Amazon and eBay during Recession Period - Literature review Example

Introduction The recent economic performance of UK is not considered as healthy or encouraging as with the change in government and drastic cuts in public spending, the overall forecasts indicate slow growth rates. According to the estimates made by PWC, UK’s economy will grow only by 1% during 2010 however; it is expected to grow around 2% during 2011. (pwc.co.uk, 2010). Slow growth of the economy therefore has also resulted into the declining performance of many large firms due to drastic reduction in consumer spending. Consumers are however focusing more on internet as an alternative source of purchasing. During recession times, the number of consumers referring to websites like Amazon.com and eBay is increasing and people are making money even during recession also. (Gribben, 2009). However, generally the trends are not very encouraging for eBay as its profits fell during recent times and it divested from its Skype business also. (Timesonline.co.uk, 2009). The case of Amazon is however relatively different as the decline in the book sales on the high street stores is captured by online sellers such as Amazon.(Hall,2010). The profitability of Amazon has therefore risen even during the period of recession and it is generally believed that the Amazon has successfully withstood the credit crunch.(Arthur, 2009). This indicates that Amazon.com might have performed better than eBay during the recessionary period. This literature review will provide a comprehensive analysis of the performance of Amazon.com and eBay.com during the period of recession with special reference to the economy of UK. Amazon- Performance during recession Amazon just before the beginning of recession was able to post a hefty profit growth of 250% 1and continued to show higher performance in both US as well as UK markets during recession also. As discussed above that the consumers are referring to online sites like Amazon to order their book purchases. It may be important to note that other firms are gradually going out of the business due to credit crunch and it is generally because of this reason that firms like Amazon are gaining more market power and increasing sales in online retailing market. This aspect generally indicates the overall strength of the business model of the firm which is allowing withstanding the recessionary times also. Fool.com declared amazon.com as one of the five companies which have been able to resist the recession and performed better during the days of downturn in the economy. It is however, critical to note that Amazon has been able to do this mainly due to the fact that smaller companies based on brick and mortar model have failed during the recession. (Munarriz, 2010). Most of the success of the firm during the recession can also be attributed to the increased sales and acceptability of its state of the art “Kindle” which is used as an eReader for reading books on an electronic device rather than purchasing the books in physical form. This is despite the fact firms like Apple has been able to roll out their own eReaders however, the success of Kindle has not yet been replicated. Similarly, in case of EBay, it has not been able to bring out its own brand and continued to serve as an auction site. This lack of innovativeness during tough times therefore may be one of the reasons as to why EBay failed to perform better as compared to Amazon. The success of various services such as Kindle therefore allowed the firm to continue to post increasing profits and growth in sales revenue. It is also critical to note that the Amazon has entered into new lines of businesses also i.e. the businesses or segments of online businesses which it traditionally avoided. Recently it has been able to launch its online grocery store indicating its strong market position and performance during the period of recession.(Wood,2010). Amazon aims to achieve the success in this segment through forming partnerships with firms like Kraft and P&G. What is also significant to note that the success of Amazon during the period of recession is the change in its business model. Traditionally, Amazon has remained an online book retailer however, over the period of time; it has expanded itself into other areas also including consumer electronics and groceries. (forbes.com, 2010). This expansion into new areas is therefore generally believed to be one of the main reasons as to why the company was able to produce satisfactory results during the recession period. Further, it is also important to note that developed countries like UK and US also faced with the heavy snow fall during the last months of previous years thus effectively allowing online retailers to profit from the situation.(Gruener, 2008). Last year Charismas sales were mostly boosted due to this reason. This was despite the fact that many online retailers and other firms were slashing the prices in order to compete during recessionary period. The above discussion therefore indicates that during most of the recession period, Amazon was able to perform better than most of its competitors. The effective reasons for this performance are mostly due to its effective business model as well as its ability to dominate the market in most diversified manner. This also means that Amazon remained well focused during the economic downturn and performed better than its competitors. Next section of the review will provide analysis of the performance of eBay during this period and will make a comparison between the performances of two. eBay during recession The success of eBay during earlier economic downturns was believed to be rooted into the way its business model was developed. It was generally believed that with economic slow down, a bargain purchase could save more money for the consumers as compared to other means of purchase. It was because of this reason that eBay was successful in overcoming earlier economic downturn despite the fact that dot com bubble busted earlier. However, this time it may not be the case as eBay’s performance is continuously declining over the period of recent years indicating that the firm’s business model may not be as good as it was generally perceived. The case of eBay is relatively different as the continuous decline in its growth rates has also affected other segments of the business also including its subsidiaries PayPal and Skype. Recently, eBay divested its Skype business because the overall decline in sales wee relatively more and focusing on non core business of the firm was believed to be an strategic error. This fact also indicates that the overall business model of the firm may not be as efficient as it seems. This is because its own declining performance has resulted into the low performance of its other segments due to the very nature of its business model. During 2009, the revenue of the firm declined by 4% for third straight year of decline.