Annual Report 2017

CEO's report

Dear fellow shareholder,

I aim to answer two key questions in this letter. First, why are we excited about Trade Me’s prospects? Second, how can we compete with global players like Facebook and Amazon?

To answer these questions, it’s useful to look at our history, Trade Me today, and our prospects over the short and long term.

Our history

Over the last ten years Trade Me has fundamentally changed several times over. Our revenue has grown from $80m to $235m. Our headcount has grown from 100 to 550. Now over 800,000 Kiwis visit Trade Me each day, with two-thirds of our visits via a wide variety of mobile devices.

We help those people by connecting them to undertake a transaction or enter a relationship. That might be buying or selling something on our marketplace, looking for a new car or house, or finding a job. Through this we deliver on our vision: making life better for Kiwis through online experiences they love.

There’s a lot of other good things that we’ve done for New Zealand too. We’ve created a host of budding entrepreneurs and have over 2,000 small business operators selling onsite. We’ve empowered consumers and given them unprecedented choice and transparency. We’ve saved a mountain of goods from landfills. We’ve helped a plethora of charities with direct financial contribution, support through charity auctions, and free or subsidised advertising (we field up to 40 queries a week on this front, and since 2011 we’ve had a full-time charities coordinator).

We’ve tried a bunch of things that haven’t worked too - but any regrets are centred on not trying more, or not stopping things earlier once we sensed they don’t have a long-term future.

Trade Me today

Trade Me is a vibrant and well-loved business. We have many strengths, or sources of competitive advantage:

  • Local scale. We have a large and engaged community of buyers, sellers and advertisers.  This gives us brand awareness and affection, with the strength and value of our network proportionate to the number of participants  - a key concept that underpins the attractiveness of leading marketplaces around the world.
  • Local trust. We have worked hard to earn the New Zealand public’s trust through our day-to-day actions (like our careful approach to privacy and openness, demonstrated by our annual Transparency Report).
  • Local insights. We have rare and comprehensive insight into the behaviour and preferences of Kiwis, with data that spans many people and touches so many significant life events. We’re using this information intelligently and carefully, along with the advances in data science, to improve the experience and value we offer in unique ways.
  • Breadth across New Zealand. We span a portfolio of sectors - retail, automotive, real estate, employment, insurance, services and others - with a single unified brand, platform and understanding of our customers. Through this cohesive approach, the whole is much greater than the sum of the parts.
  • Kiwi affection. Finally, we have a special place in the hearts of New Zealanders - nearly everyone has their Trade Me story, where they’ve been surprised or delighted, by finding something they didn’t think they’d find, selling something for a lot more cash than they expected, or meeting a like-minded person when completing the trade.

Our prospects

We have huge opportunity in front of us, but we also have bigger, stronger and more active competitors than we’ve had at any time in Trade Me’s history - including three global competitors making their presence felt in our local markets: Facebook, Amazon and Alibaba.

It’s easy to claim these companies are too big and too good to compete against, but if you take that outlook, we were doomed and would never have achieved our success to date. We would have been swamped by eBay 15 years ago. We’d never have grown against Seek’s dominant position when we entered the employment market, and we’d have been overrun by global free classified sites that took hold in much of the world.

So, how can we compete and grow in the face of global behemoths at one end of the competitive spectrum, and all manner of start-ups and potential disrupters at the other?

First, we need to know our customers and local market intimately, and be a better fit than any global player can. This comes from a mixture of art and science.

The science is to use our rich data to uniquely tailor our offering to our consumers, and to provide those customers with personalised, friction-free experiences. We’re hugely excited about the potential in our data, and are increasingly using machine learning to improve the lives of our users, or to improve our own operations.

The art is us building relationships through strong account management and relationships with our trade customers (retailers, real estate agents, recruiters, car dealers and other advertisers) and through good customer support for our buyers (using both people and technology).

We want to keep nurturing our relationship with New Zealand. We have a good base, having recently being named in the top 10 most influential brands by Ipsos, and most loved NZ brands by Colmar Brunton.

Second, we need to broaden our offering to be as useful and relevant as possible in a local context.

We’ve been doing this with good success already - both organically, and through acquisition and partnership.

For example, our ‘Book a courier’ service has reached 500,000 parcels sent (which amplifies a key advantage of speedy local shipping compared with offshore companies), and we’re looking forward to the launch of Afterpay onsite to allow buyers to pay in four simple instalments.

We’ve announced the intended acquisition of Motorcentral, who provide inventory management systems to dealers. This will help us provide a broader offering to our dealer customers.

This strengthens our core and better ensures we’re solving the problems of Kiwi consumers and businesses, which is tough to do with a broad-reaching global approach. Additionally, it expands our addressable market well beyond the immediate opportunity, into new markets within the ecosystems of our current businesses.

Third, we need to be fast, accurate and effective with all that we do, and especially with what we build.

We’ll never have bigger teams than our global competitors, but we’ve never had their numbers. Instead, we’ve focused on accurately building the core functionality that Kiwis need, and made our user experiences simple, engaging, trusted and enjoyable.

It’s a dirty little secret within tech companies that it’s very difficult to draw a straight line between tech effort put in, what is built, and the ultimate benefit to customers or the company. Often bigger teams are slower, more cumbersome, and less efficient.

While we apply our own creative thought, we can also see what bigger overseas peers and competitors are doing, and bring the best of it into our own plans - applying a fast-follower approach to amplify our effectiveness.

We are extremely efficient and effective as an organisation (evident in our strong margins), and we’re embarking now on our next round of organisational improvements to keep our edge.

