Why Amazon Needs Others To Keep Selling
CEO letter shows why third-party sales have become key to retail giant’s business. Why Amazon Needs Others To Keep Selling
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.
Amazon Blocks Sellers From Using FedEx Ground For Prime Shipments
Amazon cites a decline in FedEx performance heading into the final holiday push.
Amazon.com Inc. is blocking its third-party sellers from using FedEx Corp.’s ground delivery network for Prime shipments, citing a decline in performance heading into the final stretch of the holiday shopping season.
The ban on using FedEx’s Ground and Home services starts this week and will last “until the delivery performance of these ship methods improves,” according to an email Amazon sent Sunday to merchants that was reviewed by The Wall Street Journal.
Amazon has stopped using FedEx for its own deliveries in the U.S., but third-party merchants had still been able to use FedEx. Such sellers now account for more than half of the merchandise sold on Amazon’s website, including many items listed as eligible for Prime.
FedEx said the decision impacts a small number of shippers but “limits the options for those small businesses on some of the highest shipping days in history.” The carrier said it still expects to handle a record number of packages this holiday season.
“The overall impact to our business is minuscule,” a FedEx spokeswoman said.
An Amazon spokesman said the policy change is to ensure customers receive their packages on time and the e-commerce company is managing delivery cutoffs so that orders arrive by Christmas. He said the ban is temporary and will be lifted once FedEx service levels improve.
In its email to merchants, Amazon said sellers can use FedEx’s speedier and more expensive Express service for Prime orders or FedEx Ground for non-Prime shipments.
Daily package volumes double during the holiday season compared with the average volume throughout the year, and carriers have battled difficult weather in recent weeks.
FedEx, United Parcel Services Inc. and Amazon are facing a challenging calendar this holiday season, with six fewer days between Thanksgiving and Christmas to deliver millions more packages than last year.
During the week after Black Friday, UPS deliveries were on time 92.7% of the time, while FedEx’s deliveries were 90.4% on time and deliveries that Amazon made itself were 93.7% on time, according to ShipMatrix Inc., a software provider that analyzes shipping data.
The carriers handle tens of millions of packages a day, so even small drops in on-time rates can affect many customers.
FedEx said it is experiencing weather challenges and some of the highest-volume days in its history, but “our networks are flexing as designed to accommodate the surge of packages.”
When packages have been delayed, FedEx said it is working to get them quickly delivered with a focus on ensuring holiday deliveries make it on time.
UPS said it has faced delays due to winter storms in Colorado, Utah, the Upper Midwest and the Northeast, and has deployed resources and extended work schedules as a result.
A spokesman said that a “vast majority” of UPS packages are meeting service-level commitments and that the network overall is performing well. On Monday, UPS also said it had temporary problems with online shipping software at its UPS stores.
Amazon, too, has dealt with delivery and logistics issues as it handles more of its own deliveries and ramps up spending to match a plan to offer free one-day delivery for many Prime orders.
Typically, Amazon has offered free two-day delivery with Prime. ShipMatrix said customers may be experiencing delays with Amazon fulfilling orders and getting all parcels on its vans for the last-mile delivery.
On Dec. 6, Amazon Senior Vice President Dave Clark replied to customer complaints of delivery problems. He wrote on Twitter that some of the company’s deliveries were impacted by weather earlier that week “but we quickly rebalanced capacity and it’s all systems go now.”
Earlier this year, Amazon and FedEx ended two major shipping contracts, totaling some $900 million in revenue for FedEx. The overnight-delivery pioneer is shifting its focus to retailers such as Walmart Inc. and Target Corp. that compete with Amazon.
The breakup came as Amazon is increasingly building up its own delivery network, buying cargo jets and thousands of vans or trucks. The Seattle giant is poised to deliver twice as many packages to homes during the holiday season compared with last year, according to parcel research firm SJ Consulting Group Inc.
Jerry Kozak, owner of Ann Arbor T-Shirt Co., which sells about 10,000 items through Amazon, said it is common for third-party sellers to use both UPS and FedEx for shipments, so adjusting to Amazon’s order this week shouldn’t be too burdensome.
Mr. Kozak’s company primarily uses UPS when shipping to consumers but has used FedEx in the past.
