Xiu’s fake product scandal damages e-commerce and eBay deal



The flagship store of fashion e-commerce company Xiu on Tmall’s online platform was shut down in September after reports of the sale of counterfeit Gucci products. After claiming that an internal investigation into the matter came out clean, Xiu has refuted the charges.

The dispute comes at an unfortunate time for Xiu, as e-commerce is one China’s most rapidly expanding markets and recently set world records for online sales on the unofficial holiday of Singles Day on Nov. 11. Tmall and Taobao alone, both owned by e-commerce giant Alibaba Group, sold US$3 billion in goods over the 24-hour period.

The scandal also delivers a blow to consumer trust both on and off the web, as counterfeits spread into all corners of the economy. As an insider remarks, “Many (customers) now believe online luxury goods are fake. Online shopping for luxury goods is an inevitable trend but the market will undergo a shakeout, which will wipe out many lesser players.”

Prior to the incident, Xiu had received two capital injections of US$20 million and US$100 million from US venture capital firm KPCB and global private equity firm Warburg Pincus, respectively, and was preparing for an IPO. After a third round of fundraising turned out to be a bust, the company started looking to eBay as a strategic investor. The recent counterfeit case could hinder progress on an agreement between the two parties.

Founded in 2008, the Shenzhen-based company was once considered one of the largest luxury goods websites in China. Ji Wenhong, Xiu’s founder, decided later to change the marketing angle to fashion products. In 2011, the website reported revenue of 700-800 million yuan (US$112-$128 million) in 2011, up from 40 million yuan (US$6.4 million) in 2009 and 200 million yuan (US$32 million) in 2010.

On Nov. 12, Xiu and eBay — which pulled out of China several years ago — jointly launched an online shopping channel. After receiving orders from customers, eBay suppliers will ship the goods to Xiu’s warehouses in the US to be shipped on and delivered by Xiu. The Chinese vendor will be responsible for after-sales services, including the return and replacement of goods.

The US company will reportedly dispatch a team to take part in the management of Xiu, a move that to an industry insider signals the start of capital flowing into Xiu.

Xiu’s flagship store on Tmall — Alibaba’s online business-to-customer platform — was racking up millions of yuan in annual sales before the country’s counterfeit goods epidemic spread to its shelves.

An insider reported that a customer had taken issue with the quality of a Gucci product purchased from the online store. After being dissatisfied with the lack of customer service support from Xiu, the customer upped the ante by sending the faulty product to a government agency, which returned it to Gucci. Gucci quickly confirmed that the product was a fake.

Shortly afterward, Xiu was asked to close up shop by Tmall, which maintains a no-tolerance policy towards online vendors selling fakes through its platform.

Xiu does not necessarily have the cleanest of records. It has been involved in a number of other disputes over counterfeit products, including one with French sporting goods producer Le Coq Sportif.

Xiu purchases and sells 70% of its products through the website, according to Ji Wenhong. The company now has three regular sources for its products: branded firms, franchise dealers and department stores, accounting for 30%, 40% and 30% of its inventory, respectively

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