Description

Please refer to Pluto’s writeup from 1/7/21 (https://www.valueinvestorsclub.com/idea/Mercari/1606236639) for a great summary of the business and the investment thesis. We are also bullish, and I wanted to share our perspective in the hope that it’s at least somewhat incremental to the conversation.

Thesis:

Management is strong

• They built a fantastic c2c business in JP by focusing on what matters to c2c sellers and delivering a really innovative tech solution to build the marketplace

• Management has shown a long-term focus on maximizing shareholder value and smart capital allocation decisions. In the past, they’ve shut down businesses that weren’t on a path to demonstrate success (UK marketplace, etc.)

Mercari JP is very dominant

• 30% ebit margin with a stated medium-term goal of 40%+ margin

• 18mm MAUs and GMV of 712B jpy with no other competitor even close

• Significant logistics infrastructure - 80,000 shipping locations, partnerships with post offices and local merchants to enable Mercari shipping, 5,000 unmanned shipping locations

• Our work has indicated that Mercari JP’s sell-through rate is meaningfully better than that of global best in class classifieds

• The app has been a top-ranked shopping app in JP for years. See exhibits for ios store app rankings over time

• Engagement is extremely high – see exhibits for a comparison of engagement statistics for Mercari JP vs. EBAY and AMZN in the US

• Mercari is executing on a vision to integrate with merchants to share sales, product, and customer data. Several large online-only brands have already partnered with Mercari, and more are expected to follow. If successful, this integration will 1) create a better, stickier user experience (easier one-click listing, better product description data, virtual inventory lists for individuals, etc.) and 2) integrate Mercari more closely with merchants, connecting the secondary market to the primary market. Mercari is then positioned to become an integrated cross-category secondary marketplace, which is an extremely powerful strategic position. Consider the value of being the de facto certified preowned marketplace (think certified pre-owned Mercedes) across consumer categories as the secondhand market blooms.

• We have also heard that the cross-border GMV opportunity is very significant for Mercari JP. There’s apparently extremely strong demand for JP inventory overseas (combination of high-quality inventory and an obsession with JP culture), and Mercari JP recently began a partnership with Shopee to ship to buyers in Taiwan. If Mercari JP commits to this venture, we believe it could be material to GMV growth in the future.

Mercari US is well positioned to succeed

• The US resale market is poised for exceptional growth. Market forecasts (see Thredup’s annual resale report: https://www.thredup.com/resale/) expect online resale to grow 5x over the next 5 years

• Mercari US is differentiated

• Numerous US marketplaces are focused solely on apparel or luxury and will have a difficult time competing horizontally (POSH, Thredup, Vinted, REAL, Vestaire Collective, StockX, GOAT, Tradesy, Depop). Each have a unique, vertical position in the softlines resale market but will struggle to succeed in other categories where they won’t have the inventory or velocity

• EBAY has executed horrendously and has transitioned to focus on professional sellers over the last 2 years. Approximately 30% of EBAY’s $38B of US GMV is c2c and EBAY is actively focusing elsewhere.

• Classifieds/meetup models (FB marketplace, Offerup) are more challenging to operate – classifieds models have a lower sell-through rate because sales only work locally, monetization is primarily through payment for listings leading to a suboptimal consumer experience, and the platforms don’t police fraud/scams. It works primarily with higher AOV items because it’s a lot of furniture/bulky items that you can’t easily ship to a national buyer pool.

• Mercari has very high customer satisfaction scores. Of the ~10 secondhand marketplaces, Mercari is the third highest-rated on the app stores and the second highest rating with Trustpilot (see exhibits)

• Mercari is winning through innovation and product-market fit

• The most important thing to a c2c seller is ease of selling and likelihood of selling an item (sell-through rate). Mercari has always been mobile-first and hyper-focused on these to optimize the user experience. The goal is to continuously innovate to make Mercari the easiest marketplace to use.

• According to a former, a “world-class” percent of listings transact on Mercari US

• According to a competitor who tracks it closely, online sentiment among the reseller communities is very positive for Mercari. Velocity is better for sellers. Mercari recently raised the take rate from 10% to 15% and there was very little pushback from the seller community.

• Mercari is much easier to sell on than POSH or ebay. According to a power seller, Mercari is “half the number of clicks to sell as ebay” and doesn’t require the seller to “feed the algo for days like at POSH” before making sales. This is because Mercari focuses on innovating for the seller and does things like price suggestions, supply-demand mapping, better product categorizations/merchandising, etc.

