What You Need To Know About Etsy Before You Invest

Business Model

Etsy’s (NASDAQ: Etsy, Inc.) mission to “Keep Commerce Human” is rooted in the company’s belief that, although automation and commoditization are parts of modern life, human creativity cannot be automated and human connection cannot be commoditized.

House of Brands

Etsy operates four online marketplaces, which collectively create a “House of Brands”.

Its primary marketplace, Etsy.com, is the global destination for unique and creative goods made by independent sellers. It adopts a seller-aligned business model: Etsy makes money when its sellers make money. It provides sellers a marketplace with tens of millions of buyers along with a range of seller tools and services that are specifically designed to help creative entrepreneurs generate more sales and scale their businesses.

In addition to the core Etsy marketplace, Etsy’s “House of Brands” consists of Reverb Holdings, Inc., its musical instrument marketplace acquired in 2019, Depop Limited, its fashion resale marketplace, and Elo7, its Brazil-based marketplace for handmade and unique items. Both Depop and Elo7 were acquired in July 2021.

Etsy generated $13.5 billion of gross merchandise sales (GMS) in 2021. Of this, the Etsy marketplace represented 90.6%, and the Reverb, Depop, and Elo7 marketplaces represented 7.0%, 2.2%, and 0.2%, respectively

Business Strategy

Etsy’s strategy is focused around:

• Building a sustainable competitive advantage – “Right to Win;”

• Growing the Etsy marketplace in seven core geographies

• Leveraging marketplace playbook across “House of Brands.”

“Right To Win”

Etsy’s “Right to Win” is centered on four key elements that makes Etsy.com a better place to shop and sell.

sellers’ collection of unique items: The foundation of Etsy.com’s competitive advantage is its sellers’ collection of millions of unique items.

Unlike other more prominent e-commerce brands such as Amazon and Alibaba that sells a whole suite of products from many different categories, Etsy has carved out a niche segment for itself, where it primarily focuses on unique items handmade by creative artisans and entrepreneurs.

This is Etsy’s key value proposition – that it sells products that are not commoditised and that most of the goods sold can only be found on its marketplace. As a buyer who is looking for something particular that suits my individual tastes or accurately reflects my personal identity, I will be more inclined to purchase from Etsy. This is because unlike the goods sold on Lazada which may be too “mass-market” for my liking, I will prefer to shop from Etsy instead, where goods are handcrafted and unique.

In fact, according to a 2021 Etsy buyer survey:

• ~87% of buyers say “Etsy has items I can’t find anywhere else;”

• ~72% of buyers agree “there is no other store or website similar to Etsy;

Therefore, creative entrepreneurs choose to list their collections of unique items on Etsy’s marketplace because they believe that Etsy has built a buyer community with an interest for such unique items.

CaitlynMinimalist is the top seller on Etsy, and some of the unique items she sells include custom pet earrings. 

From the second picture, we can also see there are many personalization options provided for the buyer.

Best-in-class search and discovery: With millions of items listed on Etsy.com that don’t map to a catalog or a stock keeping unit (“SKU”), Etsy’s challenge is delivering world-class search and discovery technology that surfaces the right unique product to the right buyer at the right time in order to drive sales and buyer satisfaction.

Etsy uses artificial intelligence and machine learning to help personalize the search experience and enable buyers to more easily browse, filter, and find the items they desire.

In 2021, Etsy launched a proprietary capability called “XWalk,” a large-scale, real-time graph retrieval engine that dramatically expands the available data processed to capture semantic meaning, and to improve conversion rate, by showing more relevant inventory to buyers.

The power of human connections: What makes the Etsy marketplace special isn’t just the unique items; it’s also the stories of how those items were brought to life by the hands of real people.

Etsy buyers work with Etsy sellers to personalize or customize items to their exact specifications. One example of how Etsy is enabling buyers and sellers to engage in new, more human ways is its use of listing videos, where sellers showcase their expertise in making and bringing their products to life. Approximately 13 million seller videos were uploaded as of December 31, 2021.

Etsy believes that fostering and elevating the quality of these human connections will continue to enable it to drive buyer engagement, loyalty, and purchase frequency, thus differentiating Etsy.com from other places.

Our trusted brand: Since Etsy sellers have relatively unknown brands and unbranded items, the company aims to ensure that the Etsy brand is recognized and valued for providing an excellent end-to-end experience.

There are two key elements to being a trusted brand: standing for something that buyers understand and rely on, and delivering a purchasing experience that feels efficient and safe.

Areas for Improvement 

While Etsy has made significant progress in product development to attract and retain a larger customer base, there are still areas where customer satisfaction is low. 

On Etsy, sellers aren’t required by the platform to accept returns and exchanges or provide refunds. On the same website, I found that those who gave low customer reviews mostly had complaints about their money not being refunded when goods received were faulty. 

That being said, most customers still have positive things to say about Etsy. 

