It's now an open secret that eBay (NASDAQ: EBAY ) has Amazon (NASDAQ: AMZN ) -like ambitions, and has been giving the latter a swift kick where it counts. The erstwhile auction site has been undergoing a gradual makeover that has seen it slowly shed its former tag as a rather drab online site that peddles Pez dispensers and the like. eBay has become a formidable online marketplace with state-of-the art retailing concepts such as Same-Day Deliveries and Home Deliveries. The best part is that eBay's Marketplaces are not just other flash-in-the-pan, me-too services offered more as an afterthought, as the services have actually been delivering solid results and giving Amazon a run for its money.
Meanwhile, old brick-and-mortar retailers such as Wal-Mart (NYSE: WMT ) , Target (NYSE: TGT ) , and lately, Home Depot, have joined the same-day deliveries bandwagon too. But same-day deliveries might not work out quite the same way for these retailers like it does for Amazon or eBay.
eBay's Marketplace to compete with Amazon Prime
eBay has conjured what it sells as a 'better and cheaper' way to attract third party sellers in the form of a series of eBay Marketplace platforms such as Shopping.com and Rent.com. Shopping.com is designed to compete with Amazon's lifeblood, its Amazon Prime online service, that has proven hugely popular with Amazon shoppers. Amazon Prime shoppers typically spend two and half times as much as regular Amazon shoppers. Sales from the platform accounted for a good 10% of Amazon's $61 billion 2012 sales revenue.
eBay has not stopped here. It has taken the battle to Amazon's home turf by introducing the utopian retailing concept of same-day and home deliveries. eBay recently moved to bolster its same-day deliveries with a tie-up with Shutl, a U.K.-based start-up that has recorded considerable success with same-day and home deliveries.
eBay has promised its shoppers that it will take the game a notch higher in 2014 when it launches eBay Now across 25 cities in the U.S. eBay Now is all about perfecting the art of instant gratification. It will not only deliver goods to customer's homes on the same day they are ordered, it will also let customers delay the time of delivery until they are available to pick up their merchandise. A mom working at a 9-5 day job will order from eBay during the day while she is at work, and delay delivery of her goods until the time when she is finally home.
A little bit of gambling
Granted, it is still quite early to tell if eBay's gamble with same-day deliveries will prove to be a success for the company. However, CEO John Donahue recently pointed out that the company can afford to just break even with this service, since the company's biggest objective will be to grow its revenue. eBay will charge its customers a piddling $5 to use eBay Now, hardly enough to even cover the cost of the service.
Perhaps eBay has learnt from Amazon, which cuts the prices of its products to the bone in a bid to grow its revenues. However, unlike Amazon, eBay's high gross margins provide ample room for the company to gamble a little bit.
Revenue growth in the retail space seems to be a big determinant of share price. Share price gains for companies here seem to closely mirror their revenue growth.
Amazon and eBay have recorded the highest revenue growth over the years compared to Wal-Mart and Target. Their shares have also recorded the highest returns.
Old retailers are hard pressed to monetize same-day deliveries
However, brick and mortar retailers, unlike online retailers, do same-day deliveries for a different reason altogether. These companies primarily offer the service to avoid losing market share to other retailers that have it, not necessarily to grow their revenues. That's the main reason why Wal-Mart offers the service in only five locations where it says that the demand for the service is highest. The cost of offering this service might therefore prove to be a huge drag on these companies' bottom-lines.
Wal-Mart has been leveraging its huge size, and has managed to outgrow its competitors despite facing similar conditions. Last quarter, Wal-Mart managed to grow its earnings by 7%, while Target suffered a huge 77% decline in earnings.
Target sales have taken quite a hit since news about its massive security breach hit news feeds. Its December sales declined 3%. Luckily for the retailer, its shares have only declined by 3% since then. I had pointed out in an earlier article how the TJX Companies suffered a similar breach in 2007, yet the company saw its sales grow by more than 9% in the following quarter. Target still boats a 2.7% yield and good cash flow, and the company could still be a good investment.
Home Depot's plans to spend $300 to build fulfillment centers that will enable it to provide same-day deliveries for its customers. Home Depot arrived at the decision after it conducted studies that show that professional contractors would not mind quicker delivery services at a higher fee. Same-day deliveries are therefore quite likely to boost sales for the company.
Foolish bottom line
eBay has been nicely matching Amazon in developing online selling platforms for sellers. However, eBay has also distinguished itself from the latter in that it does not sell its own merchandise, and, therefore, it avoids competing directly with third-party sellers. This might be a huge plus in the eyes of its customers. And of course, eBay's profits have been much higher than those of Amazon. The company could potentially give Amazon sleepless nights as far as online selling is concerned.
But is eBay a great growth investment?
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