Why Amazon Needs Others To Keep Selling (#GotBitcoin?)
CEO letter shows why third-party sales have become key to retail giant’s business. Why Amazon Needs Others To Keep Selling (#GotBitcoin?)
If nothing else, Jeff Bezos clarified Thursday why Amazon.com ’s third-party business is worth the trouble.
In his annual missive to shareholders, Amazon’s chief executive provided a more detailed look at how sales by other merchants have impacted the company’s massive retail business. Third-party sales constituted 58% of Amazon’s gross merchandise sales last year compared with 30% a decade ago. Mr. Bezos added that third-party sales have expanded at a compound annual growth rate of 52% since 1999—more than twice the pace of the first-party business through which Amazon sells goods itself.
This makes for an important contribution to Amazon’s bottom line. Recognized revenue from third-party transactions actually is much smaller than that of traditional sales since the company only recognizes the commission it earns on each sale. Gross merchandise sales includes the entire value.
But the profitability impact is much larger, as Amazon also isn’t taking on inventory risk with those sales. Analysts generally estimate operating margins in the 20% range for third-party sales compared with low single digits for first-party transactions. So while Amazon’s AWS cloud segment is significantly boosting the company’s overall profitability, third-party sales are also improving the bottom line of the retail side that still generates nearly 80% of the company’s total revenue.
Of course, the third-party business also brings its fair share of headaches. Counterfeit goods are a big one. Separately, Amazon began investigating some of its own employees in China last year for allegedly leaking data to third-party merchants in exchange for bribes. Amazon’s growing power with merchants also helps fuel calls for deeper regulation of the company and its Big Tech peers.
But since Wall Street expects Amazon’s margins to keep rising, this particular party needs to keep raging.
Amazon Changed Search Algorithm In Ways That Boost Its Own Products
The e-commerce giant overcame internal dissent from engineers and lawyers, people familiar with the move say.
Amazon.com Inc. has adjusted its product-search system to more prominently feature listings that are more profitable for the company, said people who worked on the project—a move, contested internally, that could favor Amazon’s own brands.
Late last year, these people said, Amazon optimized the secret algorithm that ranks listings so that instead of showing customers mainly the most-relevant and best-selling listings when they search—as it had for more than a decade—the site also gives a boost to items that are more profitable for the company.
The adjustment, which the world’s biggest online retailer hasn’t publicized, followed a yearslong battle between executives who run Amazon’s retail businesses in Seattle and the company’s search team, dubbed A9, in Palo Alto, Calif., which opposed the move, the people said.
Any tweak to Amazon’s search system has broad implications because the giant’s rankings can make or break a product. The site’s search bar is the most common way for U.S. shoppers to find items online, and most purchases stem from the first page of search results, according to marketing analytics firm Jumpshot.
When people search for products on Amazon*, nearly two-thirds of all product clicks come from the first page of result. So the proliferation of Amazon’s private-label products on the first page makes it more likely people choose those items.
The issue is particularly sensitive because the U.S. and the European Union are examining Amazon’s dual role—as marketplace operator and seller of its own branded products. An algorithm skewed toward profitability could steer customers toward thousands of Amazon’s in-house products that deliver higher profit margins than competing listings on the site.
Amazon’s lawyers rejected an initial proposal for how to add profit directly into the algorithm, saying it represented a change that could create trouble with antitrust regulators, one of the people familiar with the project said.
The Amazon search team’s view was that the profitability push violated the company’s principle of doing what is best for the customer, the people familiar with the project said. “This was definitely not a popular project,” said one. “The search engine should look for relevant items, not for more profitable items.”
Amazon said it has for many years considered long-term profitability and does look at the impact of it when deploying an algorithm. “We have not changed the criteria we use to rank search results to include profitability,” said Amazon spokeswoman Angie Newman in an emailed statement.
Amazon declined to say why A9 engineers considered the profitability emphasis to be a significant change to the algorithm, and it declined to discuss the inner workings of its algorithm or the internal discussions involving the algorithm, including the qualms of the company’s lawyers.
The change could also boost brand-name products or third-party listings on the site that might be more profitable than Amazon’s products. And the algorithm still also stresses longstanding metrics such as unit sales. The people who worked on the project said they didn’t know how much the change has helped Amazon’s own brands.
Amazon’s Ms. Newman said: “Amazon designs its shopping and discovery experience to feature the products customers will want, regardless of whether they are our own brands or products offered by our selling partners.”
Antitrust regulators for decades have focused on whether companies use market power to squeeze out competition. Amazon avoided scrutiny partly because its competitive marketplace of merchants drives down prices.
Now, some lawmakers are calling for Washington to rethink antitrust law to account for big technology companies’ clout. In Amazon’s case, they say it can bend its dominant platform to favor its own products. Sen. Elizabeth Warren (D., Mass.) has argued Amazon stifles small businesses by unfairly promoting its private-label products and underpricing competitors. Amazon has disputed this claim.
During a House antitrust hearing in July, lawmakers pressed Amazon on whether it used data gleaned from other sellers to favor its own products. “The best purchase to you is an Amazon product,” said Rep. David Cicilline (D., R.I.). “No that’s not true,” replied Nate Sutton, an Amazon associate general counsel, saying Amazon’s “algorithms are optimized to predict what customers want to buy regardless of the seller.” House Judiciary Committee leaders recently asked Amazon to provide executive communications related to product searches on the site as part of a probe on anticompetitive behavior at technology companies.
Amazon says it operates in fiercely competitive markets, it represents less than 1% of global retail and its private-label business represents about 1% of its retail sales.
