Etsy – Red flags.

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Etsy serves as a warning to Uber.

• The struggles of e-commerce player Etsy is yet another sign how important it is for a network business to have either 60% share or be double the size of its next competitor.
• This should serve as a warning to Uber.
• Etsy is an e-commerce market place (like Alibaba) that specialises in the selling arts and crafts products made by small artisan producers.
• It is a 3P e-commerce provider in that it simply serves as a market place rather than Amazon which mostly runs its own inventory and makes a retail margin.
• To make money, Etsy charges sellers to be on its platform and also sells them services to make the process of selling their products simple and easy.
• Etsy is often described as “the handcrafter’s Amazon.com” and it is here where its real problem lies.
• In October 2015, Amazon launched Handmade at Amazon and in doing so became a direct and brutal competitor of Etsy.
• Although Etsy remains the leader in the small niche of handmade artisan goods, it simply has no chance of competing against Amazon.
• Amazon can use its scale to put real pressure on pricing at Etsy and this has been felt with a real downturn in Etsy’s financial performance.
• Etsy has reacted by cutting 21% of its workforce and focusing on areas where it thinks that it can compete.
• These include improved search functionality as well as smoothing the buying process to ensure the highest possible conversion rate.
• However, cuts are being made across the board including both R&D and Marketing implying that Etsy has had to make some hard choices.
• The essential problem is that many users who buy handcrafts also buy products on Amazon, meaning that its easier for them just to stay where they are rather than go somewhere else.
• This means that Amazon can continue to turn the screws on Etsy and Etsy merchants are likely to have ro migrate to Amazon as this is where they will find most buyers.
• Etsy has failed to maintain its place as the go to place to buy and sell handmade artisan products as it has been unable to keep Amazon out of its niche despite having been there for many years.
• The result is likely to be that the current cuts will have a negative impact on revenues, necessitating further cuts and so on.
• Hence, I think that Etsy will be unable to survive in its own and is likely to end up being forced to sell itself at a valuation far less than the market is pricing in today.
• Network based businesses are an all or nothing market where if one is a niche player, one must defend that niche at all costs.
• As long as one remains the go to place to transact with more than 60% share or double the nearest competitor, a good return will be earned.
• However, the minute that is hallowed status is broken, with a much larger player getting some traction in that niche, then I think the game is over.
• This should serve as a red flag to Uber.
• Uber is vulnerable right now as the current turmoil has allowed Lyft to make up some ground in its home market of USA.
• Uber cannot afford to let Lyft get to close to half its size otherwise it will be at risk of losing that “go to” status signalling a bloodbath in its home market.
• Uber still has time to act, but for Etsy, I think the game is over.
• While there may be bargains to be had on its site, the share price is certainly not one of them.