The Etsy Economy
What the post-COVID comeback of craft fairs may mean for this DIY darling
In 2002, over 68 million Americans attended arts and craft fairs and festivals, according to the National Endowment for the Arts.
In 2005, a startup in Brooklyn called Etsy came along with a mission of connecting buyers and sellers of unique handmade items. By the end of 2022, Etsy was connecting 7.5 million sellers with 95.1 million buyers. The marketplace business transacted just short of $12 billion of merchandise last year.
From an arms distance, the business is still going up and to the right. Last year’s revenue reached $2.5 billion, up modestly from the previous year’s $2.3 billion. But we’re living through an important transitional year for Etsy, and for the entire arts and crafts community.
Last year, Etsy experienced its first drop in annual gross merchandise sales (“GMS”) since it was founded in 2005.
With some thoughtful maneuvering, Etsy was able to make last year’s top-line results seem reasonably robust by increasing the fee that it charges to sellers from 5% to 6.5%. The company also continued to build capabilities in value-added merchant services including on-site advertising, shipping labels, and more. This segment delivered $655M in 2022 revenue, up from $585M in 2021.
But after five consecutive years of profitability, 2022 saw more than a billion dollar swing in net income from the previous year. In 2021, the company reported a $493 million profit. In 2022, massive goodwill impairment charges caused the company to lose $694 million.
Woof.
Behind the recent lackluster results is an internet commerce company that only the astute would have bet on as a pandemic rocket ship.
Though it was no Zoom or Moderna, from trough to peak, between March 2020 and November 2021, the stock soared from $30 to nearly $300. As borders shut down, supply chains screeched to a halt, and consumers figured out that buying homemade goods from other people stuck at home was one way to avoid going shopping in stores for gifts, party supplies, and home decor. And let’s be honest, Covid increased our interest in beautifying our living quarters, having parties with our pod, and comforting ourselves and our loved ones with thoughtful indulgences.
While IRL events were on hold for nearly three years, a few craft fairs used summer months to hold outdoor, socially distanced gatherings.
Now that events are back in full swing, Etsy sales are slowing down. I suspect this is due to the resumption of in-person craft fairs and art shows. When the number of such events went to 0 in 2020, the number of Etsy sellers increased from 2.7 million (in 2019) to 7.5 million in 2021. While I wouldn’t go so far as to suggest that the active Etsy seller census and the number of domestic craft fairs are mutually exclusive, I believe the availability to exhibit and sell at the latter was (until 2020) functioned as a low-grade barrier. Makers that preferred to sell locally or in-person, didn’t need to use Etsy because other sales channels existed.
Etsy prefers to point to macro headwinds as a contributor to decreasing GMS. In my mind, macro strain impacts average GMS more than the demand (buyer) or supply (seller) side. Etsy’s self-reported data has just started to reflect this trend, which is not good news given the surge of inflation between 2021 and 2022. During a time when prices of most consumer purchases kept ticket sizes flat to modestly up, the reversal suggests that the trend line could fall further in 2023. If I were a shareholder, I’d be watching this closely, or thinking of getting out of the stock (of course, cost-basis dependent) unless I started to hear more from management about how they intend to stabilize average GMS.
The nuances of handmade items are more compelling when you can have a tactile interaction with the product under consideration. Crafts are one of the original forms of social commerce. While the conversational aspect of the exchange is replicated in Etsy’s checkout and feedback flow, swapping digital messages can ultimately feel tedious and transactional. The joy of meeting the maker and forging personal connections is lost when we leave it to online sales to substitute for discovering and supporting people who make and sell small-batch and one-of-a-kind goods.
Growing up in Minnesota, church basement craft fairs and cold arena art shows filled many of my childhood weekends.
My mom, aunts, and grandmothers loved to drop by craft fairs to browse selections of gifts and decor. For me, these early immersions into the world of handmade items drastically shaped my own aesthetic sensibilities and interest in making things of my own. When I moved to San Francisco and began attending Renegade Craft and West Coast Craft, I felt like I hit the maker jackpot. I used these shows to source new partnerships for Batch and shop for local, unique wares for my own home.
On the discovery front, lovers of high-quality craft products are often not comparison shopping. Online algorithms tend to be optimized around finding “the best” or “the right” product. When I wander around craft fairs, I’m looking for the best products, period. I seldom show up at a show thinking, I’m here to buy an 18x24” watercolor print with a coastal vibe. But if I stumble across one and love it, I might spring for it. This type of “random walk” and “impulse purchase” are super hard to codify and turn into an algorithm. And even if Etsy’s data teams could get this right - perhaps with the help of AI - I worry about what the algorithms will miss or get wrong. Of course, I’ll never know what I’m not seeing, but when I go to craft fairs with sourcing, discovery, or even entertainment in mind, I make two passes through the aisles to ensure I give everything a second look. I don’t like missing things. Something about the finite nature of even the largest shows helps me feel satisfied that whatever my purchases are, I’ve optimized my outcome based on available inventory for sale. With Etsy’s 100 million products, discovery is a complicated problem… a paradox of growth.
Another concern I have for Etsy is that close to five million of their active merchants have joined in the last one to three years. Many of these sellers came to the platform to transact with their previously offline communities during a time when they couldn’t sell in-person. For these sellers, higher fees and decelerating platform sales growth mean giving up more of each sale in a higher-competition digital environment. Over time, this may incentivize poorly producing sellers to leave the platform. The countervailing force is that setting up an Etsy storefront is an investment of time and effort that most people would hesitate to dismantle if there was any possibility of returning to it after they left. But could we end up with a bunch of zombie storefronts as in-person event driven craft commerce makes a comeback?
So far, I have scant proof that this will be true. However, as I’ve visited two farmers markets in Northwest Montana this summer, I’ve been struck at how the assortment of vendors skews heavily towards handmade goods. It just may be that early June isn’t quite peak summer harvest season for local growers and market operators want to fill booths. Sellers of soap, jewelry, ceramic mugs, candles, baby clothing, vintage fashion, dog bandanas, and tabletop accessories seem to be really out there getting after it.
Etsy’s a big business now. Big businesses are hard to grow and change. And were crafts ever meant to be monetized by titans of the internet? A debate for another day, perhaps.
So maybe we’re entering peak omni-channel times for artists and makers. And that wouldn’t be the worst scenario for anyone.