“There's a very special role for a site like Etsy in a world that's becoming more and more commoditized." - Josh Silverman, Etsy Investor Day, 2019

A scaled two-sided digital marketplace is a rare commodity. The network effect typically leads to a winner-takes-most dynamic where market leaders are significantly larger and more profitable than competitors. Etsy had a taste of such profitability last year; GMS grew 100% to $10bn and the company generated $600m FCF, a ~35% FCF margin. The underlying quality and economics of a marketplace at scale are clear; the big question we have been focused on is just how big Etsy can get? We interviewed a Former VP at Etsy to understand the GMS opportunity and potential limitations to scale.

As with any e-commerce business, understand the threat from Amazon is essential. We only need to look back to 2015 when Amazon launched Handmade, an online shop for craftspeople to sell to Amazon’s customer base. The executive shares insight into why Amazon wasn’t a threat to Etsy:

"I would say that Amazon did not invest in the Handmade brand to set expectations for consumers that you could go to Amazon to find unique items from a real person. That's just not what your expectation of shopping on Amazon is, and that's not what they've been focusing on. If you haven’t created that permission structure for the brand, it’s just not going to exist. Also, they haven't necessarily invested in it from a pure product and buying experience perspective. It's hard to find Amazon Handmade, and when you're in there, it feels like Amazon, for the most part..they haven't invested in it as a destination for people to find unique items from real people, and that just isn't, in my mind, what consumers are thinking about when they think about Amazon."

Amazon didn’t ‘create the permission structure’ for Handmade to exist. It didn’t have consumer mindshare in handmade goods. Both Amazon and Etsy were built to exist in a certain part of the consumer’s mind; Amazon is the online ‘everything store’ and Etsy is built for individual entrepreneurs to sell unique, handmade products online. When a company already owns a certain space in the consumer’s mind, it’s very difficult to change.

Amazon didn’t invest enough for Handmade to truly exist. Over 30% of Etsy’s products are customisable and in 8% of transactions the buyer directly engages in conversation with the seller. The functionality to facilitate such transactions on Etsy is very different to Amazon's frictionless, one-click purchase mentality. The listing pages on Handmade look similar to a core Amazon product page and the seller chat button leads to Amazon’s standard chat bot. The Handmade shopping experience does not foster the human connection that Etsy is built upon. Although Amazon may offer sellers access to huge demand, it’s fundamentally a very different proposition for both buyers and sellers.

But how could the threat of Amazon change at scale? Handmade was launched in 2015 when Etsy had ~$1.5bn GMS. As Etsy scales to $20 or $30bn GMS, how could Amazon compete? Is it even worth their time? In 2020, Amazon’s net income was over double Etsy’s GMS. We believe if anything is going to move the needle, it’s likely grocery or healthcare - not designing a ‘high-touch’ buying experience for handcrafted products.

Etsy’s strength is Amazon's weakness: a unique selection and a differentiated shopping experience. The company mission is ‘Keep Commerce Human’ and the whole experience is optimised to share the seller’s unique story. Everything is built around human connection and unique selection. This is Etsy’s permission to exist. As soon as they lose this, they lose their identity.

eBay could be a good case study for understanding how Etsy could evolve. eBay’s product selection shifted from second-hand goods to a broader assortment including first-party inventory from larger retailers. Arguably, eBay lost its point of differentiation. Excluding COVID-benefits, eBay’s GMV has been stalling around $80-90bn and ~160m active buyers. In 2020, Etsy generated $10bn GMS from ~90m active buyers. What is the true GMS opportunity for Etsy’s handmade goods relative to eBay?

In 2013, eBay generated $75bn GMV; $9bn from clothing, $12bn home furnishings, and around $15bn in other Etsy categories. Over $17bn GMV was from cars and parts and ~$20bn from consumer electronics. The shift into first-party inventory led eBay to compete directly with Amazon. This is usually never a good idea. However, at such a scale, for eBay to continue growing, it’s difficult not to bump into Amazon when selling commoditised general commerce.

Is the lesson for Etsy to stay true to its point of differentiation? And how does this lend itself to scale? There is still a lot of room for Etsy to grow in existing categories: in 2020, Etsy generated $3bn GMS in home furnishings, $1bn in clothing excluding Depop, and ~1.6bn in jewellery. However, what really is a reasonable 10-year GMS target for handcrafted products? Could Etsy reach $40bn - $50bn GMS?

