2020 year in review — The end of Safe
By Luis D Arbulú, Partner @ Salkantay
This year that is coming to an end will be remembered as one of the most important in our lifetimes. Not only did we see the biggest global pandemic in over a century and the subsequent global recession, but had one of the most contested and controversial US elections in memory; saw massive protests in the streets of Portland, Hong Kong, Lima, Bogotá; Peru had three presidents in a 10-day span… and it is on track to be the hottest year on record, surpassing 2019. The fact that no one is even talking about that as significant is just a sign of all the activity. 2020 is more similar to years like 1919, 1929, 1945, 1968, and 1989: era-defining years.
Globally, GDP is projected to decrease 5.2% for the year, with LatAm’s decrease being the deepest of any region (7.2%). Meanwhile, global growth prospects for 2021, projected before the latest vaccine news, are around 5%. The rapid recovery, however, will not be evenly spread. Value has been shifting from established incumbents towards a new generation of tech and tech-enabled challengers… The same year in which over 15% of restaurants in the US went out of business, Instacart went public and has a valuation of almost $70B. Netflix is now worth 100X what Cinemark is. Iconic retail chains like Neiman Marcus, GNC, Brooks Brothers, J Crew, etc. went bankrupt, while Amazon’s market cap surpassed $1.5 trillion. This year, Banco Itaú’s stock dropped 40%, while Bitcoin more than doubled and now stands at just under $20,000.
Notable 2020 Retail Bankruptcies
What was once considered a safe bet, can no longer be counted as such. Incumbents held the advantage under the stable environment of the previous era…. under the new circumstances some of their assets (large physical presence, existing distribution channels, business deals, global supply chains) can become liabilities: safety costs, multiple margin-takers, exclusivity, distance from final client, inability to react. Investors and entrepreneurs can take advantage of these new dynamics: analyze which sectors are most ripe for disruption and propose new business models, new distribution channels, different customer engagement models. At Salkantay, as thesis-driven investors, we use these macro trends to identify startups that will thrive as the region transitions to a new post-pandemic baseline.
Here’s a very broad analysis of some of the sectors most vulnerable for disruption in LatAm.
Fintech
The shortcomings of the banking system in LatAm were made evident during the pandemic. In Peru, for example, the well-intentioned distribution of direct aid from the government at the beginning of the shutdown turned bank lines into a major infection hotspot; the lack of financial inclusion meant the most vulnerable citizens had to go in person to receive cash. For SMEs, access to capital was a major difficulty this year: even though governments in most countries designed a series of emergency loans, the distribution through banks and their traditional underwriting models did not have as strong an impact as it could have had: In the first quarter of the pandemic, 30% of family-owned business in Peru either closed or underwent reorganization processes.
Banks have seen their stock value plummet this year; LatAm leaders like Credicorp, Bancolombia and Banco de Chile are down ~20% YTD; card issuers like Visa, American Express and Mastercard are flat for the year despite increasing volumes. Meanwhile, leading Fintech stocks like PayPal and Square are up 100%+.In Latin America, the potential for fintech is even bigger; so much so that the biggest fintech unicorn in the world is Nubank, which started in Brazil, expanded to Mexico, and recently opened operations in Colombia. In most Latam countries, banking penetration is less than 50%; meanwhile, smartphone penetration has reached over 80%, and even higher in urban areas. The smartphone has become the de-facto gateway to financial services for users and SMEs. It is now a channel for payments, payroll services, banking, loans, credit cards, etc. Innovative companies are redesigning the entire banking experience, chipping away at the banking monoliths. Companies like Vexi, Nubank, Albo, etc. are redefining the credit card experience; Jefa, Kubo, etc. the deposits, and Konfio, Minu*, Alphacredit, etc. the credit markets.
Peru Smartphone Penetration Trend
A special note on Bitcoin
With its long history of inflation, LatAm should be the prime territory for blockchain innovation. In the early days, most were crude bitcoin-trading sites and any infrastructure-like application failed to take off. In 2020, bitcoin enthusiasts finally made peace with the fact that it is a store of value, more so than a transacting currency due to its deflationary nature. The development and growth of instruments like stablecoins, open protocols, etc. have opened the opportunities inherent to cryptocurrencies that the bitcoin blockchain is less suited for. In LatAm, companies like Valiu, Xapo, Bitso, etc. are finally taking advantage of the infrastructure to build remittances, exchanges, wallets, etc.
Edtech
In March 2020, over 1.6 billion students and teachers worldwide were forced to migrate all learning online. At the same time, 2.6 billion workers switched to remote — along with all their corporate training. While the vaccination will return most of the K-12 students to physical learning, it is estimated that the AD (after-disease) trajectory of online learning will take it to $1 Trillion industry within 7 years.
Online Learning Market Projection
Before COVID (BC), only 30% of students were taking an online class. Nowadays, essentially 100% of them are. In surveys, over 50% of respondents stated that they would like to continue at least part of their instruction online. This has, in effect, more than doubled the baseline for online learning, even AD… at the beginning of the pandemic, education apps became the most downloaded, along with gaming.
