Amazon's Newest Prime Market Is the Country with the Amazon Running Through It

Amazon (NASDAQ: AMZN) is bringing a pillar of its online marketplace business to the biggest economy in Latin America. Brazil is the most recent market where customers can sign up for Amazon Prime benefits. The service costs just 9.90 reais per month (about $2.42) or 89 reais per year. Amazon previously offered a Prime Video-only subscription for 14.90 reais per month.

While Amazon has had a presence in Brazil since 2012 as a bookseller, it only expanded its business to a general merchandise marketplace in 2017. And it wasn't until earlier this year that it started selling products outside of books and media to consumers directly.

Amazon faces significant competition from more localized companies including MercadoLibre (NASDAQ: MELI) and Magazine Luiza as it vies for a piece of the fast-growing Brazillian market.

A truck with a trailer painted with the Amazon Prime logo.

Image source: Amazon.

The big opportunity

Brazil is the largest e-commerce market in Latin America. Brazillian consumers will spend about $24.2 billion online this year, according to eMarketer analysts, who predict that number will grow to $28.5 billion by 2022.

Importantly, Amazon still accounts for a very small percentage of those sales. It's still in its infancy as a general merchandise retailer in Brazil, and it doesn't have the same brand recognition as it does in other parts of the world.

MercadoLibre, on the other hand, reported gross billings of $385 million in Brazil last quarter, nearly two-thirds of its total gross billings. If it sees a similar percentage of its gross merchandise volume coming from Brazil, that puts it on nearly an $8 billion run rate in the country -- about one-third of the entire market, by eMarketer's forecast.

Offering Prime at a relatively low price should help Amazon win over shoppers. Prime will include guaranteed 48-hour delivery in 90 municipalities on over 500,000 items, Prime Video streaming, and other entertainment perks including on-demand access to Amazon's music, games, books, and magazines.

Expanding the logistics network

Unlimited (fast) shipping at no additional cost is the biggest perk of Prime in any market. MercadoLibre has seen a lot of success offering free shipping to customers who spend over a certain threshold on its Brazilian marketplace. Last quarter, the company spent $44 million subsidizing shipping expenses in Brazil.

Investors should expect Amazon to spend more on fulfillment in Brazil. It currently operates just two distribution centers in Brazil, outside of Sao Paulo. Building out a network to warehouse more inventory and deliver items more quickly throughout the expansive country will help attract more customers to the Prime membership.

MercadoLibre is building out its own logistics network in the country. Management said it handled 20% of its own packages last quarter, and it expects that number to climb in the back half of the year. Leaning on its own logistics network will help reduce overall shipping expenses in the long run, although it requires significant capital investments right now. That's right out of Amazon's playbook.

For Prime to become a truly competitive offering, Amazon will need to invest more in its logistics network.

It's Prime time

The introduction of Prime in Brazil is an indicator that Amazon is ready to make a bigger investment in the country, negotiate with regulators and overcome market restrictions, and vie for a piece of the growing e-commerce market. MercadoLibre and other established competitors represent a significant challenge, but Amazon has proven capable of establishing itself in fast-growing competitive markets before (see India).

Amazon has shared anecdotal updates on specific markets in the past -- e.g. India is the fastest-growing market for Prime membership -- and investors should look for updates from management in future quarterly earnings releases and earnings calls.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and MercadoLibre. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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