This is the final part on Etsy 2.0. Basically, I’ve been looking at what has changed in the last couple of years (in terms of strategy).

In Part 2, I pointed to two things I don’t like about Etsy 1.0.

• The low frequency of usage by consumers. This creates a heavy reliance on search engines and ongoing marketing activities. Plus, other problems.
• A lack of aggressive international growth. It has been way too focused on the US and UK. This limits its network effect among other things.

For Etsy going forward (which I call Etsy 2.0), the value proposition for consumers is focused on:

• The breadth and quality of seller items).
• The ease of finding items (i.e., convenience and user experience).
• Marketing effectiveness.
• Person-to-person commerce experience.

That last one that is compelling. Etsy 2.0 Is a lot about increasing human connections and differentiation, which I discussed in Part 2.

But Etsy 2.0 is also about growth by the addition of marketplaces.

Should Etsy Grow by Advantages or by Size of Opportunity?

Etsy has recently acquired three other marketplace platforms. This, plus their core Etsy marketplace, is now called their “House of Brands”.

And it’s a really interesting growth strategy.

As mentioned, I don’t like the lack of focus on international growth for Etsy 1.0. I think they should have been growing aggressively internationally for a long-time. They could have done this with partnerships (like Amazon did). They could have done this by making minority investments (like Didi did). Or they could have gone direct (like Uber did).

Those would all have been approaches for growing the core business internationally. And growth is one of the big problems of a specialized ecommerce business. By definition, you are usually in a niche. So, you usually run into a limit on the growth of your core business.

How you break out of that and re-ignite growth is an important question.

• Do you continue to adapt your core business? Adding new customer types? Adding new geographies?
• Do you jump to a growth adjacency? You can sell new products to the same customer base. Meituan and Alibaba both did this by jumping into hotel bookings.
• Do you try to leverage your core capabilities into a new business? Maybe you use your warehouses as a new logistics business? Alibaba and JD have both done this. Or you turn your servers into a cloud business? Which AWS did.
• Should you just go for a completely new opportunity?

You can see a trade-off between two questions.

Do you go for the largest growth opportunity?

Going after the biggest opportunity is attractive but, without an advantage, you have a higher probability of failure. Elon Musk went from PayPal to rockets to electric vehicles. He had no major advantages in these. But they were huge potential opportunities (if he succeeded).

Do you go for where you have the biggest advantage?

Having an operational advantage (such as a common technology or customer base) dramatically increases your probability of success. Restaurant chains buy other restaurant chains. But what if there are not major opportunities adjacent to your business? Ride-sharing giant Grab could go into bike-sharing and boat-sharing. But there really aren’t many great transportation opportunities after you have the ride-sharing business (and food delivery).

I asked the President of Alibaba this growth question once. He said they choose opportunities based on where they have a strong advantage. Size of the international market (India vs. Indonesia) was a secondary factor.

Choosing the next growth strategy is not an obvious question. And this is especially true for specialty ecommerce players like Etsy. Unlike Alibaba, they have limited resources and can’t make a lot of bets.

Etsy came up with an interesting answer to this growth question – which is.

Etsy 2.0 is leveraging their marketplace playbook and expertise to build completely different marketplaces for other non-commodities.

Let me explain.

Etsy Is Going for Growth by Adding Marketplace Platforms with Similar Characteristics

Two of Etsy’s new marketplaces don’t relate to their core platforms. And Etsy doesn’t have big operational advantages in these businesses.

But these new marketplaces have very similar characteristics to Etsy. They have unique sellers and inventories. Like with Etsy, the inventory is not easily standardized by SKUs.

But the management has expertise and a proven playbook for these types of non-commodity marketplaces. That’s really interesting.

Here are the three platforms they have invested in.

Reverb

Launched in 2013 and headquartered in Chicago, Reverb is a marketplace for musical instruments – including new, used, and vintage instruments. Their buyers are both professional musicians and beginners. Their sellers are local music stores and large retailers.

So, this is clearly a marketplace business model. And it has the same unique characteristics as Etsy. The products are unique and not the kind of inventory you would find on Amazon. Think new, used, and vintage saxophones, pianos, and trumpets. Think clarinets and trombones. Like with Etsy, the key is building a large and unique inventory of sellers and products.

There also a lot of creativity and style on the consumer side for this platform. Musicians build collections of instruments that have meaning to them. They can look for one special instrument for a long time. They play their instruments for years and decades. This has a lot to do with inspiration.

And because the products are non-standardized, Etsy needs to create a lot more trust for the marketplace to function. Used and vintage gear has lots of additional concerns that must be overcome.

Recall from Part 1, my 5 questions for viable specialty ecommerce businesses.

1. Is the company sufficiently differentiated in the user experience?
2. Can the company compete and/or differentiate in logistics or infrastructure without ongoing spending?
3. Does the company have a strong competitive advantage in a circumscribed market?
4. Is there a clear path to significant operational cash flow?
5. Has the company avoided markets and situations that are attractive or strategic for the major ecommerce companies?

