Etsy: Defining The Future Of Wholesale

Founded in 2005, Etsy is an e-commerce marketplace for unique, handmade consumer goods such as jewellery and furniture. In the past year, the company achieved a 21-per-cent increase in revenue, its first year of positive net income, and a management change. However, a closer look at Etsy’s performance reveals an alarming stagnation in its U.S. segment, potentially indicating market saturation. While international expansion and cost discipline are driving recent improvements in revenue and profit, the niche nature of Etsy’s market will limit business-to-consumer (B2C) and business-to-business (B2B) growth around the world. Etsy has an opportunity to use its competitive advantage developed in the B2C space and expand its focus in the B2B space as a wholesale agent.

Slowing Growth in America

The key symptom of Etsy’s limiting niche market is slowing growth in gross merchandise volume (GMV), the dollar value of items sold on the platform. In the U.S., Etsy’s GMV growth rates have declined to 10 per cent in 2017 from 51 per cent in 2013, which is concerning given U.S. retail e-commerce growth of 16 per cent during the same time period. Comparatively, Shopify, also a provider of e-commerce services to a customer base of independent entrepreneurs, grew GMV by 71 per cent in 2017.
Etsy has frequently stated that GMV is its most important metric as it measures the health of the two-sided marketplace and drives a feedback loop: growth in GMV attracts more sellers, which leads to more revenue. This is because GMV is a leading indicator of Marketplace Fees and Seller Services, which respectively comprise 40.7 per cent and 58.6 per cent of revenues. Marketplace Fees primarily consist of the 3.5-per-cent fees sellers pay on completed orders, while Seller Services are additional tools that help sellers start, manage, and scale their businesses.

Etsy Graphic 2 - GMV Graph

Pinpointing the Problem in Improving GMV

To improve GMV, Etsy can increase orders through two methods: attracting more first-time visitors and browsers or increasing the annual purchase value of existing buyers. The former is unlikely as Etsy already has significant consumer awareness. Encouraging browsers to make purchases on Etsy—a key initiative in the past year—has produced lacklustre results. Algorithmic improvements have been introduced to provide more personalized results and suggestions. However, Etsy’s bounce rate—the percentage of visitors who leave the site after viewing only one page—remains high at 41 per cent. It sits at only 200 basis points of improvement from last year and is higher than competitors’, including Amazon’s 36-per-cent bounce rate.

To increase the purchase value and retention of buyers, Etsy’s 2017 marketing focus was to shift the perception of the marketplace to a “go-to shopping destination for special purchase occasions”. Technical improvements to recommendation and search capabilities also aimed to increase purchases by connecting users with products they desire. However, average spending per user still declined slightly to $97.5 from $99.4. Etsy’s failed efforts to boost GMV indicate that its core product has significantly limited growth potential due to a niche addressable market.

B2B: Opportunities Outside of Marketplace

Etsy also offers its Wholesale platform, which provides current sellers the unique opportunity to scale by selling to retailers, specifically local boutiques. However, given the small size of the total addressable market, this platform contributes little to revenues and is incapable of significant expansion. Even if all clothing and accessory boutiques in the U.S. sourced all their products from Etsy, the resulting gain would roughly represent only eight per cent of Etsy’s current revenue.

The scale that wholesale requires does not match with Etsy’s seller base, as 77 per cent of vendors are businesses of one, and 97 per cent operate out of their homes. Furthermore, Etsy’s 2017 U.S. Seller Census revealed 60 per cent of Etsy sellers were reluctant to grow large enough to require hiring more help. As a result, these sellers are more likely to avoid participating in wholesale as it requires fulfilling bulk orders with rapid turnarounds. Lastly, many current sellers are ineligible for the program as they supply unique, handmade products, and thus cannot afford to provide a wholesale discount.

Measuring the Opportunity

Etsy’s current B2B marketplace acts as a wholesale trade agent, serving as a middleman between sellers and retailers. Wholesale trade agents focus solely on providing sales services; they do not take ownership of goods nor are they involved with logistics. Etsy should focus on expanding its Wholesale platform and extend the scope of its wholesale sellers to small- and medium-sized vendors and the scope of its retailers to chains of stores larger than boutiques. Given the entire industry generated revenues of $758.7 billion in the U.S., the opportunity is significant enough for Etsy to meet its growth objectives while aligning with its mandate of empowering small business owners.

Value Proposition

For vendors, this platform would help simplify the selling process and provide exposure to large retailers. For retailers, working with Etsy would streamline the buying process while also providing a quality selection of products without the added headache of dealing with multiple suppliers.

The platform supports the new target vendors’ growth ambitions as they would be enabled to scale quickly by working with mid-sized and large retailers. Traditionally, large retailers, such as Nordstrom and Indigo, have relied on established relationships with branded products to stock their shelves. These retailers have been unwilling to allocate significant resources to new vendor discovery because of the costs associated with onboarding. Typical small vendors are also unfamiliar with wholesaling and fulfillment and are thus, perceived as risky. While direct interaction with individual new vendors is unlikely, retail mammoths have partnered with wholesale agents that represent groups of small vendors.

Retailer Journey

Etsy Wholesale will also reduce vendors’ costs by lowering the time sales representatives spend on attracting new customers, considering this site will be frequented by numerous retailers. In addition, it reduces upfront costs required to make contact with retailers. One trade show could cost thousands of dollars in travel expenses, booth costs, and marketing materials. Alongside these cost reductions, digitizing the process eliminates costly manual order entry errors.

