May 8, 2014 – EBAY: Betting Big on the Future of Retail


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EBAY: Betting Big on the Future of Retail

EBAY intends to be the company that leads the way to the future of retail, seeing itself as far more than an e-commerce marketplace and an e-wallet payments solution. These present day businesses are part of a broader integrated vision of merchandizing that hopes to reinvent and combine compelling online and in store retail experiences to delight customers and remove obstacles to buying, and to help merchants earn more business from a growing base of well-targeted customers while lowering their costs. To that end, EBAY offers online design and hosting, warehousing and logistics, customer affinity programs, in store technology solutions, and merchandising strategy consulting on top of its well known Marketplace and PayPal offerings. This strategy appears to be paying off, as the sales enabled by EBAY have kept pace with archrival AMZN, and the company’s own revenues have grown at a better than 14% pace over the past 3 years, while profits have accelerated to similar growth in recent quarters. Still, we see EBAY’s success as by no means assured. Powerful rivals, such as GOOG, AMZN, WMT, VISA, and others, are pursuing important parts of EBAY’s agenda, and while none is implementing an integrated merchandising strategy as quickly or as completely, there is no assurance that EBAY will be able to fully exploit its early mover advantage. The threats to the core businesses are real, but so are their current growth and profitability. With a modest valuation and an option on the “future of retail”, EBAY is an intriguing investment.

The vision. EBAY believes that future online shopping will be tied intimately to brick-and-mortar stores, with customers moving easily between the two, enticed by value, convenience and personal engagement, with low friction sales completed to the delight of consumers who will want to come back for more. By enabling this integrated vision, earlier and more completely than its would-be rivals, EBAY believes that it can forge sustainable relationships with merchants and consumers, monetizing via its e-commerce marketplace, its PayPal payments service, and through technology and service sales to retailers. The key will be creating value for both consumers and retailers through a significantly improved shopping experience, in store AND online – increased convenience, lower costs, fewer impediments to completing sales, and improved customer loyalty.

EBAY Marketplace positions itself as the “Anti-AMZN”. EBAY’s Marketplace offers retailers an online channel without the inherent conflicts of AMZN, which captures valuable customer data for its own use and forces 3rd parties into pure price competition. EBAY is working with its partners to counter AMZN’s innovations – e.g. same day delivery will be available in 25 markets in 2014 – while supporting merchants by operating separately branded sites, reserving purchase data for the exclusive use of retailers, and managing logistics and payments if necessary.

However, EBAY is at considerable disadvantage. EBAY’s 2013 gross merchandizing volume was $76.5B, up 13% YoY, yielding $6.8B in revenue, from 128M users. In contrast, AMZN likely generated $150B+ in GMV, up more than 38% YoY, with $60.9B in sales under its own banner, and $7.6B in fees from its marketplace partners, selling to 237M active customers. AMZN investment in delivery infrastructure and IT has dwarfed EBAY’s over many years, as Jeff Bezos plows ALL of his profits back into the business, almost certainly yielding significant competitive operating cost and performance advantages. Moreover, many of the largest retailers may prefer to pursue their own, independent online strategy – e.g. WMT – and others may bite the bullet and work with AMZN anyway, particularly if it agrees not to keep data related to transactions. Given AMZN’s extraordinary scale, reach, technology and efficiency advantages, EBAY Marketplace’s growth and profitability is by no means assured.

PayPal faces many obstacles. EBAY’s PayPal has an enviable head start in the emerging field of mobile payments, but the slow development of the market in the face of entrenched players and the conflicting agendas of powerful rivals threaten to thwart its ambitions. Adoption and use of e-wallet solutions has been disappointing thus far, as solutions have not improved convenience or cost vis a vis credit cards for consumers, and the fragmentation and implementation costs of solutions have made it impractical for merchants to adopt them. PayPal has struggled to convince enough of either to constitute a critical mass, and has been unable to convince consumers to use bypass credit card fees by funding purchase directly from their bank accounts. Meanwhile, alternative solutions from 1) large retailers (the MCX consortium, Starbucks), 2) financial players (Visa, Amex, etc.), 3) online rivals (Google Wallet, Apple iBeacon, etc.), and 4) startups (Square, Stripe, etc.) threaten to further fragment the market, potentially blocking PayPal from gaining the scale necessary to be sustainably profitable.

EBAY Enterprise could be the secret sauce. The 2011 acquisition of GSI Commerce, now called EBY Enterprise, brought merchant services – web site development and hosting, warehousing and logistics, and merchandizing strategy support – into the fold. This business is EBAY’s smallest, but the most important to the company’s strategic vision. Ostensibly, the stand-alone Marketplace and PayPal operations will be stronger embedded into a platform that helps retailers 1) find attractive potential customers; 2) entice those consumers to shop online or in store, 3) complete sales surely, quickly and cheaply; 4) optimize the efficiency of keeping inventory and delivering products to customers; and 5) give incentives to keep good customers coming back for more. Enterprise, with its emphasis on retail technology and merchandizing, could allow EBAY to differentiate its Marketplace and payments solutions by delivering solutions with real value to both merchants and consumers.

Running alone. While the list of potential competitors is intimidating – AMZN, GOOG, AAPL, VISA, MC, WMT, etc. – the reality is that none of them is focused on transforming the overall shopping experience to nearly the extent that EBAY is. If EBAY is right, and if the paradigm shift in brink-and-mortar retail plays out as suddenly and completely as other parts of the cloud-era transformation, the company may be in an enviable position to capitalize. The company’s recent repatriation of $9B in foreign cash (incurring a $3B tax obligation) has led to speculation on potential M&A targets – Pinterest, Etsy, Square and Stripe top most lists – but we think deals would likely focus on retail tech for enhancing the in store experience, tracking customers online and in store, and analyzing customer data. Enabling big retailers to compete successfully with AMZN through well thought out integrated merchandizing solutions is EBAY’s only game, and the company is committed to playing it.

For our full research notes, please visit our published research site.

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