Etsy, the global e-commerce
platform known for unique and handmade goods, reported its
highest ever annual revenue of $2.7 billion in 2023. But that's not the full
picture. Its gross merchandise sales,
or the total value of goods sold on Etsy, declined in the
same period, falling flat for the second year in a row. It stocks its more than 70%
lower than its 2021 high, and first quarter 2024 earnings
results didn't look much better. Etsy's consolidated results,
while within our guidance range, were not where we
wanted them to be. After the big increase in both
buyers and spending per buyer during Covid, it looks like
they've hit a wall and you basically have a company that
has not grown in two years. Some longtime sellers are
partly blaming CEO Josh Silverman, saying his focus
on profits has pushed the company away from its vision,
allowing counterfeits and mass produced items to thrive,
demoralizing artists and buyers. Competing with people who are
generating art via artificial intelligence. Now I can't
compete. It's just junk. A lot of it. You're just going to be a
slightly more expensive Amazon. That seems like a
terrible business plan. With discretionary spending
down a first quarter 2024 miss in both merchandise sales and
profits, and an acknowledgment of poor execution by its CEO,
Etsy's future is uncertain. It's a public company. Its job is to return value to
shareholders. At the end of the day, they
need to be able to sell things that people want. When Etsy first came on the
market in 2005, it was a revolutionary idea. People who loved arts and
crafts finally had a place to buy those things all the time
and get connected with sellers and artisans and artists who
maybe they would have never encountered before. Etsy's founder and then CEO,
Rob Kalin built the platform to empower artisans. His vision was that Etsy
could influence society in a way that people would think
more consciously about the products they chose. How do you get from just doing
it as more of a hobby, to organizing this to the point
where you can actually make a living? The virtual storefront also
enabled a new kind of revolution. These small businesses, these
local artists, suddenly had the ability to connect with
buyers all over the world. And this was huge. I mean, it was an opportunity
for them to grow their brand, grow their sales. Nicole Aline Legault and
Chiarra Lohr are just two of the many artists who joined
Etsy to sell more of their work. Legault has been there
since 2009. Everyone that I knew was
opening up a little shop because it was one of the
only places that was offering this platform and template. It was very about the sellers. They were really driving the
traffic and making the site what it was and creating a
community. Transaction fees were
initially low. Etsy received B Corporation
status in 2012, and was one of the first companies with that
certification to complete an IPO, which it did in 2015. At the time, it was valued at
$1.8 billion, but the cracks in Etsy's foundation were
already forming. Kalin stepped down as CEO in
2011 for a second time. As competition was
stiffening, the next CEO made a big change in 2013,
allowing artists to use outside manufacturers to
produce their designs. The term handmade was getting
looser. And in this new public arena,
the company was beholden to financially focused
shareholders with a laser focus on growth. Etsy's stock lost more than
70% of its value its first full year as a public
company. From the beginning, Etsy
wasn't profitable. You know, when it went
public, it was deeply in the red. This wasn't uncommon for
e-commerce companies. It's still not necessarily
uncommon for disruptive new startups and things like
that. But over time, you needed to kind of change
that. Vendors, too, were unhappy for
different reasons. There's been a massive culture
clash at Etsy. It's something that really
started after the company went public. It's happening
internally with employees who had been there since the
beginning, had kind of seen this company as, you know,
different. Yet another CEO was appointed
in 2017. Josh Silverman made both
short and long term changes, laying off 22% of Etsy's
workforce that year and later pushing through transaction
fee hikes and shipping fees. He also introduced a new tier
-based subscription model for sellers to jumpstart their
growth--at a cost. It's ultimately like maybe too
focused on keeping the sellers happy and wasn't doing enough
to kind of drive buyer satisfaction. So that's what
Josh tended to focus on, you know, kind of maybe more
balancing both sides of a marketplace, which is key. By 2018, things were picking
up, sales were growing, and the stock was at its highest. The turnaround was attributed
to Silverman's leadership. And then the pandemic. For the month of April, Etsy
sold $133 million worth of face masks. That's 12 million
face masks. The pandemic was a boon for
Etsy. The number of active buyers
increased by about 77%. Gross merchandise sales grew
by more than 100% year over year in 2020, and more than
30% in 2021. Etsy stock price reached its
all-time high that same year. It also started charging some
of its sellers for advertising, bringing in
additional streams of revenue. Pandemic related success is
just that it's a fluke. It's a flash in the pan. So far missed earnings in 2023
and the first quarter of 2024 are leaving investors with
little doubt that the pandemic may have been just that a
fluke. In December 2023, the company
laid off 11% of its staff. But as Etsy focuses on a
comeback, it's also angering some of its biggest
