Commentary: The boom in online auctions

By Carrie A. Johnson, Senior Analyst

Online auction sales will grow to $54.3 billion--or 25 percent of U.S. online retail sales--in 2007. Retailers, portals and vendors will work to legitimize the format and attract as many consumers as possible to fuel the growth.

Just as we revise our e-commerce forecast annually, we also revise our online auction forecast based on discussions with industry executives, the latest consumer data and new online sales data. What have we found? As overall online sales keep up steady growth, so too do online auctions; they will grow from $13 billion in 2002 to $54 billion in 2007, a 33 percent compound annual growth rate.

Three primary factors drive these numbers:

• Mainstream shoppers make their first bids. Following a pattern similar to that of e-commerce adoption, auction sales have been driven by fanatics to date but will be fueled by mainstream shoppers in the future. Although just 18 percent of online North American households made an auction purchase in 2001, the number grew to 21 percent in 2002. As eBay, with its 42 million registered users, rolls out less risky formats--like fixed-price "Buy It Now" sales, which we include in our auction forecast--more shoppers will get comfortable purchasing new and used goods from small sellers.

• New categories catch on. Sales of auction mainstays like computers and collectibles still account for about half of auction sales, but some unlikely products have taken off with deal-savvy auction shoppers. For example, eBay sells a pair of shoes every 20 seconds, and thousands of brand-name apparel items are listed for sale at any given time; we've raised our projection for auction apparel and footwear sales from just over $1 billion to more than $3 billion in 2006. We've also doubled our forecast for linens and home d?cor because these unique, hard-to-find items are perfectly suited to--and are flourishing in--this format.

• Retailers shift merchandise--and marketing dollars--to marketplaces. As retailers like Home Depot, Sears, IBM and Motorola find value in eBay as a place to liquidate goods, other retailers are now considering moving marketing dollars to these performance-based marketplaces. To find new online customers at a lower cost, retailers are beginning to transfer dollars away from the big three portals: Office Depot, for instance, recently struck a marketing deal with Amazon.com for an office products tab. Look for a host of other retailers to announce similar performance-based deals with Amazon later this year that could all eventually lead to Amazon Marketplace sales of returned or overstocked goods.

Three keys to auction success
For auction sales to live up to the format's potential:

• Retailers must get on board. When the holiday season winds down, retailers stuck with returns and excess inventory should experiment with selling small lots of goods. Don't expect the format to move thousands of products--auctions thrive by creating a sense of scarcity--but do expect to recover some costs for

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goods that would have otherwise ended up in the Dumpster. Although Sears sells less than 1 percent of its total returns and refurbished items though auctions, the retailer's product recovery is 60 percent higher through the format than through jobbers.

• Portals must reshape auction strategies. As retailers shift dollars away from large portal deals, portals have no choice but to create compelling marketplaces that either compete or cooperate with eBay's and Amazon's marketplaces. America Online, which just announced that it will launch its own proprietary marketplace, can't unveil it soon enough to stop this drainage of marketing money--a strategy that MSN should replicate. Yahoo should swallow its pride, kill its own struggling auction marketplace, and strike deals with eBay and uBid to give its shoppers and more than 10,000 small-merchant partners access to these much larger and more successful marketplaces.

• Vendors must keep innovating. eBay can't police 46 million buyers and sellers all of the time, so auction software management vendors must do the job, especially if they want the business of large retailers and manufacturers. ChannelAdvisor's new service to control and block deadbeat bidders is a start, but as more and more retailers adopt the format, they'll want even more sophisticated analytics from companies like NCR Teradata that can identify behavior patterns of these offenders--and even factor those costs into item profitability analysis.

© 2002, Forrester Research, Inc. All rights reserved. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change.