Case 10: Etsy, Inc.

: Reimagining Innovation – Hoang Tuan Anh 2017

Executive Summary
Etsy relatively new company (founded in 2005) that has already established a strong
brand name and has positioned in the e-commerce industry. Although basic online
marketplace have been around for many years, Etsy saw an opportunity to “re-
imagination of commerce,” by offering vintage handmade products and creative business
environment. They capitalized on both consumers and entrepreneurs who love arts, crafts
and look for handmade goods.

This report provides an analysis and evaluation of Etsy, Inc difficulties in the
competitive e-commerce market.. First of all, rivalry is more intense when two largest
online marketplace were Amazon and eBay preparing a new strategy for competing with
the differentiation of Etsy. Secondly, Etsy’s sellers potentially leave the company
because several reasons related to the interface website and the fee obligation. Also, the
loyalty of users could be significantly impaired due to some new functions and policies
which might violate user’s privacy as well as their trustworthy. Last but not least, the
analysis showed a few financial performance issues such as net loss increased 3 times
from 2014 to 2015, which negatively affected their own investors.

This analysis lead us to offer that Etsy is currently in a strong market position, but its
competitive advantages are not sustainable. They will need to leverage their strengths and
resources to appeal to new customers or find ways to further differentiate their service.
As the development of company, they have many alternatives strategy such as:
diversification, reduce the internal cost or increase service fees.

Overall, the recommendations for Etsy are diversification strategy. Etsy should
continue emphasize on Seller Service, improve and figure out the solution to internal
weaknesses and expand global market. In addition, they have to keep their strength about
unique feature for both sellers and buyers, which are extremely different with other
website.

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 Case 10: Etsy, Inc.: Reimagining Innovation – Hoang Tuan Anh 2017

Analysis
I. Background
Etsy was founded in June 2005 in an apartment in Brooklyn, New York to fill a need
for an online community where crafters, artists and makers could sell their handmade and
vintage goods and craft supplies. In the spirit of handmade, founder Rob Kalin and two
friends designed the first site, wrote the code, assembled the servers and spliced the
cables to get Etsy up and running. In 2008, Chad Dickerson joined Etsy as its first CTO,
and created the company’s foundational engineering culture, treating “Code as Craft”.
Chad became CEO in 2011 and began championing the “re-imagination of commerce,” a
transformation of every aspect of how goods are made, bought and sold. Under Chad's
leadership, the website that began in an apartment in Brooklyn has evolved into a
sophisticated technology platform that connects Etsy sellers and buyers across borders,
languages and devices, a company that spans the globe and a business that is committed
to creating lasting change in the world.

II. Analysis
1. What are the major elements of Etsy’s competitive strategy in e-commerce? How
well do the pieces fit together? Is the strategy evolving?
The strongest element of Etsy’s strategy is the unique value for both buyers and
sellers. Since the Etsy was established in 2015, Etsy provided buyers “authentic and
highly personalized” handcrafted products that could not be found elsewhere. Especially,
thoughtful consumers discover and buy vintage crafts as well as build relationships with
the people who sell them by knowing how this items were made and who made them. For
sellers, Etsy offered a lot of opportunities to help them become a successful entrepreneur
by their own creative online stores and find both global and local markets for their goods.
In addition, Etsy specifically targets a niche market art lovers who love making or
buying hand-made products. This focused differentiation strategy help Etsy become an e-
commerce website with unique features, and stand out from the rest rival companies.

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 Case 10: Etsy, Inc.: Reimagining Innovation – Hoang Tuan Anh 2017

They provide a worldwide and local online marketplace where all handmade goods are
for sale at a fixed-price rather than running any auctions sites like eBay. By integrated
social tools, such as forums and blogs, to share tips and make comments on various
products, Esty focuses on connecting and communicating directly between buyers and
sellers, which satisfies any users experiencing Etsy business environment.

