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The Shopify Scandal

Oct 30, 2017

Shopify is Under Scrutiny by Citron Research  

Shopify, a popular e-commerce platform for small and medium-sized businesses, is under fire for its “get rich quick” scheme.  

Founded in 2004, Shopify provides an easy tool for people to set up an online store without any elaborate tech knowledge. The Canada-based company has been one of the best-performing stocks on the NYSE in the past year. The team also recently announced its partnership with Instagram to enable all-in-one mobile shopping for its merchants.   

Just as everything seems to be going well for the Canada tech favorite, Shopify found itself in an allegedly fraudulent claim about its customer counts. The company boasts to have over 500,000 merchants on its platform. Of those 500,000 accounts, 2,500 are Shopify Plus merchants. If we assume Shopify to have at least 20,000 Shopify Advanced accounts, then where are the rest of the 450,000 merchants?  


Citron Research’s Claims of Shopify’s Referral Scheme  

This question was raised by Citron Research’s founder Andrew Left, who previously exposed frauds of companies like Valeant Pharmaceuticals. Last week, Citron published an extensive research calling Shopify “a completely illegal get-rich-quick scheme (with a good software platform)”.   

Ironically, Shopify’s CEO Tobias Lukte was the first to mention his company’s questionable claim. In an interview with Bloomberg, Lukte said that some venture capitalists had expressed their disbelief in Shopify’s claim of having 500,000 merchants.   

“I have lots of stories about being laughed out of VC offices because they told me the entire addressable market for my company was 40,000 stores,” Lukte said. 

According to Citron Research, there are over 10,000 Shopify “partners” who teach people how to become a Shopify millionaire. One of these Shopify promoters, Keder Cormier, used to be a promoter for Herbalife, another company that was caught in a similar scheme. The Federal Trade Commission (FTC) had fined Herbalife $200 million for its multi-level marketing operations in 2016.  

Yet, Shopify seems to have completely ignored the lesson from Herbalife. Not only does Shopify recognize the promoters as its partners, it also claims that “2,700 people become millionaires each day” on its Facebook page. The company even goes as far to provide a sample resignation letter for Shopify users who are ready to quit their jobs.   

 FTC demands influencers and marketers to disclose their relationships when promoting any products or services. In Shopify’s case, the company’s affiliate program states a monetary reward of up to $2,000 for each merchant referral. However, none of the Shopify promoters, or “partners,” has disclosed any compensation from the company in their marketing materials.  

Here comes the catch – some Shopify merchants don’t even need a product to sell. The company’s service called Oberlo can find products for you to sell and take care of packaging and shipping. In other words, Shopify users can just buy the platform but not really have an original product to offer.   

At the end of Citron Research’s report, Left estimated that Shopify stock is inflated by 45%. He also stated that Citron will forward all of its findings to FTC and advised “cautious investing for all.” Shopify’s share fell more than 8% to $106.95 after the report was released, although it’s important to note that the company had seen a 150% growth in stock price since the beginning of 2017.  


So, how reliable is Left’s information?  

Left is quite an infamous short-seller who profits from betting against companies by persuading shareholders to expect a drop in share prices. In defense of Shopify, Canada Business wrote that Left’s questioning is “a common tactic for short-sellers.”  

While Left’s claims about Shopify’s inappropriate marketing strategy are valid, Shopify is still one of the most user-friendly e-commerce platforms on the market. Analysts acknowledge that Shopify’s marketing language is very aggressive and can potentially violate FTC regulations. The company perhaps needs to better regulate its promoters who might be taking advantage of the referral program. Nonetheless, we can’t simply ignore the Shopify merchants that run legitimate businesses via the platform. Notable brands like Budweiser, Tesla Motors, and Red Bulls undoubtedly use Shopify as their e-commerce platform.   


What’s Shopify’s Response? 

Without directly responding to the allegations, Shopify released a statement on the following day. “We vigorously defend our business model and stand resolutely behind our mission and the success of our merchants,” Shopify posted on its website.  

The company also pointed out that Shopify stores have “generated $10.7 billion in gross merchandise revenue in the first half of 2017.” That’s an undeniable proof that Shopify is a platform with businesses that are selling real products.  

It’s a little far-fetched to call Shopify a complete fraud. However, the company can certainly improve on its affiliate regulations and modify its marketing approach.  

From the blog

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