Amazon executives have sought to boost profitability in its retail business after years of focusing on growth. A majority of its $12.4 billion in operating income last year came from its growing cloud business.
Pressure On Engineers
An account of Amazon’s search-system adjustment emerges from interviews with people familiar with the internal discussions, including some who worked on the project, as well as former executives familiar with Amazon’s private-label business.
The A9 team—named for the “A” in “Algorithms” plus its nine other letters—controls the all-important search and ranking functions on Amazon’s site. Like other technology giants, Amazon keeps its algorithm a closely guarded secret, even internally, for competitive reasons and to prevent sellers from gaming the system.
Customers often believe that search algorithms are neutral and objective, and that results from their queries are the most relevant listings.
Executives from Amazon’s retail divisions have frequently pressured the engineers at A9 to surface their products higher in search results, people familiar with the discussions said. Amazon’s retail teams not only oversee its own branded products but also its wholesale vendors and vast marketplace of third-party sellers.
Amazon’s private-label team in particular had for several years asked A9 to juice sales of Amazon’s in-house products, some of these people said. The company sells over 10,000 products under its own brands, according to research firm Marketplace Pulse, ranging from everyday goods such as AmazonBasics batteries and Presto paper towels, to clothing such as Lark & Ro dresses.
Amazon’s private-label business, at about 1% of retail sales, would represent less than $2 billion in 2018. Investment firm SunTrust Robinson Humphrey estimates the private-label business will post $31 billion in sales by 2022, more than Macy’s Inc. ’s annual revenue last year.
The private-label executives argued Amazon should promote its own items in search results, these people said. They pointed to grocery-store chains and drugstores that showcase their private-label products alongside national brands and promote them in-store.
A9 executives pushed back and said such a change would conflict with Chief Executive Jeff Bezos’ “customer obsession” mantra, these people said. The first of Amazon’s longstanding list of 14 leadership principles requires managers to focus on earning and keeping customer trust above all. Amazon often repeats a line from that principle: “Leaders start with the customer and work backwards.”
One former Amazon search executive said: “We fought tooth and nail with those guys, because of course they wanted preferential treatment in search.”
For years, A9 had operated independently from the retail operations, reporting to its own CEO. But the search team, in Silicon Valley about a two-hour flight from Seattle, now reports to retail chief Doug Herrington and his boss Jeff Wilke —effectively leaving search to answer to retail.
After the Journal’s inquiries, Amazon took down its A9 website, which had stood for about a decade and a half. The site included the statement: “One of A9’s tenets is that relevance is in the eye of the customer and we strive to get the best results for our users.”
Mr. Herrington’s retail team lobbied for the adjustment to Amazon’s search algorithm that led to emphasizing profitability, some of the people familiar with the discussions said.
When a customer enters a search query for a product on Amazon, the system scours all listings for such an item and considers more than 100 variables—some Amazon engineers call them “features.” These variables might include shipping speed, how highly buyers have ranked product listings and recent sales volumes of specific listings. The algorithm weighs those variables while calculating which listings to present the customer and in which order.
The algorithm had long placed a priority on variables such as unit sales—a proxy for popularity—and search-term relevance, because they tend to predict customer satisfaction. A listing’s profitability to Amazon has never been one of these variables.
Amazon retail executives, especially those in its private-label business, wanted to add a new variable for what the company calls “contribution profit,” considered a better measure of a product’s profitability because it factors in non-fixed expenses such as shipping and advertising, leaving the amount left over to cover Amazon’s fixed costs, said people familiar with the discussion.
Amazon’s private-label products are designed to be more profitable than competing items, said people familiar with the business, because the company controls the manufacturing and distribution and cuts out intermediaries and marketing costs.
Amazon’s lawyers rejected the overt addition of contribution profit into the algorithm, pointing to a €2.42 billion fine ($2.7 billion at the time) that Alphabet Inc.’s Google received in 2017 from European regulators who found it used its search engine to stack the deck in favor of its comparison-shopping service, said one of the people familiar with the discussions. Google has appealed the fine and has made changes to Google Shopping in response to the European Commission’s order.
To assuage the lawyers’ concerns, Amazon executives looked at ways to account for profitability without adding it directly to the algorithm. They turned to the metrics Amazon uses to test the algorithm’s success in reaching certain business objectives, said the people who worked on the project.
When engineers test new variables in the algorithm, Amazon gauges the results against a handful of metrics. Among these metrics: unit sales of listings and the dollar value of orders for listings. Positive results for the metrics correlated with high customer satisfaction and helped determine the ranking of listings a search presented to the customer.
Now, engineers would need to consider another metric—improving profitability—said the people who worked on the project. Variables added to the algorithm would essentially become what one of these people called “proxies” for profit: The variables would correlate with improved profitability for Amazon, but an outside observer might not be able to tell that. The variables could also inherently be good for the customer.
For the algorithm to understand what was most profitable for Amazon, the engineers had to import data on contribution profit for all items sold, these people said. The laborious process meant extracting shipping information from Amazon warehouses to calculate contribution profit.
In an internal system called Weblab, A9 engineers tested proposed variables for the algorithm for weeks on a subset of Amazon shoppers and compared the impact on contribution profit, unit sales and a few other metrics against a control group, these people said. When comparing the results of the groups, profitability now appeared alongside other metrics on a display called the “dashboard.”
Amazon’s A9 team has since added new variables that have resulted in search results that scored higher on the profitability metric during testing, said a person involved in the effort, who declined to say what those new variables were. New variables would also have to improve Amazon’s other metrics, such as unit sales.
