Etsy puts down the nee­dle and thread

Chas­ing growth, the quirky mar­ket­place re­de­fines its mis­sion “I don’t see hand­made as… at the core of Etsy’s val­ues”

Bloomberg Businessweek (Asia) - - CONTENTS -

Etsy, the on­line mar­ket­place for all things hand­made, got its start in Brook­lyn 11 years ago as a quirky al­ter­na­tive to anony­mously and cheaply pro­duced goods. It was per­sonal and ar­ti­sanal, a crafts fair of the ob­scure and mun­dane. Among the mil­lions of items for sale: a taxi­der­mied Siberian weasel, a vin­tage Un­der­wood type­writer mod­i­fied to work as a key­board, and T-shirts that say “I Can’t Adult To­day.” Four years ago, the New York com­pany was cer­ti­fied by the non­profit B Lab as a B Corp, which means it con­sid­ers so­cial and en­vi­ron­men­tal pur­suits as im­por­tant as fi­nan­cial ones.

Now Etsy is listed on the Nas­daq stock ex­change. It calls it­self a tech com­pany and its sellers “cre­ative en­trepreneur­s.” And it has Sil­i­con Val­ley-size am­bi­tions. Etsy ex­ec­u­tives are no longer con­tent to over­see a cheery out­post that stands aloof from the e-tail­ing main­stream. “Our mis­sion is to reimag­ine com­merce in ways that build a more ful­fill­ing and last­ing world,” says Chad Dick­er­son, who was pro­moted from chief tech­nol­ogy of­fi­cer to chief ex­ec­u­tive in 2011. “We don’t want what Etsy is do­ing to be a marginal niche ef­fort.” What Etsy is do­ing, he says, is hu­man­iz­ing each piece of the sup­ply chain, in­clud­ing man­u­fac­tur­ing.

First, Etsy had to reimag­ine the def­i­ni­tion of hand­made it­self. Now a seller (about 85 per­cent are women) need only show “au­thor­ship” over an item’s de­sign and de­vel­op­ment, take re­spon­si­bil­ity for how it’s put to­gether, and be trans­par­ent about how many hands are in­volved. To this end, Etsy has al­lowed man­u­fac­tured goods to be sold on the site for more than two years. In Septem­ber the com­pany in­tro­duced a pro­gram to help sellers con­nect with ap­proved fac­to­ries.

Fred Wil­son, Etsy’s lead in­de­pen­dent di­rec­tor and co-founder of Union Square Ven­tures, an early in­vestor in the com­pany, says think­ing about Etsy only as a mar­ket­place for hand­made goods is too lim­it­ing. “Etsy serves a larger com­mu­nity than that,” he says. “I don’t see hand­made as some­thing that’s at the core of Etsy’s val­ues. More im­por­tant is that it’s

per­son-to-per­son com­merce.” Such talk has led to push­back from some in the Etsy com­mu­nity who worry this shift will dam­age the site’s rep­u­ta­tion as a mar­ket­place for unique items. Un­der Etsy’s re­quire­ment that sellers sim­ply be re­spon­si­ble for the de­sign of man­u­fac­tured goods, “wouldn’t most prod­ucts be ‘hand­made’ by some­one some­where?” Katie, the owner of a vin­tage ac­ces­sories shop on Etsy, wrote in an Etsy fo­rum in Jan­uary. “Ev­ery mass-pro­duced pil­low in the world had to be de­signed by peo­ple who worked with a fac­tory. … How does Etsy’s claim of be­ing a hand­made mar­ket­place hold any wa­ter now?”

Dick­er­son says Etsy is pro­ceed­ing care­fully to en­sure that the re­la­tion­ships be­tween sellers and fac­to­ries meet the com­pany’s stan­dards. He also ac­knowl­edges dis­sent. “We’ve ad­mit­ted that defin­ing ‘hand­made’ in a way that makes ev­ery­one happy isn’t pos­si­ble,” he says. “So we fo­cused on defin­ing it in a way that ev­ery­one can un­der­stand and that we can en­force.” Brean Cap­i­tal an­a­lyst Tom Forte de­scribes the sit­u­a­tion as an op­por­tu­nity and a chal­lenge for the com­pany. “Etsy has to drive scale but avoid the per­cep­tion that mass-pro­duced prod­ucts are on its site,” he says.

The com­pany is fac­ing a sober­ing re­al­ity: Chang­ing its rules is the only way Etsy sellers—and the com­pany that lives off their fees—can scale up. Newly pub­lic com­pa­nies of­ten have to adapt to as­sure growth, some­thing the Sil­i­con Val­ley crowd calls piv­ot­ing.

EBay, that other mar­ket­place that isn’t Ama­, re­al­ized in 2008 that cus­tomers had tired of hag­gling, so it be­gan em­pha­siz­ing fixed prices. By 2010, sales of fixed-price items ex­ceeded those of auc­tioned goods.

