* About 200 brands track sellers with Channel IQ
* Brands want to stop unauthorized discounting on Amazon
* Amazon’s 3rd-party selling platform a high-margin business
* Amazon reports quarterly results on Thursday
By Alistair Barr
SAN FRANCISCO, Oct 23 (Reuters) – Amazon.com Inc is
grappling with a problem that eBay Inc has struggled
with for years: The proliferation of unauthorized third-party
sellers that undercut the world’s top consumer brands.
The sellers offer online shoppers goods ranging from Guess
watches to LG televisions and Adidas sportswear at low prices,
upsetting Amazon suppliers who want the world’s largest online
retailer to crack down on unauthorized discounting.
On eBay, the brands mostly complained about counterfeit
products sold by third parties. The problem on Amazon is that
while the goods are authentic, sellers often get them from leaks
in supply chains, and then sell the products online at below the
minimum advertised price set by the label.
The brands want Amazon to help them weed out such sellers,
but the online retailer prefers not to get involved, according
to industry executives. Amazon declined to comment.
Amazon has little incentive to discipline sellers because it
takes a cut of third-party sales through its lucrative 3P (third
party) marketplace, these executives say. That business
accounted for 40 percent of Amazon’s second-quarter unit sales
and has provided a big boost to revenue and margin growth.
The 3P marketplace’s growth prospects will be front and
center when Amazon reports results on Thursday. This platform
for independent sellers is different from Amazon’s traditional
online retail business, known as 1P (first party), where the
company buys products from manufacturers at wholesale prices and
sells them online itself.
“Wall Street may be excited about Amazon’s 3P growth, but
it’s a freight train out of control,” said Wes Shepherd, chief
executive of Channel IQ, which helps companies monitor online
prices and sellers.
“Amazon is so big, manufacturers feel the need to be there,
but at some point something has to give,” he added. “Many major
brands are very frustrated and are rationalizing their business
with Amazon right now.”
Amazon shares have risen 40 percent so far this year,
outperforming the Nasdaq Composite Index’s 16 percent
rise in part because of hopes for improved profit margins from
3P and other services.
3P sales offer Amazon gross margins of 90 percent to 100
percent, while its traditional retail business has gross margins
of about 20 percent, according to Nomura estimates.
TRACKING DOWN SELLERS
To enforce the minimum advertised price, brands often
withhold sales to distributors and sellers that do not comply.
But when unauthorized sellers obtain a product without a
manufacturer’s knowledge, severing the flow becomes difficult.
Unauthorized sellers are also active on eBay, but since the
site does not specialize in brand-new products where pricing is
paramount and does not compete as a retailer in its own right,
the labels are less concerned about discounted goods there.
In contrast, Amazon treads a fine line because its retail
operation relies on brands supplying it with products, while the
3P operation needs lots of sellers competing on price to thrive.
“Amazon has to work this out with its suppliers,” said Scott
Tilghman, an analyst at Caris & Co. “They will say, ‘We
recognize third-party sellers violate rules, but we can only
police it so much.'”
He added: “Depending on the breadth of violations, it
definitely could dampen 3P growth.”
Some brands, including German chef knife maker W 1/4sthof, said
they stopped selling goods on Amazon after the company priced
some products below the minimum advertised price. When W 1/4sthof
complained, Amazon cited competition from third-party sellers,
according to Todd Myers, W 1/4sthof’s vice president of sales in
the United States. Myers said Amazon told W 1/4sthof to crack down
on these third-party sellers itself.
Others, such as Swiss Gourmet, distributor of Swiss Diamond
cookware in the Americas, have threatened to pull out unless
Amazon limits discounting and cracks down on unauthorized
third-party sellers.
Ralph Lauren Corp, Hugo Boss AG and Guess
Inc have all protested recently about unauthorized
sellers. Adidas AG plans to ban dealers listing its
products on Amazon and eBay starting in 2013.
LG Electronics USA started a new pricing policy this month
and may cut off sellers who break it.
It is not easy to curtail third-party sellers. For instance,
W 1/4sthof had severed ties with a seller called Abe’s of Maine.
But that company was able to obtain W 1/4sthof knives from other
distributors and continues to sell them on Amazon.com.
When contacted by Reuters, an Abe’s sales rep confirmed
Myers’ account. A search on Amazon on Tu esday showed Abe’s of
Maine as a third-party seller of 19 W 1/4sthof items.
“They can try as much as they can, but we will sell their
products still,” said an Abe’s employee who said he was a sales
representative named Lawrence but declined to give his surname.
It is difficult to know how many unauthorized online sellers
there are, but tracking them down for consumer brands is a
growth business, e-commerce experts say.
Since Channel IQ started its tracking service in 2009, the
firm has signed up about 200 manufacturers, including LG
Electronics, Olympus Corp, Harman
International Industries Inc and Weber Grills.
When Channel IQ started, it said it fielded complaints from
clients about eBay sellers that mostly focused on counterfeit
goods. EBay tackled this problem with a program called VeRO that
lets brands request listings be pulled if they suspect fake
items. In 2010, the focus shifted to Amazon.
“In 2011, complaints got louder. And this year it has become
frenzied,” s aid S hepherd o f Channel IQ.
Gerard Florendo, an e-commerce marketing analyst at Guess,
said third-party sellers on Amazon can price “way lower” because
of lower overheads. “We call it out whenever we see resellers
selling below the minimum advertised price, he said. “But we
don’t have a police force to enforce this. We are already
stretching our resources.”
Mark Harris, president of Swiss Gourmet USA , spends his
weekends checking Amazon for third-party sellers who are pricing
the company’s products below mi n imum ad v ertised pr i ces.
Swiss Gourmet has stopped selling to two dealers recently,
one t hat was selling on Amazon and another on their own website.
Some larger brands , such as Sony Corp, have had
more success. T he Japanese electronics giant cut off Abe’s of
Maine and also stopped suppliers selling to the retailer.
Sony ordered its own products from Abe’s and had the items
shipped to their offices. They then checked the product serial
numbers and use that information to find out which wholesalers
sold to Abe’s.
“They then threatened to suspend the wholesalers and not
sell product to them anymore,” the Abe’s sales rep said. A Sony
spokesman did not respond to a request for comment.
