In little over two years, Shopee has become a giant in Brazil

RIO DE JANEIRO, BRAZIL – The e-commerce arm of Sea, a Singaporean group valued at US$70 billion, Shopee landed in Brazil in 2019. Since then, the operation has been gaining scale among local consumers and, in the same measure, constituting a serious threat to players already established in the country.

As it draws attention, the company has been accused by some of these rivals of selling counterfeit products or products without an invoice. But not even these allegations and the bleak outlook for e-commerce, given the impacts of the macroeconomic scenario, have been able to contain the company’s advance.

This growth and the size of the threat posed by Shopee are precisely some of the points highlighted in a new report released by Goldman Sachs, which brings a perspective on the company’s strategy and ambitions in the Brazilian market.

“We estimate that Shopee has reached a 5% share of the e-commerce market in Brazil by 2021, just two years after it entered into the market, and with this share likely reaching high single digits by year-end,” write analysts Irma Sgarz, Felipe Rached, Gustavo Fratini, Piyush Mubayi, and Pang Vittayaamnuaykoon.

The report also estimates that Shopee will invest about US$1.5 billion in Brazil and the Latin American market by 2022, even in the face of Sea’s projection of a loss before interest, taxes, amortization, and depreciation of US$3.5 billion for the year.

Although they point out that some issues, such as increased cash burn and a 66% drop in its share price, may lead Sea’s management to show more discipline in capital allocation, the analysts believe that the group’s commitment to make Brazil a core market for Shopee is “unwavering.”

To justify this view, they cite that Sea itself highlighted it raised US$7 billion in 2021 and that the plan was to allocate a good portion of these funds to its e-commerce operation in Brazil and Latin America and also to its fintech arm.

Earlier this month, the importance of Brazil on Shopee’s operations map was reinforced by Forrest Li, Sea’s CEO, during the release of the company’s results for the fourth quarter and consolidated year 2021.

“We are very excited to see Shopee rapidly gaining strength in Brazil, the sixth-largest country in population in the world, and our new growth market,” said the executive.

On occasion, Sea presented some numbers from the Brazilian operation. Between October and December, Shopee registered more than 140 million orders, a 400% growth over the same period a year ago.

The revenue in the country grew 326%, to US$70 million in this same interval. The company also recorded a loss before interest, taxes, depreciation, and amortization of approximately US$2 per order in the country, a 40% improvement over the fourth quarter of 2020.

On this last point, Goldman Sachs believes that the ideal strategy for Shopee’s operation to break even in Brazil involves increasing the average ticket per order and reducing unit order delivery costs.

In the case of the average ticket, the analysts understand that the increase will occur through gradual adjustments in the free shipping policy of the orders, with the expansion of the minimum value to have this benefit, in addition to initiatives such as the growth of the assortment and branded items on the platform.

As for logistics costs, analysts expect Shopee to build its own delivery network in the country, combining modalities and resources such as direct shipping and cross-docking.

In this direction, the report highlights the recent inauguration of a cross-docking unit – a distribution point where there is no storage of products – of Shopee outside the city of São Paulo at the end of 2021. In addition to the expansion of the list of logistics partners in the country and the launch, also last year, of Shopee Express, its own service of pickup and delivery of products.

“So far, Shopee’s growth in Brazil has not happened without logistical bottlenecks. But while there is a learning curve, we believe that local partner investments in quality and service level agreements will gradually address these bottlenecks,” the analysts conclude.

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