Reverb has a strong answer to question 1. The company is sufficiently differentiated in the user experience. And for question 3, it has a network effect. Reverb is a compelling specialty marketplace business. Just like Etsy.

depop

This business was founded in 2011 and is headquartered in London. It is a marketplace for the resale (i.e., pre-owned) of apparel in the US and UK. It’s the site where you can buy and sell unique clothing items. These can be from your closet. Or purchased from local thrift shops or elsewhere. As of 2021, Depop had +21 million users, the majority of of whom were under the age of 25.

It is another marketplace for unique and non-standardized items. Consumers care about apparel, and it is about “discovering and celebrating style”. And, again, you need a lot of trust in the marketplace to buy used and vintage clothing.

Elo7

Elo7 is their newest acquisition. It is basically the “Etsy of Brazil”. This is just a geographic expansion of their core business.

Etsy is Growing Based on Expertise in Marketplaces and Marketing

Across the 4 marketplaces of their “House of Brands”, you can see:

• Unique inventories and seller types
• Creativity, community, and special values associated with the products.
• Marketplace business models that require.
  • More sophisticated search and discovery
  • Strong brands and other factors to provide the increased trust.
  • Performance marketing.
  • Unique seller services.

But Etsy does not appear to be leveraging their current customer base much. And they don’t appear to be tying these businesses together (yet) operationally.

What Etsy is doing is leveraging their expertise in platform building and performance marketing.

Those are the two key skills management has. That is what they used to build Etsy. And they are trying to repeat as much as possible what they did with Etsy. They are sharing best practices and talent across a collection of separate but similar businesses.  In practice, that is mostly about being really good at specialty marketplace building. And at performance marketing.

I like this strategy. It reminds me of Bic pens. Another business I like.

Bic is a particularly good business that is a strange collection of three unrelated products (pens, lighters, razors). They are different products but have very similar characteristics. Pens, lighters and razors are all:

• Cheap.
• Available everywhere.
• Disposable and need to be replaced regularly.

Those characteristics, like the unique characteristics of Etsy, make for good products and good businesses. Bic is selectively targeting products that are profitable and defendable. All three of these products are:

• Cheap. Nobody thinks much about what pen or lighter to choose. They are so cheap that you just don’t care. So, people buy the same one over and over. And there is no way to break into the market with a competing product because these are “mindless” purchases.
• They are available everywhere. Where do you buy a lighter when it runs out? You walk into the any nearby store and grab one.
• All their products get used up. Ink and pens run out. Razors go dull. You have to keep buying them over and over.

These three characteristics make these products attractive businesses.

Etsy has a similar strategy. The specialty marketplaces they are targeting all have characteristics that make them attractive businesses. That is a good way to go for growth. I like this approach.

Last Point: TikTok Shop and Short Video Are Big Problems. Etsy’s Core Needs to Adapt ASAP.

Going after growth adjacencies is important. But growing and adapting the core business is critical. And it looks like Etsy’s core business has failed to adapt. This is a major concern.

As mentioned, Etsy has low consumer engagement and frequency. As a result, they have to:

• Do a lot of brand and performance marketing.
• Constantly focus on churn, retention, and reactivated buyers

They are also dependent on a small number of power buyers, which they call “habitual buyers”.

This has long been a weakness of Etsy’s core business. But I think the problem is bigger. Etsy has just been very slow to innovate in the user experience. It’s 2024 and Etsy still:

• Has no video. Neither short video nor livestreaming.
• Has no real social and community functions.
• Has no gamification.

Compare this to Alibaba and Pinduoduo, which are very good at innovating in the user experience (both for buyers and sellers). Alibaba explicitly says that rapidly improving the user experience is a strategic imperative. In the brutal China market, improving the user experience is how they continually increase value and stay ahead of the competition.

We don’t see much of this at Etsy. In fact, the website and mobile app look like something out of 2012.

I have been harping about how lethargic and crappy US-based ecommerce is. And for most businesses (Amazon), they can get away with this because their business model is so strong. But for specialty ecommerce, there is far more risk from this. And when the emerging technology starts to impact the core value proposition, it’s a huge issue.

That’s what is happening with TikTok Shop and the merger of video and commerce. Etsy is focused on person-to-person interactions that make their marketplace more human. That’s exactly what video does. We already see small business and solopreneurs using video to compete with larger sellers.

I think the core Etsy business is now at risk. The lack of video and international connections is a big opening.

• What happens when TikTok Shop starts targeting craft sellers and providing them unbelievable video tools?
• What happens when an enterprising Chinese ecommerce site connects artisans from Asia with US consumers? What happens when the Shein of crafts appears?

That’s what I’m watching for.

That’s it for Etsy.

Cheers, Jeff