My previous analysis definitely shows that their strategy pieces fit very well together.
Etsy can appeal to and connect an online community and marketplace for individuals,
particularly the feminist crafter movement. Buyers and sellers come together on Etsy to
socially interact and discuss the products; ultimately, promoting products to be sold.

Esty’ strategy is probably continuing to evolve, as their main values is unique

product based on the creative of people which are unlimited and connecting everybody in
the world. Owing to the continuous development of technology, Etsy invented an online
business environment linking directly purchasers who can find a unexpected items
satisfying their demand and sellers who can independently set up a handicraft business
without efforts. They has changed marketplace from the U.S to entrepreneurs around the
world and combined with social networking system - which holds strong confirmation
that their strategy continues to evolve and complete their missions very well.

2. Explain the competitive pressures facing the online marketplace for handcrafted
goods industry. What does a five-forces analysis reveal about the nature and strength
of the competitive pressures facing Etsy? Which of the five forces is the strongest?
Which of the five forces is weakest?
The bargaining power and leverage of buyers – a strong competitive force
Buyers were a moderately strong force. There were no costs involved in switching to
competitors or substitutes. This means that consumers can simply to change other
handmade goods with wide range of price, even though the items sold through Etsy are
unique, they can purchase goods from other services such as Amazon. In addition, buyers

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 Case 10: Etsy, Inc.: Reimagining Innovation – Hoang Tuan Anh 2017

are well informed about the product offerings of sellers and the cost of production. The
number of buyer are relatively larger 16 times in 2015 than the number of sellers
The bargaining power and leverage of suppliers – a weak competitive force
The power of suppliers is low because the quantity of active sellers is smaller than
buyers. Also, it is not difficult or costly for handcraft purchasers to switch their demand
from one sellers to another. Although the items selling in Esty are differentiated and
considered as luxury goods, other substitutes are available for buyers who have large
power in choosing whether to buy or other services.
Competition from substitutes – a moderate competitive force
Items sold on the Etsy’s site do not have Stock-Keeping Unit and cannot be found
elsewhere, and therefore cannot be easily substituted with other products offered on the
service. Etsy differentiates itself from e-commerce websites through its claim of products
that are homemade and connect appropriated consumers and businessman. Because the
products are not considered necessities, users can adjust other shops or services for the
products. Although the products themselves are individually unique, customers can find
what they are looking for on a variety of other platforms
Threat of new entrants – a moderate competitive force
The threat of new entrants is fairly high for Etsy as this current industry takes little
resources to launch. Etsy does not hold inventory – sellers ship goods directly to the
buyer and Etsy offers support to facilitate this transaction and helps address any issues.
This platform could easily be re-created, and would require a limited amount of resources
to become successful. If a new entrant were to offer Etsy’s service in a better and more
efficient way that benefited both buyers and sellers, they would migrate to another
service.
Rivalry among competing sellers of e-commerce – a strong competitive force that is
likely to intensify
Etsy is in an information technology industry that is currently booming, and they are
currently leading the online marketplace which brings together buyers and sellers. There
are several companies that offer online marketplace such has eBay; Amazon, Buy.com, or

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 Case 10: Etsy, Inc.: Reimagining Innovation – Hoang Tuan Anh 2017

many other smaller services that offer handmade goods from sellers. However, they
create an auction site where two parties meet and enter into mutually beneficial
transactions, which appeal to users not satisfying Etsy services. The competition will
only intensify as the overall market grows larger and new competitors start to take more
market share.

