Etsy (NASDAQ:ETSY) stock is down about 25% since it was first reported Amazon.com (NASDAQ:AMZN) would compete directly with the newer e-commerce site with its own marketplace of online storefronts for artisans. Is there merit to the market's concern?

Handmade At Amazon

Image source: Amazon.com

Direct competition?
There's little doubt that Handmade at Amazon is an attempt to woo Etsy's loyal sellers to the e-commerce giant's website. "Handmade at Amazon is a new store on Amazon.com for invited artisans to sell their unique, handcrafted goods to our hundreds of millions of customers worldwide," reads Amazon's description of the new service. It encourages artisans to showcase their "one-of-a-kind products."

Etsy's early growth has been fueled by serving a market Amazon has, so far, overlooked. Amazon's current e-commerce platform has focused on higher volume sellers and does little to appeal specifically to lower-volume sellers of handmade goods. But what will happen to Etsy now that it is actually honing in on this unique market of sellers with Handmade at Amazon?

Amazon's target market with Handmade at Amazon is well defined -- and clearly aimed at Etsy. In a list of frequently asked questions about the new service, the company defines what qualifies as "handmade."

All products available in your Handmade at Amazon store must be made entirely by hand, hand-altered, or hand assembled (not from a kit). Products must be handmade by you (the artisan), by one of your employees (if your company has 20 or fewer employees), or a member of your collective with less than 100 people. Mass-produced products or products handmade by a different artisan are not eligible to sell in Handmade.

What artisans can sell on Handmade (assuming they receive an invitation)?

"Right now, Handmade at Amazon is open to artisans who make Jewelry, Home products (Art, Baby Bedding, Bath, Bedding, Furniture, Home Décor, Kitchen & Dining, Lighting, Patio, Lawn & Garden, Storage & Organization), Party Supplies and Stationery," the site reads.

Etsy currently markets to a much broader range of artisans, saying on its website anyone selling handmade goods, vintage items 20 years or older, or craft supplies can sell on the marketplace. Notably, however, Amazon says anyone selling handmade categories that doesn't fit into its currently listed categories shouldn't fret; "we are working to open up more categories in the coming months."

It probably won't be long before Amazon at Handmade is available as a direct alternative marketplace to the majority of Etsy sellers.

Handmade at Amazon is not Etsy's demise
But despite the two service's similarities, Handmade likely doesn't spell doom for Etsy. Here are a few reasons why.

Etsy's user base is loyal. Even though Amazon's reach and experience in e-commerce are unmatched, it won't be easy to convince Etsy sellers to stop investing in their online store on the service. Users are already demonstrating loyalty to the marketplace.

Etsy Home Page

Image source: Etsy.

For instance, about 32% of active sellers and 45% of active buyers as of the end of 2011 were still active sellers and buyers, respectively, three years later, Etsy said in its S-1 filing. Or here's another way to look at Etsy's loyalty: about 79% of Etsy's gross merchandise sales, or GMS, in 2014 represented repeat purchases by Etsy buyers, and more than 99% of this GMS represented a repeat sale for an Etsy seller.

Etsy's network is attractive enough to encourage a high level of user and seller retention.

Etsy's fees are lower. While fees as a percentage of the selling price on Handmade are lower than Amazon's other seller categories on its normal e-commerce platform, they're still significantly higher than Etsy's artisan-friendly fees of just 3.5%. Amazon deducts a 12% referral fee on each sale on its Handmade platform.

There's room for other platforms. There are significant tailwinds driving Etsy's addressable market. Consider some of these catalysts for Etsy's target market of sellers and buyers. 

  1. The rise of self-employment and freelancing.
  2. The increasing importance of small-batch manufacturing.
  3. A growing emphasis on ethical manufacturing.
  4. The continuing growth of e-commerce in general.
  5. Growing conscientious consumption.

In light of these these growth drivers for lasting growth in Etsy's total addressable market, Etsy will probably grow even if Handmade is a success.

It may be wise to show some skepticism toward Etsy's growth potential, but to imply Amazon at Handmade is poised to put a cap on further growth, or even to erode Etsy's user count, would mean ignoring current trends and facts that support a compelling case for a likely optimistic future for Etsy.

Daniel Sparks has no position in any stocks mentioned. The Motley Fool owns and recommends Amazon.com. The Motley Fool owns shares of Etsy,. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.