Magazine Luiza Brazil — Photo: Shutterstock

Magalu wants to grow in on-demand grocery services and reduce the delivery time of third-party sellers

Magalu's online operation (first and third parties) ended 2020 accounting for ⅔ of its business, a 121% Y-o-Y growth

09.Mar.2021 19:12 BRT
UPDATED 10.Mar.2021 21:14 BRT

Brazil’s Magazine Luiza reported significant growth in 2020, when it gained more than 13 percentage points of participation in the country’s retail market. During the call with investors on Tuesday, the company’s CEO, Fred Trajano, reported that Magalu (as it’s better known on e-commerce) has grown ten times in five years.

Magalu operates direct sales (first-party or 1P sales), selling directly to customers, and third parties sales (3P), through its marketplace, where sellers use Magalu’s infrastructure to sell. To thrive during an unprecedented pandemic was only possible because Magalu digitization soared: the company’s online operation (first and third parties) accounts for ⅔ of its business, with an annual growth of 121%.

Trajano also disclosed that the retailer’s marketplace reached the number of 47,000 sellers. A good part of them started operating online sales with Magalu last year when they were forced to migrate to e-commerce due to physical stores’ closing. It is precisely at its third-party operation that Magalu sees an opportunity for growth with faster delivery times, taking advantage of its physical stores.

Even when closed, brick-and-mortar stores are Magalu’s most outstanding feature

“Almost half of the first-party (1P) orders go through the physical store. We use the store, so delivery is fast,” said Trajano. The physical store is a central point of Magalu’s sales ecosystem because it brings the possibility to ship-from-store.

Magalu’s first store in 1950. Photo: Magalu’s IR website/Courtesy

Magalu’s goal? Invest in what they call “the year of logistics” to reduce first-party orders freight times to less than 24 hours, and increase the percentage of third-party orders deliveries as a whole. In 2020, 32% of the third-party orders went through Magalu Entregas (its logistics response to Mercado Libre‘s Mercado Envios), and 1,400 sellers used Magalu’s cross-docking model, with 324 stores enabled for the customer to buy from the seller and pick up the order at the store. This kind of operation led Magazine Luiza to acquire GFL Logística and SincLog in 2020 – and investments in the logistics area should not stop there.

“We redefined growth with sustainability; we had BRL 2 billion in accumulated profit in 5 years. Last year, we generated BRL 3 billion in cash. The company generates cash and gives consistent results every year,” Trajano said to investors, stressing that all of this happened in 2020, when, from March to August, the company had to keep hundreds of physical stores closed. Practically a year later and 800 stores of the retailer are closed again due to what is now the most critical moment of the COVID-19 pandemic in Brazil.

The store is super important for 1P. It was the decisive factor with growth above the market, with profitability. We want to replicate this model for 3P, to make the store a point of logistical support for the seller.
Fred Trajano, CEO of Magalu

“We reached almost BRL 44 billion in sales last year, even though several stores were closed. The company grew 60% compared to 2019. We went through the most difficult situation with 100% of stores in March 2020”.

Magalu’s logistics bet is different from e-commerce giants like Amazon, which operates on the long-haul model, through fulfillment all over Brazil. According to Trajano, long-haul in Brazil is much more expensive than in the United States, since the country does not have efficient airports in interior cities, only in the capitals. For this reason, Magalu bets on short-haul deliveries, bringing the local retailer’s stock to the platform. Mainly because the company’s CEO just doesn’t see economic viability in long deliveries.

“Making a logistical operation for a fully long-haul seller, with giant distribution centers, making the goods travel a lot, it is economically unfeasible, and the result impacts cash generation,” he said. “We are scratching the surface. I have only 40,000 retailers in our base, of 5 million available. For us, it is very important to gain scale, to grow a lot, and above the market,” he added.

You can’t be an ecosystem if you don’t deliver groceries

During the pandemic, Magalu saw an expressive growth in non-core categories, such as sporting (166%). “Our super app is already the main sales channel and is increasingly relevant in the daily lives of our customers.” Of the online sales in 2020, 76% were made through the mobile app.

Despite the promising results, there is still a lot of headroom to grow in the country. “The pandemic has catalyzed the acceleration of the Brazilian economy, but this digitization process is still far from over. When we compare the Brazilian market to others, even after the pandemic, we are still at a very low level of digitization,” says Trajano.

The 11 acquisitions that Magalu made recently fulfill a company’s strategic purpose: to be a digital ecosystem. For this, Trajano states that Magazine Luiza wants to address different markets, betting on diversification. “Brazilian retail has a potential of BRL 1 trillion, one of the largest in the world. Even after a pandemic, only 10% of Brazil’s retail is online, just over BRL 100 billion. There is still a huge opportunity.”

Trajano said that even if Brazilian retail and GDP do not grow, if the country grows in digital maturity and reaches the digital penetration that China has, the market potential would be BRL 300 billion. Magalu’s ace up one’s sleeve: this potential encompasses several segments, including food, beverage, and hygiene category, which, according to Trajano, account for half of Brazilian retail. Currently, the digital penetration of this category in the country is only 1%.

B2W (Americanas.com‘s owner) also recently announced more investments in the supermarket category. According to Trajano, grocery delivery brings frequency, which is strategic for creating recurring customers.

“It is not a well-penetrated market all over the world; it has logistical challenges with the cost of freight,” he says, since the logistical costs are generally calculated by the ticket of the product and by weight. In the case of grocery shopping, the ticket is usually smaller than in household appliances, but the weight is heavier. “However, any multi-channel operation can solve these challenges and crack this code,” he said.

Today, Magalu only operates in the grocery market through 1P sales. But the idea is to grow and help small local shops to sell online. “Geolocation is important. The merchandise does not need to travel so much,” says Trajano.

For this reason, Magalu also acquired VipCommerce, a company that helps 100 grocery chains sell online. “We launched a dark store format [where almost all of them can have their stocks] with VipCommerce, and we are going to grow in 3P as well.”

According to Trajano, food delivery in Brazil has the potential to reach BRL 24 billion. Thus, the acquisition of AiQFome in 2020 is justified, which already accounts for BRL 1 billion in GMV, in a separate application from Magalu’s super app. In 2021, the focus is on integration with the app. “There are 1.6 million restaurants in Brazil, and our estimates say that only 300,000 deliver via apps. We have 20,000 of this market,” he said.