Etsy Buys Depop for $1.6 Billion and the Rise of Resale

June 11, 2021 by  Chris Erwin

Today marks our seventh episode of the RockWater Roundup.

 

What’s In This Episode

Etsy just bought Depop, an ecommerce marketplace known for vintage clothes and streetwear that’s highly popular with Gen Z. We discuss the deal logic, how the $40 billion resale market is outpacing overall apparel, the recent IPOs of Poshmark and Thredup, Gen Z buyer values, downward seller fee pressures from incumbents like Facebook Marketplace and eBay, and how resale platforms bolster their competitive position via product UX and distribution partnerships.

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Exec Sum

(original audio + transcript)

Etsy / Depop Deal Dynamics

  • On June 2 2020 Etsy announced its acquisition of Depop, a secondhand apparel marketplace, for $1.6B. That’s 23X Depop’s $70 million in 2020 revenue
  • What’s in it for Etsy? Etsy gets Depop’s #GenZ audience
  • What about Depop? Depop gets Etsy’s fulfillment and logistics support, discovery tech, and other resources to achieve international scale (which Etsy has already done)
  • Some interesting Depop marketplace dynamics:
    • 90% of buyers are younger than 26
    • Average seller is 39 years old
    • Why? Gen Z is hungry for 90s and vintage apparel, which is sitting in the closets of these 39 year olds
  • But that’s just the tip of the resale iceberg!

Growth of Resale

  • Some resale stats:
    • Apparel resale market growth outpaced the total retail market in 2019 by 25X
      • Makes up just 2% of the total apparel market, but projected to hit $40 billion in 2021 sales
      • Projected to grow 20% YoY for the next 5 years
  • Demand for resale is high. We’re going to see more startups trying to meet this demand, and more M&A deals from legacy companies looking to stay ahead of competitors
  • Some more deals in resale:
    • Poshmark IPO, $3.5 billion mkt cap, 6.2 million active buyers
    • thredUP IPO, $2.5 billion mkt cap, 77% of supply from repeat sellers = deeply engaged + passionate user base
  • Despite so many qualitative tailwinds for the resale market, individual companies are struggling. RentTheRunway closed its stores in 2020, Poshmark stock price is down 54% YTD, RealReal is down 10% YTD. What’s happening?

Future of Resale

  • Increasing competition = pressure on seller fees
    • Typical resale upstarts take 15-20% of sales, but eBay is at 10% and Facebook Marketplace is just 5%
  • If you’re competing based on fees, startups will lose. You need to differentiate in 3 ways:
    • Distribution. thredUP partnered with big box retailers so you can buy resale product through Walmart, Gap, and Macy’s websites
    • Customer Experience. Poshmark has robust social features, like the ability to “follow” your favorite sellers. Also, amazing customer service to make shipping and returns simple for buyers and sellers
    • Seamless Seller Experience. As great as the buying experience is, you need suppliers to buy from. And the easier it is for sellers to sign-up, onboard, market their wares, track sales, and process customer orders, then the more likely that higher quality sellers will join the platform…which will then lead to more buyers…and the flywheel spins

 

Episode Transcript

The conversation was lightly edited for clarity.

Chris Erwin:

So Andrew, lots of activity in the overall resale goods market, particularly just saw that Etsy over the past couple of weeks bought Depop for around a little over 1.6 billion. Did you see this?

 

Andrew Cohen:

I did. I did. Yeah. The market is definitely having a moment right now.

 

Chris Erwin:

Pretty wild stuff. So a few details on the deal. So Depop is a secondhand e-commerce marketplace that’s known for vintage clothes and streetwear. It’s very popular with Gen Z, while the Etsy audience skews a bit older, typically targeting Millennials.

 

Chris Erwin:

A few notes on the combination and deal logic. Both are very aligned in terms of DIY spirits across both companies. The Depop apparel items are known for being a bit more cool and cutting edge, that whole streetwear vibe. So Etsy gains access to Depop’s high-value Gen Z audience, and then for Depop they get improved search and discovery, which is something that Etsy has been working on for years. Also, the ability to scale internationally, which Etsy has done, and then also a boost in fulfillment and logistics support as well for the overall Depop market end users.

