Saturday, January 12, 2008

Will Recession Really Hurt eBay and Amazon?

The big "R", many people can't even force themselves to say the word completely -- R E C E S S I O N. The very mention strikes fear in the markets and in households.

Recently, Jim Friedland, Senior Research Analyst for Cowen & Company, LLC, came out with a research note on the likelihood that eBay and Amazon would be hit hard in a recession. I don't have the research note to reference but this is what said:

"The odds look pretty good that we'll see a recession this year, and as we learned last time around, that can't be good for commerce sites like eBay and Amazon.

While lots online stores are poised for decent growth (especially as gas prices soar), Cowen & Co. analyst Jim Friedland thinks eBay and Amazon will get pinched as consumers curb spending. It's a pretty reasonable conclusion given that
December sales results from national retailers were dismal.

Friedland notes that during the last recession, Amazon only grew North American revenue by 3 percent. To put that number in perspective, in 2006, Amazon grew North American revenue by 25 percent."

Many will look at this as a foregone conclusion, but IMO, Amazon and eBay are completely different companies now, then during the last recession in 2001.

Let's look at Amazon first:
  • In the Last 7 years Amazon has built an efficient infrastructure that has reduced their cost per transaction.
  • Free shipping has become a staple at Amazon with Super Saver shipping and Amazon Prime and will be even more important during a recession as gas prices rise. Why go to the store and spend the money on gas when you can have your item shipped for free.
  • Amazon guarantee's every order so there is less risk in a purchase on Amazon then, say for instance eBay where perception of risk is much greater.
  • Amazon's 3P (third party merchant) business is much more robust now then it was in 2001 and this high margin business provides Amazon with greater product selection, in addition to nicer margins.
  • In a slower economy many consumers will choose to sell their no longer needed and used household items to get some extra cash. Amazon should see an increase in this type of business, either directly from consumers or increased inventory from professional sellers who buy back product from the consumer.
  • Amazon's FBA program should see an increase in inventory as 3P sellers decide to cut back on their fixed expenses. FBA items also benefit from Amazon merchandising and can take part in the Super Saver and Prime shipping programs.

With eBay there are more concerns.

  • eBay should see an increase used and no longer wanted inventory, either directly from consumers or increased inventory from professional sellers who buy back product from the consumer. Though, it has been my expereince that selling your unwanted items on eBay is a lot more work then selling on Amazon.
  • If consumers perceive eBay purchases to be a greater risk then they will purchase elsewhere, maybe even Amazon; after all much of the same inventory is now available at Amazon.
  • eBay does not control S&H so many sellers charge high S&H costs. This is a greater risk for eBay now than during the 2001 recession because at that time S&H costs were more reasonable. When I first started selling there in 2000, I had a $3.95 flat shipping rate for each order, no matter how many DVDs were in each order. Today many DVD sellers on eBay charge $5.95 per item.
  • eBay doesn't guarantee orders but PayPal does, sort of. PayPal guarantees transactions up to $2000 but you have to jump through many hoops to get them.

So, as you can see, both companies are in a much different place now then during the last recession. If eBay can correct some of these issues they might be able to weather the storm. I think Amazon is already positioned to do that.

Just my 5 cents.


Anonymous said...

Ebay will do relatively better. Amazon's good for new/newer items but Ebay is much better for used items. Ebay benefits from a double-whammy: listings for closet junk increase and buyers increasingly look for discounted merchandise.

Randy Smythe said...

I would agree partly. eBay will get first shot at the junk but Amazon is now selling a lot of used media items -- that is all I sell there. So their customer base is being conditioned that used is also fine if you want to save some money.

eBay certainly will be the choice of liquidators but they've spent the last year scaring off the big sellers.

Randy Smythe said...

One additional problem, I see for eBay during a recession, is their sponsored ad revenue might take a hit. Advertising is the first thing to go in a recession.