Way forward for ecommerce in Brazil is optimistic, however the price of progress ought to be excessive
- July 28, 2022
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In Brazil, around 70% of online commerce volumes come from electronics sales.
Brazilian ecommerce is expected to exceed R$500 billion in 2026. Despite all the short-term challenges for the retail and for investment in technology, the value is still about 40% higher than pre-pandemic projections. The prospects, therefore, are better than previously expected, in terms of GMV — gross merchandise volume or total gross sales value — despite the slowdown in the past year, especially since the second quarter. This is the legacy of the last two years for Brazilian ecommerce, or at least an important part of it.
In our estimates, after growing 66% in 2020 and 31% in 2021, compared to the previous year, we assume that online sales will increase by 12% in 2022, mainly driven by the main players, which account for more than 2/3 of the market. . And from then on, on average, 19% per year until 2026. This is the same average rate of expansion between 2015 and 2019.
In the last two years, estimates of the addressable ecommerce market in Brazil have already been revised to reflect the exponential growth in sales of the main players with changes in consumer habits, but also a legacy whose effects are expected to persist long after the end of the pandemic. It’s more sellers, more traffic, more assortment, purchase frequency and service level investments.
Thus, we still see a secular trend of Brazilian ecommerce growth in the coming years and, unlike more mature markets, with GMV much higher than pre-pandemic estimates.
But in Brazil, with approximately 70% of online sales coming from cell phones, appliances and electronics (all driven in 2020 by higher demand due to the Coronavoucher and home office), it was reasonable to assume much lower growth prospects in 2021 and throughout that year. .
And for now, a higher cost of capital will also prevent most players from keeping up with the growth pace of recent years, paving the way for further consolidation, while margins, due to competition and still high inflation, will remain under pressure in the future. next.
Therefore, we believe that there are three trends in the coming quarters for the online sector in the country: (i) weaker GMV growth (affected by lower disposable income and restrictions on access to capital); (ii) focus on profitability of operations (meaning less focus on non-profitable categories, especially those with lower average ticket) and cash preservation method; and (iii) greater market consolidation among a small group of players, a trend that we expect to accelerate due to these less favorable market conditions already listed.
Before the world had to deal with the current inflationary scenario, the low interest rate environment of recent years, both in Brazil and globally, made technology companies more attractive, leading to a significant increase in investments in the sector, both for public companies how private.
But for now, as much of the population returns to face-to-face work and spends less time at home, the sector has suffered profound losses. Investors are worried that companies boosted by the pandemic are losing steam.
Not coincidentally, stocks that soared during the pandemic rally were some of the biggest losers in the downturn since last year. A reversal that also signals investor concerns over the valuation of many risky assets.
fears with the inflation and the trajectory of high interest rates has sparked market turmoil and heated debate over the correct valuation multiples for technology stocks in today’s environment.
One of the biggest sources of concern is the risk that the tightening of the Fed (the US central bank) will send the economy into a recession, further damaging fundamentals and investor sentiment. In the short term, higher interest rates reduce companies’ future cash flows in frequently used pricing methodologies.
For every 100 basis points increase in the cost of equity (discount rate), on average, the combined market value of the technology companies we cover drops by about 15%, which in part explains the stock crash. In Brazil, at its last meeting, the Central Bank’s Monetary Policy Committee raised the base rate to 13.25% per year.
As part of the same scenario, inflationary pressures and the impact on disposable income mean that demand will be affected in the short term, mainly for cyclical and high average ticket categories such as electronics and appliances.
That is why, despite the positive secular trend for ecommerce, we see the sector in a difficult position in the short term, which means, at the very least, still high volatility. Companies are currently navigating an unfavorable top-down perspective, which puts pressure on the fundamentals of most companies. Furthermore, prospects for future growth are unlikely to be priced in advance. The market must continue with an increasingly focused focus on valuing profitability, rather than growth at any cost.