A review committee that approves all additions to the algorithm has sent engineers back if their proposed variable produces search results with a lower score on the profitability metric, this person said. “You are making an incentive system for engineers to build features that directly or indirectly improve profitability,” the person said. “And that’s not a good thing.”
Amazon said it doesn’t automatically shelve improvements that aren’t profitable. It said, as an example, that it recently improved the discoverability of items that could be delivered the same day even though it hurt profitability.
Amazon’s Ms. Newman said: “When we test any new features, including search features, we look at a number of metrics, including long term profitability, to see how these new features impact the customer experience and our business as any rational store would, but we do not make decisions based on that one metric.”
In some ways, Amazon’s broader shift from showing relevant search results is noticeable on the site. Last summer, it changed the default sorting option—without publicizing the move—to “featured” after ranking the search results for years by “relevance,” according to a Journal analysis for this article of screenshots and postings by users online. Relevance is no longer an option in the small “sort by” drop-down button on the top right of the page.
A ‘Grass-Roots’ Campaign to Take Down Amazon Is Funded by Amazon’s Biggest Rivals
Walmart, Oracle and mall owner Simon Property Group are secret funders behind a nonprofit that has been highly critical of the e-commerce giant.
About 18 months ago a new nonprofit group called Free and Fair Markets Initiative launched a national campaign criticizing the business practices of one powerful company: Amazon.com Inc.
Free and Fair Markets accused Amazon of stifling competition and innovation, inhibiting consumer choice, gorging on government subsidies, endangering its warehouse workers and exposing consumer data to privacy breaches. It claimed to have grass-roots support from average citizens across the U.S, citing a labor union, a Boston management professor and a California businessman.
What the group did not say is that it received backing from some of Amazon’s chief corporate rivals. They include shopping mall owner Simon Property Group Inc., retailer Walmart Inc. and software giant Oracle Corp. , according to people involved with and briefed on the project. Simon Property is fighting to keep shoppers who now prefer to buy what they need on Amazon; Walmart is competing with Amazon over retail sales; and Oracle is battling Amazon over a $10 billion Pentagon cloud-computing contract.
The grass-roots support cited by the group was also not what it appeared to be. The labor union says it was listed as a member of the group without permission and says a document purporting to show that it gave permission has a forged signature. The Boston professor says the group, with his permission, ghost-wrote an op-ed for him about Amazon but that he didn’t know he would be named as a member. The California businessman was dead for months before his name was removed from the group’s website this year.
Free and Fair Markets, or FFMI, declined to reveal its funders or disclose if it has directors or a chief executive.
“The bottom line is that FFMI is focusing on the substantive issues and putting a spotlight on the way companies like Amazon undermine the public good—something that media outlets, activists, and politicians in both parties are also doing with increasing frequency,” it said in a statement in response to questions from The Wall Street Journal. “If Amazon can not take the heat then it should stay out of the kitchen.”
The creation of a group aimed solely at Amazon is an indication of the degree to which competing companies have coalesced to counter the growing and accumulated power of Amazon and how far competitors are increasingly willing to go to counter-strike. Lobbyists that exaggerate the extent of their grass-roots support—a practice known as “AstroTurf lobbying”—are common in Washington, but it is rare for a nonprofit group to be created for the sole purpose of going after a single firm.
Amazon is facing additional opaque opposition as well, with websites and articles popping up portraying the software giant as the Evil Empire. The website Monopolyamazon.com, which does not disclose who is behind it and registered its web address anonymously, includes a handful of articles calling on the Defense Department to reject Amazon’s bid for a $10 billion cloud-computing contract. For months last year, an anti-Amazon dossier circulated in Washington alleging conflicts of interest in the Pentagon procurement process and a chart from the document later reached President Trump before he asked for a review of the Amazon bid.
Free and Fair Markets is run by a strategic communications firm, Marathon Strategies, that works for large corporations, including Amazon rivals. Marathon founder Phil Singer is a veteran political operative who has worked as a top aide to prominent Democrats, including Sen. Chuck Schumer of New York and on Hillary Clinton ’s 2008 presidential campaign.
In a statement, Mr. Singer defended the group. “FFMI is not obligated to disclose its donors and it does not,” Mr. Singer said.
Marathon initially asked for a fee of $250,000 per company to fund the anti-Amazon group, according to a person at one of the companies approached. Among those invited to fund the group but declined were a trade association that includes members who compete with Amazon, and International Business Machines Corp. , according to people familiar with the contacts. IBM, which declined to comment, previously was a client of Marathon.
In a statement, Amazon said, “The Free & Fair Markets Initiative appears to be little more than a well-oiled front group run by a high-priced public affairs firm and funded by self-interested parties with the sole objective of spreading misinformation about Amazon.”
Simon Property, the world’s largest mall landlord, declined to comment. Simon does not have any brick-and-mortar Amazon stores in its roughly 200 malls, outlets and open-air centers in the U.S., whereas its peers with smaller portfolios count multiple Amazon stores in theirs. The Indianapolis-based landlord recently launched its own online shopping platform, Premiumoutlets.com.
Walmart funds the organization indirectly by paying an intermediary that pays for Free and Fair Markets, according to sources familiar with the arrangement. Walmart is a client of Marathon.
Walmart spokesman Randy Hargrove said, “We are not financial supporters of the FFMI but we share concerns about issues they have raised.” Mr. Hargrove declined to comment further.
