Internet retailers are a much-watched sub-industry in the stock market for good reason: worldwide retail ecommerce is predicted to generate double-digit growth each year through 2022, reaching total sales of $3 trillion by the end of that year, according to Euromonitor. For those of us who measure innovation, that makes the internet & direct marketing retail sub-industry, home to Amazon, eBay and Grubhub, an especially vibrant one. Among all the star-power, it’s a US small cap stock, Etsy, that ranks No. 1 for innovation in the category. According to our intangible-adjusted data, this online marketplace for artisans and vintage sellers spends 16.1% on R&D as a percent of sales, outspending brands such as No. 2-ranked Amazon at 12.4%, No. 3-ranked eBay at 11.9% and No. 8-ranked Grubhub at 8.2%.

While Etsy’s brand is all about the “human touch” and building a community that allows sellers to “turn their creative passions into economic opportunity,” Etsy is first and foremost a technology platform, a team of innovators tuning and optimizing search and delivery in fine slices in effort to reach more buyers with its one-of-a-kind products.

City ring on Etsy, credit: Etsy

This year, the Brooklyn, New York-based firm aims to grow sales in its top six retail categories — homewares and home furnishings, jewelry and personal accessories, apparel, craft supplies, paper and party supplies, and beauty and personal care — in six top markets: the United States, United Kingdom, Canada, Australia, Germany and France. With about $3.9 billion in gross merchandise sales, Etsy owns only a 2% share in what it estimates to be about a $1.7 trillion total market. Last year, Etsy’s active seller count grew 9% to 2.1 million sellers, and its active buyer count grew 18% to 39.4 million. And the Etsy community is loyal. Eighty percent of sellers are one-person businesses, 28% live in rural areas and for 53% of them, Etsy was the first platform where they ever sold their goods. Thirty-two percent of sellers report their Etsy shop is their sole occupation, 87% are women, 97% run their shops from home, 82% aspire to grow sales in the future, 75% call their shop a business, 64% started it to supplement income, and 32% report it as their sole occupation. By Etsy’s count, its sellers have so far contributed $5.37 billion to the US economy, generated more than $1.76 billion in income and created 1.52 million jobs in the independent worker economy, the number of jobs necessary to employ the entire city of San Antonio, Texas.

Personalized name puzzle on Etsy, credit: Etsy

Unlike Amazon, Etsy doesn’t warehouse or ship items. It never touches the custom t-shirts, or wedding favors or vintage 70s pantsuits sold on its website. Etsy makes money only when buyers complete a transaction with sellers, at which time Etsy takes a 5% slice of the cost of the item plus shipping costs. The firm aims to “keep commerce human” by connecting its record 60 million unique listings from around the world with their ideal buyers. Seventy-eight percent of buyers say they go to Etsy for items they can’t buy anywhere else. In order to power all this humanity, Etsy’s innovation efforts are focused on the engine that runs its website and proprietary search algorithms. The firm’s R&D efforts aim to create loyalty by attracting buyers to sellers. One of its differentiators, for example, is a messaging technology that allows buyers to speak directly with sellers about listings and make requests to personalize items.

In 2018, Etsy spent $97.2 million on product development, up 30% from 2017, with R&D efforts focused on improving search relevance with context specific rankings, optimizing landing pages with recommendations and notifications, speeding search page load times, adding new buyer customization features, optimizing promoted listings and adding new trust signals like best-seller badges and shop review ratings. Another key area of focus is enabling Etsy purchases on mobile devices. Etsy mobile apps for iOS and Android have been downloaded 56 million times and have become the largest driver of visits with purchases about 1.2x the desktop conversion rate, making mobile an area Etsy is keen to grow by enhancing its buyer experience.

To produce personalized recommendations that feel human, Etsy has created a proprietary machine learning algorithm that captures roughly one billion user-generated events every day aimed at enabling shoppers to more easily browse, filter, and transact, even, the firm writes in its most recent annual report, “when they may not have something specific in mind.” Machine learning also works to translate transactions and conversations between buyers and sellers into 10 languages. In the future, Etsy’s R&D team aims to solve the “tyranny of choice” by improving search and discovery so that for buyers, items that feel personally curated simply rise to the surface. The firm aims to generate trust between buyers and sellers, and sees this trust as key to its ability to grow.

Succulent plant pillows on Etsy, source: Etsy

Like most Knowledge Leaders, Etsy publishes its goals toward being a good global and social citizen. By 2020, the firm expects to have replaced power operations with 100% renewable electricity via solar and wind energy farms. It was the first global ecommerce company to offset 100% of carbon emissions generated by shipping by purchasing verified emissions reductions through a third-party partner for every purchase, and it also runs zero waste operations at all its offices. Etsy has achieved gender parity at the executive level. Founded in 2005, Etsy has 874 employees, with its largest team of 316 in engineering. The Etsy marketplace supports buyers and sellers in nearly every country in the world.

As of 3/31/19, eBay was held, and Etsy, Amazon and Grubhub were not held in the Knowledge Leaders Strategy. Intangible-adjusted data source: Knowledge Leaders Capital and Factset, as of 6/25/19.