Thesis

1. Unique Value Proposition

Etsy believes that the nature of commerce is continuing to evolve: more people are choosing to purchase goods online and many consumers are looking for special items as an alternative to mass-produced goods.

Amazon, however, has made attempts to vie for market share. Amazon Handmade is a store within the Amazon framework that, similarly to Etsy, focuses on handmade products only. 

As we can see, Etsy is the clear winner when it comes to being the platform that sellers choose to sell their handmade products on.

This is even though Amazon has a much larger consumer base. On Etsy, sellers are directly targeting customers who already have strong search and purchase intent for their creative goods. In other words, buyers who visit Etsy are already looking for specific handcrafted, customized items, whereas buyers who visit Amazon can be looking for almost anything. Therefore, for individual creative entrepreneurs, Etsy is the place they will likely find their intended target audience on. 

This shows how Etsy being a focused marketplace on a niche category can actually carve out a segment out of the e-commerce market that the e-commerce juggernaut Amazon still fails to compete effectively with.

 Evaluating price competitiveness 

Sellers decide which e-commerce platform to sell on, depending on which brings them the most traffic and revenue.

Therefore, the other important factor that matters to sellers, probably second only to how much traffic they can get on the platform, is the number of transaction fees they will incur. 

Transaction fees charged by Etsy:

• $0.20 listing fee for each item listed (for up to four months);

• 5% transaction fee that an Etsy seller pays for each completed transaction

• A fee for Etsy Payments, our payment processing product, which typically varies between 3.0% and 4.5% of an item’s total sale price, including shipping

Etsy has announced that it will be increasing its seller transaction fee from 5% to 6.5%, displaying the strength of the company’s pricing power. Etsy is confident that sellers will continue to use its platform despite the higher fees. 

The additional fees will be spent on marketing strategies to raise awareness of the company’s unique proposition and to engage more people through social media and digital advertisements. This will further strengthen the network effects that Etsy benefits from.

On the other hand, Amazon Handmade charges sellers a transaction fee of 15%. Etsy is, therefore, more attractive when it comes to seller fees.

There are other e-commerce sites on that creative entrepreneurs can sell their handmade goods as well.

Facebook – 5% commission 

Shopify – basic plan ($29/month), 2.9% + $0.30 per transaction 

The seller fees incurred on these other platforms are lower than that of Etsy. However, these platforms, similar to Amazon’s mass marketplace, are not designed specifically to sell handmade items.

2. Total Addressable Market (TAM) allows for yet further expansion to occur

Etsy estimates that the online market size across all relevant retail categories for the Etsy marketplace represents a $466 billion market opportunity.

Etsy marketplace GMS only represented approximately 2.6% of the TAM. This shows that there is demand still yet to be fulfilled by Etsy.

According to Business Wire, the North American handicrafts market is expected to reach a value of $402 billion by 2024. According to IMARC, the global handicrafts market reached a value of $680 billion in 2021. 

An additional upside to this opportunity could come from further geographic and/or category expansion for Etsy.

Geographical expansion – Etsy currently focuses on 7 core geographies (United States, United Kingdom, Germany, Canada, Australia, France and India).

In 2021, 43% of total GMS was generated outside of the US. This is in contrast to 2013, where only 28.4% of total GMS was from international markets. Non-U.S. active buyers also continued to outpace the growth in US active buyers in 2021 4Q.

Furthermore, Etsy also invests in localization, particularly within its core non-U.S. markets, to create a more localized experience such as browse features and shipping filters, which has resulted in more buyers purchasing from sellers within their own country.

Etsy’s “House of Brand” marketplaces, not only represent additional revenue sources but also expand Etsy’s TAM. According to a 2021ThredUp Annual Resale Report, 40% of Gen Z and Millennial shoppers shopped second-hand fashion in 2020. And the U.S. fashion resale market is projected to double in five years to $77 billion.

And Etsy’s goal is that all four of its marketplaces will benefit from shared expertise in product, marketing, technology, and customer support, so that the sum of the whole, over time, will equal more than its individual parts. 

3. Increased Consumer Mindshare

Etsy wants to get the flywheel effect going and hence is spending extensively on marketing efforts to aggressively gain market share. In 2021, it spent 28.1% of its total revenue on marketing expenses.

As Etsy continues marketing its services as well as investing to create a better customer experience, this translates into greater brand awareness among consumers.

Etsy buyer surveys indicate that, since the fourth quarter of 2018, Etsy has nearly doubled buyers’ loyalty, prompted awareness is up 11 percentage points, and unprompted awareness is up 8 percentage points. In addition, purchase intent has grown over 100%, and visit intent has nearly doubled in that same period.

Etsy is rather popular in the US and UK, but brand awareness is still rather low in the other countries.

Furthermore, 2020 data showed nearly 50% of male consumers in the US were unaware of Etsy. Knowing this, Etsy has taken steps to reach broad male audiences.

Finally, CEO Josh Silverman has an ambitious goal for Etsy to be the starting point for consumer’s e-commerce journey. 

