OMERS Shifts Private Equity Strategy After European Exit
- Private Equity
Activist investor Elliott Management is now Etsy’s largest shareholder after amassing a 13 percent stake in the online boutique marketplace. Etsy also announced that Elliott would take a seat on its board starting next week, sending shares up almost 14 percent on the news.
Etsy has fallen more than 55 percent over the last twelve-month period as it navigates an uncertain e-commerce environment. Inflation and pressures on consumer discretionary spending have taken their toll, along with the more pressing risk from the encroachment of low-cost offshore retailers Temu and Shein.
Etsy management says this is a market-wide phenomenon and isn’t disproportionately impacting the business, though they acknowledge that, at least for Temu, rapid growth to $14 billion in sales had to come from somewhere; meaning there is some element of lost market share for Etsy and its peers.
Part of the problem is the deluge of ad spend that Temu and Shein have allocated to digital marketing platforms like Google and Meta. It’s driven a meaningful increase in equivalent marketing costs for Etsy, and pushed them to explore potentially less efficient channels like television.
While management questions whether Temu and Shein’s spend is being done at positive or even break-even ROI, there’s little option but to sit tight and hope it tapers off in the near future.
In a conference presentation last month, Etsy CEO Joshua Silverman described the online retail platform as a marketplace for things that are handmade, vintage, or bought directly from the person who made them. A standout experience in “a world that's becoming ever more commoditized.”
But, with scale that’s now hit 6 million sellers hawking more than 120 million items, an artisan experience has proven difficult to maintain. That’s forced the company into the paradoxical position of working to grow its commerce activity while aggressively shutting down sellers it feels have violated its product listing criteria.
Part of the policing has involved a nearly $50 million investment in enforcement activities this year, spread across new machine learning solutions and human-led manual actions. Takedowns were up 140 percent year-over-year through 2023, though it’s unclear if that’s a result of enhanced monitoring or a deluge of suspect listings.
It’s an important battle because an improvement in the shopping experience could drive even more impactful second-order changes. Jefferies-led expert calls point to buyer unease with high-ticket purchases on Etsy, which has contributed to a hard-to-break ceiling on the platform’s average order value. The company has already launched a purchase protection (refund) program, though could see a greater willingness to spend big from consumers who don’t have to sort through low-quality product listings.
Next up on management’s quality control roadmap is further integration of AI, with a long-term goal of providing users a personalized guided shopping assistant. Though others may disagree, Silverman says Etsy “may have more to gain from Gen AI than almost anyone.”
Even with recent turbulence, there remains a lot to love about Etsy.
The platform’s dynamics mean the business is uniquely capital light compared to other e-commerce players. Etsy’s independent sellers handle all production, inventory, and logistics, leaving the business with limited working capital and physical infrastructure requirements (e.g. warehouses, shipping facilities). Last year, Etsy converted around 90 percent of its $800 million of EBITDA to free cash flow.
Despite its curation challenges, Etsy has also proven it possesses real staying power. Many other pandemic success stories have struggled to retain customers after sudden jumps in growth. Etsy, on the other hand, has been able to make some of its lockdown shoppers stick around—it’s now 2.5 times larger than before the pandemic.
Following initial conversations with company leadership, Elliott partner Marc Steinberg is now preparing to take his seat on the board. The quick resolution may have averted a drawn-out public activist campaign, though more upheaval at the business could be coming.
Elliott has not yet publicly disclosed its proposed changes. With a mature U.S. market and seller pushback on previous take rate increases (fees charged to sellers), revenue growth has been largely limited to international brand awareness campaigns.
That leaves organizational changes as the next obvious lever for value creation. Etsy already executed an 11 percent headcount reduction in 2023, so an attempted quick win from headcount-related margin improvement may be off the table.
One obvious target is a dismantling of the company’s inorganic growth strategy. Etsy has seen mixed results from its acquisitions of resale platform Depop, Brazil-based marketplace Elo7, and instrument retailer Reverb. The company has already sold off Elo7, just two years after its $217 million purchase of the asset, and could be preparing to hang a for-sale sign on its remaining standalone brands.
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