Fulfillment by Amazon counterfeiting

2017-03-26 3 min read

    Recently I’ve come across a few articles describing the supposedly massive amount of counterfeiting happening on Amazon. The way it works is that Amazon offers a Fulfillment by Amazon (called FBA) option where a merchant sends their items to Amazon’s warehouse which is then eligible for Prime shipping since it’s just going to be shipped by Amazon. The way Amazon implements this is by commingling the items - so if two merchants send Amazon the same item Amazon will treat it as the same item when it comes to consumers. A merchant is able to opt out of this commingling but only with a higher fee.

    The idea itself is brilliant. By ignoring the merchants and treating the items as interchangeable Amazon is able to optimize for the consumer and come up with a much more optimal warehouse distribution strategy. Rather than having to keep a merchant’s items across every distribution center Amazon can choose to just keep a single merchant’s items in a single distribution center since the remaining merchants may have shipped their items to others. And if the items themselves were the same then it’s a perfect solution that’s better and cheaper for everyone involved.

    Unfortunately, this only works when the items actually are the same. Everywhere there’s money to made someone will inevitably try to abuse the system. In this case some merchants are offering counterfeit products at a lower price. And since the items are commingled they are treated like the real goods. This means that some customers are paying a low price for a counterfeit product and getting a real product while others are paying the true cost but are getting the counterfeit. Clearly Amazon needs to do something here before it becomes a huge issue.

    The obvious way is to do a more thorough job of inspecting the merchandise and making sure it’s legitimate but I can easily see this being a difficult problem at scale. Another option is to adopt a one strike policy and if you get caught selling counterfeit goods then you get a lifetime ban. This would make it much more expensive to cheat and should reduce the fraud. At the same time if it’s easy to just start selling as a different company then it won’t do much. A way to address that is to require that every seller be a legitimate and federally registered company but that significantly hurts international sellers. Every manufacturer should know the legitimate sellers so it may also make sense to enforce a merchant whitelist for some items. I honestly don’t know enough about the industry but it does seem that for many small and niche products there should only be a few legitimate sellers that can be curated by the manufacturer. This can also expand into a “manufacturer preferred” tier to handle the edge cases where a merchant is not aware of every legitimate seller. In that case Amazon ends up with two tiers of commingling - but that itself sends a very odd message to the customers since they are then admitting they are selling counterfeit items.

    There’s no easy answer, especially given Amazon’s scale and aspirations, but something should be done and as a shareholder I’m hopeful they figure it out. My gut is that it’s going to require a combination of different approaches and a look at the data to identify the dishonest sellers. Amazon so far has gotten away with this by being extremely customer focused and very open to refunds and returns but no one wants to spend time dealing with a return in order to then just get another crappy item.