eBay and Others Eye Opportunity in Secondary Market
By Ina Steiner
In February, Best Buy revealed it was entering the secondary market in electronics to go after vendor overstock, consumer returns, refurbished, and used products that it said were often sold through alternative channels like auction sites, clearance centers and overstock stores. The company's Chief Marketing Officer wrote, "Now that we have the ability to receive, process, and re-sell products in these markets, it opens up opportunities for new business models which were not previously feasible. Things like extended product support or "trade in to trade up" privileges may become viable because we have the ability to extract the value from secondary market products through alternative channels."
The move reflects an increasing trend toward squeezing more dollars out of excess inventory by all of the players - retailers, manufacturers, liquidators and online marketplaces - using various approaches. eBay, which created an engaging bargain-shopping experience through its auction model in 1995, now finds itself competing with sites that use different models to hook shoppers, such as Woot.com's daily deals and Gilt.com's "invitation-only" flash sales. eBay is copying these approaches on its own site, and the heart of these models lies in the secondary market. But it faces steep competition, and there's no guarantee its shift in strategy will be met with success.
eBay's Push into the Secondary Market
eBay Germany's Wow Daily Deals page is home to several formats for pushing deeply discounted items quickly and gives some insight into eBay's approach. In addition to offering the same kind of deep-SKU "Daily Deals" promotions found on eBay.com, eBay Germany holds weekly auctions starting at one euro, and is also home to outlet stores from such brands as Speedo, Triumph, Sigma (camera lens) and Bosch (electronics).
eBay UK has also added outlet stores to its Daily Deals portal page, directing shoppers to "Look for other great deals direct from brands and retailers on eBay," and added a tab called Outlet next to its Daily Deals tab at the top of its pages.
In the U.S., in addition to Daily Deals, eBay.com has experimented with category flash sales, as in the Cole Haan 2-day "sales event" it heavily promoted on the site in July (link.
In March, eBay called the secondary market "a sweet spot with a global opportunity of $500 billion dollars a year" when it told analysts that the new eBay was sitting in warehouses, liquidators and off-price retailers that were looking for cost-effective channels to be able to move high velocity.
In July, eBay revealed it had seen some of its Daily Deals promotions push 6,000 and 7,000 items within a couple of hours. The German Daily Deal campaigns have generated over 10 million euros in the first 6 months, with August its second strongest month after June with 2 million euro changing hands, according to Optaros.
Sizing the Secondary Market
There is no single definition of the secondary market, making it difficult to determine the exact size of the opportunity. However, it appears eBay is unique in counting collectibles and used goods in its definition, aside from customer returns or trade-ins that others include.
eBay spokesperson John Pluhowski confirmed that eBay's $500 billion estimate of the secondary markets counts pre-owned items, including thrift stores and collectibles, and was compiled from numerous sources, including eBay company data, US Census, Internet Retailers 500, and industry interviews from a KSA study.
Three Wall Street analysts who follow eBay said they did not measure the secondary market, but referred to eBay's estimate of the market size, while Colin Sebastian of Lazard Capital Markets estimated the returns market alone to be at least $50 billion.
Blumberg Advisory Group, a research and consulting firm in the reverse logistics industry, pegged the value of inventory in the U.S. salvage liquidation market at $4.13 billion. This includes refurbished product; box damage; excess retail; shipper error; and customer returns, and is the value of products that are liquidated from the retailer and/or manufacturer direct to Wholesale Liquidators (e.g., GENCO, Liquidity Services, Overstock, etc.) and trading companies (i.e., Jacob's trading).
Blumberg Advisory Group's principal, Michael Blumberg, said, "Typically the products are liquidated at a cost of $0.30 to $0.40 on the dollar by the primary channel (i.e., retailer/manufacturer), it will then be purchased by Wholesale liquidators and Trading Companies who may mark it up another $.15 to $.20 then to brokers and jobbers who added another few cents, and then to boutiques and online retailers who end up selling the product at 80% of the retail price. Basically, the $4B market is now $8B by the time it reaches the end consumer."
Enable Holdings commissioned a report in 2008 that states that conservative estimates for the global excess inventory market ranged from $60 billion to $80 billion. "For computers alone, an estimated $1.3 billion of excess inventory is sold annually in the U.S. Non-computer consumer electronic asset recover is at least $600 million annually." In February, Best Buy wrote that the secondary market for electronics was an estimated $15 billion in the U.S., calling it easily a $1 billion revenue opportunity for the retailer alone.
Challenges in Capitalizing on the Secondary Market
The traditional viewpoint is that retailers and manufacturers don't want to think much about excess inventory and returns because they'd rather invest their resources into selling new product. Manufacturers also worry about brand protection, and retailers worry over their liquidated goods competing with retail store sales.