“My biggest concerns as a seller are that my products that I send are getting there in the time frame customers expect and are in good shape,” Mr. Kozak said. “After that, it doesn’t matter to me too much which carrier is taking it.”
Morgan Stanley recently estimated that Amazon is already shipping nearly half of its U.S. packages on its own, and estimates that Amazon is poised to launch a third-party shipping option that will pose a greater threat to the incumbent delivery giants.
The firm adds that Amazon’s promise to deliver more product in one day is resetting expectations for fast shipping and putting pressure on other retailers to match that. As such, the analysts view the move “as a potential trojan horse to drive long-term adoption of an eventual” shipping option provided by Amazon.
FedEx is slated to report its latest quarterly results on Tuesday.
You Might Be Buying Trash On Amazon—Literally
Dumpster divers say it’s easy to list discarded toys, electronics and books on the retailer’s platform. So we decided to try.
Just about anyone can open a store on Amazon.com and sell just about anything. Just ask the dumpster divers.
These are among the dedicated cadre of sellers on Amazon who say they sort through other people’s rejects, including directly from the trash, clean them up and list them on Amazon.com Inc. AMZN 0.93% ’s platform. Many post their hunting accounts on YouTube.
They are an elusive lot. Many The Wall Street Journal contacted wouldn’t give details about their listings, said they stopped selling dumpster finds or no longer listed them as new, didn’t respond to inquiries or stopped communicating. Some said they feared Amazon would close their stores.
So the Journal set out to test whether these claims were true. Reporters went dumpster diving in several New Jersey towns and retrieved dozens of discards from the trash including a stencil set, scrapbook paper and a sealed jar of Trader Joe’s lemon curd.
The Journal set up a store on Amazon to see if it could list some of its salvaged goods for sale as new.
It Turned Out To Be Easy.
Amazon’s stated rules didn’t explicitly prohibit items salvaged from the trash when the Journal disclosed the existence of its store to the company last month. The rules required that most goods be new and noted that sellers could offer used books and electronics, among other things, if they identified them as such.
“Sellers are responsible for meeting Amazon’s high bar for product quality,” an Amazon spokeswoman said. Examples the Journal presented to Amazon of dumpster-sourced listings “are isolated incidents,” she said. “We are investigating and will take appropriate action against the bad actors involved.”
She declined to comment on the Journal’s store.
Late last week, Amazon said it updated its policy to explicitly prohibit selling items taken from the trash, adding to its list of unacceptable items any “intended for destruction or disposal or otherwise designated as unsellable by the manufacturer or a supplier, vendor, or retailer.”
Amazon exerts limited control over its third-party marketplace, which connects buyers with millions of merchants around the world. The company has said it isn’t liable for what these merchants sell, saying in court cases Amazon itself isn’t the one selling the products listed by third parties.
“We had an internal saying: Unless the product’s on fire when we receive it, we would accept anything,” said James Thomson, who helped oversee the Fulfillment By Amazon program—under which Amazon handles logistics for third-party sellers—before leaving in 2013. He is now a consultant to brands with Amazon accounts. In his view, he said, “Ultimately consumers are the police of the platform.”
The Amazon spokeswoman said Mr. Thomson’s “statements are demonstrably false.” Mr. Thomson said he stood by his assertions.
Wade Coggins, near Beaverton, Ore., said he finds items to sell on Amazon and eBay in store clearance sections, abandoned storage units and dumpsters. He said he has salvaged cardboard boxes, bubble wrap and peanuts from trash bins to package his orders.
Blemishes need to be cleaned off, he said, adding that some people shrink-wrap items to make them look more legitimate. “When you send stuff in to Amazon,” he said, “it needs to look brand new.”
Mr. Coggins identified one Amazon store and said he had another that he declined to disclose. The Amazon spokeswoman said the company couldn’t find evidence of a second store.
To list items under Amazon Prime—the subscription service offering quick, free delivery—third-party sellers send them to an Amazon warehouse where the retailer handles packaging, delivery and returns. Shipping boxes or labels often include Amazon branding. Sellers can also ship directly to customers from their homes and warehouses, qualifying for a Prime designation if they enroll in a program called Seller Fulfilled Prime.
