Why Etsy Bought Depop

Until recently, fashion resale was mostly about potential: sites like The RealReal and Thredup reported quarter after quarter of explosive growth, but for most secondhand players, profits proved elusive. Investors who snapped up shares in newly public marketplaces were souring on the sector.

Etsy’s $1.6 billion, all-cash acquisition of Depop should silence those doubts, at least for a while. The deal represents a major bet by one of e-commerce’s giants that the resale market’s dramatic rise has only gotten started. It also speaks to the growing spending power of Gen-Z; Depop has one of the youngest-skewing customer bases in the secondhand fashion market.

In Etsy, Depop now has an owner with deep pockets that can help it make further inroads in a crowded category. Etsy’s market capitalisation tops $22 billion, more than twice that of Poshmark, Thredup and The RealReal combined. And while the buyer is no fashion specialist — apparel made up less than one-tenth of the $10.3 billion in sales on Etsy’s platform last year — the company knows how to run a marketplace.

“There are a number of people in resale and several well-funded folks, and yet Depop has seen explosive growth and has built the brand to be distinct from everyone else,” Etsy chief executive Josh Silverman said in a call with analysts and investors Wednesday.

Etsy had been in conversation with Depop for almost two years. A loyal base of young buyers and sellers and an asset-light model similar to Etsy’s own marketplace — where buyers, rather than the platform, store and ship inventory — along with meteoric growth since the start of the pandemic, sold Etsy on the London-based start-up. Between January 2020 and May 2021, Depop sales increased threefold, according to data from Earnest Research.

The sale is also another sign that the resale space is maturing: where small start-ups dominated the category just two years ago, today many of the most successful players are publicly traded, like Poshmark and The RealReal, or have the backing of fashion giants, like Vestiaire Collective, which includes Kering among its investors. That consolidation is likely to continue, analysts say.

“What we’re seeing is retailers realising there’s a need for partnership,” whether that’s collaborations or full-on acquisitions, said Sonia Lapinsky, a managing director in AlixPartners’ retail practice. “They’ve got to look at where these resale companies are unique and how they’re harnessing a different consumer.”

A More Formidable Depop

For Depop’s competitors, the acquisition means bigger, badder competition.

“Depop was definitely a successful standalone operation, but now they are being plugged into Etsy, a [$22] billion public company that’s been extremely successful for a long period of time,” said Joseph Einhorn, founder of resale service company The Archivist and former chief executive of shopping app Fancy.

The deal will also create some tough choices for brands, Einhorn said. Depop is perceived by many young consumers as more of a fashion company than tech platform. If Etsy can further grow Depop’s brand awareness, then it could “draw consumers away from new luxury retail sales too,” he added.

Etsy’s scale will also help Depop boost its margins, a consistent problem in the resale space, where costs ranging from engineering and marketing to fraud prevention are high. Typically marketplace models such as Depop and Poshmark tend to have better margins because they don’t handle inventory, whereas consignment resale companies such as The RealReal and Thredup must stomach the cost of picking, sorting, photographing, authenticating and listing each item that comes through their warehouses.

Depop has not disclosed whether it is profitable, though in the sale’s announcement Wednesday, Etsy said Depop will contribute to the company’s top-line growth rate but is expected to be “modestly dilutive” to EBITDA margin.

Etsy’s EBITDA (earnings before income, taxes, depreciation and amortisation) of $678 million in the first quarter of 2021 marks a 254 percent increase year-over-year. Reverb, a music instrument resale site acquired by Etsy in 2019, has seen its gross margin increase from 33 percent in the third quarter of that year to 53 percent in the first quarter of 2021.

“Marketplaces are just more financially viable,” said Kristin Kohler Burrows, senior director of Alvarez & Marsal Consumer and Retail Group. “This is a great purchase for Etsy because Etsy, too, has a marketplace model.”

As the resale market grows, Depop’s new ownership will no doubt raise the bar, according to Chris Ventry, vice president, in the Consumer and Retail practice of SSA & Company, a global management consultancy. This means every player from The RealReal to eBay will be pressured to provide better service, lower prices for buyers as well as sellers, savvier marketing and more exclusive product offerings.

When [resale] gets these younger consumers, it has implications for all of us across the board.

Still, resale is growing too quickly to be a zero-sum game, Ventry added.

The deal could benefit even Depop’s competitors, however, if it convinces more consumers that secondhand clothing is an option, said Sarah Davis, founder and president of Fashionphile, a luxury accessories reseller in which Neiman Marcus took a minority stake in 2019.

Davis is hopeful that if Gen-Z shoppers are buying $15 vintage T-shirts through Depop today, they might graduate into vintage Hermes or Saint Laurent as they age.

“I love the trickle-up effect,” she said. “When [resale] gets these younger consumers, it has implications for all of us across the board.”

Editor’s note: This article was revised on 3 June, 2021. A previous version stated Sarah Davis is the chief executive of Fashionphile. This is inaccurate. She is founder and president. The version also said Fashionphile was acquired by Neiman Marcus in 2019. Neiman Marcus took a minority stake.

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