The group’s aim is to sully Amazon’s image on competition, data-security and workplace issues, while creating a sense of grass-roots support for increased government regulatory and antitrust enforcement, according to people familiar with the campaign.
Free and Fair Markets has lobbied the government for legislation and investigations of Amazon, sent dozens of letters and reports to Congress and staff, according to congressional staffers, published scores of op-eds in local and online media and tweeted hundreds of social media posts blasting Amazon.
Over the past year, many of the actions advocated by the group have gained traction. Amazon has come under increasing antitrust scrutiny from the Department of Justice, Federal Trade Commission, states attorneys general and the European Union. In New York, Amazon backed out of plans to open a second headquarters in Long Island City after facing political opposition. Free and Fair Markets campaigned against government subsidies to support the site and tweeted more than 300 times on the topic.
Oracle provided financial support as part of an all-out strategy to stop Amazon from getting a $10 billion mega-contract to handle cloud computing for the Defense Department. The Pentagon eliminated Oracle as a bidder in the first round. Kenneth Glueck, who runs Oracle’s office in Washington, confirmed that the computer technology firm has contributed to the effort.
A goal of the organization was achieved in July when President Trump said he wanted to conduct a review of the contract. In August, the secretary of defense said he was investigating conflict-of-interest allegations surrounding the $10 billion contract known as Joint Enterprise Defense Infrastructure, or JEDI. At the urging of President Trump, the bid award has been put on hold during the review.
Mr. Trump, a frequent critic of Amazon, cited complaints about the project from several of Amazon’s competitors, which in addition to Oracle included IBM and Microsoft Corp. , saying he had heard the contract “wasn’t competitively bid.” The contract has not been awarded and Microsoft remains one of the two remaining bidders.
Though Free and Fair Markets has contacted members of Congress and the administration, it has not registered as a lobbying organization. Such groups are required to file with Congress if more than 20% of their work involves lobbying. Marathon said it complies with lobby disclosure rules.
The group’s chief spokesman is Robert Engel, the retired chief executive of CoBank, an agriculture bank in Denver. Mr. Engel has published more than 20 op-eds blasting Amazon in print and online news publications across the country including in The Philadelphia Inquirer, Pittsburgh Post-Gazette, Houston Chronicle, The Hill and RealClearPolicy.com.
None of the articles notes that Mr. Engel’s group is funded by rivals of Amazon.
A spokeswoman for The Hill said the publication was unaware of the funding sources and failure to disclose such payments violates a standard written agreement all op-ed writers are required to sign.
Sandy Shea, managing editor of opinion for the Inquirer’s parent company, the Philadelphia Media Network, said, “We aren’t equipped to investigate the makeup or structure of a nonprofit that submits a piece.”
Bill Zeiser, RealClearPolicy editor, said RealClearMedia publishes “commentary on politics and public policy from a wide array of sources. These submissions are assessed on their editorial merits.”
Representatives of the Post-Gazette and Chronicle did not respond to emails.
In an interview earlier this year, Mr. Engel said the motive of the group was not to promote the views of Amazon’s rivals. He said Amazon has been the only target because its business tactics run counter to the group’s goal of free and fair markets. “The one organization that feels it stands above that is Amazon,” Mr. Engel said.
Marathon did not make Mr. Engel available for comment a second time after the Journal determined that rivals were funding the group.
Mr. Engel and his group have been quoted in publications, including once each in The Wall Street Journal and The New York Times. None said who funded the group.
One article about Free and Fair Markets was commissioned by Marathon.
Last October, an Iowa writer and consultant, Jeff Patch, published an article on RealClearPolicy.com, a news website known for political coverage, about a report by Free and Fair Markets critical of Amazon’s record of hiring and firing women. “Many [women] were fired after Amazon concocted pretexts for their terminations,” Mr. Patch wrote.
Mr. Patch, who has worked as a journalist and a staffer for a Republican congressman and conservative think tanks, did not disclose in his article at the time that he was a paid contractor for Marathon.
Bank statements and invoices reviewed by the Journal show that Mr. Patch billed Marathon, and was paid thousands of dollars for promoting a variety of Marathon projects. One line item on Mr. Patch’s spreadsheet of outstanding invoices noted $1,175 for placing an article, subject: “Amazon piece.”
Mr. Patch said the documents referred to by the Journal were “unrecognizable” and said “I have been the target of an ongoing misinformation campaign.” He did not address directly the question of whether he was paid by Marathon.
Marathon said it has “engaged Mr. Patch for editorial and research services in the past.”
RealClearMedia Group executive editor Carl Cannon said the article was an unpaid guest op-ed. The editors who published the piece are no longer with RealClearPolicy and Mr. Zeiser, the current editor, said his predecessors “were unaware that the author was being paid by Amazon’s business competitors.”
Free and Fair Markets has tweeted more than 1,060 times and produced glossy videos, some of which it has circulated through thousands of dollars in paid advertising, according to Pathmatics, an independent company that tracks social-media ads. A review of the tweets shows that aside from four tweets about FoxConn Technology Group, which assembles Amazon’s smart speakers, all of the tweets are about Amazon or an Amazon-related issue. The tweets have attacked Amazon on several fronts, including antitrust, worker rights, data privacy, soliciting subsidies from local governments for its second headquarters and its bid for the Pentagon cloud contract.
Marathon officials said the group will expand to address other companies’ abuses. “The organization has started looking at FoxConn and is preparing to scrutinize other tech giants,” Marathon’s statement read. Taiwan-based FoxConn, a major supplier also to Apple Inc., got $4 billion in public support to locate some of its operations in Wisconsin.
