eBay (EBAY 0.88%) reported third-quarter results in late October. The announcement revealed a troubling trend for the company -- it lost active buyers for the second consecutive quarter.
Since eBay is an e-commerce retailer that benefited tremendously at the pandemic's onset, it's easy to point the finger at the economic reopening as the reason customers are leaving. But a closer look under the hood reveals another potential cause for the losses.
Image source: Getty Images.
Some customers are just not worth the effort
In its third quarter ended Sept. 30, eBay reported total active buyers of 154 million, down from 159 million in the previous quarter. That makes it the second consecutive quarter the company has lost buyers. eBay peaked at 166 million active buyers in Q1 of this year before falling to 159 million in Q2. Of course, these losses coincide with the economic reopening worldwide and rapidly rising vaccination rates against COVID-19.
Consumers with more places to go and more things to buy will inevitably spread their purchases out over more businesses. There could be pent-up demand to visit stores consumers have been avoiding for the better part of a year. And if they spend money at these locations, that leaves less income to spend on eBay. This would be a legitimate reason for buyer losses.
However, there could be another reason that is at least playing a part in the losses. eBay management has shifted its focus to target high-value buyers. It says these buyers shop multiple times per year and spend more each time they buy. Additionally, they are also buyers who sometimes list items for sale. Management argues these are the customers who drive growth for the business and so deserve the increased attention.
Management discussed the matter on the company's recent earnings call:
Over the past year, we have focused on attracting and retaining high-value buyers by innovating in focused categories and targeting enthusiasts with upper funnel marketing. We have also discontinued legacy couponing that's skewed toward low-value buyers. These actions are resulting in a gradual evolution of our buyer base over time. Compared to the third quarter of 2019, high-value buyers are up 6%.
In contrast, low-value buyers are down 7% compared to the third quarter of 2019.
Active buyer losses could continue for eBay
eBay says low-value buyers make up more than 50% of overall buyers but generate 5% of the gross merchandise value (total value of transactions on eBay). Management warned that buyer losses could continue as it is focusing less on these low-value buyers. It seems then that the company's buyer losses could be just as much a result of management policy as anything else.
One of the benefits of this strategy was lower spending on sales and marketing. In its third quarter, sales and marketing as a percentage of overall sales fell to 18.8% from 22.3% in the same quarter last year. The company has historically operated at high profit margins, and this new strategy could boost them even higher -- that is, of course, if revenue does not drop substantially after losing buyers.
It's still early in this transition, and it's hard to discern the impacts from the effects of the pandemic. Regardless, it's something investors should keep an eye on that could make eBay a more attractive stock.
