(EBAY) eBay to Provide Fulfillment Service

Not unsurprisingly, eBay Inc (EBAY) has stated that it would soon be offering a fulfillment service to sellers, similar to the service already being offered by Amazon.com (AMZN), as well as fulfillment companies employed by other online retailers.

In fact, the company’s recent acquisition of GSI Commerce was partially on account of the latter’s over 2.6 million square feet of warehouse fulfillment space across the United States, Canada and the U.K. eBay will retain seven of the nine fulfillment centers it acquires from GSI.

The fulfillment service is intended to help woo large sellers that provide a much bigger opportunity, according to eBay. The company estimates that the large seller segment opportunity is currently $160 billion compared to the small seller opportunity of just around $12 billion and the small and medium business (SMB) segment of around $36 billion.

This opportunity at large sellers has prompted eBay to rethink its growth strategy, consistently coming out with new policies that could attract big sellers. Of course, it does not clearly mention the impact of its policies on active seller accounts, which have been “over two million” for a while now.

However, the company’s fixed price format, introduction of badges to attract buyers, insistence on free shipping for consumers, reduction of fees, investment in technology and now, fulfillment centers makes the eBay sites much more conducive for big sellers than small ones. eBay has an additional advantage over Amazon, since the company has its own payment platform (Paypal), which has been doing extremely well in recent times.

eBay and Paypal are currently engaged in legal battle with Google Inc (GOOG), claiming that Google misappropriated information related to the future development of the Paypal platform and also picked up key personnel engaged with it. We expect this to generate some cash for eBay, although the impact on the future of Paypal and its adoption appears unclear right now.

As far as the fulfillment service is concerned, (which by the way will not commence until later in the year), we expect initial hiccups. Amazon has been providing fulfillment centers for long and sellers are accustomed to it. Amazon added 13 centers in 2010 and expects to add another nine this year.

Despite its service being several years old, these investments have had a considerable impact on its earnings. Since eBay has acquired a few centers from GSI, its investments may have a lesser impact on results. However, there is necessarily a learning curve attached to every process, so some moderate impact on profits is possible.

The fact that fulfillment centers don’t just remove the hassles of packing and delivery of products for the seller, but is also advantageous for the buyer, who would be relatively more certain of its availability, is also a matter to consider.

We are therefore of the opinion that the initiative is commendable and we believe that eBay is on the right track to tap the tremendous growth opportunity in the market.

The Zacks Rank on eBay shares is #3 (short-term Hold recommendation), while it is #4 for both Amazon and Google. We are Neutral on all three companies in the long term (3-6 months).

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