(timesonline.com, 2009). It is also generally believed that the competition from internet services like Craigslist and Amazon.com is one of the chief reasons as to why the firm may not be able to perform particularly well.(Hof,2008). The recent performance of eBay indicate that it has performed better owing to the increase in profitability of its PayPal division and better performance in some of the European markets including UK. During the most recent times, it has been observed that eBay’s UK performance is improving as compared to its performance in other markets mostly owing to the fact that new visitors are hitting the site more frequently.(Waters, 2010). It is also important to note that there has been a gradual shift into the overall strategy of the eBay which is considered as the main reasons for the non-performance of firm during recession times. eBay started as an auction site and thrived on this idea however, over the period of time, it has started to focus more on the “buy it now” and “fixed price” type of stuff which left little bargain room for the buyers to obtain stuff at relatively cheaper price. This shift into the strategy is also believed to be the key reason as to why the firm has not been able to attract more shoppers to its site. Further the increase in the listing fees as well as the sudden and dramatic changes in the policies also resulted into the decline of the company’s performance over the period of time. It is also generally argued that the decline of eBay and its performance during the recession times is also attributed to the rise of other social networking sites such as facebook and MySpace. This is because of the fact that eBay was generally a fun and excitement place also.(Rabois, 2009). This side of argument therefore bases the decline of eBay due to loss of its entertainment and excitement value which it earlier provided to its visitors along with the opportunity to make bargain purchases through auctions. Further, it is often believed that eBay has been run in a bureaucratic style with too much restrictions and policy changes that took place frequently. Such management style therefore gradually stripped the fun element from the eBay and the rise of alternative sites such as Facebook, which has also integrated applications like marketplace into the site, started to take over. This gradual shift therefore became significant during the recession time where people along with socializing, also made attempts to buy and sell stuff. Further, there is also an element of uncontrolled selling and buying on eBay which is causing negative publicity for the site. News of buying chemicals and nail bombs which can potentially threaten human lives is emerging fast as eBay has potentially failed to restrict such trade on its site.(Britten, 2010). This therefore also culminated into the negative publicity for the site and gradual decline of the visitors. Conclusion The above discussion indicates that during the recession period, Amazon.com was able to perform better than eBay. The above literature focused on diversified range of issues which contributed towards the success and failure of both the firms during the recessionary period. One important aspect that has been unearthed during the discussion indicates that eBay lost its ground mostly due to the changes that it made during the recent years. The gradual shift into the way business was conducted by eBay pushed the customers away from the site and allowed other competitors to take hold of the market. In case of Amazon.com, it focused on its core business and continue to add other lines of business also such as groceries. References 1. Arthur, C (2009). Amazon resists the credit crunch [online]. [Accessed 16th July 2010]. Available from: . 2. Britten, N (2010). Boy made nailbombs with chemicals bought on eBay [online]. [Accessed 18th July 2010]. Available from: . 3. Gribben, R (2009). Second eBay millionaire emerges from recession [online]. [Accessed 16th July 2010]. Available from: . 4. Gruener, W (2008). No recession here: Amazon.com reports best Christmas season ever [online]. [Accessed 16th July 2010]. Available from: . 5. Hall, J (2010). Book sales hold up during recession [online]. [Accessed 16th July 2010]. Available from: . 6. Hof, R (2008). Will eBay Escape the Recession This Time? [online]. [Accessed 17th July 2010]. Available from: . 7. Munarriz, R (2010). 5 Double-Dip Recession Winners [online]. [Accessed 16Th July 2010]. Available from: . 8. Rabois, K (2009). How Facebook, MySpace and YouTube Killed eBay [online]. [Accessed 18Th July 2010]. Available from: . 9. Recession continues to hit eBay growth [online]. (2009) [Accessed 16th July 2010]. Available from: . 10. Recession continues to hit eBay growth [online]. (2009) [Accessed 17th July 2010]. Available from: . 11. The 10 fastest-growing US retailers [online]. (2010) [Accessed 16th July 2010]. Available from: . 12. UK Economic Outlook July 2010 - highlights [online]. (2010) [Accessed 16th July 2010]. Available from: . 13. Waters, R (2010). PayPal lifts Ebay’s fortunes [online]. [Accessed 23rd July 2010]. Available from: . 14. Wood, Z (2010). Amazon launches online groceries division as Ocado gears up for flotation [online]. [Accessed 16Th July 2010]. Available from: . Read More