Analyst raises counterfeit red flag for Etsy marketplace

Online marketplace Etsy has seen its shares slump after coming under scrutiny for counterfeit sales.

The sell-off came after analysts at Wedbush downgraded the stock - despite suggesting near-term growth would accelerate - because of risks associated with being a platform for counterfeit good sales.

In a research note Wedbush's Gil Luria suggested around 5 per cent of all items sold on Etsy might be fake - equivalent to around 2m items - and said "Etsy has become a go-to destination for counterfeits."

"Counterfeit candidates include items infringing on Louis Vuitton, Chanel and Michael Kors, as well as a wide range of Disney and NFL brands," said the note, which also downgraded the stock from "neutral" to "underperform".

A search on the site today (April 11) revealed a large number of listings selling items "inspired" by big brands, as well as others claiming to be the genuine article. Many sellers on the site focus on handmade and bespoke items.

Luria said the counterfeit estimate comes from internal Wedbush research and he stressed he is not suggesting Etsy will be held legally responsible for the actions of its vendors, noting that in a recent eBay versus Tiffany suit it was found that it is the responsibility of the trademark or copyright owner to identify fakes and request deletion of infringing listings.

Shares in Etsy were down around 9 per cent as this article went to press, providing an object lesson in the risks companies take if their businesses become exposed to counterfeiting, even inadvertently.

Chinese online retail giant Alibaba has had a torrid time in recent months dealing with negative sentiment relating to counterfeit goods sold on its TaoBao site, recently coming under fire from the American Apparel & Footwear Association (AAFA) for not doing enough to tackle the problem.

Luria suggested brand owners may start taking increased action against sellers on Etsy, reducing its listing fees and commissions which could have a meaningful impact on the company's revenue.

Etsy has more than 1m active sellers and buyer base of nearly 20m people, generating some $196m in revenues for the company last year. It went public last month, raising $267m, a good result but one dwarfed by Alibaba's $25bn flotation last year.