By Diego Rodríguez Posted June 11, 2020 In Logistics
COVID-19 is proving highly disruptive to Latin America’s logistics industry. For the last decade, international air-freight delivered consistent growth while LAC e-commerce was viewed with bottom-line skepticism by global logistics operators. Now the tables have turned.
#1 Unprecedented E-Commerce Growth in Latin America
As strict lockdown measures took hold in most of the region to slow the spread of the virus, e-commerce has boomed. MercadoLibre, the region’s largest e-commerce marketplace, registered 1.7 million new customers from Feb 24 to Mar 22, up 28% from the same period in 2019. Meanwhile, Marcos Pueyrredon, president of the Latin American Institute for E-commerce, said in April that “the growth in sales in some categories in the last 45 days during CyberMondays is impressive. We experienced growth that would normally require five years to achieve.”
The period from March 15 to April 15, 2020 shows triple-digit growth in LAC e-commerce penetration:
In the same month, weekly penetration of e-commerce spiked significantly in three of the region’s largest markets for online purchasing:
In the past, e-commerce had penetrated only a portion of consumer products but COVID frightened consumers into staying at home, obliging them to buy (usually for the first time) essential products like food, medicine and cleaning products online. As people sad idle at home, toys, baking supplies and sports equipment also jumped. Online shopping, which now accounts for just 5% of the retail sales in Latin America, could surge to 25% in a decade, according to HSBC. The coronavirus is accelerating the shift, said the firm, which previously forecasted 18% penetration by 2030.
Global logistics market entry
E-commerce retailers have struggled but largely kept up with record demand during the COVID surge thanks to fulfillment technology investments made in recent years and their logistics partnerships.
Small fulfillment companies have sprung to action, some using old dispatch communication models, others operating on an Uber-like platform. Consumers, desperate to receive their e-commerce deliveries of essential products, have put up with lots of poor service from inexperienced delivery firms and staff. In a recent survey conducted by AMI, those demanding the return of an e-commerce delivery are unhappy with the results about half of the time. Others don’t bother with the hassle of returns. Their silence usually leads to abandoning that e-commerce retailers. Few e-commerce retailers have the time or inclination in a booming market to bother conducting consumer satisfaction surveys.
This period of rapid growth, poor fulfillment service and burgeoning new small players provides an excellent entrée point for global players looking to grow their e-commerce fulfillment business via acquisition. The hard lessons learned by these new companies, their thirst for cash, depleted business credit availability in LatAm and battered local currencies are in fact a perfect storm for M&A activity.
#2: Oversupply in Air Freight
Air freight providers have benefited temporarily from the urgent import needs of personal protective equipment, medical devices, and other components. Prior to the crisis, these types of products were shipped by ocean, but with the pressing need for them, air shipping has become the preferred approach. But the good news ends there.
Passenger airlines are struggling (LATAM and Avianca both sought chapter 11 bankruptcy filings in New York in May. International travel restrictions put in place by Latin American governments have crippled their airlines. Colombia and Argentina extended the prohibition of international flights until the end of August 2020. With the exception of Brazil, no Latin American airline industry can sustain itself without international traffic.
Latin American and US based carriers are retooling passenger aircraft to carry air freight and thereby expanding air freight capacity. American Airlines increased its cargo schedule from 80 weekly flights in April to 140 in May, including more frequencies from/to San Juan, while LATAM and Avianca launched belly cargo flights to China. In the first week of May, LATAM completed its first Boeing 777-300ER aircraft conversion to temporarily remove the passenger seats and increase its cargo capacity by 20% at its Sao Paulo Maintenance Center. Other airlines like Avianca now place cargo in the passenger compartment, secured by netting and other restraints, to maximize efficiency. All of a sudden, cargo operations changed from a contribution to fixed overhead to become the only source of revenue for airlines in Latin America.
Even as governments start to lift social distancing restrictions in Latin America, international air travel will take a long time to recover. Essential travel (visiting sick relatives, attending weddings, funerals, going to grad school, some business meetings) will generate initial traffic but international air travel thrives on discretionary travel both within the personal and business segments. International business travel will take time to bounce back because of the lack of conferences and trade shows as well as the realization that many business relationships can be maintained, if not initiated by Zoom. Battered corporate P&Ls will also limit business travel budgets. Discretionary personal travel will be hampered by fear (both in-bound tourists fearful of COVID levels in LatAm and Latin Americans fearful of COVID elsewhere) and by the fact that as many as 65% of LatAm household’s will see a reduction of income in 2020, based upon a recent AMI survey. If passenger airlines are obliged to space passengers, then load rates further drop, prices must rise and discretionary travel further declines.
Passenger freighters are inefficient, cannot accommodate palletized cargo, and are a temporary solution at best. Experts believe that a great number of passenger widebodies will be converted into full freighters with main deck cargo doors and reinforced floors. The surge in airfreight capacity (and lower fuel prices) has induced pricing to plummet. The low margin air-freight industry will be further squeezed in the 12-24 months ahead.
#3: Tough Times for Trucking Services
COVID-19 will hurt ground cargo demand in Latin America this year. Mexican associations CONCAMIN and CANACAR forecast a drop of at least 10%. Mexico’s world class manufacturing sector, which is hugely supported by export demand, was essentially shut down for eight weeks. Within Mexico, demand for non-essential products may have dropped as much as 50% in Q2, 2020. With traditional (non-essential) retailers still closed in Latin America’s largest cities, trucking demand is at an all-time low.
Cross-border trucking and the domestic ground shipment of imports will suffer by as much as 20% in LatAm in 2020 as bludgeoned currencies (versus the dollar) combined with declining household income reduce non-essential consumption. In Mexico, economists forecast a decrease of more than 5% in exports in 2020 with imports falling more sharply. Outside of the movement of assembled cars, most cross-border transportation of manufactured goods in and out of Mexico travels by truck.
Across Latin America, cross-border trucking is far more consolidated than domestic trucking, the latter remaining very fragmented (more than 60% of active fleets consist of operators with less than 20 trucks). With few fiscal resources or political will to rescue trucking companies, Latin America will see hundreds of trucking company bankruptcies. Worst hit will be those companies focused on the supply chains of non-essential manufacturing (automotive, aerospace, consumer electronics, etc.) By contrast, trucking firms whose clients benefit from the boom in e-commerce or focus on food & pharma retail, consumer staples (food, FMCG) will fair decently to well. A year from now, which trucking companies are left standing will be a very different roster from today. That disruption will provide an opportunity for large scale, efficient operators whose mix of clients is well calibrated to the COVID economy.