In March last year British classifieds website Gumtree – owned by eBay – pulled out of New Zealand. The reason was unstated but clear as crystal – Trade Me is just too dominant. If Kiwis want to sell stuff, they know there will be more buyers on Trade Me, even if it costs them about 8% of the sale price.
Trade Me’s dominance, not to mention its ubiquity, is why it’s such a great business. But it’s not bulletproof. As we said in our August upgrade in Trade Me: Result 2016: ‘there’s the ever-present risk that a new or existing competitor tries to take market share’.
Facebook’s recent announcement that it has launched ‘Marketplace’, a forum for trading goods, in the United States, the United Kingdom, Australia and New Zealand is an example of a new competitor. Except Facebook Marketplace is not really a new competitor at all, but more about that in a moment.
Facebook Marketplace is a 'new' free classifieds venue
Facebook's network effects represent some threat
Trade Me likely to remain dominant long term
The threat of Facebook’s 1.7bn users selling stuff to each other was enough to cause eBay’s share price to fall 3% after the announcement. In a delayed reaction, Trade Me shares have since fared worse, with the stock down by almost 10% from recent highs (and 5% from our most recent review). Is it time to panic?
To answer that question, let’s consider what Facebook Marketplace is – and what it isn’t. It’s a free, no-frills classifieds service that’s currently offered through Facebook’s mobile app to over-18s only. It’s primarily designed to help you buy or sell stuff near you.
Marketplace isn’t likely to become a direct revenue-generation tool for Facebook. Instead, your activity – including what you buy, sell or even view – will presumably be used to sell you advertisements. (Remember: If the product is free, you’re the product.) Facebook Marketplace, then, is designed to keep you within the Facebook ecosystem for the purpose of gathering better data on you.
Just like the Australian classifieds sites, Trade Me has always competed with free listing venues such as craigslist and Gumtree. Kiwis may also have heard of postanote.co.nz. So Facebook Marketplace is just another free listings venue, although its powerful network effects mean it should be taken seriously. Trade Me’s management doesn’t have its head in the sand, recently stating that it has a ‘healthy degree of paranoia’ about the potential impact of Facebook on its business.
It’s worth noting you’ve always been able to sell stuff on Facebook, and that this new venue just formalises it – for the second time. Facebook launched an earlier version of Marketplace in 2007, although it didn’t take off. And around 450m people already use Facebook 'buy and sell groups' every month. So the latest version of Facebook Marketplace isn’t really a ‘new’ venue at all.
Is free too expensive?
There are also various disadvantages with free listing venues. They’re no frills, so they usually lack features. They don’t facilitate payments or logistics, nor is there a feedback facility. And because they’re free and light on regulation, there can be safety and security issues. Already there have been reports of fraud by people using Facebook Marketplace, as well as illegal items for sale.
|Primary purpose||Classifieds site||Social contact|
|Currently available||Desktop and mobile app||Mobile app only|
|History in classifieds||Long-term success||Failed before|
|Cost||7.9% (success fee)*||Free|
|Revenue model||Listing/success fees||Advertising|
|*Most items. Other fees may also be charged.|
But perhaps Trade Me’s most significant advantage compared with Facebook Marketplace is the obvious one. It’s a well-trusted existing classifieds venue where people go to buy and sell stuff. Facebook isn’t.
Facebook is primarily for social contact; Trade Me is for selling stuff. Facebook has a record of failure in this area; Trade Me has a record of success. Facebook Marketplace is free and will attract some stingy sellers and tyre-kickers; Trade Me costs a small amount and is more likely to attract serious buyers and sellers.
Facebook Marketplace could make a dent in Trade Me’s business, particularly in the short term as people try it out. We’ll be watching closely, and clearly Trade Me’s management will be too. But Trade Me has seen off competitors in the past and there’s a strong likelihood Facebook Marketplace will fail again.
The risk of new competitors has always existed, but the actual entry of Facebook is real evidence of ‘new’ competition. So there’s an argument for dropping our valuation a little – and therefore our $5.25 Buy price.
That said, we’re confident Facebook is a threat at the very edge of Trade Me’s business. Our assessment is that the two can happily co-exist, or that Facebook will eventually drop this feature just as it did the last time.
We often say you rarely get buying opportunities without a little bad news. Here’s the perfect example, and we’re upgrading Trade Me to BUY again at a price up to $5.25 (with the same caveats as in Trade Me: Result 2016).
Note: The Intelligent Investor Growth and Equity Income portfolios own shares in Trade Me. You can find out about investing directly in Intelligent Investor and InvestSMART portfolios by clicking here.
Disclosure: The author owns shares in Trade Me.