When the pandemic struck, eBay's (EBAY +2.59%) business got a serious boost. The online auction and e-commerce site saw a surge of new customers and activity on its platform as tens of millions of consumers avoided shopping in person.
NASDAQ: EBAY
Key Data Points
Now that conditions are allowing people to return to brick-and-mortar stores more regularly, those pandemic tailwinds are turning into reopening headwinds. One metric where that is particularly apparent is in eBay's active buyer count, which is falling at an accelerating rate.
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Buyer losses are partly a result of a strategic shift
As of the end of the fourth quarter, eBay boasted 147 million active buyers on a trailing-12-month basis, down 9% from the 162 million it had a year prior. That also was a loss of 5 million active buyers from the previous quarter. Overall, it was the third consecutive quarter of active buyer declines for eBay.
Undoubtedly, the economic reopening is primarily to blame for these losses. Consumers now have more options for places to spend their money and time. As a result, more of them are choosing options other than eBay. But the company's management is not helping in this respect. They appear to now be focused more on high-value buyers instead of on increasing the total number of buyers.
As CFO Stephen Priest explained during eBay's fourth-quarter conference call:
"Starting with active buyers. We ended 2021 with 147 million active buyers on a trailing 12-month basis, representing a 9% year-over-year decline. The expected decrease in active buyers was primarily driven by low-value buyers, which fell 9% versus Q4 of 2019. Growth in high-value buyers over the same period was 3%. Although fewer buyers sold on eBay as compared to pre-pandemic levels, total high-value buyers were up due to growth in high spending and [inaudible]. And importantly, even as mobility restrictions have been lifted, spend for high-value buyers continues to expand at healthy rates."
The company shifted its focus to higher-value customers by reducing promotional activity. For instance, eBay formerly sent out coupons on a roughly quarterly basis for $15 off a purchase of $75, but it has largely eliminated these types of promotions. Unsurprisingly, that has meant fewer total active buyers. However, it has also meant a dramatic reduction in sales and marketing expenses as a percentage of revenue. That metric fell to 20.2% in the fourth quarter, down from 25% a year earlier.
What this could mean for eBay shareholders
The longer-term impacts of this strategic shift to a greater focus on higher-value customers remain to be seen. That said, the near-term results of it appear to be higher earnings derived from lower marketing spending. Adjusted earnings per share were 24% higher in Q4 2021 than in Q4 2020, despite the e-commerce site attracting fewer customers. It could be that some customers cost more to serve than they are worth in terms of revenue and profits.
Indeed, eBay has a decade-long history of a profit focus. In the past 10 years, eBay has grown its revenue at a compound annual rate of 1.2%. Meanwhile, it boosted earnings per share by 19.2% during that time. A more intense focus on the bottom line can be good news for shareholders.
