eBay (NASDAQ:EBAY) could be poised to become the Wal-Mart (NYSE:WMT) of online retail. Like Wal-Mart, eBay is building its business by concentrating on neglected markets, emphasizing low prices, and developing new technical capabilities along the way.
If you remember your retail history, you know that Wal-Mart grew to be a dominant force in American retail by taking a roundabout route. Founder Sam Walton concentrated on markets ignored by other retailers in the South: small towns and rural areas. Along the way, old Sam built a retailer with tremendous capabilities in technology, distribution, and merchandising that transformed American retail.
Walton was able to do this because he had discovered untapped markets with little or no competition. Wal-Mart didn't have to worry about lots of competitors, unlike K-Mart, now owned by Sears, which concentrated on urban and suburban markets. It had huge amounts of revenues and the room to experiment.
Growth on the fringes
eBay is now in a very similar position. The auction site works on the fringes of the online retail world; it doesn't try to compete head on with Amazon.com. Instead, eBay goes after markets Amazon.com (NASDAQ:AMZN) ignores or pays less attention to: small business, start-ups, individual sellers, used items, and thrift stores.
eBay also concentrates on one area that Amazon has so far neglected: finance. It has built PayPal into a sort of bank of choice for the net savvy. There's one other thing that eBay has in common with Wal-Mart: it is constantly experimenting and trying new strategies while improving old ones. Finance in the form of PayPal gives eBay a massive revenue stream to play around with and steady constant cash flow, something that we chart watchers know Amazon lacks.
eBay just spent $800 million to purchase Braintree, a rival electronic payment platform to PayPal. Buying Braintree gave PayPal control of Venmo, an app that allows users to transfer money on mobile devices for free. Braintree now processes around $12 billion in payments a year.
eBay is developing some other interesting capabilities. The company is rapidly expanding its global shipping program, which allows small business and sellers to ship items all over the world at little or no additional cost. eBay sellers like myself can ship to such places as Russia and South Africa for the same rate as Brooklyn or Peoria.
The company is also experimenting with same day delivery services in some cities. Basically, it lets the lazy American order stuff from his favorite store and have it delivered to his or her home within an hour—something that will appeal to busy soccer moms and work-at-home types. This is a concept that could give eBay a vast edge over Amazon.com and eventually threaten delivery services like UPS and FedEx if it works.
These strategies have paid off for eBay; its revenue has grown by nearly $6 billion in a decidedly dismal economy over the past five years. The growth has been steady, and it is accelerating. Investor's will note that eBay's growth bears a spooky resemblance to Amazon's.
Both companies are growing at similar rates; eBay is a lot smaller than Amazon at $66.85 billion, so it has more room to grow. Online retail is exploding, and eBay is poised to take advantage of it.
So is eBay really a threat to Amazon?
My answer to that question is no; I think there's enough room in the world of online retail for eBay, Amazon, and several other giants. Online retail today is where Big Box retail stores were in the late 1970's or early 1980's—just breaking out into the mainstream.
Wal-Mart came out of the South at the moment when average Americans were switching their shopping habits from the neighborhood store to the regional big box. Walton had pioneered the concept in the South, a region where retail choices were limited and people were used to driving miles to shop. When the same shopping patterns emerged all over the country, Wal-Mart was ready to pounce.
Now that Americans are shifting to online shopping, eBay is there with a low-priced alternative to Amazon.com that is more accessible to lower income individuals. Many of them are already familiar with eBay. Amazon.com has introduced Americans to buying online--now eBay is there to profit it from it.
Online retail is about to explode because it is cheap and convenient, much like Big Box retailers did in the 1980's and 1990's. I think there will be enough room for both Amazon.com and eBay, but if Amazon stumbles, eBay could overtake it. Remember that back in the 1980's most observers predicted that K-Mart and not Wal-Mart would be the retailer of the future.
History could repeat itself. Even if it doesn't, eBay has a very bright future in a growing industry. It's also a very cheap stock compared to Amazon.com, although it won't stay that way for very long.
Daniel Jennings owns a position in eBay. The Motley Fool recommends Amazon.com, eBay, FedEx, and United Parcel Service. The Motley Fool owns shares of Amazon.com and eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.