 

Chris Erwin:

Also of note is that the revenue multiple for the deal was 23X, and that is reflective of 2020 revenue of around 70 million. A pretty high multiple there, but I think it’s time to step back, Andrew, and talk about all the activity that we are seeing in the resale market overall, and I think you have a few interesting datapoints here.

 

Andrew Cohen:

The Depop deal is just the tip of the iceberg, and the resell market as a whole is definitely having a moment right now. In 2019, the growth of the second-hand fashion market outpaced that of the overall retail market by 25X. This year, resale apparel sales are excited to hit 40 billion worldwide, and although that’s only 2% of the total apparel market, it’s also projected to grow up to 20% year over year for the next five years. So we definitely expect it to represent a much bigger share of the fashion market going forward, and because of that, definitely excited to see a lot more of these deals, a lot more companies popping up to meet this market demand going forward.

 

Andrew Cohen:

Couple of big recent deals that also speak to the power of this moment. Poshmark, which went public in January after raising 280 million, its valuation peaked at 7 billion, thredUP went public in March after raising 170 million, and all this momentum is really fueled by some unique buying habits that we’re seeing, mostly from Gen Z. So for Poshmark, they had 6.2 million active buyers. For thredUP, 77% of their supply comes from repeat seller, which jumps out at me as really being indicative of a deeply engaged, passionate user base, and as we see in media or really any other consumer business, that’s how you win. It’s really going deep with an everyday, recurring, passionate user base and it definitely seems like it’s Gen Z is the demo that’s fueling that fire. What do you think?

 

Chris Erwin:

I think, look, we’ve done a lot of research into the Gen Z audience and consumer base, and have also done surveys of them as well, both in the US and in China. There’s a few interesting characteristics of them that we’ve observed. So particularly as it relates to resale, that Gen Z shoppers are turning to greener and more economical purchases, and that’s what resell offers. In addition, that they prefer to buy online versus in store. So looking at digital marketplaces, this has also explained the growth of StockX and Goat, which we talked about in our last microcast, and so this trend was also further accelerated by COVID.

 

Chris Erwin:

When you break down the demographics of the buyers and sellers on Depop, there’s some interesting insights or things that we want to figure out. So what were some of the numbers that you’ve found Andrew?

 

Andrew Cohen:

Yeah, this jumped out at me, 90% of the Depop buyers are under 26. That definitely checks out like we were saying, it definitely seems to jive with Gen Z purchasing behavior. But what really stood out to me was that the average seller is 39 years old, so 13 years older than most of the buyers. That definitely jumped out at me because my first instinct was that secondhand apparel works really well in social commerce environments because there’s this feedback loop between buyer and seller, where the buyer is the seller and the seller is the buyer. It’s what has fueled social content creation itself. But looking at these numbers, that’s not really the case. There’s definitely a different class of buyers then there are sellers here. I don’t know, how do you reconcile that and bridge that gap?

 

Chris Erwin:

I’m more closely aligned with the age of the average seller, around 39, so I’m definitely a Millennial. I do know that for Gen Z, 90s vintage product, music, apparel is very popular, and I think a lot of that exists in the closets or in the homes and apartments of Millennials that are around 39 years old. I think if you’re in the age range of 15 to 26, which is the target Depop buyer base, then I think maybe that dynamic is playing a factor. That’s just one thing that came to mind. Does that make any sense, Andrew?

 

Andrew Cohen:

No, I can see it. I’ve got some anecdotal experience there myself. I actually helped start a music festival called 90s Fest. It was basically just purely built on this same level of nostalgia for 90s culture. At each event we would have this bizarre, which was basically just a market of local thrift shops and everything, and that was happily one of the most popular affirmations that we had, and just seeing firsthand how much people love digging through a vintage Coolio shirt or whatever. You could definitely see that connection that generations have for vestiges of the past.

 

Chris Erwin:

So on a vintage Coolio shirt, what was the image on the shirt? I just think of his hair, how he used to do it, which is pretty wild.

 

Andrew Cohen:

The hair is the main silhouette. He was a performer. He brought the house down.

 

Chris Erwin:

Yeah, that’s a pretty cool thing you did back in the day and another version of yourself.