3. What does a competitive strength assessment reveal about Etsy’s e-commerce

business, as compared to the leaders in the e-commerce retail industry? Use the
methodology in Table 4.3 to support your answer.
Competitive strength assessment of the company reveals following factors as the
strength of the company:
- Highly Focused Differentiated Business Strategy: The company provides highly
differentiated handcrafts product to its particular customers - art lovers in highly
diversified market. Customers more willing to search Etsy for meaningful items rather
than go to big box retailers. They design fixed price policies for both sellers and buyers
rather than auction site like eBay or Amazon
- Seller could easily establish a online shop for themselves rather than concern with
the cost of physical shop. Etsy has beautiful interfaces for sellers to customize their
stores and better suit their customers‟ needs such as using high-quality photos that
display products from every angle.
- A loyal group of sellers and buyers who buy and sell on the platform. For instance,
the company’s primary market was women, who made up 86% of Etsy and 30% of them
consider their Etsy shop was the sole occupation.
- Continuously updating, adapting and learning infrastructure with flexible platform
business model. Etsy’s operating model facilitates a two-sided marketplace where Etsy
focuses on connecting buyers and sellers. Thus, they constantly develop search functions
and informational website designs help users easily navigate and search for products that
they are looking for. In 2011, company introduced a Facebook-like social networking

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 Case 10: Etsy, Inc.: Reimagining Innovation – Hoang Tuan Anh 2017

system called People Search so that buyers and sellers could connect with one another
and become friend. Etsy is also extremely popular on social media.

4. Does it make good strategic sense for Etsy to be a competitor in both the
Marketplace and Seller Services segments? Which one of its product lines —
Marketplace and Seller Services — do you think is most important to Etsy’s future
growth and profitability? Why? Should either of these product lines be discontinued?
Yes, it makes good strategic sense for Etsy to be a competitor in both the
Marketplace and Seller Services segments. Etsy breaks out its revenue into two main
categories: Marketplace Revenue (3.5% + $0.20/listing) and Seller Services includes fees
such as prominent placement in search results via Promoted Listings payment processing
via Direct Checkout and purchases of shipping labels through the Shipping Labels
platform. From 2013 to 2015, Etsy posted that their revenue from this 2 segments
increased dramatically. While in 2013, they have about 125 mil, this number doubled
respectively in 2015, which is concrete evidence for successful strategic sense of Esty.
Also, Seller Services contributed remarkably to appeal to customers and new sellers
participating in Etsy website.
My analysis show that nowadays Seller Services is most important to Etsy’s future
growth and profitability. Although revenue was mainly driven by marketplace transaction
fees in the past, Etsy has put an emphasis on growing their seller services revenue. Etsy’s
Seller Services revenue has nearly doubled from 34 percent to 50 percent of total
revenues in the last three years. Despite the significant growth of expense (68% increased
between 2013-2014), the seller services continuing to mature can compensate and make
sure the future growth and profitability. Actually, the net los for the six month period
ending June 30 2016 declined from $42.9 mil in the same period in 2015 to $6.1 mil.

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 Case 10: Etsy, Inc.: Reimagining Innovation – Hoang Tuan Anh 2017

Sources of Revenue (%)

100%

80%

60% Other
Seller Service
40%
Marketplace
20%

0%
2013 2014 2015

The company should continue either of these product line because both of
Marketplace and Seller Services still gain revenue and profit for the company. While
Seller Services is Etsy's fastest growing revenue stream and help them attract more users,
the cost relating to this services also went up considerably to perform well. Otherwise,
Marketplace is a stable sources of revenue with low percentage of commission on each
sale, clearly needs to keep its best sellers around

5. What is your assessment of Etsy’s financial performance over the 2013 – 2015
period? (Use the financial ratios in the Appendix of the text as a guide in doing your
financial analysis.)
The financial and operating summary in case Exhibit 1 indicate that Etsy’s financial
performance during the 2013-2015 period has been not good at all. Although the revenue
significantly increased from $125.02 million in fiscal 2013 to $273.5 million in fiscal
2015 and gross profit margin went up steady each year, other profitability ratios were
problematic. Especially, net profit margin was negative and exacerbated after once year
and reach a peak of about negative 20% in 2015. Moreover, this consequence also affect

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 Case 10: Etsy, Inc.: Reimagining Innovation – Hoang Tuan Anh 2017

net Return on Assets and Return on SE when this ratio increased negatively by 4-6%
after one year.