More than two dozen tweets are particularly critical of Amazon’s bid for the cloud-computing JEDI contract.
One tweet said, “As if $1.5 billion in state and local corporate welfare wasn’t enough, @amazon wants $10 billion more from American taxpayers to host the @DeptofDefense most sensitive data,” and then linked to a list of stories that recounted the complaints of a primary opponent for the contract, Oracle—mainly that the technical specifications in the JEDI request for bids had been “rigged in favor of a single provider: Amazon.” Oracle sued in an attempt to block the Pentagon from awarding the contract, but a federal judge ruled in July that the bid could proceed.
Amazon has previously said that Oracle’s claims are “meritless and a desperate attempt to distort the facts”
None of the members listed by Free and Fair Markets on its website seemed to have an obvious issue with the cloud-computing contract or several other of the group’s issues. When the Journal began inquiring with the members about their reasons for being listed—some did not know their names were posted on the website—the group took them down.
Marathon said, “The names of the groups listed on the site were removed at their request after we heard complaints about some receiving harassing phone calls” from journalists.
One listed member, Aubrey Stone, was founder and head of the California Black Chamber of Commerce. He died in September 2018. His name remained listed as member until at least June and wasn’t removed until the Journal contacted the group.
Maria Gillette, a member of the largely inactive Carbondale Tea Party outside of Scranton, Pa., is listed as an advisory member of Free and Fair Markets. Ms. Gillette, known in her small community for appearing in national media in 1974 after seeing an unidentified flying object, said she thought the group was about free trade—not Amazon.
The New England Convenience Store & Energy Marketers Association is listed as a member, and Jonathan Shaer, executive director, said the group is aligned with its stated principles but does not share the anti-Amazon animus. Mr. Shaer said his association “hasn’t had any active involvement in any of the Initiative’s activities.”
Benyamin Lichtenstein, a business professor at the University of Massachusetts Boston, said he was contacted out of the blue by a Boston corporate public relations firm last year about signing his name to an op-ed opposed to Boston’s bid for Amazon’s second headquarters. The firm sent a draft of the op-ed that called on Boston politicians to “reject an Amazon headquarters for the sake of small businesses.” The PR official wrote in an email to Mr. Lichtenstein, “If you are happy with the draft we can submit it as is,” according to a copy of the email reviewed by the Journal. The article was pitched to Boston newspapers and was eventually published in DigBoston.com.
Chris Faraone, editor-in-chief of DigBoston, said Mr. Lichtenstein first submitted the article, but that DigBoston didn’t publish it until receiving an email from the same public-relations representative who had initially contacted the professor.
“As for whether Lichtenstein wrote the piece himself, we assumed that was the case, but if it wasn’t, we assure you that we’re no more surprised to hear that than we are when politicians or celebrities use ghostwriters,” Mr. Faraone said.
Mr. Lichtenstein said he agreed to sign his name to the article, to which he made some changes and checked citations, because he believes in advocating for small businesses.
Told he was listed online as a member of the group, Mr. Lichtenstein said, “Wow. I had no idea.” He said the group had inflated his role.
In a statement, Marathon said, “All of the individuals and groups that we work with have full editorial control and input on any materials they put their names on. In fact, those who play a more formal role with the group sign agreements that clearly spell out the mission and vision of the group.”
Mr. Singer provided the Journal a copy of Mr. Lichtenstein’s signed agreement.
Service Employees International Union Local 721, which represents more than 95,000 workers in Southern California, was named as a member without permission, said Coral Itzcalli, communications director. “We have zero involvement with that organization,” she said. After being contacted by the Journal, the union’s attorney sent a cease-and-desist letter demanding the removal of the union from the list of members. A few days later, it was.
Asked for comment, Marathon emailed to the Journal a membership agreement that the agency said had been signed by Gilda Valdez, the chief of staff for the union local, dated July 23, 2018. The firm also provided a statement from Juan Carlos Mendez, president of Churches In Action, a Christian community group in South Gate, Calif., stating that he had asked Ms. Valdez to join the group and had “secured her signature of FFMI’s consent form.”
But Ms. Valdez said that the signature on the documents provided by Marathon was not hers.
“I did not sign on with this group,” she said. “Their real motive for listing us as supporters remains unknown to us.”
Amazon’s Heavy Recruitment of Chinese Sellers Puts Consumers At Risk
The e-commerce platform has included banned, unsafe, mislabeled products. One reason: It wooed China’s manufacturers to sell directly to the U.S.
It looked like Amazon.com Inc.’s years-long quest to build a shopping business in China was a bust in July when it folded a big part of its local business.
In fact, Amazon’s China business is bigger than ever. That is because it has aggressively recruited Chinese manufacturers and merchants to sell to consumers outside the country. And these sellers, in turn, represent a high proportion of problem listings found on the site.
The Journal earlier this year uncovered 10,870 items for sale between May and August that have been declared unsafe by federal agencies, are deceptively labeled, lacked federally-required warnings, or are banned by federal regulators. Amazon said it investigated the items, and some listings were taken down after the Journal’s reporting.
Of 1,934 sellers whose addresses could be determined, 54% were based in China, according to a Journal analysis of data from research firm Marketplace Pulse.
Amazon’s China recruiting is one reason why its platform increasingly resembles an unruly online flea market. A new product listing is uploaded to Amazon from China every 1/50th of a second, according to slides its officials showed a December conference in the industrial port city of Ningbo.