 

Andrew Cohen:

So on one hand, this market is clearly blowing up right now. Everything we just said shows major tailwinds. But at the same time, what gave me pause is we’re also seeing a lot of headwinds. Poshmark, their value is down 54% year to date RealReal is down 10% year to date. Rent the Runway closed down all of its stores in 2020. I don’t know, Chris, how do you reconcile the good with the bad that we’re seeing in this market right now?

 

Chris Erwin:

I very much agree. As I was reflecting on this, I think there’s this theme of he duality. It’s the headwind plus the tailwind.

 

Chris Erwin:

Just the of note for Rent the Runway, lots of challenges after they raised that 125 million in 2019, because they really catered to special events like weddings and for work wear. During the pandemic when that just wasn’t happening, their usership and revenue just fell through the floor. But their subscribers are now up 100% year over year and they’re at 60% of pre-pandemic levels so there is some good here.

 

Chris Erwin:

But here’s how I break it down. There’s definitely a lot of increasing competition, which is putting downward pressure on seller fees. So think of the major competitors like eBay, which I think has around 185 million buyers and 19 million sellers, and then Facebook marketplace. The marketplace alone has around an 800 million average users. Then, what’s not even being discussed enough but we brought up last week, is these emerging resale marketplaces like Whatnot, like Goldin Auctions and in all these niche verticals there’s going to be more.

 

Chris Erwin:

We’ve had conversations privately with a lot of clients and founder peers that are launching resell products. The typical revenue take is around 15 to 20%, but that’s likely going to be coming down from some of these platforms because eBay only takes 10% cut, Facebook charges sellers is 5%. So I think Poshmark and thredUP and the RealReal and others are going to see some downward pressure on their margins.

 

Chris Erwin:

That then raises the question of what do these companies need to do? I think there’s a few ideas that we have. One is thinking about just overall user growth and thinking differently about distribution. I liked what thredUP has done. They’ve done distribution partnerships with Walmart, Gap and Macy’s and many other big box retailers, where if you go to the Walmart website, you can actually buy resale product from thredUP.

 

Chris Erwin:

Then I also think about going really deep in your vertical and giving a custom user experience. Poshmark has done this really well. They’ve really emphasized social features, so when you go into their marketplace, you can follow different sellers the same way that you follow different personalities on an Instagram or on a TikTok, for example. Then because they really understand what happens around the transaction, and within resale goods there’s a lot of returns and exchanges, so Poshmark makes it very easy to custom print a return label and return product, and wherever there’s any mix-up their customer service gets involved right away to right the situation for both buyer and seller. I think companies need to be thinking like this, but what else stands out to you, Andrew?

 

Andrew Cohen:

Yeah, I totally agree. I think the resell marketplace is particularly interesting when it comes to user experience, because in this case that applies to both buyers and sellers. So in addition to all of the improvements that you just mentioned to make the buying experience more seamless, the same could be said for the selling experience.

 

Andrew Cohen:

For example, the guy looking to make some money and free up closet space by selling off his collection of vintage Coolio shirts isn’t a professional retailer, so how can platforms best empower him with a custom product experience? I think of what we’re seeing in the livestream selling space like Popshop Live offering a creator playbook and real time analytics dashboards to make it easy for independent sellers to succeed on their platform, and I’m sure we’ll see more innovations like this in the future as the resell marketplace continues to evolve.

 

Chris Erwin:

All right, Andrew. Well, I think we are running up on time. So I think, look, my closing note is we’re seeing a lot of the revenue multiples for these IPOs or the M&A in the space. We’re in the low 20s, that was in the beginning of this year. They’ve really come down to now be in the low teens. Are they going to go up in the future as some of these things are sorted out? Maybe, but we’ll have to track. But at the least I do expect, I think there’s going to be a lot more product launches here. There’s going to be a lot more marketplace activity, and I think this market’s just going to grow consistently overall. All right. Any final notes you want to add?

 

Andrew Cohen:

No, I agree. It’s only just beginning, so I’m sure we’ll have a Part 2 soon.

 

Chris Erwin:

All right. Till next time, Andrew.

 

Andrew Cohen:

Later.

 —

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