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LYNDA M. APPLEGATE
Submarino.com (A)
Our financial results for the holiday season exceeded our expectations. In addition, we were very fortunate to close another round of funding totaling [US]$20 million,
especially given the state of the market in early 2001. However, the budget for 2001 was based upon several aggressive targets. We will have to grow rapidly during the next two
years to break even by the end of 2002, and we will have a significantly lower budget to achieve this growth. Consequently, we must quickly determine our strategic and financial
priorities and modify our operating budgets accordingly.
— Antonio Bonchristiano, CEO, Chairman and Founder, February 20011
Antonio Bonchristiano, CEO of Submarino.com, contemplated the key issues facing his company as he boarded an American Airlines jet plane en route to Sao
Paulo, Brazil, where the company was headquartered. Bonchristiano was exhausted just thinking about what would be his third consecutive night on an airplane,
following a Board meeting in New York City and then a full day of discussions with potential strategic investors in Europe. After just over a year of operations,
Submarino had become one of the leading online sellers of books, CDs, toys/games, DVDs/videos, consumer electronics, software, and cellular equipment in
Ibero-America,2 with offices in Brazil, Argentina, Mexico, Spain, and Portugal. The company had 332,000 customers, 5.6 million monthly visitor sessions, revenues
of US $13 million, and 4,000 orders per day. Submarino had just celebrated the close of the 2000 holiday season, during which sales results had exceeded targets in
every country.
However, the outlook for business-to-consumer (B2C) e-commerce was bleak. Capital markets were tight, especially in Latin America, where capital was
historically scarce. The NASDAQ3 stock exchange fell 50% from mid-March through the end of 2000 (see Exhibit 1). Over the course of 2000, dot-com casualties
had mounted (see Exhibit 2). In early 2001, eToys announced it would shut down operations and Amazon.com revealed it would make significant layoffs.
Submarino faced tremendous pressure to achieve rapid growth and short-term profitability with limited resources. Bonchristiano commented: “In early 2001,
we were faced with a completely different fundraising situation. Just a year ago, [in early 2000] before the NASDAQ crashed, capital was relatively cheap and
plentiful. In early 2001, we were faced with an imperative that was not there a year ago: we had to have a short-term plan in place to break even.” According to
the magazine Punto.com, although Submarino had planned to raise US $40 to $50 million, by early 2001 Submarino raised only US $20 million from its existing
investors.4 Furthermore, the terms of the deal had imposed aggressive growth targets and reductions in operating budgets. To satisfy the expectations of its
investors, Submarino needed to increase sales from US $13 million in 2000 to US $50 million in 2001, US $120 million in 2002, and achieve profitability by late 2002.
Several questions entered Bonchristiano’s mind as he found his way to his seat. First, how would the company focus its efforts and resources to accelerate sales
with limited resources? The company had scaled back its marketing budget significantly since early 2000 and, as a result, marketing remained a significant
challenge. Personal computer (PC) and Internet penetration were low in Latin America, and customers were very concerned with security and therefore hesitant
1 A. Bonchristiano, interview with authors, 15 February 2001. Throughout the case, quotes obtained by the authors from interviews with company executives will not be footnoted. These multiple
interviews were conducted between November 2000 and February 2001.
2 Ibero-America refers to Latin America (Mexico, Central America, and South America), Portugal, and Spain.
3 The NASDAQ was the primary market where U.S. Internet companies, commonly called dot-coms, sold public stock.
4 “Otro Kursk,” Punto-com, Available at www.punto-com.com, 26 September 2000.

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to buy online. Second, what deep changes to the company’s operating budget would be required to break even? Third, how would he resolve the management
challenges facing the company? Bonchristiano and other senior managers were constantly on the road, sharing information and managing differences across
geographies, and this meant more time away from the company’s central operation in Brazil. Fourth, how and when should Submarino return value to the
company’s investors? The company had originally planned its Initial Public Offering (IPO) in the second quarter of 2000 but cancelled the plans due to the
dramatic shift in investor confidence in Internet business models. Bonchristiano was uncertain whether a public offering was the right path and, if so, when such
an event should be scheduled.
The way Bonchristiano saw it, 2001 would be an inflection point in the company’s history. Submarino’s ability to execute against its growth and profitability
targets with limited resources would be critical to the firm’s success. Bonchristiano needed to prove to investors that he had a winning business model, and he
had no time to waste.
