Company. Etsy: Building an Internet Marketplace in the Shadows of eBay and Amazon
Oct 23, 2023
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This podcast covers the founding history of Etsy, issues with the founder, turnaround under new CEO Josh Silverman, improving the buyer experience, how Etsy makes money, the impact of Covid-19 on ecommerce, international opportunities, capital allocation and acquisitions, competition with eBay and Amazon, and analyzing Etsy's growth and return on invested capital.
Under the leadership of CEO Josh Silverman, Etsy has experienced significant growth and has doubled its buyers to over 90 million with revenues reaching $2.7 billion in 2022.
Josh Silverman focused on improving trust, reliability, search, and marketing initiatives to enhance the buyer experience and drive growth.
Etsy aims to increase buyer frequency and average order values by improving trust, enhancing the search experience, and leveraging marketing initiatives.
Etsy generates revenue primarily through marketplace fees, including listing fees, transaction fees, commissions, and advertising fees.
Deep dives
Etsy: From Homemade Marketplace to Global Growth
Etsy is a homemade marketplace where artisans and craftsmen sell their unique goods. Under the leadership of CEO Josh Silverman, Etsy has experienced significant growth. In 2019, they had 44 million buyers and $800 million in revenue. By 2022, buyers had doubled to over 90 million and revenue reached $2.7 billion. The COVID-19 pandemic contributed to Etsy's boom, with face masks becoming a top-selling item. However, buyer growth has stagnated in recent years, highlighting the challenge of retaining new customers. Silverman focused on improving trust, reliability, search, and marketing initiatives. He implemented programs like Star Seller, purchase protection, and Etsy ads to enhance the buyer experience. Etsy's revenue is primarily generated through marketplace fees, including commissions on sales and advertising fees. Despite challenges and stock market volatility, Etsy has maintained a strong position in the e-commerce market.
The Impact of COVID-19 on Etsy's Growth
During the COVID-19 pandemic, Etsy experienced explosive growth due to increased online shopping and demand for unique handmade items. The platform attracted new buyers, and their revenue and operating income margins soared. However, as pandemic-related demand subsided, buyer growth stagnated, and Etsy faced challenges in retaining customers. Josh Silverman, the CEO, aims to drive growth by increasing buyer frequency and average order values. His focus on marketing initiatives, trust and reliability, search improvements, and strategic acquisitions have positioned Etsy for future success.
Buyer Behavior and Future Growth
Etsy's buyer behavior reveals potential areas for growth. While Etsy boasts a large number of habitual buyers, there is room to increase buyer frequency and average order values. Efforts to improve trust, enhance the search experience, and leverage marketing initiatives have been crucial. Etsy aims to move buyers from purchasing once every two years to annual and multiple purchases per year. The challenge lies in encouraging buyers to increase their spending and frequency, unlocking their potential as avid Etsy shoppers. CEO Josh Silverman is optimistic that over time, Etsy will return to positive year-over-year growth and continue to drive higher revenue.
Etsy's Revenue Model and Financial Performance
Etsy generates revenue mainly through marketplace fees, including listing fees, transaction fees, commissions, and advertising fees. Their take rate increased from 3.5% to 6.5% under Silverman's leadership. With $13 billion in Gross Merchandise Sales (GMS), Etsy achieved a 20% take rate. Financially, Etsy experienced significant growth, with revenues reaching $2.7 billion in 2022, compared to $800 million in 2019. However, it's important to note that Etsy's growth was heavily influenced by the unique circumstances of the COVID-19 pandemic, and the company will need to overcome challenges such as buyer retention and maintaining growth in a post-pandemic world.
Increasing average frequency of buyers
The average frequency of buyers on Etsy has shown an increase from pre-COVID to post-COVID. This suggests that more people are making repeat and habitual purchases on the platform, indicating some success in the initiatives to improve frequency.
Challenges in driving buyer behavior
Etsy faces the challenge of getting buyers to think of the platform and make purchases at the right time. Despite being a well-known marketplace, buyers struggle to associate Etsy with specific purchase occasions. The company is focusing on home, style, and gift categories and running national advertising and brand ads to address this challenge.
Acquisition strategy and challenges
Etsy has made both successful and unsuccessful acquisitions. The acquisition of Reverb, a musical instrument platform, has shown positive growth and integration. However, the acquisition of D-pop, a Gen Z-focused used apparel marketplace, resulted in a significant impairment charge. The success of future acquisitions will impact the company's performance and capital allocation decisions.
In this episode of The Synopsis, we cover everything from Etsy’s founding history and early strategic errors to how Josh Silverman quickly reaccelerated growth and improved profitability after several years of sagging performance. We dovetail into what makes the platform unique and how Etsy has been able to succeed where both eBay and Amazon failed. We draw on Speedwell’s 79 page report to teach not just about Etsy, but also help investors learn about how great CEOs run a business.
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Show Notes
(0:00) Intro
(0:54) Founding History
(3:01) Where the Name “Etsy” Comes From
(6:45) Issues with Founder Robert Kalin
(10:45) New CEO, The Chad Dickerson Era
(14:02) Foolish Endeavors
(19:48) Turning Around Etsy, Josh Silverman Appointed CEO
(25:29) Identifying Where Etsy Can Improve, Initiatives to Improve the Buyer Experience
Email us at info@speedwellresearch.com for any questions, comments, or feedback
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Disclaimer
Nothing in this podcast is investment advice nor should be construed as such. At the time of publishing, one or more contributors to the podcast had a position in ETSY. Furthermore, accounts one or more contributors advise on may also have a position in ETSY. This may change without notice. Please see our full disclaimers here: https://speedwellresearch.com/disclaimer/
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