Corporate America's New Outlet Mall Big companies are showing up at eBay to offload everything from home theaters to the kitchen sink.
(Business 2.0) – A year ago, Fujitsu sales VP Don McMahan and his staff spent too much time on the most loathsome chore of their jobs: haggling on the phone with often reluctant buyers in an effort to get rid of hundreds of refurbished high-end Fujitsu scanners. Today, though, McMahan's sales reps rarely lift their handsets or complete paperwork: They're using eBay to liquidate excess inventory at auction.
Scores of companies--from giants like Sears and Best Buy to small-fry slipcover manufacturer Sure Fit--have discovered the same thing, rendering the traditional third-party liquidator as archaic as the five-and-dime. For some, the hardest part of the transition is getting the busy folks at eBay to help them get started. After several of McMahan's calls to eBay went unreturned, he dispatched a manager to drive the 10 miles to the company's San Jose headquarters and carry out some simple orders. "Go bang on the door," McMahan told him, "until you find someone to help us."
It was obviously worth the trouble. McMahan launched the Fujitsu Scanner Outlet on eBay in March 2003, and has since auctioned all 700 scanners he's posted. "It's like having an extra salesperson in-house," he says. Even better, most of McMahan's eBay customers are small businesses that he couldn't have reached through his regular sales channels.
Though Fujitsu was late to the party, it was far from the last to arrive. In fact, enough companies are interested in setting up discount outlets on eBay that a cottage industry has sprung up to help them. The two main competitors going after corporate sellers--Atlanta-based Auctionworks and ChannelAdvisor of Research Triangle Park, N.C.--already count Disney, Harman International Industries, Motorola, and Texas Instruments among their clients. (A third player, an Accenture-owned outfit called Connection to eBay, closed in February and handed its struggling business to Auctionworks.) The big companies farm out the work so they don't have to deal with the accompanying hassles, from shipping goods in small quantities to carrying on e-mail conversations with every customer. Says Chuck Cebuhar, Sears's recently retired vice president for online appliance sales, "It's a brave new world."
Friend or Foe?
So why weren't fujitsu and others beating down eBay's door five years ago? Because eBay's growth has been a confusing phenomenon that both repels and beckons to big business. On one hand, eBay operates a cutthroat market in which customers set their own deeply discounted prices, putting manufacturers at risk of alienating their distributors and other partners that must compete outside the eBay universe. On the other, the $24 billion in sales that passed through eBay last year represent a market they can no longer ignore. By definition, eBay is a liquidation machine; if you can find someone to take a used, out-of-date scanner off your hands, why can't Fujitsu?
The latter argument, obviously, is drawing more companies to eBay. Large corporate sellers now account for about 5 percent of eBay's gross merchandise sales--up from nothing just a couple of years ago. ChannelAdvisor, currently the largest eBay liquidations outsourcer, says it handles $10 million a month in gross sales for corporate liquidators, up from $3 million a month last year. (eBay recently invested in the privately held company.) While Auctionworks's gross sales average twice that rate, most of it comes from small and midsize sellers using its auction-automation software.
Becoming a player in this nascent market requires a big ante: ChannelAdvisor, for example, collects a $10,000 setup fee from new corporate clients, then a monthly service fee of $5,000 to $10,000 on top of that, as well as a 4 to 15 percent commission, depending on the level of service a client prefers. But that's still a lot better than not moving the inventory at all, or giving an even fatter cut to a big offline liquidator. After all, inventory sitting on shelves is like a crate of fruit--if it sits too long, it starts to smell.
These days it smells like profit to many of eBay's new corporate merchants. Harman International, maker of Harman Kardon stereo equipment, now sells about 70 percent of its excess inventory through its branded eBay store. "The goal is cost recovery," says the company's consumer group marketing VP, Herman Sperling, "but the reality is we're making money. We don't even use liquidators anymore."
