Amazon (NASDAQ:AMZN) is the undisputed leader in e-commerce, while eBay (NASDAQ:EBAY) comes considerably behind the industry juggernaut in terms of both revenue and growth. This often begs the question: What kinds of strategies can eBay copy from Amazon in order to close the competitive gap?
eBay is, in fact, working on different strategies to improve sales growth. However, this doesn't mean that the company's going down the same road as Amazon.
Growth vs. profitability
Amazon is all about growth, innovation, and competitive strength. The company sells its products for low prices to gain market share in different retail categories. It's also investing money in areas such as building its distribution network and acquiring digital content for Amazon Prime subscribers.
This strategy has produced extraordinary results on the top line. Amazon is expected to generate $134 billion in revenue during 2016, and sales in the first quarter of the year grew by 29% in constant-currency terms. On the other hand, Amazon operates with thin and volatile profit margins. It lost money on a net-income basis during 2014, and operating margin was a minuscule 2.1% of sales in 2015.
As for eBay, the company is in the business of matching buyers and sellers of all kinds of products as opposed to operating like an online retailer. This allows eBay to be more profitable. To this end, operating margin was 28.7% of sales during the first quarter of 2016.
However, eBay is no match for Amazon in terms of revenue. Management is expecting sales during 2016 to be in the range of $8.6 billion to $8.8 billion, a modest annual increase of 3% to 5% in constant-currency terms.
eBay doesn't want to be like Amazon
eBay could easily borrow a few pages from Amazon's playbook to accelerate revenue growth. However, that's not what management has in mind. In the words of eBay CEO Devin Wenig, speaking at the code conference recently:
I don't have to be like Amazon, I don't need to be like anyone else. The world doesn't need an almost-as-good Amazon, it needs a better eBay...I'd rather have a billion unique items that arrive in 3 days than a billion commodity items that arrive in one day.
While most brick-and-mortar retailers consider Amazon a competitive threat, eBay wants to be an e-commerce facilitator allowing those companies to join the online revolution. The company is also working on expanding its inventory to provide more unique items, as well as building more structured catalogs to increase traffic from search engines.
eBay's marketplace platform generates large amounts of data, and the company is capitalizing on that information to show sellers which products are selling better than others, and how to implement the right pricing strategies. Buyers and sellers attract each other to the main platforms in the e-commerce industry, so improving product supply should also accelerate demand growth over time.
eBay is expanding its partnership with on-demand shipping company Shyp. When a transaction is closed, sellers in specific markets can contact Shyp to pick up the items, pack them, and mail the items to the buyer on the seller's behalf. The main idea is providing a better and more-uniform experience for buyers, while at the same time making things easier for sellers from an operational point of view. However, eBay doesn't seem to be willing to invest massive amounts of money in building its own logistics platform; the company is leaving that to Amazon.
eBay is making all kinds of moves to accelerate growth, but it doesn't want to go into a margin-destroying war versus Amazon. This seems like the smart thing to do, as Amazon already owns the leading brand in the business, and the online retail juggernaut benefits from tremendous scale and cost advantages. By playing its own game, eBay still has a lot of room to improve revenue growth, and the business model is very profitable.
Amazon is king when it comes to size and revenue growth in the e-commerce space, while eBay makes far more attractive margins and earnings. Judging by recent comments from eBay's CEO, that's not going to change anytime soon.
Andrés Cardenal owns shares of Amazon.com. The Motley Fool owns shares of and recommends 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.