In Latin America’s Booming e-Commerce Sector, Start-ups Aim to Improve on Logistics

When Latin America’s e-commerce heavyweights make the headlines, reports often focus on the multi-million funding rounds they keep raising again and again from high-profile global funds. However, not …

"Delivery and logistics are the major challenges for e-commerce companies in Latin America," says Dafiti co-founder Malte Huffmann.

When Latin America’s e-commerce heavyweights make the headlines, reports often focus on the multi-million funding rounds they keep raising again and again from high-profile global funds. However, not much is said about how this capital influx is reshaping the logistics sector across the region.

In other words, most stories leave out a big part of the picture. Not only do they fail to properly explain why these companies are so cash-intensive, but they also miss out on one of the most interesting trends in the B2B sector. As a matter of fact, most of the region’s largest online retailers put considerable efforts into building their supply chain.

Challenges in Latin America

In a recent interview, Dafiti Group‘s co-founder Malte Huffmann noted that “delivery and logistics are certainly the major challenges for e-commerce companies, especially in Latin American countries where we have great land extensions and poor infrastructure.” In the case of Dafiti, which is backed among others by Rocket Internet, this means making sizeable investments into new systems, automation and infrastructure, as well as constant monitoring of transportation providers.

While these expenses obviously have a negative impact on these companies’ bottom line in the short term, their investors and founders are positioning themselves for the long run. Although Latin America’s e-commerce sector remains relatively small, eMarketer expects it to rise 19.8% this year to reach US$57.69 billion in sales. In addition, the firm estimates that there will be 90.3 million digital buyers in Latin America in 2014, and sites such as Dafiti and its competitors are fighting to be their favorite destination.

With that in mind, delivering an outstanding customer experience is the best way for companies to turn first-time buyers into loyal clients; yet, Latin America’s e-commerce sector has a hard time satisfying their clients, especially once they complete their purchase. According to German entrepreneur Stefan Rehm, founder of Brazil-based SaaS logistics solution provider Intelipost, between 70% and 80% of all complaints generated by online businesses in the country are related to delivery and after-sale service.

While improvements are needed, there is no denying that it is very difficult for companies that operate in Latin America to abide by the same standards as their North American counterparts. To take the example of Brazil and its gigantic territory, one of its key challenges is the relatively high cost of logistics – corresponding to “some 15-18% of the GDP” in 2011, according to the World Economic Forum. Similar numbers tend to be the rule across the region. By way of comparison, logistics costs amount to 8.5% of the United States’ GDP, according to the Council of Supply Chain Management Professionals (CSCMP).

Betting on Optimization

In that context, best practices such as cost-free returns, free freight and same-day delivery are anything but easy to implement. Still, the sector’s leaders have been increasingly adopting them, thanks to a thorough optimization of their processes, which in turn have been disrupting the market. Indeed, companies that are often decried as non-innovative are actually bringing significant changes behind the scenes.

In a recent answer on Quora, emerging markets startup specialist and former Rocket Internet employee Miriam “Mimi” Newton shared some thoughts about her own experience: “I can tell you that while you may start with something that looks like a clone on the outside, by the time you adapt your business to the Brazilian market in a way that is successful, you will build a business that is very different on the back-end, and likely these specific market needs will also be reflected on the front end of your site,” she explained.

Logistics plays a key part in this adaptation. “When Rocket [Internet] enters markets like Indonesia, Nigeria, or Mexico – where e-commerce penetration is limited and firms specialized in order fulfillment are limited in number and sophistication – it forces the local market to more quickly develop the infrastructure and supply chain requirements more typical of advanced e-commerce ecosystems,” Wharton MBA graduate Thomas Baldwin noted on his blog Tropical Considerations, which since then helped him land “his dream job” at investment fund Valor Capital.

Baldwin’s post also quoted fellow Wharton MBA Toby Clarence-Smith talking about his summer internship: “Linio is definitely having a profound impact on the logistics landscape in Mexico. For instance, none of Linio’s logistics providers had dedicated e-commerce teams or offerings by the time I started my internship. But by the time I left, all of them had created teams or procedures dedicated to e-commerce. Also, whilst Cash on Delivery was something already offered, Credit Card on Delivery was not, and so Linio worked hand in hand with the logistics companies to create a CCOD offering.”

Opening Warehouses

This isn’t just about working with external providers: many of Latin America’s largest online sellers decided to handle their warehousing themselves to optimize inventory management. In the case of Baby.com.br, now owned by its former rival Bebe Store, this decision ended up having mixed results due to bureaucracy: “The warehouse sat empty for two months while we waited to get the appropriate licenses to hold our own product in our own warehouse. We were paying $75,000 a month for an empty warehouse,” former founder Kimball Thomas told Forbes in 2012.

This unfortunate tale didn’t stop this practice from spreading. For instance, new Argentine e-commerce website Avenida, which recently raised $17.5 million in funding, also opened its own warehouse in Buenos Aires. However, its deliveries are handled through third-party delivery network OCA.

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The fact that a well-funded site such as Avenida decided to outsource some of its distribution seems to prove that many online retailers will be better off looking for partners to handle some of their logistics. This is the bet that above-mentioned Intelipost is making; part of the portfolio of German holding Project A Ventures, it sees medium-sized e-commerce companies as its most likely target.

Meet the Startups

Intelipost’s competitors include SaaS-based online freight services company Axado, which helps companies navigate a highly fragmented transportation market. According to the company, it works with over 150 providers to help corporate clients find the solution that fits their needs.

One of the most interesting startups in this sector is São Paulo-based Loggi, which focuses more specifically on urban deliveries. While its consumer-facing app can be used by anyone who needs courier services, its API is best suited for e-commerce companies. It gives them access to the same range of features as Loggi’s main front-end, which includes features such as digital receipts, SMS notifications and real-time tracking.

Loggi’s founder Fabien Mendez likes to point out that the company is much more than a motorcycle courier marketplace; its core competency is to apply machine learning and mathematics to logistics’ optimization. “There are five algorithmic dimensions to combine: dispatching, routing, volumetric placement, scheduling and bundling,” he told Nearshore Americas.

According to Mendez, outsourcing is the only way for e-commerce companies to offer services such as same-day delivery in a cost-efficient manner. Loggi’s clients include flower delivery site Flores Online, which sees the service as a way to maximize customer satisfaction while lowering its costs.

Around 35% of Loggi’s sales come from the e-commerce sector, a number that is likely to grow with the gradual introduction of the company’s van delivery pilot program and its expansion into another Brazilian city. The startup recently announced having raised a R$10 million round of funding (around US$4.07 million) from Monashees Capital and Qualcomm Ventures, which it will use to expand its technical team.

What’s Next?

Loggi’s recent round of investment is one of the signs that this vertical is heating up. While Brazilian e-commerce veteran company B2W Digital declined to answer our questions, it is publicly known that its recent acquisitions include several firms operating along the B2B logistics chain, such as Click-Rodo, Direct Express and Tarkena.

Looking at the big picture, it is good news for Latin America to see companies interested in optimizing existing resources, rather than putting more trucks on its already saturated roads. If all goes well, these players could contribute to improving the quality of life in Latin America’s urban centers, while also delivering goods in remote locations. Still, one challenge remains: overcoming legal barriers to bring similar disruption to cross-border transportation, which would give a welcome boost to the region’s trade and competitiveness.

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