Sears also believes in the concept. The mass merchant has opened three eBay stores: one for refurbished housewares and electronics, another for returned items that are still in season, and a third for its regional outlets. It got rolling in October 2002, when Cebuhar signed up with ChannelAdvisor to offer a selection of returned and refurbished goods on eBay and linked to some auctions from Sears.com. He was stunned to discover how much his discards could fetch. Refurbished hand drills sometimes sold for close to the original retail price.
Since early 2003, Sears's monthly eBay sales have jumped from about $200,000 to more than $1 million, according to ChannelAdvisor CEO Scot Wingo, making it one of eBay's largest corporate merchants. And instead of recovering just 10 to 15 percent of the cost of its distressed items through a liquidator, Sears now collects five times as much through eBay.
A Lot to Learn
Figuring out the eBay liquidation market hasn't come easily for many companies. The first lesson to master is the economics. PalmOne and Motorola, for example, both pared back their eBay initiatives after trying to dump big volumes of the same items. Flooding the market with identical auctions only drove prices down, and many companies weren't prepared to handle the customer service chores for eBay's notoriously finicky individual buyers.
The economics are tough for the middlemen too. Connection to eBay foundered because it couldn't profit off the limited volume of merchandise it was selling for customers like Sony and Fujitsu. "This is a hard problem to solve," Wingo says. "It shows you can't just throw a bunch of Accenture consultants at it."
Politics is the second challenge many sellers face. For manufacturers in particular, selling directly to consumers on eBay--even if the product is last year's merchandise--can quickly turn their usual distributors and retailers into new enemies. To steer clear of conflict, most companies have set up politically neutral eBay beachheads--sites that sell only overstocked, refurbished, or returned goods. As successful as Fujitsu has been in selling refurbished scanners, McMahan says, "we don't plan to offend resellers by selling newer equipment."
Other merchants tread even more lightly. Ever come across an eBay store called the Faucet Discounters? eBay middlemen say it's a digital facade for Price Pfister, a maker of high-end kitchen and bath fixtures. (Price Pfister denies any involvement.) The Lawn and Garden Outlet? That one's owned by MTD Products, maker of Yard-Man, Troy-Bilt, and Bolens lawn mowers.
Still, companies willing to tout their brands on eBay can command higher prices. At the Sears-branded eBay stores, "people will simply pay more," Cebuhar says. Adds David Spain, director of sales and marketing at Pennsylvania-based Sure Fit, the leading maker of furniture slipcovers, "You raise your profile above all the other small-business operators that make a living on eBay." Sure Fit started listing "B stock" slipcovers on eBay a year ago. Since then its eBay sales have grown from $10,000 a month to about $200,000. Spain says eBay delivers prices 20 percent higher than what Sure Fit can get through traditional discounters. And while the eBay sales don't add much to Sure Fit's $160 million in annual revenue, Spain estimates that the cost reductions will help bring an additional $500,000 to the bottom line in 2004.
Far less obvious is what it means for eBay's bottom line. Publicly, eBay officials aren't saying--and for good reason. Just like its growing band of corporate merchants, eBay can't appear to promote its big sellers too aggressively; to do so would put at risk its relationships with the hundreds of thousands of smaller players that account for nearly all its revenue. "We welcome large businesses to come to the platform to liquidate excess inventory," says eBay spokesman Hani Durzy. "But we won't do anything that will provide an unlevel playing field. eBay will continue to be the home primarily of small businesses."
If corporate sellers continue to latch on to eBay in serious numbers, however, they could easily become its fastest-growing segment. And then eBay will have the delicate task of pleasing both them and smaller merchants. Durzy pooh-poohs the notion, predicting that revenue from the big players "will never be more than 10 or 11 percent [of gross merchandise sales]."
But maybe the auctioneer's role is a moot point. After all, if markets evolve as eBay's founders dreamed--operating entirely on real-time supply and demand--excess inventory will someday be a thing of the past.