eBay (NASDAQ:EBAY) comes well behind Amazon.com (NASDAQ:AMZN) in e-commerce, and the gap between the two companies is only getting wider over time. However, eBay is not standing still, as the company's management has a clear and well-defined strategy to accelerate growth and recover some of the ground it has lost to Amazon over the past several years. Is eBay strong enough to succeed in this challenging venture?
eBay is no match for Amazon when it comes to growth
Amazon and eBay have remarkably different business strategies. Amazon is all about growth, even if this growth comes at the expense of minuscule profitability. The company sells its products for razor-thin margins, and Amazon is also investing tons of money in areas such as building its distribution network and digital content. Sales growth is nothing short of spectacular, but Amazon's profit margins are low and unstable.
eBay is a commerce facilitator as opposed to an online retailer. This means the company makes a commission for every transaction on its platform, and it doesn't need to worry about factors such as inventory risk or logistics expenses. This remarkably profitable business model allows eBay to get away with extraordinary profit margins, in the area of 31% to 33% of revenue at the operating level. .
eBay and Amazon can offer different things to different customers. If you are looking for used collectibles being sold in an auction, then eBay is definitively the place to go. Amazon, which is much more like a big store, is way above eBay in terms of both size and growth, and the two companies are direct competitors in e-commerce to a good degree.
Amazon produced a gargantuan $107 billion in revenue during the full year 2015, with sales growing 20% year over year in U.S. dollars and by an even stronger 26% in constant currency. As for eBay, annual sales stand at a much smaller $8.6 billion, declining by 2% in U.S. dollars during the full year 2015. For 2016, eBay management is expecting a modest increase in constant-currency revenue of between 2% and 6% versus 2015.
eBay has a plan for growth
eBay CEO Devin Wenig spoke at the Goldman Sachs Technology and Internet Conference recently, and he shared with investors some interesting insights regarding the company's strategy to improve performance.
After the separation from PayPal (NASDAQ:PYPL), eBay lost a powerful growth engine, but the company has also gained the opportunity to better focus on its own priorities. Management is now seeing eBay as a merchandiser or a retailer, not so much an open marketplace selling all kinds of items with dissimilar characteristics and displayed in a disorderly way.
Customers typically find different alternatives for a particular product via eBay's internal search engine. The company now wants to make the selection of products included in the search results more structured, prioritizing the quality of the results over quantity and variety. After all, sometimes less is more, especially if the selection is done properly in terms of both product attributes and pricing.
eBay is prioritizing unique products and requiring sellers to include additional data about their offerings, as well as building more catalogs and enhancing content with images and other relevant information. The main idea is that the company is building a better experience for customers, simplifying inventory, improving product discoverability, and offering more and better information.
This should not only help customers who are looking for a particular product inside eBay's own platform, but the company also wants to get more traffic from Google with superior product placement. Google changed its search algorithm in May 2014, and the new algorithm penalized eBay as well as several other e-commerce players, so regaining traffic from such an important source would be a major victory for eBay. Easier said than done, though, since almost every industry player is permanently trying to optimize traffic from Google.
eBay is also building better tools for sellers, leveraging transaction data to show sellers which particular products are selling well on the platform and how to implement the right pricing strategies based on customer demand and competitive conditions. In a broad sense, what's good for sellers should also be good for customers, as parties on both sides of a transaction should benefit from a more efficient marketplace and more transparent information.
Only time will tell if eBay can jump-start growth and reduce the gap versus Amazon in the middle term. Competing against Amazon is no easy task at all, but eBay's management has a reasonable and down-to-earth strategy to improve performance, and this can be a good first step to leading the company in the right direction over time.
Andrés Cardenal owns shares of Amazon.com. The Motley Fool owns shares of and recommends Amazon.com, eBay, and PayPal Holdings. 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.