Retail's Piece of the Auction
Big-Business Strategy Emerging on eBay

The new seller on eBay was off to a good start. Twenty-nine people went for the sets of girls' polyester pajamas before the high bidders grabbed them for $7 -- less than half the retail price. Another happy outcome on the Internet's largest auction site.

But this time, the seller wasn't one of the tens of millions of individuals and small dealers who have made eBay the only profitable large company to emerge from the dot-com era. It was J.C. Penney Co. A few weeks ago, the retailer began auctioning off its 2001 spring clothes at a Web site better known for inventory like Beanie Babies and Bionic Woman lunch boxes.

Big business is moving into eBay, signaling that the next stage of electronic commerce has begun.

As hundreds of Web stores have disappeared, manufacturers such as Xerox Corp., Sun Microsystems Inc. and International Business Machines Corp. have set up shop on eBay. Now retailers are wading in, too, though not all as publicly as J.C. Penney. For every large company selling under its real name -- Mitsubishi Electric Corp. as "mitsubishiautomation" and Ritz Camera as "ritzauctions" -- others are running tests behind the scenes, scoping out how eBay could fit into their overall business strategies.

Designer dresses from Bloomingdale's, Hanes socks, factory-sealed Bose speakers, diamond-studded Piaget watches and never-worn Ferragamo shoes are a few of the items offered daily for auction or fixed prices.

"A lot of manufacturers are doing it incognito or through third parties," said Jordan Glazier, eBay's director of business development.

Gymboree, a children's clothier based in Davis, Calif., lists more than 100 items on eBay, but would rather not discuss its plans. "We're still in the early stages on eBay. We don't have any comment beyond that," said Jordan Goldstein, Gymboree's spokeswoman.

Early on, analysts envisioned most Internet shopping taking place at stand-alone Web sites with names such as Pets.com, eToys.com, Garden.com -- all now gone. Manufacturers and retailers also poured hundreds of millions of dollars into their own Web sites in the 1990s, but many are finding it hard to attract large numbers of shoppers.

EBay's community of users, meanwhile, has grown to more than 30 million and has been adding more than 2 million a month. Some 6 million items are offered for sale there on any day, up from 1.4 million in early 1999. About $2 billion in goods changed hands in the last quarter, and eBay collected commissions of 1.25 percent to 5 percent on each transaction. In addition, eBay's used-car business is growing quickly, along with electronics, clothing and sales of real estate such as time-share condominiums and undeveloped land.

Of course, commerce on eBay remains just a fraction of what is sold in, say, Wal-Mart stores, and some analysts wonder if eBay could lose its focus by expanding quickly into so many new areas. But the Web site's growth has many observers wondering where its natural limit might be.

"EBay is moving to the center of the e-commerce world," said Derek Brown, an analyst with WR Hambrecht & Co. "There are very few limitations to what can be bought or sold across eBay. This is only now starting to come to people's attention."

Retailers and manufacturers represent the latest wave of growth on the auction site. Collectible and antique dealers colonized eBay in the mid-1990s. Next came regional variety stores, small-town merchants and home-based entrepreneurs. Mass-merchandise distributors soon followed, eager to test eBay as an outlet for overstocks, returns and other bargain items.

"Businesses of all sizes are finding the value of eBay isn't so much its auctions as it is an inexpensive way to reach millions of buyers," said Rodrigo Sales, president of auction management software company AuctionWatch. "A multibillion-dollar company might use it, but it works just as well for a three-person company."

EBay's chief executive, Meg Whitman, vows that the company will rake in $3 billion in annual revenue by 2005, up from $431 million last year. Wall Street has displayed growing confidence in the site's future, running its shares up to $66.54 at yesterday's Nasdaq Stock Market close -- roughly double its price in April. Analysts are eagerly awaiting its latest earnings report today.

Whitman's growth target would require grabbing a good chunk of commerce currently conducted offline. And since most commerce occurs at fixed prices, eBay has begun offering that as an option. Last year it bought Half.com, a Web site where people sell second-hand stuff at fixed prices. In November eBay added a "buy it now" option to its auctions, allowing sellers to set a price at which buyers can end the bidding.

"Fixed pricing is an important area of growth for eBay," said Prudential Securities analyst Mark Rowan. "If it is successful at Half.com, there is no reason to believe it can't ultimately be bigger than their entire auction business."

EBay waded more deeply into fixed pricing last month by establishing virtual storefronts like those offered by competitors Yahoo and Amazon. So far, 18,000 dealers have signed up, paying $9.95 a month for the right to list all their items in one spot under their own names. A part-time antiques seller in Herndon pays the same amount as a computing giant like IBM.

