Etsy announced a new marketplace last week that will launch in April in a bid to jumpstart its growth. The company called the initiative its first new marketplace in 11 years.
While some craft supplies are already sold on Etsy's platform, the new marketplace is called Etsy Studio and dedicated solely to facilitating the sale of craft supplies.
Etsy, which went public in April 2016, has struggled in its first two years as a public company. Despite posting its first operating profit last year, the company is still trading at less than half of its IPO price.
The biggest challenge facing the company is seller growth, which was the biggest red flag in Etsy's S-1, as was noted at the time. Etsy's consumer growth accelerated in the years leading up to its IPO, as the company significantly increased its marketing spend.
Seller growth, however, didn't keep up.
The ratio of buyers to sellers on the platform increased significantly over the two years leading up to the public offering, a typical sign of slowing long-term growth. Marketing can only prime the pumps for so long, and Etsy started to cut back its marketing spending in 2016.
Since Etsy went public, seller growth has slowed even more. Over the last year, seller growth has almost come to a standstill. According to public information on its website, Etsy has just 1.7 million active sellers compared to 1.6 million a year ago. (Etsy defines an active seller as any merchant who has made one sale in the last 12 months.)
In the years leading up to the IPO, seller growth was about 250,000 new sellers a year. But from 2014 to 2016 that number only grew from 1.35 million to about 1.6 million. In other words, Etsy's seller growth has been about half of what it was leading up to its public offering over the last few years, and it's continuing to slow down.
This slowing growth makes sense. There are only so many people who sell craft goods, and Etsy may be reaching a point of market saturation. For example, according to the company, Etsy has sellers in 99.9 percent of U.S. counties.
As I wrote in my book, Modern Monopolies, the biggest reason to doubt Etsy was its addressable market. Today that concern still rings true, but Etsy wants to change that.
For the company to ever reach its IPO price again, it needs to jumpstart its growth. With that in mind, the new craft marketplace makes a lot of sense. Etsy CEO Chad Dickerson called the new marketplace "one of the most natural things" the company has ever done, and he's right. For one, it's directly adjacent to Etsy's current marketplace in craft goods. At the same time, it also builds nicely on the one thing it has done extremely well since going public: providing value-added services to sellers.
While Etsy's seller growth has stalled, it has been able to continue to increase the average revenue per seller by adding a host of services that it offers to sellers on its marketplace, aptly called Seller Services.
These services include features like promoted listings, payment processing, and shipping services, and they've been a huge reason for Etsy's revenue growth and successful drive toward profitability, as the company has noted on several earnings calls.
Creating a craft supplies marketplace builds nicely on this momentum while also giving Etsy the potential to bring in an entirely new market of sellers and capture a new and sizable market opportunity. The goal is to have 8 million products at launch, compared to 33,000 at your typical big box store.
Finally, the craft marketplace also gives Etsy the ability to open itself up beyond handmade goods. Etsy could open up its new marketplace to bigger craft supplies companies who don't make all their supplies by hand. As long as the goods made with these supplies on Etsy are still handmade, it wouldn't be a radical departure from Etsy's craft ethos, yet it would enable the company to greatly expand its supply.
Only time will tell if Etsy's new marketplace actually catches on, but it's certainly a step in the right direction. Investors should take note of the company making this smart move.