For retailers, bringing the wholesale ordering process online also increases convenience. Previously, buyers relied on physical line sheets, or visits to individual wholesalers’ websites to obtain product information. 93 per cent of B2B buyers are estimated to prefer purchasing online and 86 per cent would prefer using self-service tools for reordering, as opposed to talking with a sales representative. This platform also increases product variety by enabling retailers to work with numerous smaller vendors without the associated risks. It currently takes large retailers six to eight months to onboard a new vendor, but this could be significantly streamlined as Etsy Wholesale would have already verified the vendor’s capabilities. Finally, purchase data allows retailers to generate unique insights by looking at past trends, analyzing the performance of their inventory, and comparing the product assortment across different store locations.

Target Market for B2B Wholesale

Initially, Etsy Wholesale should connect vendors to medium-sized retailers operating 30 stores or fewer as they source products from many small vendors. In contrast to large retailers who are sought out by new vendors, can afford to attend many trade shows, and can even self-produce products, medium-sized retailers lack robust buying teams. Medium-sized retailers often have less stringent wholesale requirements, such as delivery windows and order volumes, granting the flexibility needed for initial ramp up.

The platform should initially focus on the furniture and home furnishing industries, since there are already sellers on the current wholesale platform who provide goods such as curtains, decorative accessories, and kitchenware. The base of vendors will make it easier to initially attract retailers. Furthermore, the furniture industry is highly fragmented as most operators are small, privately-run businesses, which aligns with the goal of targeting medium-sized retailers. While the home furnishing industry is more consolidated, there are numerous small and medium-sized players that satisfy local demand. The combined market size is significant at a total of $95 billion. Once Etsy has successfully entered these industries, it can expand into other adjacent markets, such as
jewelry, entertainment, or beauty.

Cutting Out the Competition

A significant competitor is Alibaba, which connects retailers to third-party vendors and products, generally located in Asia. Alibaba’s reputation for fraud, unreliability, and counterfeits prevents U.S. retailers from relying on the platform to source consumer-facing goods. Another potential competitor is Amazon. It currently offers a B2B platform for businesses to purchase products for consumption. To increase barriers against competitors, such as Amazon, Etsy needs to gain an advantage in reinforcing purchasing behaviour, increasing search cost, and raising switching costs. If it can translate its success in the do-it-yourself (DIY) market to adjacent markets, such as furniture and home furnishing, before other competitors, Etsy can continue to compete with Amazon. For barriers to be reinforced, Etsy needs to establish a network of vendors and retailers on its platform, which would make it inconvenient for companies to move to another platform.

Startups, including Joor and Handshake, have also begun to emerge in the digital wholesale industry. While none of these startups have reached substantial scale, many reputable brands and retailers have used Joor, including Kate Spade and Saks Fifth Avenue. The large number of partnerships these startups have established indicates a need for this service in the broader market. However, Etsy will not compete with Joor’s strong reputation in the high fashion industry. Handshake is focused on providing a digital solution for vendors, but does not create a B2B marketplace for retailers.

Ironing Out the Details

To expand beyond its identity as a DIY platform, Etsy must begin by onboarding vendors and retailers at trade shows with a small salesforce. After a sufficient mass of vendors and retailers have joined Etsy’s wholesale platform, network effects will guarantee a greater proportion of vendors and retailers will be self-serve. In effect, customer acquisition cost will be driven down to be more in line with Etsy’s B2C business.

Etsy can leverage many of its B2C capabilities for this B2B opportunity, including counterfeit detection, product upload processes, and quality vetting. Though it can also use its B2C payment capabilities, Etsy must develop support for Electronic Data Interchange (EDI), as it is the standard billing method in wholesale. Value-added services like these, in addition to Etsy’s seller agreement, will restrict disintermediation.

Monetization

The revenue model for the wholesale platform will be two-fold. First, vendors will be charged 3.5 per cent per sale, same as the B2C platform, since the value they derive are the additional sales made on the platform. Second, buyers will pay a subscription fee as they receive ongoing discovery of new products as well as tools to simplify the retail ordering process. Once scale is reached, seller and buyer services should be introduced. If Etsy matches its self-reported B2C penetration of two per cent in adjacent verticals in the B2B market (including furnishing, jewelry, toys, personal care, and craft supplies), revenue contribution will be more than 20 per cent of fiscal year 2017 revenues. This assumes a 3.5-per-cent fee on wholesale price—when compared to Amazon’s take-rate of 12 per cent for Amazon Handmade, there is much more room for upside.

Nailing the Execution

Etsy currently offers a robust B2C marketplace platform and the technical infrastructure is in place to offer a B2B marketplace. More importantly, while there are competitors in the B2B wholesale industry, Etsy is well positioned to succeed because of its competitive advantage of brand trust. Despite all products being unbranded, users trust that items sold on Etsy are high-quality. This will extend to retailers who are looking for high-quality products that match the online presentation and reputation.

Conclusion

Etsy’s growth potential is limited in established markets due to a small total addressable market and needs to expand to meet shareholders’ growth expectations. By leveraging its strong brand trust and marketplace capabilities, Etsy can expand its focus into adjacent markets on the B2B e-commerce space.


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