Etsy, an online marketplace for all things artisan, from dog soap to Bernie Sanders dolls, seems to be on a roll. In February the firm was recertified as a “B Corporation,” which meets certain social and environmental standards, and reported good results, with sales last year reaching $2.4 billion, up by 24%. On April 5 the firm’s executives, flanked by succulents and a yarn bouquet at their headquarters in Brooklyn, announced a new service to help sellers build their own websites. On April 16 Etsy will celebrate the one-year anniversary of its initial public offering.

All this appears to add up to what Etsy aims for: “sustainable growth.” The company wants to make everybody involved richer: not just shareholders, but buyers, sellers, and manufacturers. It does not give quarterly guidance. It works for the long term. “We are really focused on building a business that can grow consistently year after year,” says Chad Dickerson, Etsy’s chief executive.

Yet this sunny vision confronts a glum fact. In its year as a listed company, Etsy’s share price has plunged by nearly three-quarters. Investors are happy for the firm’s goods to be produced slowly. Sales are another matter.

The firm has a big market to tap. Americans spend about $35 billion each year on handmade and vintage jewelry and other crafts, reckons Rohit Kulkarni of RBC Capital Markets, a bank. Globally, that figure rises to $70 billion. Etsy fits consumer trends like a crocheted glove. Shoppers trust about one-fifth of brands in North America and one-third in Europe, according to Havas, a marketing agency. They crave “authenticity” — none more so than Brooklyn’s prairie-booted yuppies.

Etsy offers authenticity by the gigabyte. Consumers can buy all sorts of unusual products, whether handmade or vintage. For sellers, Etsy is an alternative to craft fairs and trunk shows. The firm owns no inventory. It charges 20 cents to list a product and a 3.5% commission for each sale, as well as optional services such as shipping labels. By the end of last year Etsy had 24 million buyers and 1.6 million sellers on its site.

Etsy’s share price has plummeted mainly because the firm is not growing quickly enough to satisfy investors. Sales may have climbed by 24% last year, but this is down from expansion of 43% in 2014. Growth of revenue, active buyers, and sellers slowed last year, too. For a regular e-commerce site Etsy’s numbers may still be good, but for an online marketplace they suggest a slowing of the virtuous cycle by which more sellers attract more buyers, which brings higher sales, which in turn lures more sellers.

When this flywheel is losing speed, “it limits the company’s ability to reinvest,” says Brian Nowak of Morgan Stanley, another bank. He expects Etsy’s revenues — from commissions and fees — to grow at about the same pace as Amazon’s this year, but expects sales on the online giant’s website to rise twice as fast. As Etsy’s share price has sunk, Amazon’s has jumped by more than 50%.

Being a “B corporation,” which does not bind Etsy legally, distinguishes the firm from rivals. But Etsy’s do-good culture is not what is holding it back. It is facing more fundamental problems, says Mr Kulkarni of RBC: people will spend only so much on artisan goods, so it may be hard to coax more sales from existing buyers; and Etsy’s sellers, most of whom work from home, may have trouble making more products.

Etsy is not sticking to its knitting to boost sales. It is spending more on marketing to lure new buyers, though this has widened losses. It is helping sellers to grow. Its new website service lets them reach more buyers. And a program launched last year connects sellers with vetted manufacturers. But the competition is not sitting still either: Amazon has introduced its own crafts site, called “Handmade.” Etsy’s second year as a listed company could be even more tricky than its first.

©The Economist Newspaper Limited, London (April 16, 2016)

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One response to “Etsy’s Growing Pains: Knitty Gritty”

  1. Does anyone else question all the hype around Etsy? I mean, solar pannel’s for sellers? What about focusing on their core audience and growing their marketplace.

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