On the one hand, based on the Etsy’s income statement between 2013-1015, my
analysis show that this situation was the result of totally ineffective management of the
cost as well as the various types of expense. For example throughout 2014 and 2015,
marketing expense increased from $39.7 million to $66.8 million, also the other expense
apart from operation expense was 5 time higher than previous year. In the future, Etsy
must ultimately grow its sales or reduce its expenses so that it produces net income and a
positive profit margin.

Profitability Ratios (%)

70.00 64.54
61.78 62.35
60.00

50.00
38.80
40.00 34.45 34.77
Gross Profit Margin
30.00 Operating Profit Margin
20.00 Net profit Margin

10.00 net Return on Assets

Return on SE
0.00
2013 -0.64 2014 2015
-10.00
-7.79
-20.00
-19.77
-30.00

On the other hand, Etsy’s business model is primarily based on the number of sellers
it has within its network. The more sales that are made by the sellers, the more earning
Etsy will have. As of December 31, 2015, Etsy’s marketplace had grown to 1.6 million
active sellers worldwide who attained nearly $2.4 billion in gross merchandise sales
(GMS). GMS does not represent actual revenue earned by Etsy, but because “revenue
and cost of revenue depend significantly on the dollar value of items sold on the Etsy
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 Case 10: Etsy, Inc.: Reimagining Innovation – Hoang Tuan Anh 2017

marketplace” it is used by Etsy management as an gage of the “overall health of the Etsy
ecosystem and the scale and growth of the business”. (Etsy Annual Report, 2015). In
addition, Board of Directors believe that Adjusted EBITDA can provide a useful measure
for period-to-period comparisons of our business as it removes the impact of certain non-
cash items and certain variable charges. As their Adjusted EBITDA increases, they are
able to invest more in their platform.

2013-2014 2014-2015
Growth of GMS (%) 43.34 23.62
Growth of adjusted
EBITDA (%) 36.20 34.34

The current ratio increased from 3.07 in 2014 to 4.48 in 2015, which indicates that a
company can cover its short-term debt with its most liquid assets. Working capital also
increase remarkably in year 2015, primarily due to the rise of cash and cash equivalents.

While leverage ratios have increased a little over the years, it is still indicating less
debt financing in comparison to assets and stockholder’s equity. Long term debt to capital
ratio went up by 4% . However, this is well below the industry standard for online retail
company’s and is an indicator that Etsy is in good health overall. Debt to equity ratio
have the similar trend but still below 100% that signifies a great balance sheet strength

2014 2015

Liquidity ratios

Current ratio 3.07 4.48

Working capital (in thousand) 85,608.0 278,932.0

Leverage Ratios

Total debt-to-assets Ratio 40.17 40.24

Long term debt to capital ratio 28.06 30.12

Debt-to-equity Ratio 67.14 67.34

Long term debt to equity ratio 39 43.l

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 Case 10: Etsy, Inc.: Reimagining Innovation – Hoang Tuan Anh 2017

In conclusion, from 2013 to 2015, the only problems Etsy faced is relating with their
expense in operation and other activities. Otherwise, Etsy company have a relatively
good improvement thank to the remarkable increase of revenue and strong balance sheet.
Actually, in 2016, they had made an effort to reduce the net loss from $42.9 for the six
month period ending June 30,2015 to $6.1 mil in the same period. Therefore, investors
believe in the potential development of this company, which is suggested by the
increased of price stock:

Source: www.marketwatch.com/

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 Case 10: Etsy, Inc.: Reimagining Innovation – Hoang Tuan Anh 2017

6. What strategic issues confront Etsy in 2015? What market or internal

circumstances should most concern Chad Dickerson and the company’s senior
leadership team?