Amazon merchant David Gracy, 49, who among other things resells new merchandise purchased from stores and brand closeouts, said his business partner in 2016 salvaged items from dumpsters including a batch of humidifiers and keyboards in Austin, Texas. Mr. Gracy’s Amazon store sold such items for more than a year under Amazon Prime, he said. He said he hasn’t sold dumpster finds since then.
He said he wouldn’t be comfortable selling certain salvaged items, such as food, on the site, but “Amazon’s not going to ask ‘Where’d you get it from? Did you get it from a dumpster?’ ”
‘DJ Co’ Opens Shop
Amazon said it requires sellers to provide government-issued identification and uses a “system that analyzes hundreds of unique data points to identify potential risk” and “we proactively block suspicious businesses.”
The Journal applied to open an Amazon store in September by submitting a reporter’s driver’s license and bank statement. Two days later, “DJ Co” was open for business.
An email arrived declaring: “Welcome to Fulfillment by Amazon.” The Journal signed up for a $39.99-a-month account and paid additional fees, such as for storage.
Late one night several days before the store opened, reporters with flashlights and blue latex gloves visited Clifton, Clark and Paramus, N.J., scouring dumpsters behind outlets such as a Michaels craft store and a Trader Joe’s grocery.
The bins were a humid mess of broken glass and smashed boxes, a stench of rot in the air. Several products were in original packaging, some soiled with coffee grounds, moldy blackberries or juice from a bag of chicken thighs.
Among items the reporters retrieved were a stencil set, a sheet of scrapbook paper and the lemon curd. The curd jar showed an expiration date of May 2020.
The Journal cleaned and packed the three items—bubble-wrapping and taping the curd jar—and mailed them to an Amazon warehouse in Pennsylvania in September and October. The Journal completed Amazon’s documentation requirements by specifying the items’ universal product codes, the numbers next to bar codes on most products.
Amazon didn’t ask about the inventory’s origins or sell-by dates.
The Journal’s dumpster finds were soon up for sale with an Amazon Prime logo, available to millions of shoppers, including the listing for “Trader Joe’s Imported English Authentic Lemon Curd 10.5oz” at $12.00.
After a later dumpster dive, the Journal was able to go through almost all of the listing process with salvaged breath mints, sunflower seeds, marmalade, crispbread, fig fruit butter, olives, a headband and a Halloween mask—stopping just short of shipping them to the Amazon warehouse, which is required for an item to appear for purchase on the site.
To list a sunscreen lotion, Amazon asked for a safety-data sheet. Attempts to list a protein powder, a pea-powder dietary supplement and a face sheet mask—all from the dive—elicited a request from Amazon for proof of purchase.
A Trader Joe’s spokeswoman, Kenya Friend-Daniel, said the grocer doesn’t approve of its products’ sale on Amazon and that its policy is to discard an item only if it isn’t fit for sale. Michaels spokeswoman Mallory Smith said: “We do not approve of the sale of Michaels products by unauthorized third party sellers.”
Amazon uses warehouse workers to identify problematic products, and computers direct workers to make spot checks. Some former employees said the daily volume is often too large to handle, with workers charged with scanning sometimes hundreds of items an hour.
“I myself ignored broken things more often than not,” said Chris Grantham, who held several roles in Amazon’s fulfillment center in Ruskin, Fla., until 2017, including quality-assurance inspector.
Amazon urged speed over precision, penalizing workers who didn’t hit productivity requirements, he said. Workers sometimes changed expiration dates for expired products in the computer, he said, so they wouldn’t be expected to perform a complicated disposal process—a shortcut noted by several warehouse employees in a discussion reviewed by the Journal in a restricted Facebook group for Amazon workers.
The Amazon spokeswoman said workers have the authority to sideline unacceptable products and that Amazon employs “multiple checks and balances in the inventory and picking process to ensure quality control standards are upheld.” Regarding worker-productivity requirements, she said “performance is measured and evaluated over a long period of time.”
Jesse Durfee said he has used Amazon to sell toys, videogames, electronics and trinkets from dumpsters including bins behind Michaels and GameStop stores. The 26-year-old in Torrington, Conn., said one of his favorite places to find things to list on Amazon is his town dump. He said he lists his dumpster finds as used and declined to identify his storefront, saying he fears other sellers might try to sabotage him.
