March 4, 2004, 12:00 AM

While hardly trying, eBay moves into the neighborhood

Groups of entrepreneurs are planning to open hundreds of competing stores where consumers can drop off their cast-offs for sale on eBay.

By Paul Demery

One thing that almost everyone agrees on when it comes to the phenomenally successful eBay Inc.: Don’t underestimate its ability to continue to generate sales. The latest sales engine comes from outside the company.

Several groups of entrepreneurs are competing to establish chains of eBay drop-off stores that do all the work for consumers who want to sell on eBay. “Only one out of 250 people know how to or want to sell something directly on eBay.com, so we’re going after the other 249 to make it easier for them,” says Russell Grove, president and CEO of Nashville, Tenn.-based NuMarkets, one of about 20 young companies that have emerged with plans to dot the U.S. with eBay services stores.

In a fashion that has become the hallmark of eBay, the stores are getting encouragement from eBay itself, which is allowing some to co-brand with eBay while remaining separate entities. “This is yet another way for people to become a part of the eBay community,” a spokesman says. “Anything that brings more members and more items for sale just strengthens the overall eBay experience.”

The stores, with names like Snappy Auctions, PictureItSold, auctionValet, iSold It and AuctionDeuce, say they are already showing fast growth from a ready audience of consumers looking to sell on eBay without going through the trouble of setting up their own listings or electronic stores on eBay.com. But some are  growing faster than others, and some entrepreneurs say they’re competing to see who can emerge as the leading national chain. “The race is on to see who of us will be the McDonald’s of this industry,” says Grove, who plans to expand NuMarkets from two to 50 stores in the southeastern U.S. this year and have 2,000 coast-to-coast by 2008.

EBay has made great strides in making buying easier for the general population—it claims 41.2 million active users and 94.9 million registered users, most of whom are buyers, not sellers—but many people find it too confusing to post listings and set pricing, says Neil Stern, a principal with retail consultants McMillan/Doolittle. “It’s hard to identify, but there’s a huge segment of the population who don’t sell on eBay but who might be enticed by drop-off stores,” he says.

EBay itself commissioned a consultant to study the potential market of gross merchandise sales generated by drop-off stores and concluded that it was $5-$10 billion annually. Entrepreneurs have bigger dreams, however; Randy Adams, co-founder and CEO of AuctionDrop, based in San Carlos, Calif., estimates the potential at $20-$25 billion, equal to eBay’s 2003 worldwide gross merchandise sales of $24 billion. “It’s a big market,” he says. “We expect to have 500 to 1,000 stores in addition to what others have.”

While NuMarkets and AuctionDrop have venture capital funding—and the most ambitious growth plans—many smaller eBay drop-off companies also have plans to grow. “Our eventual goal is to have a chain across the country,” says Dan Cowles, a principal of Lake Forest, Calif.-based auctionValet, which opened its first store in southern California in January and plans to open a second this year.

Co-branding

The buzz created in the industry has also led to speculation that leading courier services UPS and FedEx Corp. might play a role as eBay drop-off centers. UPS operates the chain of UPS Stores (formerly MailBoxes Etc.) and FedEx has agreed to buy Kinko’s Inc., which operates 1,200 copy and business services centers. Spokeswomen for both companies say they know of no such plans for their companies.

The drop-off stores are a brick-and-mortar extension of eBay’s Trading Assistants program, under which eBay has certified more than 30,000 of its best sellers to assist new sellers in developing eBay stores or placing listings online. Although eBay had not anticipated the rise of drop-off stores, it sees the stores as a natural extension of its Trading Assistants, some of whom have used their homes to meet with client sellers and to receive products for eBay listings. Now eBay is experimenting with a Trading Post program designed to certify brick-and-mortar operations as eBay consignment shops.

The new source of customers could help eBay satisfy Wall Street, where some analysts have been wary of eBay’s ability to build new revenue streams to maintain a lofty stock price. As of mid January, its stock traded in the mid $60s, about 96 times earnings per share.

But some industry experts, including some of the new store owners themselves, say the eBay drop-off market faces a lot of challenges and uncertainty. For one thing, the stores are in the business of selling a convenient way to sell something on eBay at a time when selling directly on eBay is easier than ever, says Scot Wingo, CEO of ChannelAdvisor Corp., which provides software and services to eBay’s online sellers as well as to drop-off stores. “Selling directly on eBay isn’t hard,” he says. The widespread use of digital cameras is simplifying what has been the most difficult aspect of selling on eBay—posting product photos online, he says.

Wingo adds that, with most drop-off stores charging 20-30% commissions on auction sales, clients will probably avoid selling items valued at $100 or more. “At that point, paying a 20-30% commission begins to outweigh the convenience,” he says.

Diversity

Some store owners say their experience shows the market for drop-off items is too small to be a store’s sole line of business. Daniel DeYoung, CEO of DropSmart, which operates a 2,000-square-foot store in Orlando, Fla., says long-term success of eBay drop-off stores will depend on their ability to diversify. “I think some are doomed to fail just doing drop-offs,” he says.

DeYoung says he hopes to open four to six additional stores in Florida by year-end, but only if he can secure enough business to complement his eBay drop-off service, he says. He’s already building a business selling used automobiles and real estate through eBay, and expects to land one or more deals with major footwear marketers to liquidate large amounts of excess goods on eBay.

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