Chinese factories are squeezing profit margins for middlemen who sell on Amazon’s third-party platform. Some U.S. sellers fear the next step will be to cut them out entirely.
Tony Sagar began noticing the China effect around 2015. His company, Down Under Bedding in Mississauga, Ontario, had sold goose-down duvets on Amazon since 2014—these days, for $699 for a queen-size version. Then Chinese competitors hit, listing goose-down duvets for sometimes a sixth his price. He bought one and had it tested: Inside was inexpensive duck down.
he Journal in October bought a duvet from the same Amazon seller claiming “100% Fill With Goose Down” and had it tested. The result matched Mr. Sagar’s: duck feathers.
“They’re claiming they’re selling a $500-$700 duvet based on false specifications, so people say, ‘$120, it’s a good deal!’ ” Mr. Sagar said. “Amazon is making a direct push for these factories in China.”
In response to this article, an Amazon spokesman said, “Bad actors make up a tiny fraction of activity in our store and, like honest sellers, can come from every corner of the world. Regardless of where they are based, we work hard to stop bad actors before they can impact the shopping or selling experience in our store.”
Amazon said it took enforcement action on the duvet seller and that its products were no longer for sale on the site. The seller’s listings appeared to be gone from Amazon’s U.S. site as of last week.
Mr. Sagar’s discovery came as Amazon was expanding a campaign it started around 2013 urging Chinese businesses to sell directly to consumers abroad. An Amazon sales director, Alicia Liu, at a 2017 conference told Chinese business people she was leading a team in China, drawing on her previous experience cutting out middlemen in Walmart Inc. ’s supply chain.
On the MarketAmazon doesn’t divulge the percentage of its sellers based in China, but an analysis of the most-reviewedseller accounts over time shows China-based merchants gaining on its Western sites.
“We help factories directly open accounts on Amazon and sell to U.S. consumers directly,” a video shows her telling them. “This is our value.”
A wave of Chinese merchants have joined Amazon’s millions of third-party sellers worldwide, who collectively represent more than half of Amazon’s physical gross merchandise sales.
Among the 10,000 most-reviewed accounts on Amazon’s U.S. site whose locations could be determined in October, about 38% were in China, Marketplace Pulse calculates, compared with 25% three years ago.
The Amazon spokesman said 38% “is a significant exaggeration of the real percentage of the top ten thousand’’ and that the methodology is flawed, citing what it said were problems with the way in which the analysis used seller review counts to estimate the percentage. Marketplace Pulse said it stood by its analysis.
How Amazon exercises control of its site has come under scrutiny from some in Congress, where some lawmakers are calling for more regulation of the company. That is part of a growing backlash in Washington over how tech companies run their platforms.
Amazon’s third-party marketplace, which connects merchants and buyers around the world, is crucial to the company’s growth. At the same time, even though it has become a source of fake or dangerous goods, Amazon has denied it is liable for what’s sold there, saying in court cases that it neither makes nor sells the products in question.
In its annual Securities and Exchange Commission filing this year, Amazon disclosed for the first time that counterfeits and fraudulent products are a risk factor. It said Amazon may be “unable to prevent sellers in our stores or through other stores from selling unlawful, counterfeit, pirated, or stolen goods,” among other issues.
Amazon said it recruits sellers in many countries and that these merchants are central to its goal of offering customers good selection at good prices. Amazon said it requires products to comply with applicable laws and regulations. It said that in 2018 it blocked more than three billion suspect listings for various forms of abuse.
Consumers and businesses with safety and intellectual-property grievances have found it hard to hold Chinese sellers accountable—in part because Amazon doesn’t require its sellers to provide their locations to the public on its U.S. site.
The Journal identified sellers as being in China from their pages on Amazon’s site in Mexico, where regulations require sellers to list their locations on Amazon—a method Marketplace Pulse also uses.
New sellers from China are hurting merchants that have built Amazon businesses offering products they import from Chinese factories, said Amazon seller Bernie Thompson. His Plugable Technologies in Redmond, Wash., lists electronics products made in China. Since about five years ago, Chinese manufacturers selling on Amazon have priced him out of some product categories, he said—some of them his own suppliers and others who game Amazon’s rating system, he said.
“Amazon is trying to disintermediate everyone they can, and get products as directly as possible to consumers,” he said. “In a way, they’re a perfect partner for China Incorporated to engage with to take them around the world.”
The Amazon spokesman said: “Independent retailers in the U.S. are enjoying record sales in our store.” Amazon said more than 75% of the 10,000 top sellers by gross sales in its U.S. store were America-based as of 2018 and that the company spends more recruiting U.S. sellers than sellers from any other location.
In China over the past six years, Amazon has made its site more accessible to Chinese speakers, created special programs that address Chinese sellers’ logistical needs and sent a stream of employees to recruit suppliers.
At the 2017 conference, Ms. Liu, who said she had spent over a decade purchasing for Walmart, told Chinese sellers that when she joined the industry in 2004, around 90% of her suppliers were trading companies and that by 2017, around 80% were the factories themselves. Ms. Liu said the same logic applied to Amazon, the video shows.
“Let’s cut out the middleman,” said Geoffrey Stewart, an Amazon employee in Shenzhen, at an April trade event in Hong Kong in a video the Journal viewed. “We think that will enhance margins for our manufacturing partners and it will delight customers.”
Amazon said Ms. Liu’s and Mr. Stewart’s comments didn’t mean Amazon was less committed to helping sellers everywhere. Ms. Liu, who no longer works at Amazon, didn’t respond to LinkedIn messages, and the Journal couldn’t determine where she now works. Amazon said Mr. Stewart wasn’t available for comment. Walmart declined to comment on Ms. Liu’s assertions.