In a 2017 YouTube video, he tests out television remote controls he said he found in a dumpster and tells viewers they can wash off corroded battery compartments with baking soda and water.
He said he opened his Amazon store six years ago after realizing it was more lucrative to resell inventory than work as a photographer. “I started with dumpster diving because I had no money to buy inventory,” he said, and branched into buying at thrift stores and discount-store clearance sections for items to sell on Amazon.
“I’ll go to pawnshops, I’ll go dumpster diving,” he said. “I’m one of those people who does everything.”
Some sellers on Amazon’s internal discussion boards have voiced concerns about garbage showing up on the site. One, in a post titled “Dumpster Divers Overrunning Beauty Category,” wrote of items in bad condition that resulted in complaints directed at the poster and other sellers in the category.
The Amazon spokeswoman said the seller’s characterization of the category as being overrun “is wrong and baseless.”
To see if Amazon customers shared such concerns, the Journal analyzed about 45,000 comments posted on Amazon in 2018 and 2019. It found nearly 8,400 comments on 4,300 listings for foods, makeup and over-the-counter medications with keywords suggesting they were unsealed, expired, moldy, unnaturally sticky or problematic in some other way.
About 544 of the 4,300 products were promoted as Amazon’s Choice, which many consumers take to be the company’s endorsement. Amazon’s website says the label reflects a combination of factors such as ratings, pricing and shipping time.
Among the 4,300 listing the Journal reviewed, 241—including generic ibuprofen, Sun Chips and an Amazon’s Choice face lotion—had at least five reviews from different customers suggesting the item was used or expired.
One reviewer said lipstick arrived with no packaging, marred and mildewed. Five reviewers said they received a protein bar sprouting white fungus, one writing: “My daughter has eaten a handful of them and called me into the kitchen today to show me that there was MOLD on the bar she had eaten half of!!!!!!”
Last year, Eileen Anastassopoulos bought her son’s favorite grape-flavored applesauce from an Amazon third-party seller, she told the Journal. The squeezable packets had expired seven months before, said the 39-year-old mother, who left a review with a photo showing its November 2017 “best before” date to warn others.
Amazon sent a new shipment after she complained, she said, but “if I wasn’t a diligent person checking expiration dates I could have had an issue with my son.” The Journal couldn’t identify her seller but did find another seller of the same applesauce that received recent reviews alleging the sale of expired or damaged products.
The Amazon spokeswoman said the company investigates product reviews and takes corrective actions as needed. Of those the Journal identified, she said, “the product reviews where customers expressed issues with quality represents less than 0.01% of orders on those products.”
She said Amazon uses “a combination of artificial intelligence and manual systems to monitor for product quality and safety concerns in our store” and that if a product fails its guidelines, Amazon will “take appropriate action against the seller, which may include removal of their account.”
Amazon customers don’t always have total control over whom they buy from. A default setting in an Amazon account known as “commingling” can mean customers think they are buying from one merchant but end up getting the product from another—if, say, another seller’s product is in a warehouse closer to the buyer.
The spokeswoman said the process “allows Amazon to efficiently process, fulfill, and ship customer orders.”
Returns for sale
One class of third-party Amazon merchants buys inventory from liquidation companies, which sell bathtub-sized cardboard boxes on pallets full of products typically removed from big retailers’ shelves or warehouses, or full of returned goods. The products often arrive in the boxes uninspected and piled loose.
Heather Hooks, 40, said she has sold thousands of goods on Amazon from liquidators, mostly returns such as Lego sets, Tylenol pills, Hanes undergarments and Maybelline makeup. She estimated that about 75% of the products she buys out of liquidation are flawless and said she sells those on Amazon as new. The rest she sells on eBay and other sites, she said, labeling their condition.
Sellers say eBay has fewer restrictions on what can be listed as used. An eBay Inc. spokesperson said the site requires sellers to describe listings accurately, including whether items are used or damaged.
Ms. Hooks, who lives near St. Louis, said she makes more than $20,000 a year on Amazon selling this way and profits from a YouTube account, where she chronicles her business. Her storefront boasts hundreds of items, including toys, candy, toiletries, makeup and clothes. Amazon temporarily banned her from selling about three years ago, she said, because a brand complained she was listing its product as an unauthorized seller.