Background
Company History
In June 1999, with US $2.5 million in seed funding from GP Investimentos, a leading private equity firm in Brazil, Antonio Bonchristiano launched
Submarino.com, an international online store (see Exhibit 3 for a summary of the management team’s background). The success of Amazon.com during the 1998
holiday season and the publicity surrounding Star Media which, according to Bonchristiano, essentially “put Latin America on the map for public and private
investors,” had sparked GP’s interest in Internet investments. The concept of replicating the Amazon.com business model in Ibero-America emerged as a
potential opportunity that was very attractive to Bonchristiano personally. In July 1999, Submarino.com acquired Book Net, a Brazilian online bookseller and its
web site and supplier contracts (see Exhibit 4 for a summary of the company’s history). By November 1999, the company launched online stores in Brazil,
Argentina, Mexico, and Spain under its new brand name. In September 2000, Submarino launched its fifth site in Portugal. Submarino entered multiple product
categories in several geographic markets quickly. The Mexican, Spanish, and Argentine online stores initially offered books and CDs, and the company’s Brazilian
store offered these categories as well as toys. Bonchristiano commented on the process of choosing a name for the company:
We wanted to use the same name in all countries, so it had to be a name that worked both in Portuguese and in Spanish. It had to convey a very broad
concept, since our product offerings were quite broad, and we didn’t want anything too focused. We also wanted it to be easy to spell. With these
requirements in place, with the help of an agency, we tested several themes, including a maritime concept. Sea-related worked the best, including the
whole concept of “navigating” the Web. After eliminating web site domain names that we could not purchase or gain access to, we chose Submarino.
Through a US $30 million two-part deal in December 1999 and February 2000, Submarino acquired Officenet, an Argentine catalog-based and online office
supplies retailer, to enter the business-to-business (B2B) retail sector.5 After the acquisition, Officenet and Submarino’s businesses operated separately but were
joined through a holding company arrangement. By late 2000, it had become increasingly clear to senior management that Officenet and Submarino were, in fact,
two very different businesses with distinct investors, customer segments, economics, and business models. In December 2000, Submarino decided to spin-off
Officenet.
5 For details about Officenet, see Coughlin, W. J., and Kuemmerle, W., “Officenet (A): Making Entrepreneurship Work in Argentina,” Boston: HBS Publishing (HBS case No. 800-238), 2000, and Collura,
M., and Kuemmerle, W., “Officenet (B): Executing a New Economy Merger,” Boston: HBS Publishing (HBS case No. 801-389), 2001.

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Latin American Retail Industry Overview
The Latin American retail industry offered attractive opportunities in electronic commerce. Traditionally high inflation, interest rates, and cost of capital made
catalog-based and category-killer retailers6 practically non-existent in the region. Bonchristiano commented:
A lot of customers never had the option of receiving goods [such as books, CDs, and cellular phones] in their home or even finding these goods in their
hometowns. There were no bookstores, so they could not get access to products. The Internet is really changing the supply side of the economy in a very
interesting way. But the Internet also has been a great leapfrogging phenomenon. In Latin America, we don’t have the catalog companies that exist in the
United States. We didn’t go through that phase because we had high inflation for decades, and it was virtually impossible to print a catalog because prices
would be out of date immediately. Furthermore, we never had the category-killer phenomenon, and in most product categories we do not have
distributors. This is because of the high cost of carrying stock, which is prohibitively expensive in Latin America due to high interest rates and inflation.
The Internet in a sense has allowed a lot of industries to really catch up with more developed countries.7
Latin American E-Commerce Industry Overview8
The Internet sector in Latin America was growing faster than anywhere in the world.9 According to Morgan Stanley Dean Witter, the value of Internet
commerce would represent US $7.6 billion or 0.34% of the region’s GDP by 2003.10 The B2C market, according to a study by the Boston Consulting Group (BCG)
and Visa International (Visa), grew 432% from US $109 million in 1999 to US $580 million in 2000.11 The Brazilian B2C market alone was estimated to be
approximately US $200 million
6 Catalog-based companies sold goods to customers using catalogs instead of retail storefronts. Category-killers offered a broad and deep selection of a single product category, such as toys, office
supplies or home goods.
7 Panel discussion at HBS Latin America Research Center, Argentina, August 2000.
8 For more details on Latin American e-commerce, see Monteiro, L. F., Collura, M., and Applegate, L.M., “E-Commerce In Latin America,” Boston: HBS Publishing (HBS case No. 801-388), 2001.
9 “EIU E-Business in Latin America – Trends, Strategies and Key Players,” Ebusinessforum, 10 Jan 2001, p.1. Available at <http:// www.ebusinessforum.com/index.asp. > (23 Jan 2001).
10 Morgan Stanley Dean Witter, “The Latin America Internet Report,” February 2000, p. 48.
11 BCG and Visa, “Online Retailing in Latin America: Beyond the Storefront,” October 2000, p. 6.