Amazon seller Zhao Weiming said the site “is the most cost-effective way to sell into the United States.” The Guangzhou businessman experimented several years ago listing gadgets on Amazon before settling on cosmetics and essential oils, he said, establishing factories to produce them under the name Lagunamoon. He said his company earns $50 million a year on Amazon.
Listings for some popular Lagunamoon essential oils claimed they were U.S. Food and Drug Administration approved, until the Journal raised the matter with Amazon and Mr. Zhao in early November. An FDA spokesman said essential oils wouldn’t meet the agency’s definition of an approved product, although it was possible some component—a dye, say—might be approved.
Mr. Zhao said FDA requirements are complex and he didn’t want to use tens of thousands of words to explain.
Amazon said it was investigating the case and would take proper action. It said sellers are prohibited from listing products that improperly claim to be FDA cleared or FDA approved, or improperly include the FDA logo. At least one Lagunamoon essential-oil listing that cited FDA approval had that claim removed after inquiries from the Journal.
Concerns at Amazon about Chinese listings arose several years ago in its China team, which noticed that as local sellers flocked to the platform, it saw increasing patterns of fraud, counterfeits and unsafe products, said former Amazon employees in China.
Washington state’s attorney general’s office said Amazon agreed to pay $700,000 as part of a legally binding agreement after an investigation revealed dozens of products marketed toward children had excessive lead and cadmium. The products were made in China, the office said, some sold by China-based third parties. Amazon didn’t admit wrongdoing.
“Customer safety is Amazon’s top priority,” said the Amazon spokesman. “We work closely with our selling partners to verify that the school supplies and children’s jewelry in our store are safe.”
Cheap Chinese counterfeits drove Kevin Williams, a Utah seller of water-powered cleaning brushes on Amazon, to lay off six employees this year—most of his U.S. staff, he said. He and his co-founder developed their patented Brush Hero product, made in the U.S. and U.K., in 2015 after finding it difficult to clean their vehicles, selling them on Amazon for $34.99.
Poorly made copies began appearing in 2018 on Amazon, eventually listing for as low as $9.99, some claiming to be the Brush Hero brand, he said. Buyers, unaware they were fake, trashed Mr. Williams’s products on his Amazon page, he said. When he complained to Amazon, he said, it told him to order the alleged counterfeits and test them. Amazon removed brushes he proved counterfeit, he said, but it could take weeks for them to arrive for testing, and new counterfeits kept popping up.
He dropped prices to $19.99, which “pulled out the rug from us from a cash-flow perspective” he said. A retailer declined to give him a large contract. “He said, ‘What the heck, your Amazon reviews are terrible,’ ” said Mr. Williams, who calls his company “walking dead.”
Amazon said that it acted on infringement cases where Brush Hero provided adequate information and that it has introduced programs for sellers to fight counterfeits, including one called Project Zero that uses automation to scan Amazon stores and remove suspected counterfeits.
Counterfeits and inauthentic reviews “have all gone through the roof with the rise of Chinese sellers,” said Chris McCabe, an investigator for Amazon until 2012, now a consultant helping Amazon sellers counter illicit competition.
Inauthentic reviews for listings from China can trick Amazon’s algorithm into boosting products, people outside Amazon familiar with the activities said. A search for “travel pillows” in August presented products with names such as MLVOC offered by sellers whose names matched those of Amazon accounts registered in southern China.
The Journal ordered MLVOC-brand pillows from sellers named Corki and Kingstyle Supplies, and got gift cards offering a free pillow if the buyer emailed an address—the same address for both sellers. A “Gift card team” responded, asking the buyer to give a five-star review for which it promised an Amazon gift card. Of one MLVOC pillow’s roughly 2,000 reviews, about 86% have five stars.
Amazon policy forbids making inducements for positive reviews. Amazon said it investigated and took action, eventually reinstating Kingstyle and Corki. Amazon said in some cases it will reinstate seller accounts after violations if the sellers provide corrective action plans, though the accounts would be blocked after further infractions.
In response to a query sent to the email address given by Corki and Kingstyle, a respondent wrote: “I can’t share the company information.” The sellers didn’t respond to requests for comment sent through Amazon’s platform.
Travel-pillow seller Teri Mittelstadt, co-founder of HiGear Design Inc. in California, said counterfeits and review manipulation from China have hurt sales. Her patented Travelrest pillows, which attach to airline seats to prevent slipping, were among the top-selling travel pillows on Amazon for seven years starting in 2008, she said, but now rank in the 20s or lower.
“The person who gets hurt the most is the consumer who buys the product. They think they are buying a product with all these great reviews,” she said.
Amazon said Travelrest’s sales on Amazon have steadily grown year-to-year since 2015. Ms. Mittelstadt said her sales growth has slowed significantly over the past two years and that this year her sales are down on Amazon’s U.S. site.
Starting in the mid-2000s, Amazon’s attempt to build an online retail business in China was thwarted by local competitors like Alibaba. Early this decade, it began experimenting with the new strategy, and employees “realized that global selling is much bigger” than selling in China, a former Amazon manager said.
At a Shenzhen trade fair in early 2013, no one had heard of Amazon, said Steven Chen, who says Amazon dispatched him to recruit Chinese sellers. He left Amazon in 2015 and operates an e-commerce consulting business.