“I’m extremely picky now,” she said, saying she inspects each product to see if seals are broken or parts are missing. “Even if it has a ding on the box, I won’t send it.”
Of dumpster diving, she said: “That’s not my scene,” but “some people think liquidation is a little bit like that.”
On Amazon’s internal discussion board, one seller complained Amazon itself was reselling returned goods. This seller, who lists earrings, wrote in a May 2018 post that Amazon said it sometimes repackages products that customers have returned and mixes them back with inventory if warehouse workers approve. This merchant wrote of asking Amazon to stop reselling the merchant’s returned earrings but said the company justified it by saying the items were inspected at the warehouse.
“I hope one day I don’t have to panic,” the merchant wrote, “every time someone returns a pair of earrings in fear that Amazon will ship it out to the next person, along with any unhygienic diseases that may be attached to it.”
The Amazon spokeswoman said the company subjects all returns to a rigorous inspection “and all items reintroduced to inventory as new meet the same high standards as what a vendor or seller sends us directly.”
Some Amazon sellers said they buy discarded Amazon returns from liquidators and then relist them on Amazon. Amazon said it works with liquidators and that items complying with its policies are allowed for sale on Amazon.
The Lemon Curd
The three dumpster finds the Journal sent to the Amazon warehouse stayed on the DJ Co store for only a few seconds—the Journal immediately bought them so nobody else could.
All came back with a return address of an Amazon warehouse in Kentucky. The stencil set was bent. The paper arrived in good condition. Both arrived in Amazon packaging, not the packaging in which the Journal sent them.
The Trader Joe’s lemon curd came back in the box the Journal packaged it in to send to Amazon, still in the same bubble wrap and tape. The only thing Amazon appeared to have done was to affix its own shipping label atop the Journal’s.
DJ Co remained open until late last week, though not stocked.
On Friday, Amazon said it updated its policy to ban items from the trash. The spokeswoman said: “Sourcing items from the trash has always been inconsistent with Amazon’s high expectations of its sellers and prohibited by the Seller Code of Conduct on Amazon, which requires that sellers act fairly and honestly. We’ve updated our policy to more explicitly prohibit this type of behavior.” Asked how it will enforce the new rule, Amazon said it expanded its existing verification efforts, including increased documentation spot checks.
On Saturday, The Journal Received An Email From Amazon:
“Your account has been closed due to violations of our Seller Policies and Seller Code of Conduct. Specifically, we have learned that your have offered products that were sourced in a manner that does not meet Amazon’s high bar for customer trust and safety.”
Amazon Is The Target of Small-Business Antitrust Campaign
National coalition of small businesses to push for more-forceful antitrust measures, saying Amazon competes unfairly.
Merchant groups are forming a national coalition to campaign for stricter antitrust laws, including measures they hope could force Amazon.com Inc. to spin off some of its business lines.
The effort is being launched Tuesday by trade groups that represent small hardware stores, office suppliers, booksellers, grocers and others, along with business groups from 12 cities, organizers say.
Merchants plan to push their congressional representatives for stricter antitrust laws and tougher enforcement of existing ones.
The groups, which collectively represent thousands of businesses, want federal legislation that would prevent the owner of a dominant online marketplace from selling its own products in competition with other sellers, a policy that could effectively separate Amazon’s retail product business from its online marketplace.
Members of the House Antitrust Subcommittee are considering legislation along those lines as they weigh changes to U.S. antitrust law, though no bill has yet been introduced.
The merchant groups also want tougher enforcement of competition laws and legal changes that would make it easier for the government to win antitrust lawsuits against big companies.
In a statement, an Amazon spokesperson said the company’s critics “are suggesting misguided interventions in the free market that would kill off independent retailers and punish consumers by forcing small businesses out of popular online stores, raising prices, and reducing consumer choice and convenience.”
“Amazon and third-party sellers complement each other, and sellers having the opportunity to sell right alongside a retailer’s products is the very competition that most benefits consumers and has made the marketplace model so successful for third-party sellers,” the spokesperson added.
Amazon also has developed its own public-relations campaigns to showcase success stories. At an event in Washington in 2019, sellers of baby products and cooking spices gave out free samples and talked about how their startups grew thanks to the Amazon marketplace.
