December 31, 2002, 12:00 AM

eBay Redraws Retailing’s Map

Phenomenally successful eBay is changing the face of retailing. Now it faces management challenges if it is to continue its success.

Of all the promises of the Internet, nothing works quite like eBay. Its unique combination of commerce efficiency and breadth is largely supported by flat-out entertainment-the non-stop global bazaar atmosphere of thousands of auctions for virtually any product. But every day its evolution is taking it further into a more conventional form of retailing, where consumers can skip the adventurous auction route and pay a fixed-price for a product directly from a major retailer or manufacturer.

And now, after years of non-stop expansion into a new retail universe, eBay Inc. faces a crucial turning point in its evolution: Can it combine the conventional world of retail brands and fixed prices with the still-popular auctions, most of which are operated by small individual sellers? More important, can these small independent sellers survive while sharing the same web site with the likes of Sears, Roebuck and Co. and Dell Computer Corp.? And if they don’t, will eBay itself remain the dominant force it has become or evolve into just another liquidator for excess branded merchandise?

The answers to these questions lay within the basic formula that makes eBay what it is: a tool for driving commerce into its most efficient mode. If that efficiency drive goes too far, eBay could whittle down to a far smaller number of sellers and cease to be what it is today. But if its efficiency engine continues to spawn new business opportunities, as it has done throughout its brief history, then it surely appears that the sky’s the limit for eBay’s expansion.

Survival of the fittest

Sellers attracted by the new business opportunities will find, however, that eBay is not and never has been for the meek. “It’s very much a Darwinian environment,” says Scott Wingo, CEO of ChannelAdvisor Corp., which represents thousands of sellers, from small independents to major retailers and manufacturers. You either become efficient at what you’re selling, he adds, or you’re out of the game. Or you start selling something else.

The challenge facing eBay management is both to help sellers be better at what they do individually and to enable eBay to channel sales of a still growing array of 18,000 categories of products.

“Our highest order is to understand category management,” says Jeff Jordan, senior vice president and general manager of eBay U.S.

To be sure, eBay has built up a formidable presence as a global site for commerce in the few years since it launched. For an organization that started in 1995 as an auction site for quirky collectible items, eBay is surging at breakneck speed beyond what anyone had imagined: 55 million registered users worldwide; $15 billion in the value of transactions, or gross merchandise sales, for 2002; $4 billion in non-auction, fixed-price sales, and a base for big-name retailers and manufacturers as well as small sellers of just about any kind of product. It’s forecasting $3 billion in revenue by 2005, up from $1.2 billion last year, and overall transaction volume by 2005 of $32 billion.

Earnings also have been surging, and at a slightly faster pace than revenues. Through the first nine months of last year, eBay earned $162.9 million on $800.2 million in net revenue, up from $64.5 million on net revenue of $529.4 million in the prior year’s first nine months.

Its market position promises to further that performance, analysts say, but only if eBay can maintain the kind of dominance it enjoys in auctions as it breaks out into different modes of selling. “EBay completely dominates the auction space, nobody’s been able to touch them,” says David Kathman, an e-commerce stock analyst with Chicago-based investment research firm Morningstar Inc. “But as they get into more areas such as fixed prices and defined retail stores within eBay, it will be harder to keep up that dominance.”

Indeed, eBay’s size, scope and fast growth raise even more questions about its future: Can it continue to grow, or has it reached the limit of expansion? As it moves more toward fixed-price sales instead of auctions, and sells through defined stores for categories like consumer electronics, how will it fare against the likes of Best Buy Co. Inc.’s successful BestBuy.com and the granddaddy of the web, Amazon.com?

Strong fundamentals

Meanwhile, eBay has another constituency beyond retailers to keep happy: Wall Street. If eBay’s growth slips, many analysts doubt it will be able to maintain its lofty stock price-recently $60-$70-at high multiples of 80 times earnings and 19 times revenue. “It’s an expensive stock and it implies a lot of growth ahead and margin improvement,” says Kathman, who figures eBay’s stock has a fair value of about $47 based on current earnings. “The problem is that no one can be sure how much they can keep growing and how fat their margins will become.”

Such concerns don’t arise in the public statements of eBay executives and managers. “The power of our business model along with the ongoing dedication and success of our buyers and sellers gives us great confidence in the future,” eBay CEO Meg Whitman said during an October conference with analysts.

And the company is beginning to tell its story to the public. In November, eBay launched a television campaign to build its own brand. “It’s intended to describe eBay’s unique marketplace,” says Jordan. The TV campaign is being supplemented by print advertising describing the broad opportunities to buy specific types of products, such as sports equipment, consumer electronics and motor vehicles.

In addition to its so-far-phenomenal business model, eBay operates with some strong fundamentals. Unlike Amazon, it has little debt. It operates with an operating profit margin of 30% or more, says Jeetil Patel, an analyst with Deutsche Bank Securities Inc. And the latest version of its technology platform - a customized version of IBM’s Websphere operating platform, along with Oracle Corp. databases - is recognized as providing ample capacity for growth in sales transactions and online merchandising displays, a far cry from the platform that raised serious doubts about the company’s viability when it crashed twice in 1999. EBay’s new platform will support the company’s drive to channel sales for major brands as well as small individual sellers, Patel adds.

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