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Etsy's Free Shipping Push Sounds Like a Marketing Gimmick

Leo Sun, The Motley Fool

Etsy (NASDAQ: ETSY) on Tuesday said it would make free shipping a "core part" of its shopping experience. Etsy is providing sellers with "tools and support" to help guarantee free shipping to U.S. shoppers who spend at least $35, and will offer priority search results to sellers who offer free shipping options. Etsy CEO Josh Silverman claims that offering free deliveries will "increase marketplace conversion and order value, encourage repeat visits, and drive more sales for Etsy sellers."

At first glance, Etsy's free shipping initiative mirrors similar moves at Amazon (NASDAQ: AMZN) and other e-tailers. But if you dig deeper, you'll notice that Etsy merely wants sellers to pass their shipping costs onto shoppers by raising prices -- which sounds like a gimmick instead of a game-changing strategy.

Handmade bead necklaces.

Image source: Getty Images.

Etsy is pushing sellers to raise prices

On its website for sellers, Etsy states that free shipping "isn't actually free" for sellers, who still "need to pay the shipping carrier to ship your orders to buyers." Etsy then encourages sellers to include shipping costs in the item's listed price so they "don't lose money."

Etsy tells sellers that, instead of listing a product for $35 and charging a $5 shipping fee, they should adjust the item's price to $40 to offer "free shipping." This strategy isn't new for e-tailers, but it indicates that Etsy simply wants sellers to plaster "free shipping" all over its marketplace to attract shoppers.

That's why Etsy is giving products with free shipping a higher priority in its search results. In other words, sellers who don't agree to hike their prices to offset the cost of "free shipping" will be less visible to shoppers.

Why "free shipping" options won't impact Etsy's margins

Etsy's platform lets sellers print USPS and FedEx shipping labels and organize shipments, but it doesn't provide fulfillment centers and logistics services like Amazon. Some Etsy sellers currently use Amazon's FBA (Fulfillment by Amazon) service to deliver their products.

Tiny parcels in a miniature shopping cart on a laptop keyboard.

Image source: Getty Images.

However, Etsy still takes a 5% cut of each transaction and another 5% of the shipping fee. This means that Etsy retains a 5% cut of a seller's entire transaction, regardless of whether the seller offers paid shipping options or bundles "free shipping" into its price.

Simply put, Etsy's "free shipping" plan doesn't cost the company anything. It also won't cost the sellers anything, as long as they hike their listed prices to offset the shipping costs. But this sweeping plan could confuse buyers if sellers don't all start offering free shipping at the same time.

Why Etsy needs some fresh tactics

Etsy's growth in GMS (gross merchandise sales) and revenue accelerated significantly in 2018 as it gained more active sellers and buyers, attracted more spending per buyer, and pulled in higher transaction fees.

YOY growth

2017

2018

2019 Guidance

GMS

15%

21%

18%-21%

Revenue

21%

37%

30%-32%

YOY = Year-over-year. Source: Etsy quarterly reports.

Those numbers countered the bearish notion that competing platforms like Amazon Handmade would throttle its growth. However, Etsy still expects its growth to decelerate slightly this year, and for its adjusted EBITDA margin to significantly contract in the second and third quarters as its marketing and cloud expenses rise.

Etsy expects its adjusted EBITDA to rise 23%-25% this year. That's a solid growth rate, but it's a bit low for a stock that trades at over 60 times forward earnings. To justify that valuation, Etsy needs to spark some fresh growth with new tactics which don't cost much -- and its "free shipping" push fits the bill.

The key takeaway

Etsy's free shipping options might help it gain more buyers. A recent NRF survey found that 75% of U.S. shoppers expected free shipping options for orders under $50, up from 68% a year ago. Two-thirds of shoppers also check free-shipping thresholds before adding items to their online shopping carts.

In that context, Etsy's move is a smart one. However, investors shouldn't confuse Etsy's move with sweeping delivery and logistics initiatives coming from other retailers. Etsy's strategy is to simply push sellers to pass the shipping costs onto shoppers, and to spread free shipping options across its platform. It won't cost Etsy anything, but it could be a win-win deal for the company and its sellers.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon, Etsy, and FedEx. The Motley Fool has a disclosure policy.