On top of this, we’re further building out our team, and anticipate hiring approximately 50 people over the coming year. We expect that up to 30 of these will be technology roles based in Christchurch. I’m very excited about us expanding the small but high-performing office down there, and to be able to support the Christchurch economy.

Our marketplace

These three principles translate to different actions and areas of focus across Trade Me. For example, in our marketplace we are clear on our consumer proposition across the four key retail pillars of range, price, experience and trust:

  • Our broad and unique range is due to our new and used goods mix and our 200,000 monthly sellers. We have over four and a half million different items for sale, and includes uniquely local and hard-to-ship inventory that is tricky for global players to replicate.
  • Our transparent platform encourages strong price competition, and the increasing number of international sellers on Trade Me means better access to great global pricing.
  • We’re tirelessly improving buyer experience through big projects like Afterpay or ‘Book a courier’ and many incremental improvements like search and recommendations. We release improvements to our websites most days of the week.
  • We’re highly trusted but we’ve further improved Trade Me with our Buyer Protection programme. We have 24/7 customer support and strong relationships with the NZ Police and government agencies.

We’re working every day to improve each of these key retail pillars, in a way that is unique to us, that plays to our own strengths, and isn’t easily replicated by anyone - regardless of their size. We have three areas in particular that we will give a lot of attention in the coming year:

  • New goods selection. We’re bringing on sellers and inventory at a faster rate than ever before, through sales effort, aggregator partnerships and integrations with the likes of Magento and Shopify’s e-commerce platforms. This will help strengthen range and price on Trade Me.
  • Core experience. While Trade Me doesn’t necessarily look state of the art in aesthetics, we have strong suits in ease-of-use and customer engagement that have proved extremely powerful. We have a particular focus on search and “findability” which becomes increasingly important as we bring on more inventory.
  • Building preference. It’s important that buyers think about Trade Me as their first option for online purchases. We are making plans around subscription and loyalty, and talking with a range of potential partners though it’s too early to give a firm steer on our intentions just yet.

With speedy and accurate execution in these three areas, along with the continuous improvement across the board, our Marketplace will keep growing in activity and relevance for New Zealanders.

In financial terms, new goods on Trade Me is a relatively small part of our business at around 11% of our revenue. We do expect to keep growing Marketplace revenue, however that growth is likely to come in waves, produced by our bigger initiatives, with lulls in between those waves.

We also see a lot of growth in the wider market. Online retail is only 8% of total retail in New Zealand, and greater activity from global players will accelerate growth in online retail for all of us. There’s a lot of headroom here - we can double the proportion of online retail and still be behind other developed countries - for example the Office for UK National Statistics reports that online retail has reached 16% of total retail in the United Kingdom.

Our classifieds

Our classifieds businesses (Motors, Property and Jobs) have been doing really well, with good consistent growth over the last few years.

The opportunity in the near term is in us better understanding our customers, and helping them better advertise their own brands and their inventory. We have great momentum with this already - with the revenue from our 'premium' promotional products to our trade customers up over 30% last year.

This helps us to facilitate the transition of advertising in print media to online - a big structural opportunity for us. For example, we estimate that at least half the money spent advertising residential real estate still goes into print media. New Zealand lags the world with this - in comparison, these days closer to 20% goes to print in Australia.

In the medium term, the opportunity is for us to build out the breadth of our offering. To continue the example of Trade Me Property, this helps us move the remaining spend that still sits in print advertising, and facilitates a shift into other interesting revenue pools such as finance, insurance, and utilities leads.

As with our Marketplace, we keep an eye out for global players in our Classifieds, and in particular see LinkedIn, Indeed and most recently Google doing interesting things on recruitment advertising. But we’re better equipped than ever to compete against them - with strong momentum in Trade Me Jobs (with revenue up 25% last year, primarily off great advertising volumes), and work afoot to expand our offering towards candidate profiles and ultimately more intelligent matching between prospective employers and employees.

The long term

We’re hugely excited at the opportunity that sits within our existing activities and the broader offering we’re building.

Beyond this, we look to other sectors where our online marketplace model may come into play, with the structural migration toward online from a traditional format. We’re particularly interested in big New Zealand markets where there are stodgy players and old-school business models ripe for transition to more efficient, transparent and democratic online platforms.

Looking beyond 10 years, there will be big changes to technology and consumer habits but our core activity - connecting people and helping them with a transaction or relationship - will persist just as marketplaces have thrived through thousands of years of human development.

We think about how our marketplaces will evolve - including things like short-term worker placement or on-the-fly renting of autonomous vehicles - and there is always that need for marketplaces that efficiently match supply with demand.

It’s our job to walk and chew gum - to provide the most value to our customers and to grow our returns to shareholders, while keeping an eye on the future and these new opportunities and threats as they develop.

We’re up to this task. It starts with having a clear understanding of our purpose and what we’re good at, and then relies on us having the culture, capacity and drive to experiment, fail at some things, succeed at others, and ultimately innovate to keep growing and stay relevant.

While we’re a lot smaller than some of our global competitors, Trade Me today is a wonderful size. We’re big enough to do things at scale and have a big impact on New Zealand. But still small enough to have good cohesion and low bureaucracy, and be a place where individuals with drive can shape the business.

We will be smart, accurate and effective. We will intimately understand our local market and our customers. We will relentlessly continue to improve our offering, while trying new things. I’m confident and excited about our prospects and the growth we can achieve.

Thank you for your continued support.

Sincerely,

jon macdonald signature

Jon Macdonald
CEO
Trade Me Group Limited