Etsy faces very different threats than eBay did in the 2000’s. This comment from our interview was particularly interesting:

"I suppose the threat, if it were to materialize, is you could have this big Shopify with their seller and retailer base somehow find a demand channel for that. Could that be partnering with Facebook? Could something happen on Instagram? That could be a threat. It's something to keep an eye on. I think it would be challenging for them because those partnerships have to work, and probably more significantly, the purchase intent on those platforms has to exist and be cultivated. There isn't a lot of evidence yet there. Yes, on Instagram, you have commerce happening, and they're finding ways to support it in a more structured manner. You can imagine something similar on TikTok, but does it work at scale? That's an open question."

Sellers can run their own e-commerce store on Shopify but finding buyers remains the big problem. A Shopify partnership with a channel that has aggregated demand, like Facebook, TikTok or Youtube, could be a potential threat to Etsy. However, these channels still need ‘permission to exist’. Facebook and Youtube already have well established use cases and consumer mindshare. A Shopify-Facebook partnership could face the same problem of Amazon Handmade: changing the consumer purchasing intent and user journey is very difficult.

The threat of scaled vertical-specialists like Wayfair is also a risk:

"the other competitive threat is you have lots of category-specific players. I mentioned Wayfair in terms of home furnishings. Depop was – and still is – a category-specific marketplace, for apparel, and Etsy was selling vintage apparel. Vintage was one of Etsy’s first three main categories: handmade, craft supplies, and vintage. Suppose you were to have more category-specific players come up competing in one of Etsy’s big six categories and you had enough of those players get to scale and be successful in chipping away at Etsy, then that could represent a competitive threat. "

Although category specialists can’t replicate Etsy’s offering, they chip away at Etsy's potential GMS. The external limitations to scale for Etsy notwithstanding, the company has a huge opportunity internally to grow GMS by improving repeat buying. Only 50% of Etsy’s customers buy again the following year. Of Etsy’s $10bn GMS, 17% comes from new buyers that spend $46 on the first purchase, 40% from habitual buyers who spend around $500 per year, and 43% from repeat buyers.

Repeat purchasing is a high priority for management; in the last quarter, Etsy reported a 22% increase in GMS per active buyer although the percentage of repeat buyers remains around 50%. Repeat buying has been very tough to improve in the past:

"I think it's interesting that they are talking about frequency in those terms and not purchase days per year, which is historically what we talked about. They talked about it in an earnings report a couple of years ago, and I think they held it up as a big win. I think they moved it by 1%. It's so small, but even if you do small movements, they are significant. But they stopped talking about it in that term with that metric. Can it be done? Nothing's impossible. Did we ever see success in moving that metric? No. While they have been reporting on that specific metric, have they moved it? Not too much. But have they seen growth in other things, such as proxies for frequency around repeat buyer growth and habitual buyer growth? Yes, there's something there."

The repeat buying percentage is a core metric we are following to measure Etsy’s execution. There are over 80m listings of non-standard SKU’s tagged and uploaded by sellers. This is an advantage but also a huge challenge to produce relevant search results that drive conversion. New initiatives such as discount coupons, higher mobile app penetration, and search and discovery improvements all aim to drive repeat purchasing. If Etsy can improve repeat buying closer to Elo7's 60-65%, this will drive significant GMS growth at high incremental margins. If they can’t move frequency, Etsy will continue to recruit 50% of the customer base each year just to stand still.

The step-change in Etsy’s scale from COVID has fundamentally changed the business; over the last 12 months, 40m new buyers have been introduced to Etsy and the market value has increased 2x in 1 year and 4x in 2 years. By our rough numbers, at a 20% take rate and 30% FCF margin, the market prices Etsy reaching $30bn GMS in 2026 and $48bn in 2030. At such scale, Etsy would generate $1.8bn and $2.8bn in FCF in 2026 and 2030, respectively. Etsy has a great management team rolling out many incremental improvements to search, brand marketing, and the overall shopping experience that could potentially drive growth beyond $48bn in 2030. However, in 2026, even if growth is flat and the multiple derates, the underlying FCF generation means Etsy can optimise the capital structure to squeeze out a healthy return with little growth. We will continue to follow Etsy closely and plan to cover eBay soon.