Top Eduction App Download Ranking
Workforce learning is an even more dramatic switch. Whereas there’s a concerted effort to reopen schools, plenty of workers expect to continue to work remotely for years. Not only that, but as industries got disrupted by the pandemic, it became evident how unprepared the workforce was for this shift: digital skills are in higher demand than ever, old-line industries like mining, energy, and manufacturing are shedding workers that would need to be retrained.
More than traditional K-12 and higher education, we are seeing skills-based training as the sector with more innovation: it is less regulated, responds faster to market demands, and the impact is seen right away. A clear example is Miami-based Aprende Institute*. The startup saw demand for their career-focused courses explode in LatAm countries but also in the US LatinX community as businesses closed and workers started looking for supplemental income.
While companies like Ubits are training and onboarding frontline workers online, startups like Platzi, Crehana, Henry, etc. are focused on core digital skills in short courses. Startups like Talenty, Revelo, and Protalento are complementing those skills with soft skills and placement (a key role of colleges and universities). Finally, companies like Slang* are allowing workers globally to participate by focusing on the requisite professional language skills.
B2B
Just as schools, companies had to rethink their structure. Everything from internal operations (remote work, communications, offices, HQs, etc.) to the interaction with consumers and the market in general has been affected.
Remote work used to be seen as a niche for certain low-value functions. Nowadays, it is the norm for most white-collar jobs, and some of the most innovative companies have stated that it will become the default mode. This is having a severe impact on office leases, but also on the tools necessary to make work click: we all know of Zoom, whose stock has multiplied 6X this year; but we have seen massive uptake in use of Google Docs, Slack (recently acquired by Salesforce for $28B), Atlassian (stock doubled to a markett cap of $60B), etc. Of course, finding talent in a remote work world is a completely different equation; companies like Torre* are driving this democratization of opportunity by connecting top-notch talent to the right opportunities, regardless of geography.
Marketing dollars flow to where consumers spend time, increasingly, smartphones. In the US, mobile ad spend is now the largest category, having recently surpassed TV. However, by 2022 it is projected to be almost 50% of all spend. Meanwhile, traditional categories are losing relevance; for example, print’s share is expected to halve to less than 5% by 2022. This rapid reshuffling of platforms means that brands need to rethink their outreach efforts: emerging social platforms such as Tik Tok have grown 8X y/y. In my days at the Google Ads product team, we would hear from marketers afraid of placing their brands alongside user-generated content (UGC) in YouTube — nowadays social/UGC is the only reliable way to reach audiences.
US Ad Spend Trend
TikTok Downloads in select LatAm markets
Just like in education, e-commerce was the only available commerce for many consumers at the beginning of the pandemic, and retail companies had to adapt overnight. We have seen rapid growth in adoption… in Brazil, e-commerce penetration grew the same amount in the 1st ten weeks of the pandemic as it had in the previous ten years. “Ten years in ten weeks” was the saying. And the growth has been in previously underserved categories: groceries (Justo, Merqueo, Freshsmart), prescription medicine (Vitau, Lentesplus), prepared foods (Frizata, Manzana Verde). Combined with an improved delivery system from the likes of Chazki, 99 Minutos, Rappi, Mensajeros, etc. and better payment options, we expect the continued growth and the emergence of more e-commerce-first retailers, supermarkets, pharmacies, etc. as well as the more common sectors like electronics and fashion.
This explosion of data, new communication and distribution channels, distributed operations, etc. is putting the role of IT in the organization in the spotlight. Traditionally, IT has seen their purview as residing within the walls of the corporation. Nowadays, the best systems live outside of the corporation, in the cloud. From AWS/ Google Cloud/ Azure for infrastructure, to Workday for HRIS, Tableau for data visualization, Shopify for commerce, Salesforce for customer management, and Adobe for marketing. Looking at BVP Emerging Cloud Index, the 100% YTD growth is evidence of this seismic shift in IT. For example, Snowflake, the cloud-based data platform that went public three months ago, is now worth more than IBM, whose stock has been on a steady decline since 2012. A number of LatAm startups are riding the cloud adoption wave: VTEX on ecommerce, Auth0 on security, Webdox on CLM, Rocketbot for RPA, etc.
BVP Emerging Cloud Index, YTD
The opportunity Ahead
Just like 1919, 1929, 1945, 1968, and 1989, 2020 will mark the end of an era and the beginning of a new paradigm, both socially and economically. The roaring 20’s followed 1919, the year of the Spanish flu, the German revolution, and the recovery from WWI. Meanwhile, 1929 had the Wall Street collapse and the advent of the great depression, and was followed by the rise of authoritarianism in Europe. The outlook for the next decade, while uncertain, looks very positive: The effort to deliver vaccines in the US and UK is already underway and will continue for the next three years globally. More trade-friendly governments are taking power, and there will be a concerted international effort to address climate change. Over the next years, new players will come to dominate existing industries, and altogether new industries will be created.
It is up to corporate executives, investors, innovators and entrepreneurs to tackle those opportunities. The disruption to industry will only accelerate, leaving fewer safe harbors for incumbents.
note: (*) Salkantay investments