Amazon employees distributed Chinese-language tutorials on opening Amazon accounts to prospective new sellers, people familiar with the company’s strategy said. Interns in Beijing phoned vendors on Chinese e-commerce sites to invite them to join Amazon.
Chinese sellers’ products often took weeks to ship across the Pacific and arrive at buyers’ addresses. So Amazon offered a logistics system, “Dragonboat,” which for a fee brought goods made in China and elsewhere to Amazon fulfillment centers in the U.S.
American buyers could receive purchases within 48 hours in Amazon boxes, said a former high-level Amazon China employee and a Chinese seller who used the service.
By 2015, Amazon’s website was functional for sellers in Mandarin. Its team responsible for signing up and assisting Chinese sellers expanded to 120 people in 2016, said the former high-level employee. Other employees built relationships with businesses such as Chinese logistics-services providers and translator services, asking them to encourage clients to establish Amazon accounts.
It is often hard to tell that an Amazon seller is based in China, as is the case with the Amazon page of Lagunamoon, the essential-oil and cosmetics provider. It shows no indication the products are Chinese and gives no store address. Lagunamoon’s Mr. Zhao said that is because the U.S. doesn’t require it.
Amazon seller Molson Hart in Texas is suing 73 sellers, many located in China, in Texas federal court, for trademark infringement on products like his Brain Flakes interlocking plastic disk set. He has been selling the Chinese-made toys on Amazon since 2014, and counterfeits started appearing in 2015, he said.
After he filed suit, he couldn’t hunt down the Chinese companies. “I know who did it,” he said, “but I can’t serve them.”
Amazon said it has worked closely with brands to support criminal referrals against counterfeiters in China and anticipates working with brands to jointly pursue litigation in the U.S. and China.
Amazon buyer Irvin R. Love Jr. of Georgia bought a hoverboard on Amazon in November 2015 that caught fire and burned down his home, according to a suit he filed February 2018 against Amazon, the seller and others, in Georgia federal court. In an amended complaint this year he alleged that Amazon was negligent for not removing the hoverboard from its website before Mr. Love’s purchase. Amazon argued in a legal filing that it doesn’t owe damages because it didn’t design, manufacture or sell the hoverboard.
Mr. Love also sued the seller, Panda Town, which his lawyer, Darren Penn, said appeared to be a Chinese company, based on sales information. Mr. Penn said that he can’t locate the seller and that Amazon declined to provide its location.
Cross-border e-commerce has made it harder to police unsafe products entering the U.S., he said. “When you had the traditional importer and customs and brokers—and all those procedures are followed—you provide a couple of layers of protection that you don’t when you’re talking about an internet market.” The case is in discovery, and Mr. Penn declined to make Mr. Love available for comment.
Amazon said it has provided information about the seller to the plaintiff, consistent with its policy on such matters. Panda Town doesn’t appear to list on Amazon anymore, and the Journal couldn’t locate a company by that name.
Product safety on Amazon and other online marketplaces isn’t assured, because Amazon doesn’t require all third-party sellers to test products to prove they are compliant with regulations, said Sebastien Breteau, chief executive of QIMA, an inspection, certification and audit company that is an Amazon vetted service provider.
“It’s not normal that a factory with 200 people manufacturing baby monitors in Dongguan can ship products directly to consumers in Minnesota or in Europe through a marketplace,” he said. “The day the regulator makes them responsible, then we’ll have proper compliance programs.”
Amazon said sellers create their own product listings and are required to comply with all relevant laws and regulations when listing items for sale in Amazon stores.
Mr. Thompson, the electronics seller, said Chinese factories have steadily pushed him out of lower-end goods such as USB cables, pricing at less than he can. The Chinese sellers often boost their product rankings by arranging large purchases of their own products and leaving positive reviews for themselves, he said—a tactic he said he learned about while attending an independent Amazon-seller event featuring a China-based sales consultant in Hong Kong several years ago.
He now counts on selling higher-end products like $199 docking stations for displays and charging electronic devices, he said, but “there really isn’t much upper end left for us.”
Amazon said competition is a part of business and some more-mature product categories can be particularly competitive. The spokesman said its goal is to quickly remove abusive reviews and that over the past month “over 99% of the reviews read by customers were authentic.”
Chinese sellers were seen as too valuable to give up, despite warning signs, a former Seattle-based Amazon employee said. “There were crazy things, hundreds of listings created every hour,” the person said, adding that when U.S. vendors complained, staff told them, “We don’t control third-party selection. It’s not us, it’s an open-end platform.”
Mr. Sagar, the goose-down-duvet seller, said an employee posing as a customer last year contacted Rosecose, the Chinese seller of the down duvet on Amazon, offering proof its product was deceptively listed. A Rosecose representative apologized and said its suppliers could be to blame, offering to refund the lab-test costs, according to messages the Journal viewed.
The employee last year also sent an email to Amazon with the test results showing the duck down, he said. Rosecose kept listing duvets, Mr. Sagar said.
The Journal bought a duvet on Amazon from Rosecose in October and sent its own test results to Amazon late in the month. Early this month, Rosecose was still selling duvets on Amazon as “100% Fill With Goose Down,” including a king-size option listing for $129.99.
The Wall Street Journal verified Rosecose was based in China by visiting its page on Amazon’s Mexican site, which listed its location. Rosecose didn’t respond to inquiries sent through Amazon and no one picked up calls to a phone number associated with the brand.
Amazon said it took down Rosecose listings Nov. 4. They appeared to be gone from the U.S. site early last week, but some still appeared on Amazon’s Canada site until after the Journal pointed them out to the company.
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