• According to POSH formers, Mercari used to copycat POSH and now Mercari is way ahead on innovation

• Innovation examples:

• Mercari Now is a partnership with Postmates where Mercari goods can be sold and delivered same-day locally cheaper than they can be shipped. This removes a pain point for buyers in dense metro areas, increases buyer-seller matching frequency, and improves the value proposition. This feature is new as of June 2020, yet in markets where it’s live, a meaningful portion of GMV is now listed as Mercari Now. AOV is also 5x avg AOV. We believe that the economics of the Mercari Now feature are working and Mercari will likely market it more aggressively once it’s rolled out more broadly across the US.

• Mercari has automated pricing features that indicate the likelihood of selling an item at a specific price, predict supply-demand over time, help adjust pricing over time if an item doesn’t sell, etc.

• In late 2019, Mercari implemented an AI service for luxury product authentication that’s apparently very accurate. Luxury (who knew?) is now growing very nicely for Mercari. From our research, it’s so accurate that power sellers from other platforms use it to authenticate their products, which provides supply and generates GMV

• In the last 12mo, Mercari has also enabled shopping cart and bundling features so a user can buy multiple items, potentially from multiple sellers, at once.

• Mercari’s US website was new in 2019, so it’s now maturing to a point where SEO is becoming more effective at generating more meaningful google rankings

• Growth is outpacing all other material C2C platforms

• Google trends show that Mercari is gaining on competition (see exhibits)

• Decent engagement statistics – see exhibits for a comparison of engagement statistics of Mercari US vs. some peers

• Mercari is materially outgrowing its closest competitor, POSH. Check out your nearest credit card panel. Each of Mercari’s cohort LTV curves has outperformed POSH’s respective cohort LTV curve since early 2019

• Mercari cohort LTV curves have been improving each year since 2017 – (see exhibits)

• We believe that unit economics have improved to a point now where Mercari US has a solid LTV-CAC ratio at its new take rate. We expect this ratio to improve over time as Mercari’s brand recognition improves and the secondhand resale market grows.

Risks

Competition from FB marketplace.

• FB marketplace operates a classifieds model, but it has started to enable shipping. FB marketplace is monetized through advertising and doesn’t charge a take rate. FB obviously has massive scale and user engagement so they are a real competitive threat. However, there are some offsetting factors. First, the market is just really big and growing fast. Second, the FB demographic is older. Also, as a marketplace, it’s hard for FB to introduce the infrastructure for fraud prevention, customer service, payment processing, etc. that you need in order to manage a high quality transactional marketplace. FB is also poor at merchandising/categorization/tagging/search because they haven’t focused on it. Apparently, FB marketplace has also fallen off the FB ribbon and been replaced by news because users weren’t engaged and FB’s ecommerce strategy is primarily focused on b2c where escrow features, participant reputation management, quality assurance, and dispute resolution aren’t as important. Also, FB marketplace hasn’t stopped Mercari US from putting up exceptionally strong growth over the last 12mo.

Weakness over the next 6-9mo period post-covid.

• There’s an argument to be made that Mercari has seen exceptional growth (potentially both in US and JP) over the last 12mo because people were stuck at home and started selling their used stuff on Mercari. As people “re-emerge,” it’s not entirely clear how well Mercari will “comp the comp,” particularly compared to consensus, as society reopens post-covid. The stock has traded with significant volatility in the past, so this setup could cause for some harsh sell-offs. However, with the greater penetration of ecommerce, the growth in the online secondhand resale market, and the innovations that Mercari US and JP have been working on, Mercari should be positioned to succeed over a more medium- and long-term duration.

The stock

Lots of JP-based internet businesses are held more by international than local investors. Mercari was the reverse a year ago, but it may be getting more balanced now. However, we believe that most local investors and many international investors aren’t underwriting much success in the US market because they consider it to be a hyper-competitive market with several undifferentiated players. As such, Mercari currently trades at 6.6x sales and 0.8x GMV. Compared to listed US peers, only EBAY (low growth, losing share) and REAL (market questions the unit economics) trade below 10x sales and only EBAY trades below 1x GMV. If the JP and US businesses continue to grow nicely, I see the opportunity for the stock to re-rate materially higher, particularly if investors really get excited about the traction the US business is seeing.

Exhibit: ios store app rankings in the shopping category over time in JP

Exhibit: Mercari JP app engagement metrics vs. major US peers

Exhibit: Mercari US app store and Trustpilot rankings

Exhibit: Mercari US is gaining on peers in google trends

Exhibit: Mercari US engagement statistics vs. peers

Exhibit: Mercari US cohort LTV curves have improved each year since 2017

Catalyst

Earnings results that show the true earnings power of the business