While hardly trying, eBay moves into the neighborhood

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

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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.

Especially with a number of cases recently of criminals who were caught trying to sell stolen goods over eBay, drop-off stores should take steps to guard against becoming fences, says Adams of AuctionDrop. AuctionDrop videotapes everyone who drops something off for sale and requires sellers to produce a driver’s license for identification. “This scares some people from dropping things off,” he says, noting that about 2 out of 5,000 declined to proceed with a drop-off when asked for identification.

The new breed of eBay services entrepreneurs differ widely in their use of technology and their financial resources—differences that could set them apart as they seek to dominate their market either nationwide or in local or regional areas.

Although they all say they advertise in local media outlets to drum up customers, some are more active as advertisers than others. DeYoung, for instance, pays about $1,500 per month for a mixture of media exposure in newspapers and flyers, plus $2,400 per month for his own weekly one-hour radio show that advises listeners on how to use eBay.

Adams, the CEO of AuctionDrop—one of only two store operations along with shipping services firm PostNet testing the eBay Trading Post designation—takes an approach opposite that of DeYoung’s by avoiding diversification. “We think the way to go is to focus on one thing, serving eBay drop-offs,” says Adams, whose past ventures include founding and then selling the Internet Shopping Network to HSN.com and setting up financial backing for the startup of Yahoo Inc.

Centralize—or not

AuctionDrop is also one of the most highly capitalized operations among the new eBay services companies, having secured more than $6 million from Mobius Venture Capital and Draper Associates. AuctionDrop currently operates four stores in the San Francisco Bay Area and plans to open more this year in the Los Angeles and New York metropolitan areas, with each geographic grouping of stores served by a regional service center.

AuctionDrop employs two or three auction consultants in its stores to advise customers regarding what can sell on eBay and at what price. It picks up dropped-off items at its stores each day and takes them to a regional hub, where products get photographed, written up with listing descriptions, stored and then shipped once they’re sold on eBay. In addition, AuctionDrop operates a separate customer service center to handle the large amount of e-mail messages it gets for each listed product. Each of its five stores averages 30 to 60 items dropped off each day, and each item generates on average more than two e-mails per listing period. “We originally thought we could do all this out of stand-alone stores, but we’re processing more than 2,000 e-mails per week,” Adams says.

Grove of NuMarkets figures his company has the edge for long-term growth because of its technology infrastructure that supports quick service through a centralized web-based e-commerce platform that can process up to 300,000 auctions per day. “We think we’ll break away from the pack,” he says. “We can take an item in the door, and three and a half minutes later have it for sale on eBay.”

Each NuMarkets store, including franchises, enters item listings directly onto eBay and operates its own warehouse for shipping. The NuMarkets company processes purchases for all listings in a central location, integrating transaction information from eBay with its central order management system, then automatically printing out the order and shipping information to the warehouse in the pertinent store. Smaller drop-off companies process all listing and order-taking at each store location.

Grove, who has a background in logistics systems, says one of the in-house-developed tools is a database of product descriptions designed to let store employees quickly write listings on eBay. The system also coordinates the descriptions with digital photos NuMarkets employees take of sale items. And by hosting the knowledge base and e-commerce platform on central web servers, it realizes economies of scale that enable it to offer lower rates while handling larger items for sale than its competitors, he says.

NuMarkets’s e-commerce platform, which it developed in-house, takes order information from eBay’s PayPal online payment system and places it into an order fulfillment application that prints out an order at the pertinent store’s shipping department. With financial backing from the Southern Appalachian Fund, Grove says NuMarkets has the capital now to build 500 stores, with plans to extend soon into Chattanooga, Tenn., and several locations in North Carolina and Georgia.

AuctionDrop counters that it isn’t speed in getting a listing on eBay that matters as much as planning a listing for the right category, which is why its business model is based on a spoke-and-hub network designed to have auction listing specialists in each hub service center. It would be too costly to employ listing specialists in each store, Adams says. “This is a deceptively easy business to look at, but one that’s hard to execute well,” he says.