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eBay Needs Some Changes to Compete With Amazon

By Adam Levy – Oct 26, 2019 at 10:33AM

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eBay wants to copy the shopping experience of its biggest competitor as it struggles to grow merchandise volume.

eBay (EBAY -0.42%) provided an updated outlook for its full-year operating results alongside its third-quarter earnings release, and investors did not like what management had to say.

In its first earnings report since the departure of former CEO Devin Wenig, eBay's fourth-quarter outlook came in below expectations. The company expects to generate $2.77 billion to $2.82 billion in revenue and $0.73 to $0.76 in earnings per share (EPS). Analysts were looking for $2.85 billion in revenue, on average, and $0.76 in EPS.

On the company's earnings call, interim CEO Scott Schenkel said, "For 2020 and beyond, change is needed to improve the underlying health of the Marketplace's business." That statement underlines the poor gross merchandise volume (GMV) growth the company has seen in both the U.S. and international markets.

A person placing an item in a cardboard box with an eBay logo.

Image source: eBay.

A look at the GMV slowdown

eBay has seen a decline in U.S. gross merchandise volume (GMV) throughout 2019 as internet sales taxes go into effect on a state-by-state basis. Volume has fallen 5% to 6% each quarter through the first nine months of the year. Management warned the impact will be noticeable in the fourth quarter, too, as California, Texas, and nine other states enacted their laws this month. eBay will feel the impact through 2020 as a result.

But eBay's challenges extend beyond internet sales tax. International GMV growth has slowed from 7% in the third quarter last year to just 1% this year. Moreover, the number of items sold declined 3% year over year last quarter.

eBay's results stand in stark contrast to its biggest competitor, Amazon (AMZN -0.77%). The majority of Amazon's sales stem from its third-party marketplace, which faces the same internet sales-tax challenge as eBay. Yet Amazon's seen strong growth -- above 20% every quarter -- for its third-party seller services.

As Schenkel pointed out in his comments, eBay needs to make changes internally in order to correct the negative trend in GMV growth. And it's going to try to copy Amazon in order to do so.

Structured data will help shoppers find what they're looking for

eBay has been working on organizing the items available on its marketplace for years. "While progress has been made, we have changed our approach to make it easier for sellers to provide product details or aspects when they list items for sale," Schenkel told analysts.

The ability to find unique items on eBay is what differentiates it from competitors like Amazon. But the plethora of different items available from sellers makes it difficult for consumers to actually find what they're looking for. And when they do find it, the number of sellers with the same item available can make it hard for consumers to know they're getting a good deal.

Compare that to the shopping experience on Amazon, where users can quickly find the items they're looking for and sellers compete for the "buy box" on a single product listing. Shoppers know what they're getting and that they're getting the best offer available on Amazon's marketplace.

Managed delivery for a consistent buying and selling experience

eBay will launch a managed delivery service next year. The program is similar to Fulfillment by Amazon, offering fast and free shipping to buyers and inventory storage and automatic order fulfillment for sellers. eBay says the program will lower fulfillment expenses for small businesses and provide a more consistent shopping experience for consumers.

eBay says pricing will be competitive with the rest of the industry, and it could be a way for sellers that use other fulfillment services to sell on eBay to cut their costs while providing a new revenue stream for eBay. Amazon notably charges more to fulfill most orders outside of its marketplace.

The challenge for eBay will be communicating its new initiative to buyers. Amazon does a great job of marketing the benefits of Prime shipping to consumers. eBay will have to compete with Prime and several other fulfillment initiatives from big retailers for consumer attention.

While eBay can copy pieces of Amazon's marketplace business, that alone won't completely solve its problems. Schenkel said he and the rest of management will give a more detailed update on its plans to improve the health of the marketplace business in its fourth-quarter earnings call in January. Investors hoping for a turnaround in eBay's core business need to see not only that eBay is making changes, but how it's communicating those changes to consumers.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends eBay and recommends the following options: long January 2021 $18 calls on eBay. The Motley Fool has a disclosure policy.

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