Although Etsy is performing well in the market in 2015, they are still vulnerable to
some strategic issues. First of all, Etsy is facing is the risk from their recent policy
changes. Their recent changes include allowing sellers to outsource production to third
parties and factories.. The help from other manufacturers meant that sellers can use cheap
products from factories in China, which makes the products not “handmade” anymore.
Therefore, both sellers and buyers, were opposed to this idea and are transferring to other
websites. Other challenges relating to search feature from 2011 was made the users of
this service complained about violation their right to privacy. In addition, Etsy faces a
number of potential competitors in the market. Other than big e-commerce websites like
eBay, direct competitors include Art Fire, BigCartel, and Zibbet that sell handmade and
original products online and target art-lovers globally like Etsy.

Chad Dickerson and the company’s senior leadership team should most concern
about internal circumstances rather than market one. The reason is that although the
rivalry of market from direct and indirect competitors was intensified and had some
advantages such as not requiring commission, Etsy is still the biggest player within the
market place. They have some very differentiated activities that other website can not
compete with and attract a lot of niche customers who are global art-lovers. As a result,
Etsy should deal with internal problems to make a better service performance.

7. What recommendations would you make to Etsy to address the strategic issues
confronting it in 2016 in order to sustain its impressive growth in revenues and achieve
profitability?
In order for Etsy to sustain its impressive growth in revenues and achieve
profitability, we recommend them to implement the diversification strategy. The most

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 Case 10: Etsy, Inc.: Reimagining Innovation – Hoang Tuan Anh 2017

important thing is they should continue focus on enhancing their Seller Service which
give them opportunities to compete with other competitors and gain more profit:
- Etsy could provide fixed price shipping for customers which will provide
convenience and cost benefits for both suppliers and customers. Etsy also should concern
about international shipment to attract more users in the world
- They should have some discount for active sellers. Instead of 3.5% transaction fee,
Etsy can reduce it to 3% in 3 months if the sellers complete some conditions.
- Etsy should have a strict law of sellers pattern. As we know, Etsy is full of creative
people and if sellers can be successful on there, chances are that they can too - this makes
competition rife throughout the site. Some sellers are sneaky to the point where they even
copy descriptions, titles and photos.
- Etsy should create a forum which people can come to share their experience, ideas
and demand for handcraft goods. Some experts can conduct and share knowledge about
online stores to inspire the entrepreneurs to do businesses. Moreover, Etsy should
brought dozens of sellers. to meet face-to-face with congress members on the issues that
directly affect their businesses
- The company should dispose the feature that allowed users to search other users’
buying histories and trace their purchase. However, they should focus on updating new
attributes for listings to help buyers find exactly what they need.
- The allowance for sellers to outsource production to third parties and factories is
necessary to develop business of sellers. To deal with trustworthy issues, Etsy should
require sellers to disclosing their production partners. As part of that process, they'll need
to be completely transparent about where and how their items are being produced. It’s
also a great opportunity to catch attention from shoppers who are increasingly interested
in the way things are made.

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 Case 10: Etsy, Inc.: Reimagining Innovation – Hoang Tuan Anh 2017

APPENDIX

2012 2013 2014 2015

Net revenue 74,602 125,022 195,591 273,499
COGS 24,493 47,779 73,633 96,979
Gross profit 50,109 77,243 121,958 176,520
operating expense 51,464 76,510 128,209 178,404
Operating loss -1,355 733 -6,251 -1,884
Net loss -2,385 -796 -15,243 -54,063
Net loss per share-basic and
diluted -0.09 -0.02 -0.38 -0.59
Current Assets 127,061 359,054
Current Liabilities 41,453 80,122
Total assets 246,203 553,061
SE 147,300 330,498
Total debt 98,903 222,563
LT debt 57,450 142,441

2012 2013 2014 2015

Profitability Ratios
Gross Profit Margin 67.17 61.78 62.35 64.54
Operating Profit
Margin 31.02 38.80 34.45 34.77
Net profit Margin -3.20 -0.64 -7.79 -19.77
net Return on Assets -6.19 -9.78
Return on SE -10.35 -16.36

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