stakeholders its sellers. Etsy has been changing how
buyers interact with the platform to prioritize buyers
buying more, faster and staying on Etsy, not
prioritizing buyers having a good experience from
individual sellers. Chiarra Lohr leads the Indie
Sellers Guild, a labor advocacy group for Etsy
sellers formed after a week -long strike against the
platform. Creators were frustrated by yet another
transaction fee increase and a controversial star seller
program that prioritized sellers who meet requirements
like fast shipping, high ratings and quick response
times. And everything seems very
corporatized. It's almost as though you're
penalized for not using Etsy the way they're trying to
make you use it. Don't shut down my shop
without letting me talk to a person. Don't issue a refund
to a buyer without getting proof that it was damaged. It's not drop your fees by
half. It's not get rid of offsite
ads. It's let me opt out if it
doesn't work for me. Kind of all those things
accumulating to where they find themselves heaping less
and less of the money from when they have a sale, but
having to do more and more work, not even in their craft
of the thing that they make, but just to make their Etsy
shop work for them. The company has said it had to
make some tough changes to compete with giants like
Amazon, which spends more on marketing and has more repeat
buyers. Its deteriorating reputation
is another issue the company is fighting. Sellers have
blamed the 2013 rule change, allowing creators to
outsource their production for what they call the
"junk-ification" of Etsy. This isn't a new problem, but
one that some say has gotten worse as the number of
sellers grows. I want to show you the the
sadness on Etsy and what it's become. Legault went viral for her
TikTok, exposing many of the top Etsy shops as
dropshippers or sellers who make the designs but
outsource the labor to another company. Some designs are
made with AI generated images. Dropshippers are able to mass
produce items like T-shirts, stickers and stationery. Others just sell supplies
like beads. In a comment to CNBC, Etsy
said that it recognizes its current definition of
handmade, includes a broad spectrum of items, and will
clarify its policies to be more transparent about what
belongs on Etsy in the coming months. There are some like old school
people in there, very few. But, um, every click I was
like, what is it? Cups again, cups and then
another. I click again, it's cups
again. And I'm just like, how is
this possible? I get that it's business, but
it's so not how I want to do business. Though this comes at odds with
the company's mission, it is not necessarily bad for its
finances. If people are buying it, then
there's not a lot of incentive for management to change that
because it's working, apparently. But of course,
you are going to risk alienating the people who
started with the platform. I think we do pay attention
when sellers object to some of the policy or pricing
changes, but I don't think it's had any impact on their
business. Etsy said it removed 115% more
listings for violating company policy in the first quarter
of 2024, than the year prior. We've always taken down items
for not complying with not handmade. That's always been
a focus, but we've been getting better technology and
investing a lot in that. As Etsy tries to compete with
e-commerce giants like eBay or Amazon. The path for being
both successful and loyal to its core principles is
unclear. Can you be Etsy while also
having the pressures of a public company? Should it
have gone public? I mean, it depends on who you
ask. Etsy CEO says the company is
still trying to engage and retain current buyers, half
of whom only shop on Etsy once per year. The 7 million
artists are what the company was founded on, and without
them, Etsy is perhaps no longer Etsy or offers what
buyers are looking for anymore. Many sellers feel trapped. They're not really making
enough profit margin on Etsy anymore. But because Etsy is
still there, it's very hard for alternatives to grow,
right? So they've kind of really
taken over this space and then shifted and are now like
still sitting in that space. In February 2024. Activist investor Elliott
Management built a 13% stake in the company, the largest
of any investor, earning it a board seat. Stock shot up
more than 10% on the news. We haven't really seen a ton
yet as far as what the impact will be from that. But generally, public market
investors generally do applaud activists being involved
because it perhaps is an outside opinion kind of
coming into a room. I actually think the most
likely case is Etsy will find a way to use that AI to help
their sellers, and then perhaps it'll be a way to
kind of build up trust, which is like, let us set the
price. I think what also they're
missing is that we are not into having these third
parties. Like, I want to work directly
with my printer, I want to work with other artists, I
want to collaborate. I want to do these things in
in the way that makes me feel human. Ultimately, some major changes
could shake up the company if it can't boost profits or
innovate fast enough. In February 2024, it
introduced a one-time seller fee of $15 for new shops,
which it said helped boost revenue in its Q1 results. If ultimately, you know, the
the outlook for the company is five 6%, 7% revenue growth
and not 13% revenue growth, they probably would
restructure their expenses. Could they shrink the size of
the organization, have more layoffs, increase the margin? I mean, generally scaled
marketplaces can operate at margins higher than Etsy is
operating at today.