Members of the coalition, dubbed Small Business Rising, include the National Grocers Association, the American Booksellers Association and the Alliance for Pharmacy Compounding.
They aim to capitalize on local business owners’ connections to their hometowns by meeting with members of Congress and staff, writing letters, seeking coverage in local media, and other efforts.
“Those stories are powerful and are motivating for lawmakers,” said Stacy Mitchell, co-director of the Institute for Local Self-Reliance, a research and advocacy group that has previously partnered with unions and others to oppose what it views as excessive corporate power and spearheaded the campaign. “It’s a real business that is really going to go under with a real community that is going to suffer as a result.”
The small-business owners might struggle to counter big businesses and their lobbyists, who are pressing Congress to leave antitrust laws alone. Amazon disclosed spending about $18 million on lobbying last year on antitrust and other issues, the second largest among U.S. corporations.
Amazon has also touted to lawmakers its growing ranks of U.S. employees, including at warehouses in many corners of the country
Those against changing antitrust law have another advantage: Washington gridlock. While discontent with large technology companies’ power is bipartisan, Republicans and Democrats haven’t reached consensus on how exactly to address those concerns and may well fail to do so.
“Competition policy and antitrust reform is the likeliest potential legislation affecting the tech sector that this Congress could pass, and yet I still think it’s below 50% odds,” said Alex Cynamon, a policy analyst with research firm Veda Partners. “It’s a tall order for any advocates and groups to compel Congress to actually enact material changes to the statute.”
Proponents of stricter antitrust policy can count some victories early in the Biden administration. Two critics of Amazon and other big tech companies, Columbia University law-school professors Tim Wu and Lina Khan, have been named to jobs in the White House and Federal Trade Commission, respectively. (Ms. Khan’s appointment still requires approval by the Senate.)
The Small Business Rising campaign has grown out of meetings the groups have held for months. It won’t have its own staff and will rely on the existing budgets of member organizations.
Besides lobbying, another goal is recruiting more business owners to talk publicly about antitrust issues, said Derek Peebles, executive director of the American Independent Business Alliance, a network of local business groups in places such as Cambridge, Mass., and Madison, Wis.
The business owners come from different industries, but competition from Amazon is a common thread.
Doug Mrdeza, a Michigan-based merchant on Amazon’s marketplace, said he laid off close to 40 employees in late 2019 after Amazon raised his fees and struck deals with some of his suppliers to sell products itself, cutting him out of the supply chain.
David Guernsey, chief executive of Virginia-based office supplier Guernsey Inc., says government agencies are buying more on Amazon’s site, but he is wary of selling there because it would mean giving Amazon access to data on his prices, transactions and customers.
“I’ve never had a competitor that had that kind of insight to my business,” he said.
The Wall Street Journal has reported on some of Amazon’s tactics and use of seller data.
Allison Hill, chief executive of the American Booksellers Association, said some of the group’s roughly 1,800 independent bookstores have started “sleeping with the enemy”—selling on Amazon’s marketplace—to survive.
“If a company was operating that marketplace and was not your competitor, they would be offering very different support and services,” she said.
Seventy-five of the bookstore group’s members closed down in 2020.
Amazon-Business Acquirer Benitago Files For Bankruptcy
New York-based company sought protection from creditors less than two years after a $325 million capital raise.
Benitago, one of a slew of investment groups that acquire businesses selling their products through Amazon, has filed for bankruptcy, less than two years after raising $325 million in funding.
The New York-based online seller sought protection from creditors Wednesday in the U.S. Bankruptcy Court in Manhattan, listing both assets and liabilities ranging from $50 million to $100 million. Tom Studebaker at advisory firm Portage Point Partners has been appointed as Benitago’s chief restructuring officer.
The company, founded in 2016, operates in a small but lively wing of the e-commerce market in which groups of investors buy small third-party sellers on Amazon’s online marketplace and run them as a group, providing greater marketing and logistics expertise to the businesses.
Many of those sellers use the Fulfillment by Amazon warehousing and delivery service and can gain better pricing when they consolidate their purchasing under a single owner.
Santiago Nestares Lampo, chief executive and co-founder of Benitago, said in a filing with the bankruptcy court that consumer preferences shifted during the later stages of the pandemic when lockdowns ended.
