin American Companies that Seem to Get It: Internet ventures can reward "old economy" companies with greater profitability and perhaps with valuable equity stakes in separate Internet entities. Lucrative Internet investment opportunities are not limited to day traders and institutional investors. Mexican Cement company Cemex hopes to profit from the Internet through its $50 million dollar investment in e-business accelerator Puntocom Holdings, which will roll out B2B Internet ventures across the regions. Puntocom has already invested over $10M in B2B ventures according to CEO Raul Rivera. The real value creation, however, arises when a company not only invests financially in Internet opportunities, but is positioned to realize synergies between its core business and its Internet franchise.
Several Latin American companies are already seeing their initiatives pay off as investors reward them with higher valuations. Pão de Açucar, a Brazilian grocer and an Internet pioneer, has seen its stock shoot up over 200% over the last year. Although online sales represent only 1% of total sales, analysts have actually valued the company's Internet division, Amelia.com, at 25% the value of the entire bricks-and-mortar operations! Another example of investor confidence in the bricks-and-mortar realm came in December of 1999 when Mexican banking concern Banamex announced a B2B joint venture with CommerceOne. The result was a continual rise in the value of the stock. In December alone it increased 20% and by March it was up nearly 80% and reached an all time high, before falling back to earth in conjunction with the NASDAQ. Despite the fact that the venture's name of Artikos was just announced, it has already been valued by analysts at 20% the value of the brick and mortar assets. By focusing their assets and market power on e-procurement and B2B portals traditional bricks-and-mortar companies can streamline their supply chain and improve internal processes to achieve record profits.
B2C in the Latin American Context: So far, B2C ventures have received the most attention in the press and from investors, obtaining over $253M in funding in 1999 and 2000. Latin American B2C sales are projected to reach $8B by 2005, which may seem small in comparison with the US number of $177B. What is intriguing, however, is that demographic differences in Latin America could very well make several B2C business models which have struggled in the US viable in Latin America. Consider first of all that wealth in Latin America is highly concentrated in certain individuals and geographic areas. The top 20% of the populations controls 60% of the buying power which translates into an average income of more than three times the regional average. Then consider that in most Latin American cities the upper class is very geographically concentrated, living only in 3 or 4 neighborhoods. This has a profound impact on what business models will flourish in Latin America. For example, this smaller required coverage area for target customers results in the feasibility of business models such as home delivery groceries. Thus while Webvan and has struggled in the US, home delivered groceries are already profitable in Brazil.
Another difference between the US and the Latin American markets concerns the evolution of the retail sector. In the US "category killers" such as Toys R' Us and Home Depot arose in the late 1970's and 1980's and attacked the traditional full-line department stores. These category killers came under attack themselves by vertical Internet startups such as eToys and Amazon. However, due to regional economic and demographic factors, category killers never emerged in Latin America. Thus vertical B2C Internet players are emerging as a direct threat to full-line department stores, such as Palacio de Hierro in Mexico and Lojas Americanas in Brazil.
The Opportunities and Challenges of B2B in Latin America: While bricks-and-mortar companies are clearly in an excellent position to leverage the Internet as an alternative distribution channel, the real opportunities lie in B2B e-commerce. Although the value of the Latin American B2B market is projected to be between $124B and $175B by 2004, the real question is how much of this will be conducted over exchanges and auctions (eMarketplaces) and how much will be traded directly between companies. The answer is probably that the vast majority of the trade will take place bilaterally through vertical portals established by bricks and mortar companies. Independent B2B start-ups such as Asista, Agrozona and Aceronet had received only $45 million of venture capital and will struggle to succeed if they cannot quickly achieve scale. Indeed in Latin America bricks-and-mortar companies will dominate the B2B scene in many industries due their inherent market power and their desire to cut costs and to capture the equity upside of their Internet ventures.
Overall B2B E-commerce is expected to have a significant impact in Latin America since suppliers tend to be extremely fragmented and inefficient. Both suppliers and buyers have been very slow adopters technology such as EDI due to its high set-up and operating costs, estimated at $150 per hour. In many Latin American industries the implementation of enterprise resource planning software (ERP) and electronic data interchange (EDI) adoption lags 5-10 years behind the US and Europe. The Internet provides an ideal means to leapfrog technologies by using the Internet to transact and to streamline activities across a company's entire value chain. In fact Bain research shows that in the Latin American retail sector B2B initiatives could have significant bottom-line results. Savings from lower purchasing prices, lower transaction costs and less inventory could decrease total costs by 12% and result in up to a 40% increase in operating margins.
However, B2B in Latin America will not evolve as it has in US due to structural market differences between the regions. Many industries in Latin America are dominated by a few huge players that control significant portions of the market. This makes it particularly difficult for independent exchanges to penetrate and compete in these oligopolistic industries. Additionally, consortia exchanges, which are the trend in the US, will not be as popular in Latin America due to the hesitation of dominant businesses to go into ventures in which they do not have majority control. Many of these companies are family owned and are not accustomed to joint ventures or deals where they do not have at least a 51% controlling interest. The result could be that many Latin American B&M companies set up their own closed B2B portals for procurement and supply chain management.
Key Success Factors in Latin America: In order to succeed in the Internet world we recommend that Latin American executives and bricks-and-mortar companies focus on the following four key areas:
· Value Chain Specificities: Look across your company's and industry's entire value chain and see which parts are most threatened by the Internet and which areas offer the greatest online opportunities. Find where the most leverage is and do not be afraid to redesign entire business processes. If you don't, you run the risk of falling behind more astute competitors that take the difficult yet necessary actions to increase profits and market valuations.
· Capabilities and Shortfalls: Each organization must do an assessment of what its core capabilities and shortfalls are and then think of how these skills may or may not translate into Internet success. Companies must aggressively address their shortfalls through outside help or through partnerships.
· Technological Investments: Invest in technology and in the technological know-how of your own company. Make sure your managers have computers, receive training and have incentives to use the Internet. A great Internet strategy does nothing for a company whose employees don't have computers. Consider audacious moves and don't underestimate the time and money required to bring your own organization up to Internet speed.
· People: Possibly the largest obstacle for bricks-and-mortar companies Internet initiatives, particularly in Latin America, is the shortage of talent. However, Internet success does not simply require hiring a group of computer scientists and programmers. What is really needed is an eclectic mixture of seasoned industry professionals and technology savvy newcomers. But be prepared to adequately compensate these people for their skills and to give them the right incentives, otherwise someone else in the market will.
Finally, speed cannot be stressed enough. The importance of quickly mobilizing and implementing Internet strategies is critical. There is currently a land grab going on in the building of vertical portals and in the B2B space. As B2C and B2B sites proliferate in Latin America winning business models must continually evolve to changing market conditions and must add value to all participants.
Karchi Lukac (Karchi.Lukac@bain.com) is a Director at Bain & Co. and the Head of the Mexico City office. Daniel Baranowski (Daniel.Baranowski@bain.com) is an Associate Consultant and Jim Kunihiro (James.Kunihiro@Bain.com) is a Manager at Bain & Co., Boston. Bain and Company is a global strategy consulting