Executives at eBay acknowledge they are recruiting major manufacturers and retailers to the site, partly because they know brand names sell. But they insist the impetus for change is coming from the marketplace, not management.

"Big business sought eBay out because of all the economic activity taking place on the site," Whitman said. "We are slowly working with different manufacturers and retailers to see if they can be successful selling on eBay. The early returns are positive."

For their part, large companies say their eBay listings are mostly unsold inventory and merchandise nearing the end of its retail store life. J.C. Penney is selling this year's clothes on eBay -- but all from the spring catalogue, two seasons behind the current fall catalogue.

Penney's is joining other retail liquidators, among them eValueville, an authorized agent for Bloomingdale's that recently set up inside a cavernous warehouse in Hattiesburg, Miss. Two dozen people are working a corner of the old structure, taking photos of Anne Klein dresses and other clothing, uploading more than 1,000 new listings onto eBay each day, then shipping to winning bidders.

Not just individuals, but also businesses are becoming customers for the new breed of products offered on the auction site. Mitsubishi Electric, for example, is posting expensive factory automation gear that didn't sell elsewhere.

"Most of us figured we would get two or three orders a month off eBay when we started in March," said Scott Whitsitt, Mitsubishi's manager of Internet business. "I am writing two to five orders a day, and I have 50 to 75 auctions running at any given time." Bidders pay discounted prices, but still three to four times what the manufacturer would get elsewhere.

IBM has devoted several full-time staffers to the eBay site it ramped up in March. The computer company has experimented with a wide range of products, from new laptops to overstocked, high-end Web servers and flat-panel monitors. "We are doubling our sales monthly," said Paul Canham, an executive with IBM auctions.

Sun Microsystems was eBay's first big manufacturer more than a year ago. It is bundling services with outdated computer gear and also uses eBay to test prices and demand for newer products. "We want to know what is the real price level -- what is someone willing to pay?" said Sun Vice President Steve McGowan. "This will give us real insight rather than just hearing from a marketing manager."

Half the buyers are new customers for Sun. "We believe companies will be selling much more of their business through dynamic pricing on the Internet," McGowan said.

Some analysts worry that eBay is overreaching. Critics wonder whether any commercial outlet can comfortably sell teddy bears alongside Caterpillar tractors. In April, Lehman Brothers analyst Holly Becker released a report suggesting that eBay's expansion, including forays into Europe and South Korea, could slow profitability if the new initiatives don't catch on.

One product of eBay's evolution is growing disgruntlement among many of its longtime dealers.

Whitman said eBay goes out of its way to treat small and big merchants alike, and she contended eBay's platform offers small fry a better chance to compete against large corporations. Part-time sellers still make up the vast majority posting items on eBay; eBay says only about 75,000 of its dealers have monthly sales over $2,000.

But some old-timers feel the auctioneer is turning its back on them in its rush to woo mass merchants whose inventories can propel the growth Wall Street demands.

EBay irked veteran sellers by raising listing fees this year and restricting their efforts to market their own Web sites. Watching warily are small sellers such as Mike Mosely, an air-conditioning service manager in San Diego who sells fishing flies on eBay: "I think eBay is going away from their roots," he declared, "and they'll find big companies are not the way to go."

Bob Kerstein, a Fairfax dealer who closed his antiques store to sell rare stock certificates (Scripophily.com) full-time online, agreed. "They are changing the way they do business, and in the long run it will come back to bite them," he said.

Kerstein has been selling on eBay for three years and is a featured merchant its new storefront program. Yet he's been wrangling with eBay over its refusal to let him link to his own Web site.

"The thing that made eBay was the flexibility people had to promote themselves in fun and creative ways," said Kerstein, a former chief financial officer for McCaw Cellular Corp. "People put classified ads on eBay to sell their products. Now they are trying to control everything and take that away."

EBay Chief Financial Officer Rajiv Dutta sees this bumpy transformation as part of a natural evolution. He compares the changes to how farm markets grew into thriving metropolitan economies.

"Ask yourself, did the fact that Sears, Roebuck or Macy's became such a dominant force in retail in New York actually drive out the small entrepreneur? The fact is, it didn't," Dutta said.

For the big companies dipping their toes into the auction site, the motivation is less the freewheeling culture of eBay than the imperative to sell where customers shop.

"If people want to buy on eBay, we want to offer them our products there," IBM's Canham said. "We recognize that not everyone will come to our Web site or call us on the phone."