Trade Me has added at least $3 billion to the NZ economy

A persistent, err, troll over at Bernard Hickey’s blog post on Trade Me and Australia asks an interesting question: 

“How is Trade Me a productive NZ asset?

The answer requires just a little bit of economics, and it is really quite amazing.

First – Trade Me sold for $750m, and the money was paid to New Zealand shareholders. So you can easily say they created $750m of economic value for those shareholders. Many of those shareholders are now investing their time and wealth in new businesses or charities based in New Zealand, and so the economic value creation goes on.  (1)

Second, Trade Me has build a new marketplace, creating value for new buyers and sellers. Let’s look at the (estimated) 50% of goods that sell on Trade Me that are second hand. 

We have 540,000 more Listings each week  

Trade Me has 1.24 million listings right now, implying that they have about 600,000 2nd hand items for sale. (2) The default action period is 7 days, so let’s assume that there are 600,000 second hand items listed each week. 

Before Trade Me the market was found in the free classified listings newspapers – Trade & Exchange. I’m estimating that the free newspaper classifieds had, in their heyday, about 20,000 listings per big regional paper, and they had say 3 equivalent big regional papers.(3) That’s about 60,000 listings each week. 

We have $5m more sales each week

Let’s assume that the Trade Me and old time newspaper listings sell at the same sell through rate of 25%.(4)  Therefore under the newspaper regime we had 25% x 60,000 = 15,000 items sell each week, and with Trade Me we have 150,000 items selling each week.  That means New Zealanders are now buying and selling 135,000 more items between each other than we used to. If the average sale price is $50 (excluding cars etc.) then that’s $6.75m per week of additional 2nd hand trade.

That second hand trade was not happening before, so where was it in the past? I suggest that the items that are now being sold were then sold in garage sales, or given away or thrown away – either immediately, or eventually. Mostly I suspect they were thrown away or sold for almost nothing at a garage sale. Let’s say $1.75m worth was given away or sold far too cheaply in garage sales (5) each week, leaving $5m per week of items that would otherwise have been thrown away.  

That $5m per week is say $250m (6) each year of revenue that is going to the former owners of those items – money that they would not have received before Trade Me existed. 

Moreover that $250m is an increase in recycling of items in New Zealand. That’s pretty impressive.

$250m a year is about $2 to 3.5 billion of net present value to New Zealand, depending on how you value the future flows. Add that to the $750m (7) from the sale and Trade Me has added $2.75-$4.25 billion to the New Zealand economy – let’s call it “at least $3 billion” in net present value. What’s particularly great is that all of this money has gone to household rather than big businesses.

But there is more.

Third – Trade Me lessens deadweight loss

Trade Me offers a much clear marketplace than the old car magazines (auotrader) and newspapers. We dealt with the newspaper market above, but the car market is a different story.

With Trade Me the number of people viewing each car advertisement has risen significantly versus Autotrader’s magazines, and the quality of those advertisement has also improved. Also viewers of that advertisement are able to compare all other listings for that same model of car (including recent historical listings) and can therefore derive a much better market price.

The market price is much more informed (closer to “perfect”), and so buyers are less likely to over pay, and sellers are more likely to receive a fair price. Thus Trade Me is removing distortion in the marketplace, and that distortion was economic loss. I’m not going to attempt to value that economic loss difference (or that for property), but I suspect it would be a figure on par with the $3 billion above.  

We have also not considered the new goods selling without rental and other overheads, the reduction in advertising costs and the ability for small businesses to form and start selling quickly and profitably.

What do you think? What is missing?  

Notes under the fold

The point of this exercise is to get the approximate  size of the economic value added, not to get it absolutely right. While I have access to some historical Trade Me numbers I have deliberately not referred to them for this post, nor for the same reason have I tried to make the numbers too precise. If someone wants to do so then it could make a nice journal article.

(1) You could argue, as I did at the time, that Trade Me’s shareholders could have got more money if they had waited. Indeed – they may have been able to sell for say $1 billion a year or so later. But then again we didn’t know whether a 2001-type market crash would come during that year or two (e.g. housing prices were already pretty high) and so the shareholders made the right decision and took the deal on the table. As things turned out they may have left a little behind, but then the financial events of 2008 could well have happened in 2007, and they’d be looking at a much lower valuation right now.  Meanwhile purchaser Fairfax acquired debt to purchase Trade Me, but Trade Me is one of the few well-performing parts of the business.

(2) It may be higher, but a lower sell through rate would compensate.

(3) Actually I have no idea how many separate geographic editions of Trade and Exchange there were, and what the overlap was of listings between editions. I am assuming 4-6 editions, but that 3-4 of them were fairly slim, and that 3 larger regional ones would also take account of listing overlap. If someone knows the actual numbers then I’ll update everything above.

(4) This is a big assumption. 2nd hand sales should have higher sell through rates on Trade Me as new sales would more often be for buynow=reserve and they have a cost price to beat before they will sell. A percentage of free newspaper ads are relisted each week, and of the ones that do not relist many will not sell. I am 90% confident that the free listing sales % was in the rather wide 15-40% range. Again – the point of this exercise is to get a rough figure, so we will go with what we have. If anyone has a fact based number, then let me know.

(5) A garage sale is a poor market, as there is only one seller, and buyers come in one at a time. This means that prices were often too low (too high and they didn’t sell), especially at the end of the day. A working motor-mower sold by my Dad for $1 springs to mind.  

(6) We’ll give the traders Christmas and New Year’s weeks off.

(7) actually it should be 750m X 2.5 years of return to bring it to present day values. We’ll stick with $750m given recent financial events.

Published by Lance Wiggs


2 replies on “Trade Me has added at least $3 billion to the NZ economy”

  1. Thanks Lance for putting this out there, TradeMe does get a lot of flack and this will help to clear the air, however I suspect there is a lot of the ‘tall poppy syndrome’ behind the majority of criticism.


  2. Many charity organizations seem to have higher prices, perhaps due to a reduction in donations, which are possibly auctioned on Trademe. Used infant clothes appear to be a prime example, though I guess it widens the market geographically for buyers throughout NZ…


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