Friday Reflection | October 16, 2020
Shopping Small Wins Big
This year, the top performer in the S&P 500 is not Apple or Google or even e-commerce giant Amazon with its vast network of distribution centers and one-day shipping. The top S&P performer this year, at +240% through mid-October, is Etsy.1 An online marketplace for handmade crafts and vintage items, Etsy is comprised of thousands of small individual sellers. While not the largest company in the index, the reasons for their strong performance are indicative of key trends in the broad market and provide useful lessons for both companies and individuals alike as we navigate forward.
Elsewhere in the market this week, stocks were mixed. Investor appetite was dampened as hopes for a pre-election stimulus faded further, and accelerating coronavirus cases led to tightening government restrictions in Europe. Economic reports here in the US, fueled concerns that progress is stalling. New unemployment claims were 898,000 last week, a fresh two-month high which represents the 30th straight week at over 800,000 new claims. Layoffs and new claims have spread more substantially into middle-class positions as we wrote about a few weeks ago, and optimism is waning as winter approaches. On top of everything else, the US election is less than three weeks away, and many people are holding their breath until an outcome is settled.
Through all this, Etsy has continued to climb higher.
Adaptation: Small Sellers Moved Quickly
The fate of small retail business has been widely scrutinized. Campaigns to shop at small businesses flooded email inboxes the last few days as an attempt to prevent Amazon from gobbling up even more market share during their Prime Day event. Further challenges for brick and mortar stores have emerged with mandated closures of non-essential businesses as well as shoppers electively staying home, but the trend toward digital was underway long before 2020. The reality for small businesses is that the landscape is changing, and these shifts are opening new opportunities and new audiences for business owners willing to adapt.
“Adaptation” is a word that has been key to individuals and businesses this year. At Etsy, this meant the rapid mobilization of small sellers to begin making face masks in March. By the end of June, more than 110,000 unique sellers had grossed $346 million selling face masks on Etsy’s platform. By comparison, the clothing industry behemoth Gap Inc. sold $130 million of masks over a similar time period.2 This willingness to adapt to new a landscape, rather than stubbornly stick to old routines and product mixes, paid off.
The platform itself also adapted rapidly. Their search algorithm was overhauled in early March to better feature face masks, so shoppers would see fabric masks instead of Halloween masks or cleansing face masks in searches. The jump in sales extended beyond just face masks, with sellers able to quickly offer products that respond to any news event, such as “Notorious RBG” merchandise and other tributes to the late Justice. Home décor has been another strong line for Etsy sellers as people seek to refresh furnishings while spending more time at home, or improve their newly important Zoom backgrounds.
Even as the re-opening of non-essential businesses has begun locally and nationally, shoppers are still understandably cautious, and foot traffic in urban shopping districts remains significantly below historical averages. With the timeline for approval and adoption of a vaccine still a major unknown, we expect consumers will remain cautious and online marketplaces and delivery services will remain in favor.
Diversity: Democratizing Retail
Opening a store to sell retail products traditionally meant needing a physical location. This often meant needing access to capital or getting a small business loan, and the need to devote oneself full-time to that business. This business model is particularly challenging for people who hold family responsibilities or who have less access to financing. The digital revolution of the past 20+ years has slowly shifted this landscape and reduced the barriers for new sellers to participate in the marketplace.
At Etsy, diversity has been a priority since their early days as a certified B Corp. Their platform creates the opportunity for sellers to add an additional income stream, even on a part-time basis, and without the need for substantial startup capital. As of 2019, 83% of sellers on Etsy were women, compared with only 30% of business owners nationally. This has been a valuable lifeline for women who have been disproportionately impacted by job losses during this pandemic.3 Further, online marketplaces can provide a lifeline to sellers that don’t live near high-density shopping districts or even near urban hubs in their region. Only 17% of business owners in the US live in a rural area, but more than 28% of Etsy sellers reported living in a rural area.4
Beyond the diversity of their sellers, the platform also offers a variety of products that aren’t found at other major retailers. People don’t go to Etsy for commodities like diapers or laundry detergent, so it sidesteps direct competition with the core businesses of other e-commerce giants such as Amazon or Walmart. A recent survey showed that 88% of buyers on Etsy think the marketplace has items you can’t find anywhere else; this differentiation has allowed Etsy to build a niche and a resilient community of sellers and shoppers.5 The diversity of community, products, and income streams creates stronger financial outcomes for all stakeholders.
ESG: Using Business as a Force for Good
Investors have been adapting to the changing landscape as well, with an appetite for ESG or social screening steadily increasing in recent years. The social and political climate has contributed to this shift, with more people wanting to vote with their dollars. Beyond that preference, it is now a more common expectation that companies with more diversity in management and the boardroom, or a more responsible approach to environmental sustainability, will perform better financially in the years to come.
Etsy is a prime example. The company was one of the first to IPO with a B Corp certification, a third-party validation of its commitment to social responsibility. While they subsequently had to give up this certification, it was a strong signal to investors about the values held by company management. Today, more than 3,500 companies in over 70 countries are certified B Corps, including well-known companies such as Patagonia, Warby Parker, Ben & Jerry’s, and Kickstarter. Closer to home, North Berkeley Wealth Management received its B Corp certification in 2013.
Beyond just being the right way to do business, in recent years ESG strategies have been broadly outperforming. While past performance does not guarantee similar future results, we believe strong demographic and climate trends support profitability for companies attentive and responsive to these issues. Companies that adapt their business models, leadership teams, and product mixes will be better positioned to outperform in tomorrow’s economy.
Much like the current retail transformation, we at North Berkeley have seen our own services migrate to the virtual realm. We believe the expansion of digital tools and new capabilities are here to stay and will complement in-person options when they return. Small business broadly is not doomed, but it is changing. The same is true for energy production, auto manufacturing, and many other industries. New platforms like Etsy can provide a path forward, for small business owners and shoppers, to create new routines and support the growth and evolution of our shared economy.
1 This commentary is not a recommendation to buy Etsy as an investment, but rather a representation of our views on overall market trends and conditions.
2 How Etsy Won the Stock Market in 2020. By Sarah Halzack. Published October 5, 2020. Washington Post
3 COVID-19 and gender equality: Countering the regressive effects. Published July 15, 2020. McKinsey & Company
4 Etsy seller demographics. 2016-2019. Statista.com
5 As a local example, the artist Katie McCann who will be featured in North Berkeley’s first virtual/hybrid exhibition displays and sells her art primarily on Etsy. The exhibit goes up November 2, 2020.
About Brian Kozel, CFP®
Brian Kozel works as a partner and lead advisor at North Berkeley Wealth to help his clients feel confident in their financial decisions.
This commentary on this website reflects the personal opinions, viewpoints, and analyses of the North Berkeley Wealth Management (“North Berkeley”) employees providing such comments, and should not be regarded as a description of advisory services provided by North Berkeley or performance returns of any North Berkeley client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data, or any recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. North Berkeley manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.