Etsy's (ETSY +0.06%) marketplace has grown substantially in recent years and now almost four million sellers with over 69 million buyers around the world. The increasing popularity of e-commerce has certainly been a powerful contributor, but it's not the only reason Etsy's marketplace is growing. Here are three other reasons for the company's success.
1. Etsy's inventory
Etsy's unique inventory sets it apart from competing retailers like Amazon and Walmart. With millions of creative sellers on its marketplace, the inventory is both sizable and diverse. In fact, as of Dec. 2019, over 66 million items were listed on the platform, and those products range from home furnishings to beauty and personal care supplies.
Image source: Getty Images.
Additionally, Etsy's sellers are typically small entrepreneurs, meaning they can adapt quickly to changing demand. This makes Etsy's inventory dynamic as it can rapidly evolve to reflect the latest pop culture trends and social norms. For instance, mask sales skyrocketed during the pandemic -- over 53 million face masks were sold on Etsy in 2020 -- as thousands of sellers responded to overwhelming consumer demand.
Ultimately, this diverse and dynamic inventory is a big advantage. If you're a buyer looking for something personal or unique, there's a good chance you'll find it on Etsy. And if you're a seller looking to monetize your creativity, this marketplace is a perfect fit.
2. Etsy's technology
Improving search and discovery is a core part of Etsy's growth strategy. Since the company's inventory differs from that of many traditional retailers, both in terms of breadth and diversity, it can be hard to decipher exactly what a buyer is looking for when they search the marketplace.
In the second quarter of 2020, Etsy launched Saved Searches, allowing buyers to indicate an interest in a particular topic. This has two benefits: It alerts buyers when new products that fit the search criteria are listed on the platform, and it provides Etsy with valuable data about the buyers on its marketplace.
It has also invested in machine learning to help improve search. For example, by using data gathered from a customer's clicks, favorites, and purchases, Etsy's platform can personalize search results. In other words, if two different people search the exact same phrase on Etsy, they can get different results. In each case, the results are tailored to the their individual interests, which should improve engagement and monetization over time.
Image source: Etsy.
Finally, Etsy is also using machine learning to bring augmented reality (AR) to its platform. Right now, the company is using this technology to help consumers visualize wall art in their home, eliminating the guesswork that goes into deciding if the piece will fit the space and color scheme. Wall art is one of Etsy's most popular product categories, and this AR service should help energize sales. Moreover, management's willingness to invest in the latest technology is a positive sign for the company's future, since it underscores a commitment to growing the business.
3. Etsy's marketing strategy
In 2020, Etsy revamped its marketing strategy. Since 2019, sellers have been able to purchase search ads on the marketplace to help promote their brands. Now, the company offers an improved offsite advertising solution too.
These offsite ads will appear on popular search engines like Google (Alphabet) and Bing (Microsoft), as well as social media platforms such as Pinterest, Facebook, and Instagram. This should help bring new buyers to the marketplace, driving top-line growth. But Etsy still maintains its alignment with sellers -- merchants can opt in to the new service risk-free, and they're only charged if the offsite ad actually results in a purchase. This strategy differs radically from other marketplaces where sellers are required to bid on ad space upfront.
As a result of this aggressive marketing strategy, ad spend jumped 153% year over year to $127 million in the third quarter of 2020. However, investors shouldn't be overly concerned (yet) -- this looks like a smart investment for both Etsy and its sellers.
A final word
Investors should pay attention to Etsy's growth in future quarters, especially in regards to gross merchandise sales (the value of all goods sold through the marketplace). The company generates revenue by charging sellers transaction and payment processing fees, both of which are driven by GMS. If this metric starts to decelerate quickly, it would be a bad sign for Etsy's long-term prospects.
Likewise, investors should also watch operational expenses, especially in marketing. If growth in operational expenses is outpacing revenue growth long term, it could be a sign that the aggressive ad tactics aren't paying off.
However, with a strong growth strategy, a well-known brand name, and a big market opportunity, Etsy looks like a solid long-term investment that will reward patient shareholders.
