One thing the COVID-19 pandemic has done is helped clarify which companies can easily adapt to new customer behavior and which ones fall flat in this area. 

Etsy (ETSY 6.33%), the online creative goods marketplace, has had a daily niche audience of DIY enthusiasts to back up its brand, but new management has enhanced the platform so that it's moving right along with customer tastes and demands.

Here's why these facts and others suggest that Etsy should be seriously considered as an investment.

Woman sewing.

Image source: Getty Images.

Pandemic puts Etsy model to the test

In the company's first-quarter earnings call back in May, CEO Josh Silverman detailed Etsy's opportunistic effort to mass-produce masks as the coronavirus pandemic swiftly made its way across the U.S. 

First, the company needed to recognize that there was a quickly growing product demand. Next, it realized that the standard search for masks on its site was returning holiday mask-related results, so within a matter of hours it had to rewrite search engine algorithms to generate the results potential shoppers actually wanted. Then it had to be sure there were enough masks to meet the demand, but Etsy doesn't actually manufacture anything so it had to appeal to its seller base to step up and make them. Then it needed to distribute the overwhelming demand among sellers so supply could meet it. Finally, it had to work out seller delivery times so customers would know what to expect and when to expect it. 

Silverman said this supply and demand case touched on all of Etsy's teams and it had "all hands on deck." In April, 12 million face masks were sold on the site. 22% of purchases were from new buyers, and 2.5 million were buyers who had not visited within the year. There are currently 60,000 face mask sellers on the platform.

"The reason I wanted to tell this story is because I think it really highlights the dynamism of the Etsy model and our Etsy sellers and how they're able to shift so rapidly to meet new demands," he said. I couldn't agree more.

Etsy is adding sophisticated tools

Etsy recently introduced Augmented Reality to its marketplace so people can see how a piece of wall art suits their space. With this kind of technology, Etsy moves out of the "creative" space and slides smoothly into the "artsy" space, to appeal to upscale customers who can get custom and exclusive items. According to the company, 88% of buyers said Etsy has products not available elsewhere, and this projects a different image than an amateur DIY shop. This opens up the company to a whole new consumer without alienating its core customers, who can still get their creative products. 

This is only the most recent version of the company's move into a heightened customer experience. As the seller base increased to 2.8 million active sellers, it had become burdensome to sift through the thousands of results that came up for a search term. With the marketplace's makeover, Etsy introduced a more sophisticated search system that more accurately pinpoints what a customer is looking for, which returns much better results. Not only does this increase the odds of a purchase, it makes life easier for customers, who feel better about coming back again.

These new tools paid off during the pandemic, when retail options were limited. Etsy's sales soared, with non-mask product sales up 79% for the month of April. And especially at this time, Etsy gave concerned customers a means to support small businesses, which are the meat and potatoes of its marketplace.

Teaming up with well-known names and celebrities

Etsy has made strategic partnerships with celebrities and designers to promote itself as a mainstream marketplace. 

In April, it released a home collection designed by Madison Avenue proprietor Joseph Altuzarra and produced by eight selected Etsy makers. This is the perfect marriage of high design and small business. It plays on the distinctive advantage that Etsy's marketplace can offer in an innovative way, leading to new market segments that match the company's strengths and profile.

On the heels of that launch, Etsy announced that Drew Barrymore is joining the company as a celebrity judge for its second annual design awards. This is another way to normalize the company's unique model and connect with customers who don't yet know Etsy.

The bottom line

How big can a niche company get? Very, if it focuses its energies on enhancing the customer experience, whether it's vertical growth through adding capabilities or horizontal growth such as acquiring Reverb, a musical instrument marketplace. 

Etsy didn't look quite as solid when its stock IPO took place in April 2015, but it has made important changes to both management and model in the five years since that have made it well-positioned to handle the pandemic, which it has successfully. It's continuing to leverage its digital platform to acquire customers during the shift to e-commerce and will likely see greater growth as it fulfills customers' demands.