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Can Etsy Knit Together a Recession-Proof Plan?

Motley Fool - Mon Jun 27, 2:58PM CDT

If you think Etsy's (NASDAQ: ETSY) business model as an e-commerce platform offering craft luxuries will struggle during a bear market, think again. Etsy has some unique advantages that other digital sales platforms like Amazon, Shopify, and eBay lack. It has also proven to be a resilient and adaptive company. Etsy was successful during the peak of the pandemic, when it became a go-to source for masks, while e-commerce giants like Amazon struggled to keep up with demand. This shows that during a crisis, Etsy can leverage its vendors' talent and resourcefulness to meet market needs. Etsy's fundamentals include several clear advantages that position it well for a potential recession. These include its nimbleness, customer loyalty, intellectual property (IP) strategies to provide a user-friendly experience, and Etsy's value proposition for suppliers. All of these will be critical during a potential recession.

Etsy's platform-centric infrastructure could improve margins, even in a bear market.

One of Etsy's biggest advantages is that it is a lean digital platform instead of a vertically integrated firm. Etsy lacks a logistics infrastructure to store and deliver its sellers' goods, which differentiates it from Amazon. Etsy also hasn't developed the agreements and relationships that eBay has with UPS and FedEx. In a bull market, lacking those agreements or infrastructure could limit growth, but in a bear market, these factors could keep Etsy lean and resilient enough to survive and thrive, as its costs do not include inventory, manufacturing, jets, vehicle fleets, or negotiated carrier relationships, which is part of why its gross margin has remained so high.

Etsy continually onboards new, loyal customers

Yet Etsy's advantages are not limited to its infrastructure. Etsy has a surprising degree of customer loyalty, evidenced by repeat purchase behavior, which has increased in frequency. The platform offers a compelling degree of "stickiness" that could make a major difference in the hyper-competitive e-commerce sector. This is partly because Etsy has an evergreen customer onboarding process. Many first-time customers initially choose Etsy to find special goods for milestone events (e.g., weddings), then become more regular buyers. Even during downturns, many consumers are willing to spend money on life milestones, and Etsy presents a vast variety of choices at every price point.

Etsy has two major advantages when it comes to its intellectual property

Customers are able to find those choices because of a third compelling advantage: Etsy's intellectual property and other digital assets. The company's digital assets are designed for easy use; many of its patents seek to improve natural language and visual search capabilities. Even though most e-commerce firms invest heavily in search algorithms, Etsy has turned a potential disadvantage to something positive: Its 100 million-plus products are non-standardized, nor are they coded with universal product codes (UPC's). Yet Etsy has developed search algorithms that uniquely match user queries to its non-standardized primary market.

This technology strategy could help it capture market share among both sellers and buyers choosing from Amazon, eBay, or Etsy. Etsy recently invested in the development of a suite of powerful seller tools, including a seller-facing app and augmented reality technology. These tools improve the experience on both the seller and buyer ends without requiring any technical expertise from sellers. This could be another growth factor during a bear market: During tough times, many people try to monetize hobbies for extra cash. Unfortunately, the friction from less user-friendly platforms can discourage these would-be micro-businesses. Imagine a would-be entrepreneur trying to start a small store. They might not meet the inventory requirements to use Amazon's FBA, and the process of setting up a new Shopify store could frustrate them further due to the fees and the many tech-heavy steps involved. In contrast, Etsy has developed technology with its end-users in mind, which reduces the perceived risk of launching a store. If sellers can turn a hobby into a side hustle with only a few clicks and some pocket change for a listing, and if buyers can find whatever they can imagine (as well as things they hadn't imagined, but discover they want anyway!), then Etsy can improve its market share even during down markets. If it can do so without incurring the costs associated with a logistics infrastructure, then its margins will be even better.

If you previously dismissed Etsy as a superfluous consumer discretionary business that would struggle in a bear market, now is the time to reassess. Etsy might be better positioned than you think.

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Miranda Tedholm has no positions in any of the stocks mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. The Motley Fool has positions in and recommends Amazon, Etsy, FedEx, and Shopify. The Motley Fool recommends eBay and recommends the following options: long January 2023 $1,140 calls on Shopify, short January 2023 $1,160 calls on Shopify, and short July 2022 $57.50 calls on eBay. The Motley Fool has a disclosure policy.

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