EBay Inc. (EBAY:US), which operates the world’s largest online marketplace, is betting that a new fashion-focused partnership in China will help it break into a market where it failed five years ago.
EBay Style debuts in China today in a deal with luxury online seller Xiu.com, featuring 5,000 brands in apparel, handbags and shoes, said Steve Milton, a spokesman for EBay. The arrangement lets consumers in China buy new items from EBay merchants in the U.S. while Xiu.com handles sales, shipping and customer service.
Chief Executive Officer John Donahoe needs to expand into new markets to sustain growth that analysts predict will top (EBAY:US) 20 percent for a second straight year in 2012 -- up from a single- digit pace in the preceding years. At stake is the Chinese electronic commerce market, which is poised to more than double to $356.1 billion in 2016, according to Forrester Research Inc. (FORR:US)
“They’ve been very successful going to developed economies, but to continue to grow at those rates ten years from now, they need to be in these larger emerging markets,” Gil Luria, an analyst at Wedbush Securities Inc., said in an interview. “That’s a tall task because there are incumbents.”
Donahoe is refocusing on China after predecessor Meg Whitman had difficulty gaining traction in Asia a decade ago. Facing competition from Alibaba Group Holding Ltd.’s Taobao.com, EBay closed its unprofitable Web auction unit and formed a venture with billionaire Li Ka-shing’s Tom Online Inc. In 2002, EBay withdrew from the Japanese market.
Luria estimates that less than 15 percent of EBay’s revenue currently comes from Asia.
The online retailer still sees demand. Merchandise bought by China’s consumers via EBay increased 40 percent in 2011 from the preceding year. They spent 17 million hours navigating its Web properties in 2012, Milton said.
“I would describe our approach as focused,” Milton said. “We don’t want to attack the domestic market. We just know we want to operate in the domestic market. The biggest risk is competition.”
EBay is using its sellers’ inventory of western brands, such as Michael Kors Holdings Ltd. (KORS:US) and Coach Inc. (COH:US), to appeal to an estimated 15 to 20 million young, affluent locals -- part of a growing middle class in China, Milton said. A team of about 800 at Xiu.com, which has expertise in importing into the country, will help translate the site into Chinese and handle shipping after U.S. sellers send purchases to a warehouse in Dallas, he said. He declined to disclose financial terms.
Pairing up with another company means EBay doesn’t have to deal with fulfillment centers, inventory and other logistics that were difficult hurdles for retailers in the country in the past, said Colin Sebastian, an analyst at Robert W. Baird & Co. The company will also have to seek out other partnerships to cater to a market with different tastes, he said.
“EBay should be able to leverage a stronger technology platform, a more global buyer and seller base, and perhaps most importantly, they will need partnerships that help them localize the site and user experience,” Sebastian, based in San Francisco, said in an e-mail.
The company may have trouble gaining traction with a domain that’s secondary to Xiu.com -- ebay.xiu.com -- and shipping that may be slower than the two-day delivery Chinese consumers are used to, because the packages are coming from the U.S., said David Zhao, founder of Shangpin.com, a Chinese e-commerce site.
Still, luxury fashion is a good starting point in a country that has been difficult to enter, even for giants such as Amazon.com Inc. (AMZN:US), said Victor Anthony, an analyst with Topeka Capital Markets Inc. in New York.
“Starting with luxury goods is an excellent idea, given the Chinese consumer’s insatiable appetite for brand name and designer Western products,” he said. “The Chinese market is challenging, and competition is rife, forcing companies like Amazon to invest more in its Chinese subsidiary. With careful execution, EBay stands a chance.”
Even if EBay is successful in new markets, the company has warned in quarterly filings that it “often” expects operating costs of new ventures in most countries to exceed net revenues for at least 12 months.
EBay Style will be the company’s fourth business unit in China. The other divisions are PayPal, an analytics and engineering center and a marketplace that lets Chinese users sell items to consumers in other countries.
EBay’s online payments service PayPal may also give it an advantage in China, said Luria. Alipay, Alibaba’s online payments competitor, can’t be used by U.S. sellers, making it harder for Chinese consumers to buy U.S. goods.
To make sure consumers know about the marketplace, EBay is starting an advertising campaign that will cost no more than $8 million this year, targeting social media and high-end fashion magazines.
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