Etsy Just Took a Big Step Into MercadoLibre’s Biggest Market

Etsy (NASDAQ:ETSY) just agreed to buy Elo7, a Brazilian marketplace for handmade items, for $217 million in cash. Etsy CEO Josh Silverman, who called Elo7 the “Etsy of Brazil”, predicted the deal would help the online retailer “establish a foothold” in Latin America — “an underpenetrated e-commerce region where Etsy currently does not have a meaningful customer base.”

Elo7 connects approximately 1.9 million active buyers to 56,000 active sellers. Its marketplace offers about eight million items, the majority of which are made to order, across more than 40 categories. It generates over half of its gross merchandise sales (GMS) from “special event and life moment” categories, such as wedding, baby, home décor, and children’s parties.

Elo7 is much smaller than Etsy, which ended last quarter with 90.7 million active buyers and 4.7 million active sellers. However, the acquisition will likely boost Etsy’s international GMS, which surged 169% year-over-year last quarter and accounted for 42% of its total GMS.

A tiny parcel with a Brazilian flag, placed in a tiny shopping cart.

Image source: Getty Images.

Etsy’s expansion into Brazil makes sense, but calling Latin America an “underpenetrated” e-commerce market seems to ignore MercadoLibre (NASDAQ:MELI), the region’s top online marketplace. MercadoLibre generated 56% of its revenue in Brazil last quarter, and the country is still the company’s third-fastest-growing market after Argentina and Mexico.

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Is Etsy underestimating MercadoLibre’s strengths, or will it carve out a niche in Brazil’s handmade market as it previously did in the U.S. against Amazon (NASDAQ:AMZN) and eBay?

Elo7 vs. MercadoLibre

Etsy calls Elo7 a “top ten” e-commerce site in Brazil, but the privately held company has never publicly disclosed its revenue or market share estimates. But with 1.9 million active buyers, it’s clearly much smaller than MercadoLibre, which ended last quarter with 69.8 million unique active users. MercadoLibre also provides a dedicated section for handmade products.

However, many analysts predicted Amazon would kill Etsy with the launch of its Handmade marketplace back in 2015 — yet Etsy held its ground with its first-mover’s advantage, simpler sign-up process, lower commissions, and more lenient rules regarding mailing lists and promotions.

At the end of 2015, Etsy served 24 million active buyers and 1.6 million active sellers. Since then, its numbers of buyers and sellers have nearly quadrupled and tripled, respectively — so we shouldn’t underestimate Elo7’s ability to thrive in MercadoLibre’s shadow, as Etsy did in Amazon’s.

Furthermore, the Latin American e-commerce market is still underpenetrated relative to other regions. Fidelity International, BTG Pactual Research, and Euromonitor peg Brazil’s e-commerce penetration rate at just 12.5%, compared to 27.3% in China and 20.3% in the U.S. Other Latin American countries have even lower e-commerce penetration rates.

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Therefore, there might be plenty of room for Elo7, MercadoLibre, and other e-commerce companies to expand without trampling each other. The skeptics might claim Etsy will face an uphill battle — especially since Amazon couldn’t gain much ground in Latin America against MercadoLibre — but Elo7’s niche appeal as an artisan marketplace might help it avoid Amazon’s fate.

What does this acquisition mean for Etsy’s investors?

Elo7 marks Etsy’s third major acquisition in less than two years. It bought Reverb in 2019 to expand into the online musical instruments space, and recently agreed to buy the U.K.-based fashion resale marketplace Depop.

Both of those acquisitions diversified Etsy’s marketplace beyond handmade goods and expanded its overseas presence. Reverb’s app is available in dozens of countries, while Depop serves more than 26 million active users in over 147 countries. Elo7 is another brick in that same wall.

We can clearly see the impact of the Reverb acquisition, along with the broader pandemic-induced boost in online shopping, on Etsy’s overseas GMS growth in 2020 and the first quarter of 2021.

Source: Etsy. YOY = Year-over-year.

Etsy’s GMS growth at its core marketplace could decelerate as the pandemic passes, but Depop and Elo7 could still buoy its overseas GMS growth and gradually reduce its dependence on the domestic market.

The key takeaways

Etsy’s purchase of Elo7 faces clear risks. It will face fierce competition from MercadoLibre and other e-commerce marketplaces, while inflation — which constantly reduces MercadoLibre’s reported revenue — could throttle its growth in U.S. dollars and reduce its overall benefit to Etsy’s GMS growth.

That said, the acquisition is still a step in the right direction. If Elo7 carves out the same high-growth niche in Brazil as Etsy did in the U.S., it could grow significantly, boost Etsy’s overseas GMS, and turn it into a major player in Latin America’s growing e-commerce market.

 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.


View more information: https://www.fool.com/investing/2021/06/30/etsy-just-took-a-big-step-into-mercadolibres-bigge/

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