In its IPO filing, an e-retailer admits it created fake orders to raise its ranking on web marketplaces. Those phony purchases accounted for 42% of its 2014 orders.A small e-retailer created a big news recently in China when it admitted to a practice many believe is commonplace on China’s online marketplaces: a seller placing fake orders to boost its apparent sales and thus its rankings in search results on the country’s huge online shopping malls.
Flower e-retailer Shanghai Aishang flowers Co., Ltd. last week confessed in its prospectus filed in advance of an initial public offering of stock that it hired workers to place orders from its store on Alibaba Group Holding Ltd.’s Tmall.com and JD.com, two major web marketplaces, in order to move up in search results.
The Shanghai-based company spent 739,268 yuan ($113,690) to hire individuals who placed 163,676 fake orders on marketplaces in the first seven months of 2015, representing 42.02% of its total orders. For the same reason, Aishang Flowers also spent 989,165 yuan ($152,097) in 2014 and 26,234 yuan ($4,033) in 2013, respectively, accounted for 24.05% and 4.95% of orders in those two years, according to its prospectus.
Aishang Flowers said in the prospectus that it considered creating fake orders “a marketing approach” and didn’t include the fake orders in the sales reported in the filing.
Founded in 2008, Aishang Flowers’ major business is to sell flowers through online marketplaces Tmall.com and JD.com, and via its company site, Iishang.com. The company reported its sales reached 36.6 million yuan ($5.6 million) in 2014, up 66% from 22.1 million yuan (3.4 million) in 2013.
“We sincerely apologize to consumers and regulators. Under pressure from competitors, Aishang Flowers created fake orders. We didn’t count the sales from those fake orders and stopped doing so since August 2015,” Aishang Flowers said in a news release.
Although this is the first time that an e-retailer publically admitted to making phony orders, analysts say this example represents just the tip of the iceberg.
“Aishang had to explain those fake orders, otherwise its sales would conflict with the records of the marketplaces,” Zhang Zhouping, a senior analyst at the China E-commerce Research Center, says. “Fake orders is a widespread issue and has existed for a long time. I don’t think it can be completely solved. The current rules of marketplaces encourage consumers to buy from top sellers, and consumers also want to buy products from them.”
A search for the term “fake orders” on China’s leading search engine, Baidu.com, produces a first page of search results with five sites offering fake ordering services to merchants. Those sites, including Taoshuashua.net and Shuazuanle.cn, claim they can help merchants recruit individuals to place fake orders on marketplaces.
The practice of placing fake orders is so common that the industry has created a term for it—“brushing orders”—and some have suggested big marketplace operators like Alibaba, China’s leading e-commerce company, don’t make much of an effort to curtail the activity.
Alibaba denies that. “Brushing is an issue faced by the entire Internet industry around the world, and Alibaba is the industry leader in combatting this unfair and illicit practice. The only way to effectively get to the root of brushing and other online criminal activities is through proper investigation and prosecution by law enforcement authorities, who can make legally binding decisions. We strongly urge the authorities to take swift and aggressive actions to bring these offenders to justice. We also call upon the entire industry, including social chat apps and platforms, to work together with us to rid criminals of the tools through which their crimes are enabled.” Alibaba Group Holding Ltd. said in a statement.
Alibaba also says it has punished 220,000 sellers for creating fake orders in February, including closing 6,000 stores and deleting sales records for 390,000 products for which there were suspect orders.
JD.com is No. 1 in the Internet Retailer 2016 China 500. Although Alibaba’s marketplaces, primarily Taobao and Tmall, account for the majority of online retail sales in China, it is not ranked because it is not the merchant of record for any sales. Instead, like eBay Inc., Alibaba provides a platform on which other companies sell.