One of the stocks we hold in the domestic portfolios is TradeMe. The company is an online marketplace for goods – effectively the eBay of New Zealand – and enjoys a dominant market position. But that could soon change. It is about to go head-to-head with Facebook, which has announced the launch of its own marketplace function. We will be watching TradeMe’s tussle with Facebook very closely. TradeMe dominates the used goods trading market in New Zealand, with eBay having a very small share. TradeMe has been able to leverage the traffic flow the marketplace site has generated to build other platforms with similar barriers to entry through the virtuous circle of consumer traffic resulting in vendor participation, which in turn drives ongoing consumer participation.
Today, TradeMe is the leading used goods marketplace in New Zealand and has the number one online auto classifieds site, as well as the number two property (number one by revenue) and employment classifieds sites. It is also developing a number of other product platforms including insurance.
We noted with interest last week’s announcement from Facebook regarding the launch of its own marketplace function in New Zealand, Australia, the UK, and US. Facebook will add a ‘shopping bag’ button at the bottom of its mobile app, with the functionality open to users over 18 years of age. The app will be accessible on both the iOS and Android platforms, with a desktop version expected to be launched over time.
The New Zealand function will compete with TradeMe’s core business. We note that Facebook has actually been running a trial in Sydney and Auckland over the last year, but this did not seem to impact TradeMe’s performance over this period.
At this stage, the functionality of the offer is limited relative to more developed marketplace sites like TradeMe, eBay, and Gumtree. It is also currently limited to used goods, whereas TradeMe is generating stronger growth and has more upside in the new goods retail market. However, the product functionality gap is likely to be a temporary one with Facebook expected to improve its product over time. Facebook Marketplace will be free initially for both buyers and sellers. This will be the hook Facebook initially uses to convert its vast pool of users.
TradeMe generates around 30% of its revenue and a third of its EBITDA from its marketplace site. On top of this, the traffic from its marketplace also allows it to generate display advertising revenue and provides a pool of users for other applications such as its classifieds, insurance, and other sites.
Given the traffic Facebook generates, this is not a threat that can be dismissed easily. There will be a period over which Facebook’s product becomes competitive as the offer is developed. Facebook will also be required to solve some on the ground technical and logistics issues such as the development of a returns and dispute resolution capability, more targeted search algorithms, a database of buyer and seller reviews, as well as providing some logistic support to sellers. This will all take time.
We note that Facebook tried to enter the marketplace space in 2007, only to exit in 2014. It will no doubt take lessons from this experience, as well as the more recent Sydney and Auckland trials, into its latest attempt to enter the market. Facebook clearly has the viewership to potentially break TradeMe’s virtuous circle. However, it will need to build the other side of the equation, with a deep and broad pool of listings. Interestingly, according to Deutsche Bank research, total listings on a sample of large buy and sell groups has fallen since March even through membership increased over the same period. This suggests trial of the product but reduced engagement over time.
The power of Facebook, particularly in the mobile market, is not something that can be dismissed. While there are a number of boxes it still needs to tick to be a real competitive threat to TradeMe; it is something that will need to be monitored on an ongoing basis. At the very least, it will require TradeMe to continue to invest in an ongoing programme of product and user experience improvement, while reducing the likelihood of any earnings upside from improved fee generation.
Contributed by Montgomery Investment Management: (VIEW LINK)
Montgomery owns shares in TradeMe.
Stuart is the Portfolio Manager of The Montgomery [Private] Fund – a concentrated, All-cap Australian equity fund that aims to achieve absolute returns from a portfolio of long only Australian shares and cash. Capital preservation is paramount.