Etsy has had a rocky start as a pub­lic com­pany. Be­fore its de­but, the busi­ness had two years of tremen­dous growth, re­port­ing an­nual in­creases in mer­chan­dise sales and rev­enue of as much as 70 per­cent. On its first day of trad­ing in April 2015, the stock’s value al­most dou­bled, to $30. But last year, mer­chan­dise sales growth slowed to 23.6 per­cent. And the num­ber of ac­tive sellers in­creased just 15.5 per­cent; their ranks now stand at al­most 1.6 mil­lion. In­ter­na­tional ex­pan­sion has stalled be­cause of un­fa­vor­able ex­change rates and an in­suf­fi­cient num­ber of lo­cal sellers in some mar­kets. Mean­while, Etsy spent 68 per­cent more on mar­ket­ing in 2015 with­out much re­turn yet, and it’s in­vest­ing in seller ser­vices and im­prov­ing its mo­bile order­ing ex­pe­ri­ence. It also has new com­pe­ti­tion from Hand­made at Ama­zon, which opened in Oc­to­ber with more than 80,000 prod­ucts from 5,000 sellers.

Etsy col­lects 20¢ per item of­fered on the site and 3.5 per­cent of the sell­ing price. The most promis­ing source of rev­enue, though, is the ser­vices the com­pany of­fers its mer­chants, in­clud­ing di­rect check­out, ship­ping la­bels, and prom­i­nent place­ment of list­ings on the site. In 2015 th­ese ser­vices brought in half of Etsy’s $274 mil­lion rev­enue. Still, the com­pany hasn’t been prof­itable for the past four years, which is one rea­son the once-high­fly­ing stock traded at less than $9 a share in early March.

CEO Dick­er­son has helped Etsy grow up. He hired its first chief fi­nan­cial of­fi­cer and made deals to sell Etsy prod­ucts at re­tail­ers such as Whole

Foods Mar­ket and chil­dren’s fur­ni­ture seller Land of Nod; Macy’s is also host­ing an Etsy shop for a year at its flag­ship store in New York.

The no­tion of hand­made goods was a found­ing prin­ci­ple of Etsy. But that even­tu­ally cre­ated a para­dox: Etsy’s most suc­cess­ful sellers couldn’t ex­pand by us­ing out­side pro­duc­tion help with­out po­ten­tially vi­o­lat­ing com­pany rules. Those guide­lines to­taled 14,000 words by 2011. “Imag­ine that you want your busi­ness to grow, but you also fear that, if it gets to a cer­tain place and you need out­side help, you might get kicked off the plat­form,” says Heather Jassy, se­nior vice pres­i­dent for mem­bers and com­mu­nity. “Peo­ple had a tremen­dous amount of anx­i­ety.”

Now Etsy mer­chants can find man­u­fac­tur­ers on their own, as some 5,000 have done, or they can join Etsy Man­u­fac­tur­ing, a pro­gram that en­ables sellers to de­velop re­la­tion­ships with se­lect fac­to­ries in the U.S. and Canada. Etsy says it may col­lect fees on th­ese or­ders. So far, 700 man­u­fac­tur­ers have ap­plied; one-quar­ter are Etsy sellers who have their own equip­ment, em­ploy­ees, or time on their hands. Etsy re­quires fac­to­ries to pro­vide in­for­ma­tion about their pro­duc­tion pro­cesses, sub­con­tract­ing, la­bor prac­tices, and will­ing­ness to col­lab­o­rate with the com­pany’s sellers. But Etsy doesn’t plan to au­dit and ver­ify th­ese man­u­fac­tur­ers. “Sellers need to do their own home­work about who they’re work­ing with,” says Stephanie Schacht, the di­rec­tor for re­spon­si­ble seller growth.

An­other sign that Etsy is be­hav­ing more like a con­ven­tional com­pany: It re­or­ga­nized a sub­sidiary in Ire­land—a fa­vorite lo­cale for U.S. com­pa­nies to base for­eign op­er­a­tions be­cause of its low cor­po­rate tax rate—to man­age most of its in­ter­na­tional busi­ness. Amer­i­cans for Tax Fair­ness called the ar­range­ment a tax dodge and asked

“Ev­ery masspro­duced pil­low in the world had to be de­signed by peo­ple who worked with a fac­tory. … How does Etsy’s claim of be­ing a hand­made mar­ket­place hold any wa­ter now?”

that Etsy’s B Corp sta­tus be re­voked, but the com­pany’s sta­tus was re­cer­ti­fied in Fe­bru­ary. Says lead di­rec­tor Wil­son: “In my mind, the tax struc­ture is not hyp­o­crit­i­cal; it’s good busi­ness.” −Su­san Ber­field

The bot­tom line

Etsy grew fast be­fore go­ing pub­lic in 2015. To achieve scale, it’s let­ting sellers make goods in fac­to­ries if they fol­low Etsy’s rules.


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