Key Metrics

GMS

GMS had a compound annual growth rate (CAGR) of 33.4% from 2013 to 2021. Pre-pandemic, GMS was growing at a CAGR of 24.3% from 2013 to 2019.

After a very strong growth year in 2020, Reverb again grew GMS in 2021, up 16% year over year, despite other musical instruments sales channels being reopened.

Number of Buyers

For the Etsy marketplace, the number of active buyers – those buyers who have made a purchase within the trailing twelve months – has grown at a 28.2% CAGR since 2017.

GMS Per Active Buyer

One of the most useful ways to track buyer retention and frequency of purchases is to look at GMS per active buyer. You can see the progression of this metric for the Etsy.com marketplace below.

In fact, GMS from existing Etsy buyers grew 34% year-over-year in 2021 and represented approximately 87% of overall Etsy.com GMS.

New Buyers

While the growth in new buyers decelerated from the pandemic-driven peak levels achieved during 2020, new buyer acquisition remained meaningfully elevated when compared to pre-pandemic periods. GMS from new Etsy.com buyers was up 3% year-over-year and represented approximately 13% of overall Etsy.com GMS in 2021.

Reactivated Buyers

Etsy also made significant strides in reactivating lapsed buyers, generating purchases from buyers who hadn’t made a purchase in a year or more.

Habitual Buyers

Habitual buyers are defined as those who have spent $200 or more and made purchases on six or more days in the previous 12 months. As of December 31, 2021, habitual buyers grew to 8.1 million, an increase of 26% compared to 2020. The growth in habitual buyers is faster than overall active buyer growth, indicating successful efforts to convert buyers into more loyal shoppers on the Etsy marketplace.

Growth in habitual buyers in non-U.S. geographies is outpacing the U.S. growth, with 73% and 17% growth, respectively, from 2020 to 2021. Habitual buyers account for about 9% of buyers but represented approximately 45% of GMS in 2021.

Additionally, half of Etsy’s buyers are repeat buyers, and they are actually buying an average of 5x a year.

Number of Sellers

Number of sellers increased by a CAGR of 22.1% from 2013 to 2021.

GMS Per Seller

Our sellers’ growth can be measured by trailing twelve months (TTM) GMS per active seller, which has increased from $1,865 in 2019, to $2,281 in 2020, to $2,302 in 2021. In 2021, active sellers, those who sold an item in the last 12 months, grew 28% compared to 2020 and 109% compared to 2019.

In addition to the growth in GMS per seller, this seller cohort data shows that newer vintage seller cohorts on the Etsy platform are generating more GMS in their first year on the platform than prior vintage seller cohorts, and that all seller cohorts are retaining more GMS in subsequent years.

Financials

Revenue for Etsy had an average 44.1% CAGR from 2013 to 2021. Pre-pandemic, revenue for Etsy had an average 36.8% CAGR from 2013 to 2019. Revenue increased 31.2% in 2021 to 2.3 billion, as one would expect given that number of buyers, sellers, and GMS per buyer and per seller are all trending upwards.

Revenue Breakdown 

Etsy’s business model benefits from a virtuous cycle – by enabling transactions and collecting fees for its online marketplace services, it can then reinvest the revenues it collects into improving customer experiences, which will further grow Etsy and sellers’ revenues.

Revenue is generated primarily from marketplace activities, including transaction, listing, payments processing fees and offsite ads transaction fees – this initiative advertises products in sites like Google, Facebook. Sellers with more than $10,000 in annual sales are required to participate, giving Etsy a 12% future sales cut. 

Etsy also generates fees for optional seller services (which include on-site advertising and shipping labels). 

Net income 

Net income increased 41.3% to 493.5 million in 2021. This translates to a net income margin of 21.2%, definitely an impressive number for a high growth company like Etsy.

Free cash flow

Etsy’s capital light business model allows for strong profitability and cash flow. Free cash flow is positive and has been increasing steadily.

Risk: Highly Competitive Industry

E-commerce is a lucrative industry that many companies have and will continue to leverage on. Well established players like Amazon, Alibaba and eBay have not only built a strong reputation for themselves, but also have superior financial positioning they can use to their advantage. Besides the e-commerce players, Etsy is also faced with stiff competition from the likes of Facebook Marketplace, a social e-commerce platform and Shopify, a platform that allows sellers to build and deploy their own online shops.

I believe that Etsy proffers a unique selling point that really distinguishes itself from the already tried-and-tested e-commerce success story. Personally as a buyer, Etsy will be one of the first places I think of when I’m looking for a customized or personalized gift that is also unique and special.

Summary

Recently, there have been numerous concerns surrounding Etsy’s future growth, after it saw triple digit growth during the two-year pandemic period. Many investors are sceptical that such growth rates will be sustainable going forward.

While Etsy’s growth will definitely not be as high as what we have witnessed during the pandemic, I am personally confident that Etsy will continue growing at rates above that of the overall e-commerce industry. This is because Etsy has a unique value proposition in a rather commoditised market and still has lots of room to expand further.

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