3 Opportunities That eBay Can Capitalize On

eBay's unique business model means this company can do what no one else can.

Mar 22, 2014 at 8:00AM

What do you do if you already have one of the most well-known names in cyberspace? If you are eBay (NASDAQ:EBAY), what you do is simple: You capitalize on missteps by your competitors and take advantage of your unique business model. These are just two of the three opportunities that eBay can capitalize on and investors should be excited about the future.

Amazon's loss is eBay's gain
It has been fairly well reported that Amazon.com (NASDAQ:AMZN) is raising the price on its Prime service from $79 to $99 a year. While the stock initially jumped on the news, this rally could be short-lived.

In the last quarter, Amazon generated 69% of its domestic sales from the sale of electronics and general merchandise. By contrast, eBay generated 51% of its revenue from its marketplace division. Of course, Wal-Mart (NYSE:WMT) is a natural competitor to both Amazon and eBay. Since Wal-Mart only gets 2% of its sales from its online business, the company has a natural opportunity to increase its sales through this channel.

Amazon grew its domestic electronics and general merchandise sales by 26% in the current quarter. By comparison, eBay only reported a 12% revenue increase from its marketplace business, and Wal-Mart's overall sales increased by just more than 1%.

Unfortunately for Amazon, a recent study has suggested that less than 50% of existing Prime members would "probably" renew if the price increased to $99 a year. With one of the main benefits of Prime being free two-day shipping, customers could decide that they are willing to wait a little longer to save the $99 cost.

This leads us to the first opportunity eBay could capitalize on. The company reports that roughly 70% of sales are fixed-price, and the company offers a significant savings to sellers on their fees if they offer free shipping. If Amazon members decide to avoid paying $99 for Prime, this could give both eBay and Wal-Mart the opportunity to land millions of potential customers.

An opportunity only eBay could capitalize on
Unlike Amazon or other online retailers, eBay doesn't directly compete with physical stores. Though some customers may decide to buy on eBay instead of at a local store, the company itself exists to connect buyers and sellers.

eBay's Marketplace business has more than 128 million registered users, and this user base has been growing by 12% to 14% per year. Physical retailers are starting to realize and appreciate the fact that eBay can connect buyers with sellers.

Companies from Best Buy to Barnes & Noble and Neiman Marcus have storefronts on eBay. Wal-Mart may have more than 4,000 domestic locations, but the company doesn't have the same pull in online sales that eBay does. Though Wal-Mart had more than $470 billion in sales in the last year, only $10 billion of these sales were online.

The more retailers like Wal-Mart realize that an eBay storefront can benefit their business, the better eBay's growth could be. While Amazon offers its own Marketplace business, there is a clear conflict of interest for a retailer to place its fate in Amazon's hands. Amazon offers millions of products directly and has routinely undercut its physical competitors' prices to take market share.

In addition, Amazon's newest initiative with big-name retailers would simply direct buyers to the retailer's own website to complete the transaction. By comparison, eBay offers stores where sales integrate perfectly with PayPal and its myriad of payment options. Another big problem is, Amazon could theoretically use the data collected from these shoppers to direct Amazon's own sales focus in the future. If you are a retailer with a popular product and it's not available on Amazon, isn't it reasonable to expect that Amazon could see these sales as a threat and decide to carry the item at a lower price?

If you are a small business owner or a big-box retailer, the choice is clear. eBay offers no direct competition, just a prime location on the Web for retailers to showcase their goods.

Ridiculous margins = opportunity
One of the biggest differences between eBay and Amazon and Wal-Mart is in the structure of each company. Both Amazon and Wal-Mart purchase goods to sell to customers. Each company carries inventory risk, has to handle shipping and warehousing goods, and must compete on price with many other companies.

By comparison, eBay only connects buyers with sellers and doesn't have inventory or warehouse concerns. The company mainly needs to make sure its sellers take care of their customers. eBay just changed its seller ratings to include a rating for "defect rate," which, according to eBay, measures  "the top predictors that a buyer will leave eBay or buy less."

In theory, the more satisfied customers are with sellers, the less reason they have to leave. In the most recent quarter, eBay reported a gross margin of more than 68%. Considering Amazon's gross margin was just 27% and Wal-Mart only managed a 25% margin, you can see how significant eBay's structural advantage is.

Since smaller sales require sellers to pay fees of as much as 11% or more to eBay and between 2% and 5% to PayPal, physical retailers and sellers have less reason to use eBay for these types of transactions.

In theory, eBay could cut its fees for these smaller purchases and increase its growth rate from the wider customer and seller base. Considering eBay grew revenue 13% overall with a 68% margin, imagine what the company could do with somewhat lower margins and much faster growth.

In the end, eBay has multiple opportunities to increase its growth and take customers from Amazon, in particular. If you want to keep up with whether eBay is capitalizing on these opportunities and more, consider adding eBay to your personalized Watchlist today.

Which retailers have a bright future ahead?
To learn about two retailers with especially good prospects, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.

Chad Henage has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and eBay. The Motley Fool owns shares of Amazon.com, Barnes & Noble, 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.

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