Since then, the company has experienced a rapid and dramatic reversal of fortune due to macroeconomic forces as the e-commerce sector has shrunk dramatically in the past two years and has continued to decline, Nestares said.
At the time of filing, the company recorded roughly $7.5 million in cash.
Benitago plans to restructure its debt and potentially sell parts of the business in bankruptcy, including entities that own the intellectual property rights to 15 brands and sell more than 300 products including health supplements, office products and beauty products, court papers showed.
Marketplace Pulse, an e-commerce research group, said the aggregators had raised more than $16 billion in capital over the past four years, much of it in 2021 and 2022 as online shopping boomed during the Covid-19 pandemic.
In November 2021, Benitago said it had secured $325 million in funding provided by a group led by technology venture capital and debt financier CoVenture. That followed an initial $55 million raise in early 2021. CoVenture is among Benitago’s largest senior creditors.
At that time, Benitago had launched 10 brands and 300 products in-house, and had also acquired 10 brands that it was helping to grow.
The backing of aggregators like Benitago has leveled off since the middle of last year as the growth in e-commerce demand has pulled back to prepandemic levels.
One of Benitago’s larger rivals, Thrasio, in 2022 laid off staff and saw both co-founders and its chief financial officer depart within months. The trouble at Thrasio set off a flight of capital for the sector, said Nestares in the filing.
Business analytics firm CB Insights said in a report in May that funding for Amazon brand acquirers declined by 88% last year and that only five funding deals were completed in the first five months of this year.
The market, CB Insights said, “is unraveling,” and some debt-laden aggregators are putting their investors at risk.
Neither Benitago nor its lawyer at Togut, Segal & Segal could be immediately reached for comment.
The case has been assigned to Judge Sean Lane, with number 23-11394.
CoVenture Says It Wasn’t Warned of Amazon Brand-Buyer Bankruptcy
* Investment Firm Says Benitago’s Chapter 11 Came Without Notice
* CoVenture Backed Benitago And Says It’s Owed About $85 Million
Investment management firm CoVenture said it was preparing to discuss restructuring options for Benitago, a struggling e-commerce startup it funded, when it was surprised to learn the business which rolls up popular brands sold on Amazon.com Inc. instead filed bankruptcy.
CoVenture lawyer Oscar Pinkas said Friday during a bankruptcy hearing in New York the firm consented to waivers and forbearances on a loan it provided Benitago to aid the startup’s turnaround efforts. CoVenture invested in
Benitago and is owed roughly $85 million in principal and deferred interest payments on its loan, according to court documents.
Benitago has been struggling for more than a year and talks on how to restructure the business — without putting it in Chapter 11 — were scheduled for earlier this week, but those discussions didn’t occur because the company filed bankruptcy on Wednesday without giving advance notice to CoVenture, Pinkas said.
“Instead, we got notice of a filing overnight about 36 hours ago,” Pinkas said.
Benitago develops and acquires a vast array of products, using marketing strategies to increase their prominence on Amazon. The company is one of several Amazon “aggregators” that rollup brands sold on the site.
The industry experienced a boom in the early months of the Covid-19 pandemic when most consumers were stuck at home, but has struggled in recent years as shoppers have returned to stores.
Its CEO Santiago Nestares Lampo said in a sworn statement the company filed Chapter 11 because it couldn’t reach an agreement on a path forward with CoVenture and was facing forbearance penalties.
Lampo said Benitago has had multiple, profitable quarters before taking the CoVenture loan, adding the company is hopeful it will be able to strike an agreement with its financial stakeholders “in a transparent, court-supervised process.”
CoVenture didn’t challenge Benitago’s entry into Chapter 11 and requests it made Friday to continue paying its ordinary expenses as it starts operating in bankruptcy.
However, CoVenture could bring legal challenges later in the case after the firm learns more about how Benitago intends to restructure its business in Chapter 11, Pinkas said.
Benitago lawyer Kyle Ortiz said the company intends to sell retail brands it has acquired, along with restructuring its core business of developing its own products based upon research and data it collects from Amazon.
The case is Benitago Inc., 23-11394, U.S. Bankruptcy Court for the Southern District of New York (Manhattan)
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