“Etsy? Who cares about Etsy Q1 earning call when we can review Amazon’s?” Believe it or not, the world of ecommerce is more than just Amazon. Etsy is a large marketplace that is much more relevant than Amazon for many small business owners. I found that Etsy is working on relevant projects over the last year. And as the competition from Chinese giants is threatening many companies, I thought it would be interesting to see if/how Etsy approaches it. 

Let’s Start With the Financials

Let’s start by quickly going over the financials. According to Etsy CEO Joshua G. Silverman, “Etsy’s consolidated results, while within our guidance range, were not where we wanted them to be.” While Etsy revenues seem to be increasing in the long term, the earning call pointed out that “GMS was just shy of $3 billion, down 3.7% from last year. Revenue grew a bit up 0.8% to $646 million, and we delivered $168 million in adjusted EBITDA, a very healthy adjusted EBITDA margin of approximately 26%.”

The disappointment came from Etsy GMV, which is down 5.3% YoY. While the number of active buyers is at a high of 92 million, it appears that the average order value is down, driving GMV down as well. Joshua Silverman explains that “these trends are cyclical rather than structural” and tells us about macroeconomic conditions, including the “high cost of money”, and customers having less disposable income after paying for necessities. He proceeds to tell us that other marketplaces are doing better because they sell necessities at low prices. I agree to some degree, but I think an important factor is missing from his analysis. More on that later.

Gift Mode and the Paradox of Choice

It is a hot summer day. You’re craving ice cream, and your freezer has vanilla or chocolate. Unless you’re like me and you get a scoop of each, it isn’t hard deciding between the two. Now let’s say you walk into an ice cream store and they have literally every flavor you can think of and more: triple fudge brownie, avocado swirl, wasabi, fried chicken, etc. That is the paradox of choice: the more options you have, the more likely you are to end up in a mental flavor frenzy rather than enjoying your scoop. And it is easy to experience that on Etsy, when customers are offered with a large number of items in each category.

Enters Gift Mode, one of Etsy’s recently launched features. Gift Mode uses human interaction and machine learning algorithms to display a curated selection of products to visitors shopping for a gift. It feels like going into a gift store and telling the sales clerk who you are shopping for and what your criteria are. As an Etsy customer, I find the shopping experience fantastic and very helpful. As Mother’s Day is coming, I can see this feature making a difference, and I really think it adds value to Etsy. I am hoping it will make a difference in conversion rates.

“Creating Cleaner Shopping Aisles” versus Creating Ad Space

As Etsy CEO explains, “We stand for keeping commerce human and believe that doing this in a way that no one else can is our most important competitive advantage. We’re focused on creating cleaner shopping aisles for buyers.” This makes sense to me, and I am looking forward to seeing how these new initiatives contribute to the marketplace’s success in the long run.

He continues: “All too often, when you visit Etsy, your search is cluttered, showing you too many items that feel very similar, increasing cognitive load while failing to highlight the incredible diversity that is a towering strength for Etsy.”

While this sounds great, I took the time to review Etsy’s financials and found that its share of revenues coming from “Services” is getting larger and larger. My concern is that revenues from ads are increasing, meaning that potentially 1 – Etsy is charging more for ads and is squeezing its third-party sellers and/or 2 – Etsy is dedicating more ad space in the search results, resulting in a less than ideal customer experience. We have seen this trend with Amazon: it isn’t uncommon that half of Amazon’s search results are ads, making it difficult for customers to find the most relevant product. The FTC has an eye on these practices, as I explained in past articles. If that is the case, it would go against Etsy’s efforts to “create cleaner shopping aisles for buyers”.

Rachel C. Glaser, Etsy CFO, briefly mentions ads later in the call: “During the quarter, we continued to enhance Etsy Ads.” However, it isn’t clear what Etsy’s long-term strategy regarding advertising is.

Taking the Trash Out

Too often in earnings calls, I hear companies use “AI” and “Machine learning” as filler buzzwords, without disclosing exactly how these technologies bring value. However, in Etsy’s case, I found it much more relevant. Joshua Silverman explains “We’re doing more than ever to suppress and remove listings that violate our policies. And advances in ML have been particularly powerful as enablers here.” Now I admit I don’t know how bad the situation is on Etsy. But removing low-quality listings can definitely improve the customer experience while also making a better experience for legitimate, high-quality sellers.

When Silverman suggests that “Our improved enforcement capabilities have resulted in the cumulative removal of millions of listings and tens of thousands of active sellers.”, I can imagine that the situation was pretty bad. I find it great that Etsy CEO is addressing this issue in the earnings call, as this can be extremely frustrating for both buyers and sellers on a marketplace.

What About Temu/Shein?

I was really interested to hear Etsy’s response to Maria Ripps questions on the competitive environment. She explicitly expresses her concerns on Temu’s strategy, and asks: “So as we start to sort of lapping that, do you anticipate maybe a more favorable or maybe a little bit more stable competitive backdrop? Kind of, is that becoming less of a headwind as we move through the second half of the year?”

Etsy’s CEO response is that they “think that the Chinese competitors are more symptoms than a root cause. […] Consumers feel really pressured and so they are seeking value in deep discounts and deep promotions.” That is a good point. However, he later concludes “The more that they find really, really cheap and really disposable things, I think the more they will crave an alternative to that and we’re bound and determined to use this moment to get even stronger as that alternative”.

I think two key pieces are missing here. First, how much do customers value craftsmanship over cheap items? If someone is shopping for jewelry, are they willing to spend $10 more to get it from a small business if they see a similar design they like on Temu?

I like that Etsy is removing low-quality sellers and listings and working towards making the website more “trustworthy”, where handmade items are actually made by skilled creators rather than purchased for cheap in bulk and branded “handmade” after taping a fancy-looking sticker to it. But even then, are customers really willing to spend more to support small businesses? What people say and what they do is often a different story, as we have seen with people saying they want a more sustainable alternative while they buy clothes from Shein.

More importantly, the main issue I don’t see addressed here is the intellectual property issue, and the numerous reports from small businesses and independent creators on Temu/Shein allegedly stealing their design. This is in my opinion a huge threat for Etsy, one they must take seriously. 

It can create a very confusing experience for customers, and some of them won’t see a reason to not get the cheaper item from a Chinese website. In the long run, this can cause many of these sellers to go out of business or to offer a much smaller assortment of items. Now, fixing this issue is easier said than done, but I really believe it can’t be ignored by Etsy management.

Left, a screenshot from Leora Aileen’s website, a small business owner. Right, the same design on Temu. Source : Time.com


Don’t expect me to tell you whether you should buy Etsy stock or not; there are people way more qualified than I am if that is what you are looking for. Plus, I’d feel bad if some of my readers lost money in the stock market after taking my advice. 

What I can tell you is that Etsy seems to be focusing on the customer experience seriously, with great innovation such as “Gift mode”, and the initiative to remove low-quality offers. However, my main concerns are the intellectual property issue, which can definitely deter sellers from selling on the marketplace, and the growing % of revenues from services.

Ultimately, I enjoy looking at businesses like Etsy or eBay, which really bring something unique to the e-commerce landscape. Let’s see how things go for Etsy, but you can be sure I’ll be using it for gift ideas.