Howard Rosenberg of B-Stock Solutions worked for eBay for over 6 years and was responsible for creating eBay's B2B (business-to-business) Private Marketplaces business in 2004. He said manufacturers and retailers already have a network in place - it's a relationship business, he said. Ninety-five percent of the time they contact only 2 - 3 major liquidators to clear out all of their unwanted inventory - it's fast and easy - and generally they don't like to sell on multi-seller marketplaces.
"It's my belief that big companies with huge quantities of inventory to be liquidated want to liquidate in bulk - I don't think many want to liquidate one item at a time. It's not important enough." The portion of revenue that comes from liquidating excess inventory is a mere 2 - 3 percent, depending on industry and product type, Mr. Rosenberg said.
Blumberg Advisory Group's Blumberg said "No longer in season" goods (referred to as NIS-1 or N-1) typically don't go through traditional liquidation channel. He said for example, Ralph Lauren Polo Shirts or IZOD shirts are timeless. "A retailer may hold onto them forever until they are sold or the retailer/manufacturer may have a discount outlet or online website where they can sell the stuff." Mr. Blumberg said he believes it would be a tough sell to convince manufacturers and retailers to sell through a marketplace like eBay instead of through their discount outlets.
Enable Holdings' report revealed another problem that companies face in liquidating products online: "Too many identical items can flood the market for a given auction category and depress prices participants are willing to bid. The conclusion to be drawn is that simply putting excess inventory online does not constitute a solution."
Unique Challenges for eBay
eBay has increasingly moved to an Amazon.com-like policy of guaranteeing purchases to the buyer's satisfaction, which often conflicts with liquidation sales. For example, Woot.com - the grandfather of the "daily deal" promotion - warns its shoppers upfront not to expect the same level of customer support they are used to.
By putting certain seller restrictions in place, eBay has become an incubator for its own competition. Paul St. James racked up over one million positive feedback on eBay under the User ID Bargainland selling salvage goods before exiting the marketplace. He now operates Warehouse86 Ventures, which provides ecommerce solutions for the reverse logistics and liquidations industries. Its Bidtopia.com B2C marketplace is attracting other eBay sellers who wish to get away from eBay's restrictions. Mr. St. James left in part, he said, because, "It felt like eBay was distancing itself more and more from the large volume sellers and, in particular, the as-is, 99-cent, No Reserve type seller. It seemed like to us they were trying to get more into the sexier, cleaner Amazon-type space."
Meanwhile Howard Rosenberg has taken up where he left off at eBay with his new company B-Stock Solutions, which builds private B2B marketplaces for manufacturers and retailers to liquidate their goods.
It's also difficult not to be struck by eBay's broad definition of the secondary market while at the same time it has abandoned some of its liquidation businesses, including closing its eBay Live Auctions and B2B Reseller Marketplace, and discouraging "as-is" liquidation auctions on its site.
As Best Buy's move reveals, retailers and liquidators are looking to capture a piece of the secondary market opportunity for themselves, opening even more competition for eBay. Enable Holdings is concentrating on this space with its RedTag and Dibu businesses, and believes its ability to take inventory position as well as its hand-holding approach by its reps who can devise multi-channel disposition strategies - both online and offline - give it an edge with suppliers.
Among competitors in the deep-SKU promotional space are marketplaces like Overstock.com with its "RedLine Deals"; invitation-only sites that conduct flash sales, such as Gilt Groupe, Rue La La, and in Europe, Private Outlet; and of course, Woot.com and its imitators.
The outlet store concept eBay is trialing in Germany may be seen as the third pillar in its marketplace strategy that had traditionally been composed of individual sellers and PowerSellers. The question is whether this third pillar will help sales of the other two channels by helping to drive traffic to the site from bargain hunters, or whether the downward pricing pressure from heavily discounted branded merchandise will hurt professional sellers' margins. Indeed, the shopping experiences eBay has been rolling out, such as Daily Deals, may change shoppers' behavior on the site, leading them to wait for better pricing before hitting the Buy It Now button.
Many a liquidated item has found its way to eBay since 1995, particularly by core sellers, and eBay's efforts to move higher up the chain may have an effect on these smaller sellers.
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About the author:
Ina Steiner is co-founder and Editor of EcommerceBytes and has been reporting on ecommerce since 1999. She's a widely cited authority on marketplace selling and is author of "Turn eBay Data Into Dollars" (McGraw-Hill 2006). Her blog was featured in the book, "Blogging Heroes" (Wiley 2008). Follow her on Twitter at @ecommercebytes and send news tips to firstname.lastname@example.org.
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