Agreement comes into effect next quarter quarter; Magazine Luiza shares closed up 12.3%

06/25/2024

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AliExpress will sell products through Magalu’s online marketplace, while Magalu will enter the Chinese platform — Foto: Divulgação

Magazine Luiza and Alibaba’s AliExpress announced a strategic agreement with the potential to transform e-commerce competition in Brazil.

Under the agreement, AliExpress will become a retailer on Magalu’s online marketplace, for a specific product line, and the Brazilian retailer will sell its items on the Chinese company’s platform. The companies signed a memorandum of understanding on Monday (24) in Hangzhou, China, and the agreement comes into force in the third quarter. The companies detailed the agreement to journalists but did not provide a date.

It’s too early to say whether this will be a successful move, as many questions are yet to be answered, but this is the first time a Brazilian retailer has become a partner of an Asian giant, putting to rest the debate about divisions between the domestic and foreign sides that guided the sector for years. The issue was the subject of controversy among industry executives on Monday.

It’s also the first time Alibaba, through AliExpress, has entered into a strategic partnership with a company outside China. Magalu has never listed and sold its products through another platform. The negotiation, which began at the end of 2023, involved around 100 people at Magalu. Combined, the two companies total more than 700 million visits per month and 60 million active customers.

Magalu shares ended Monday’s session up 12.28%, at R$12.16, revealing a positive reaction from investors (it’s still down 36% in the year, though). Analysts pointed out that the agreement increases Magalu’s supply of items, improving assortment, with the potential to increase visits to its website and customer recurrence. However, it does not solve Magalu’s competitiveness issues, some analysts argued.

There is room for new agreements involving other online marketplaces in the segment. “This announcement opened a door and could take national retailers out of their comfort zone, reducing the resistance of local chains to Asian retailers,” says a retailer of domestic and foreign chains.

The agreement was closed amid accelerated international competition in Brazil, while Magalu and “Ali”—as AliExpress is known in the market— seek to reduce their weaknesses. Magalu’s online channel growth slowed, despite a downsizing by competitor Americanas. AliExpress is weak in high-value items, a segment in which Mercado Libre has grown recently.

While Magalu seeks to maintain its relevance compared to foreign rivals (Mercado Libre, Amazon, and Shopee), AliExpress works to avoid being recognized as a foreign brand selling “trinkets.” The strength of the Magalu name could have a positive impact on this effort and help AliExpress consolidate its presence in other categories.

Estimates indicate that Mercado Libre already has 42% of online sales in Brazil, and could reach 50% in two to three years. Calculations based on the sector’s gross merchandise value (GMV) and data from Neotrust show that the Americanas’s crises led to a transfer of sales mostly to Mercado Libre and Shopee.

Furthermore, China’s Temu—owned by PDD Holdings, which also controls Pinduoduo, China’s third-largest e-commerce platform—has arrived, offering aggressive deals to attract customers. People familiar with the deal point out that the announcement is not an isolated reaction from both companies to Temu’s entry into the country in June. Conversations between the two parties began even before Temu confirmed its entry into Brazil.

With the deal, AliExpress could improve its product distribution, which is on the group’s radar. Its logistics are currently operated by Cainiao, the company’s global arm in the area, with support from Brazil’s postal company Correios. The companies signaled on Monday that a delivery agreement with Magalu is not ruled out.

Under the signed agreement, both companies can earn from an increase in customer recurrence and visits. Each will pay a commission on sales to the partner, as in a conventional marketplace operation. In the market, the commission on sales rate ranges from 10% to 22% but the two companies have not disclosed any numbers.

AliExpress products will be sold through Magalu under a Brazilian government’s program, which Magazine joined months ago, with new import rules. As defined a few days ago in the Parliament, consumers pay 20% import tax and 17% Tax on Circulation of Goods and Services (ICMS) on imports below $50. “With the new tax rate, we feel comfortable accelerating the deal and came to China,” said Magalu CEO Frederico Trajano on Monday.

The partnership could be a successful move if Magalu manages to take advantage of what AliExpress has to offer—the option of premium products under its “Choice” label within the categories of the agreement—without being “swallowed” by the Chinese. “It [Magalu] cannot deliver its best without taking the best they [AliExpress] have to offer,” one Magalu competitor said.

Some marketplace executives point out that Magalu understood that since imported items are entering the country with less import taxes, it’s a good thing that it could involve the company.

When questioned on the fact that the Brazilian retailer approached the Chinese group when there are still differences in tax rates between Brazil and China, Mr. Trajano said that, after changes in the rules, equality has improved. He sees no contradiction in the approach after Magalu criticized foreign platforms operating irregularly in Brazil and affirmed that he never criticized the Chinese company.

He said the products shipped are part of a curated line and will go through Magalu’s controls.

Por Adriana Mattos — São Paulo

Source: Valor International

https://valorinternational.globo.com/