Trademe Cars to Buy

Imagine joining eBay, Seek, Carsales, and REA Group together and you can picture the huge dominance that classifieds-cum-marketplace website Trade Me has achieved in New Zealand.

Trade Me Cars was founded in 1999 by Kiwi entrepreneur Sam Morgan as an eBay-style online marketplace. After establishing a leading position in general goods auctions, Trade Me quickly added car sales, property listings, and finally employment classifieds.
This rapid progress allowed Trade Me to capture dominant market share in general merchandise, car sales and property, while also establishing for itself a solid second-place position in employment classifieds (behind Australia's Seek).

The fattest margins in all the land

Trade Me's dominance makes it one of the most profitable companies in Australasia. In its most recent annual results, Trade Me reported operating profit margins of a jaw-dropping 65 per cent and net profit margins of an astounding 44 per cent. The company's balance sheet is in great shape too, with debt to equity at a low 25 per cent. On top of its immense profitability, Trade Me has had a long history of growing sales, compounding annual sales over the past 5 years at a strong 13 per cent. This revenue growth has been fuelled in large part by the long-term tailwind of increased online shopping, and advertising shifting from print to digital.

The company has also boosted revenues by flexing its muscles on pricing. Trade Me has used its strong market position to raise the fees that it charges to sellers in its various marketplaces.

The real estate revolt

But Trade Me could be losing some of that pricing power muscle. In November 2013 Trade Me pushed through significant pricing changes for its property listing business. Real estate agents would be migrated from a flat bulk-pricing model, to a per-listing fee. Trade Me hoped to capture more revenue from high-volume agencies by charging for each individual listing. The move was intended to set the stage for Trade Me to gradually raise those per-listing fees over time, as it has done elsewhere.

But many real estate agents revolted against the move, switching thousands of their listings to an industry-owned rival. Trade Me finally buckled in July of this year, allowing some agents to remain on a bulk-pricing model.

Trade Me will be able to recover from the short term damage caused by lower property traffic. But the failure raises questions over how much pricing power Trade Me really has, and whether the company could face a similar backlash in other business units such as car sales.

Amazon: King of the jungle

Trade Me may be the 800-pound gorilla in New Zealand, but on a global scale it is just a minnow.

There are rumors that Amazon could soon enter Australia directly. Amazon already operates an Australian website, but has not built out its warehousing infrastructure here yet. Once it does, online delivery times will fall substantially, removing a key barrier that has protected Australian retailers thus far.

The same threat applies to Trade Me. Once Amazon sets up camp in Australia, the shipping time for goods to cross the Tasman will plummet, and the range of relevant products will expand. After securing Australia, Amazon may even decide to jump the final hurdle and put boots on the ground in New Zealand.

Trade Me could pre-empt this threat by imitating Amazon's model and investing in warehousing and fulfilment centres of its own. But to do so would mean slashing those fat profit margins that the company has come to love.

It is a classic innovator's dilemma. Trade Me must face lower short-term profitability if it wants to protect its business in the long run. If there is one global hyper-competitor that has proven time and again that it is willing to make that trade-off, it is Amazon.