By Livia Chanes, Fernanda Hoefel and Anna Gabriela Martins

The American giant has arrived in Brazil

with AWS (Amazon web services) and has
announced plans to start selling digital
cultural products (music, books, films)
and the Kindle later this year. That could
be a game-changer in one of the worlds
most promisingand exasperatinge-
commerce markets.
Lets consider some of the basic dynamics.
For a start, Internet penetration in Brazil
is not exclusive to the wealthier segments
of society; it has already reached more
than half the countrys 195 million people.
Mobile access in particular is growing fast.
By 2015, mobile broadband penetration is
expected to reach 85% of the population.
Its interesting too, that Brazilians are so
socially absorbed online; 87% of Internet
users belong to at least one social network,
compared to a global average of 70%.
Brazil also has one of the worlds highest
penetrations of Twitter.
This matters, because in Brazilmaybe
more than anywhere else in the world
retailing is increasingly social. About 30%
of the countrys Internet users follow
retailers (compared to 12% in Britain) to
track special offerings and promotions. As
a result, companies like Magazine Luiza
one of Brazils largest retailers, both online
and offare leveraging F-commerce
(doing business via social networks like
Facebook) to generate new revenues and
build consumer loyalty/advocacy.
The use of e-commerce varies widely.
Online spending in such traditional
e-commerce categories as travel, books,
and consumer electronics is mature.
Other categories, like DIY, apparel and
housewares, trail world standards but are
catching up. There are also wide geographic
variances. The southeast (Brazils richest
region) accounts for more than 58% of
Brazil briefng:
Where is the e-commerce market going?
Consumer and Shopper Insights
July 2012
No of e-consumers
Million
SOURCE: Euromonitor; e-bit Webshoppers; McKinsey
E-commerce as a
percent of total retail
0.7 0.9 1.5 1.9 2.2 2.7 3.5
3 5 7 10 13 18 23 29
3.9
19
15
11
8
6
4
3
2
2011E 10 09 08 07 06 05 2004
Note: Excludes airline tickets, auctions and car sales
Exhibit 1:
Up, up and away
R$ billions
Brazil may be home to the hemispheres largest river, but it still doesnt host its
Internet namesake: Amazon.com. The worlds largest e-commerce brand has not yet
opened retail operations in Brazil. But it is on its way.
all e-commerce, but the northeast is
becoming one of the main drivers of
consumption. Right now, the northeast
accounts for only 7% of e-commerce, but
the market is growing eight times as fast
as the southeast.
Could do better
How well is this market being served?
In a phrase that will be familiar to
Brazils many social network addicts, its
complicated.
The required ecosystem to support
e-commerceeverything from web
design to anti-fraud protection to
fulfilment to behavioral marketingis
improving as local players professionalize
and international players set up
operations in Brazil. The payments
situation is developing as well. Credit
cards are by far the preferred option and
are fast displacing the use of boletos, a
payment system in which a bill is issued
requiring later payment by the customer
at a post office or bank branch which in
many instances is then is emailed back
to retailer as proof of payment. Services
like PayPal are also growing briskly. All
this has helped e-commerce enjoy stellar
growthan average of 38% a year since
2004, more than four times as fast as
in-store retail. Online retail revenues (not
including travel and auto sectors) reached
R$19 billion last year (US$10 billion).
Even so, some key areas of execution
remain sub-par. Take logistics and
delivery. There is no truly national third-
party logistics provider in Brazil, and
in peak seasons, there is a shortage of
capacity; consumers and businesses are
too often frustrated by unfulfilled orders.
The fact is, despite the gaudy growth
numbers, e-commerce in Brazil is still
nowhere near where it should be. Fewer
than 40% of Brazilian Internet users buy
online, compared to 66% in Spain and
81% in the UK. E-commerce represents
less than 4% of total spending, compared
to almost 10% in the US and 8% in the UK.
There are cultural issues at work here
some people want to touch and feel the
product or bring it home right away. But
there is no doubt poor service also taking
a toll. In fact, having a bad experience is
the third most important reason declared
by consumers for not having shopped
online in the last six months (see Exhibit
2). The online sector leads the nation in
consumer complaints.
Brazils traditional retailers account for
most of the e-commerce market, but pure
online players are growing faster, and
thus increasing their market share. In
the first quarter of this year, according
to Agncia Estado, pure-player revenues
increased 127%, significantly more than
the online sales of multi-channel players
(76%). Three of the top 10 most visited
e-commerce sites in Brazil are online only.
Of these, the biggest is Submarino.com.br,
which is owned by B2W (Latin Americas
largest online retail player). Netshoes.
com.br and Dafiti.com.br, category killers
in sports goods and shoes, respectively,
rank second and third. While Submarino
has been struggling to keep performance
up, the latter two are thriving and could
each reach R$1billion (almost $500
million) in sales this year. The reason
for their success is revealing: Dafiti and
Netshoes have blossomed in large part
by moving away from the price game
and putting more emphasis on offering a
superior value proposition based on such
elements as personalization, assortment
breadth and depth, and superior customer
service. Netshoes was the first to have
24-hour, seven-day-a-week customer
service; it even has a post office post in
one of its distribution centers.
The Amazon effect
As more consumers try online shopping;
as logistics improves; and as lagging
categories and regions catch up, we
estimate Brazil could be a top five global
e-commerce market as early as 2015.
Succeeding in Brazil, however, will not
come easily, even to the likes of Amazon.
The tax system is extremely complex and
costly. Brazilians are also used to paying
in instalments, which means retailers
must finance many purchases. And finally,
1 Only users that do not buy online, per category
SOURCE: McKinsey
12
17
7
5
2
40
19
Concern about safety of site
Needed to talk to store assistant
during purchasing process
Didn't want to pay for shipping
Wanted to touch and feel
product before buying
Wanted product immediately
Did not know product could
be bought online
Had previous bad experience
with e-commerce
8
5
2
4
24
35
18
5
29
7
1
27
8
11
Cultural
barriers
Bad
experi-ences
% of internet users
1
Main reasons for consumers not to buy category online
Electronics
N = 51
Appliances
N = 72
Apparel
N = 315
Exhibit 2:
Why not shop online?
there are, literally, many potholes simply
to get from Point A to Point B: Most of
Brazils roads are unpaved.
On the other hand, almost a third of the
countrys 30 million e-consumers signed
up in the last year. There is clearly is great
momentum in terms of the willingness
to give online shopping a go. People are
ready to be pleasedor disappointed.
Given the relatively fragmented and
unsettled competitive landscape in Brazil,
the e-commerce market is still very much
up for grabs. But Amazon looms large.
The American giant has proved capable
of adapting its model to very different
marketsit is number 2 in Japan, for
exampleand it is taking Brazil seriously.
Brazils incumbents need to improve their
game. Otherwise, the American Amazon
could storm the country that inspired its
name.
http://csi.mckinsey.com
Livia Chanes is an engagement
manager is Sao Paulo, where Fernanda
Hoefel is a principal and Anna
Gabriela Martins is a senior research
analyst.