Fake Goods Sellers Take Polish Off Jumei

| About: Jumei International (JMEI)

Investors have taken some of the shine off of recently listed online cosmetics seller Jumei International (NYSE:JMEI), following reports that some third-party merchants on its site were engaged in the sale of fake goods. In an interesting twist, the news had little or no effect on another recently listed e-commerce firm, JD.com (NASDAQ:JD), which was also mentioned in the same reports. To some extent, the mixed reaction shows that investors are still less familiar with Jumei, which is a younger firm and was far less known to Wall Street before the company's recent listing. Still, this kind of selling of knock-off goods is always a risk for any e-commerce firm that allows third-party vendors to sell products on its sites.

The latest revelations came from an investigative report, which found that a merchant on both JD's and Jumei's open platforms was selling fake luxury goods from names like Armani, Burberry and Dior. (Chinese article) The reports say the merchant was earning more than 10 million yuan ($1.62 million) per month through sales of the goods, and that the online platforms had becoming breeding grounds for many other similar shops selling fake merchandise.

Jumei's stock fell 4 percent after the reports came out, though it's worth noting the shares are still up nearly 40 percent from their IPO price back in May. JD's shares didn't see any negative reaction from the report, and instead rose nearly 2 percent the day the news came out. They are also up nearly 60 percent from the company's IPO in May. Shares of China's other 2 major US-listed e-commerce firms were also mixed, with Dangdang (NYSE:DANG) falling nearly 2 percent, while Vipshop (NYSE:VIPS) continued its meteoric rise as investors embrace the discount retailer.

So, what does all this mean for investors, and how much should they worry about the piracy issue for Chinese e-commerce sites and their stocks? The answer is that the impact should be relatively small, especially for more veteran operators like JD and industry leader Alibaba, which are aware of the risks of piracy and have implemented numerous measures to weed out such activity from their sites.

Alibaba has been a leader in the space, and after years of negative publicity was rewarded for its efforts when Washington removed the company's name from a global list of "notorious" piracy sites in late 2012. (previous post) Alibaba was particularly vulnerable to piracy, since it uses a business model of operating online malls completely populated by third-party merchants. By comparison, most of the other companies operate a hybrid system that sees them directly handle the majority of their sales through their own online shops, with third-party platforms comprising a smaller portion of their revenue.

Dangdang's stock pullback this week, even though its name wasn't mentioned in the latest reports, probably reflects the company's emphasis on its recently launched third-party marketplace, which is growing much faster than its traditional business. As all of these companies add more third-party merchants, it's almost inevitable that some sellers of pirated goods will open up shops on their platforms.

None of these companies is likely to be shut down by Beijing, since all are quite large and their closure would send shock waves through the Chinese e-commerce space. Instead, the biggest dangers for any of these firms is that the US or another major western government could single a company out for punitive action, including the addition of its name to the "notorious" list. Such a development could deal a major blow to a company like Jumei or even Vipshop, hurting not only its image but also its chances for future expansion outside of China.

Bottom line: Revelations about sale of fake goods on Jumei's and JD's third-party merchant platforms aren't hugely surprising, but the companies will need to take care to quickly purge such vendors from their sites.

Disclosure: None.