Gas Prices, Urbanization, and E-commerce in Chile

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Since Russia invaded Ukraine in February, the average price of a US liter of gas has shot up 21%. Russia is the world’s 3rd largest oil producer, and the fear of lower supply caused a spike in demand and thus in price. However, gas has been on a steady rise since early 2021. In fact, most of the increase happened during last year’s economic recovery, when COVID vaccines were being rolled out, and restrictions eased. More people on the streets meant higher demand for gas and a rise in prices.

Although many Americans are reportedly complaining about the most recent spike in gas prices, most Latin Americans have been paying more to fill up their tank for years. All while earning a fraction of the income on average. According to our Research Consultant, Cesar, in his hometown of Juarez, Mexico, whenever people cross over to El Paso, Texas, it’s common to make sure to fill up. Now the practice is reversing, with Americans looking for gasoline across the Mexico border.

Mexico’s Pemex is the country’s nationalized petroleum company, and it’s the main reason Mexico can’t compete with the US gas prices. In the US, drivers enjoy a low tax rate on gasoline, and the oil & gas industry is entirely subject to the forces of capitalism, making it more efficient. On the other hand, Pemex serves the Mexican government’s interests and has been accused of everything from being a painful bureaucracy to inefficient to downright corrupt. Since the Russian conflict and the spike in global crude oil prices, Mexico’s government has subsidized gas prices to prevent them from spiraling out of control. Given that Mexicans pay about 7% of their daily wages to buy just one liter of gas, perhaps the government’s strategy is necessary.

Latin America is the world’s 2nd most urbanized region, next only to North America. In 1950, the region’s urban population was 40%, but by 1990, it had risen to 70%. Estimates say that by 2050, 90% of Latin Americans will be urban dwellers as cities keep growing and bringing in more residents.

Today’s urbanization in the region is about 80%. By comparison, the European Union is 74% urbanized, whereas the APAC region is 52%. LatAm’s largest 132 cities are home to over 300M people — almost half of the region’s population. There are over 77 cities with over one million people, including some of the world’s most populous metropolitan areas: São Paulo, Mexico City, Buenos Aires, and Lima.

In comparison, more than half of the world’s population live in cities since 2007. By 2050, that number will have risen to 70%, which is less than Latin America’s current rate. The region’s high urbanization means that policy from the cities will become increasingly influential. LatAm policymakers must continue developing innovative policies that promote equitable economic growth, effective urban services, long-term housing, and public space solutions.

Falabella has come a long way since starting as a small tailor shop in Santiago, Chile, in 1889. The shop was founded by Italian immigrant Salvatore Falabella. In the 1960s, the company began an expansion plan across Chile, and in 1980 introduced Chile’s first credit card. Credit cards wouldn’t be its last visionary business strategy; in 1999, falabella.com was registered, and the company began its e-commerce shop. The timing was perfect because Argentinian Mercado Libre, founded in the same year, is Latin America’s most successful e-commerce company, and it had its sight set on Chile.

As far as Google Trends data is available, ‘falabella’ has been searched more than twice as much as ‘mercado libre’ in Chile. In 2011, the free marketplace Yapo was founded (similar to Craigslist), and Google’s data suggests that it took Chile by storm, reaching its peak in 2016. Yapo’s traffic has come back to earth, but getting more search volume than Falabella and Mercado Libre for some of its years is remarkable. According to financial statements, Falabella’s parent company has 65K employees, and Mercado Libre has 16K. LinkedIn says Yapo has only 125 employees.

Falabella’s impressive operation doesn’t stop in Chile, and it doesn’t stop in retail either. At the end of last year, the parent company opened its 85th Tottu supermarket in Peru. It also opened its 9th Sodimac location in Mexico, a home improvement store that competes with Home Depot. Its financial branch, Banco Falabella, had 1.3M active credit cards in Colombia.

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