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Amazon forms teams to target a proliferation of fakes

November 28, 2016 04:22 PM
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(Bloomberg)—Randy Hetrick first noticed counterfeits on Amazon.com Inc. in 2013. He had been selling his TRX Training System—an exercise kit of suspension straps—on the site since 2008. When he began noticing cheap imitations, he had his employees scour Amazon for more, then go through the tedious process of reporting them for removal. But new imposters would pop up right away, and by 2014, "We realized this was an epidemic," said Hetrick, who estimates phonies cost him $100 million a year, twice his annual sales.

Amazon's Marketplace gives inventors like Hetrick exposure to hundreds of millions of shoppers without the big expense of building and promoting a website from scratch. Merchants give Amazon a commission on each sale. But a hot-selling product on Amazon encourages counterfeiters to make flimsy knockoffs with cheap materials, steal sales and damage a brand with few consequences.

Amazon, No. 1 in the Internet Retailer 2016 Top 500 Guide, has known the problem is getting worse, according to a source familiar with the matter, but for years, the company has been largely silent about the flourishing fakes. That has frustrated manufacturers and brand owners who bear the cost and responsibility of policing the site, reporting problems and hoping Amazon takes action.

Now, the world's biggest online retailer is getting serious. It has made fighting phonies a major goal for 2017, building teams in the U.S. and Europe to work with major brands on a registry to prevent fakes, according to a person familiar with the initiative, who was not authorized to speak about the matter and requested anonymity. Discussions with Major League Baseball and the National Football League about selling merchandise on Amazon hit a standstill earlier this year due to concerns about Amazon's lack of control over fakes, the person said.

“Amazon has zero tolerance for the sale of counterfeit items on our site," Amazon said in a statement. The company said it was "aggressively pursuing bad actors." In a statement, the MLB said: “It is our responsibility to provide our fans with reliable and secure marketplaces to purchase officially licensed merchandise. Given the rampant growth of online-only retailers supplying counterfeit merchandise, our policies must hold every distribution partner to that same level of commitment.” The NFL declined to comment.

The new Amazon teams will encourage brands—even those that don't sell on Amazon—to register with the online store, the person said. Once registered, Amazon requires any marketplace merchants listing those products to prove that they have the brand's permission to sell them online. Amazon began experimenting with the registry earlier this year with Nike and other companies. The bigger push in 2017 will target thousands of large companies, including those that have been reluctant to sell on Amazon because of knock-offs.

In addition, this month Amazon teamed up with Hetrick's business to sue three people, accusing them of selling fakes on its site. It filed another similar suit the same day against an alleged counterfeit ring. Moving the battle to a courtroom is an acknowledgment that despite spending tens of millions of dollars a year and employing an army of software engineers, investigators and research scientists tasked with fighting copycats, Amazon is not winning the war against counterfeiters.

"The depressing thing about it is, brands that invest the most to innovate and create new products are the ones that lose the most because they are the ones the counterfeiters target," said Hetrick, who is encouraged by Amazon's new vigilance. "You end up becoming the sales and marketing arm for these shysters selling illegal goods."

Amazon is desperately trying to bring order to the Wild West atmosphere on its marketplace, where more than 2 million independent sellers compete for the attention and money of shoppers. About half of the goods purchased on Amazon come from independent merchants, who help Amazon expand its inventory more quickly and with less upfront cost than Amazon could do on its own. It also makes the retailer and its customers more vulnerable to fakes because the simple online registration process currently in place is designed to make it easy for businesses to begin selling immediately. But that also makes it simple for counterfeiters to list fake goods, sell as many as they can before they're detected, and then vanish.

Amazon’s suits targeting sellers were the first of their kind for the company, a warning to counterfeiters heading into the busy holiday shopping season when the most is at stake. It could be too little, too late.

The shift of spending from stores with tight inventory controls to online marketplaces where it's tough to distinguish between fake and authentic is fueling a rise in counterfeiting that shows no signs of slowing. Alibaba Group Holding Ltd. and eBay Inc. are also grappling with copycat products. Counterfeits made up nearly $500 billion, or 2.5%, of global imports in 2013, a figure expected to grow as more spending shifts online, according to an April report by the Organization for Economic Cooperation and Development. China is the biggest source of phonies.

Despite efforts to decrease them, complaints about imitations on Amazon have been growing along with its inventory since at least 2014, according to a person familiar with the matter. What Amazon has known internally for years is spilling into the public eye. Birkenstock announced it would cease selling products on Amazon in January due to concerns about counterfeits. And in October, Apple Inc. sued an Amazon supplier claiming the business sold fake Apple products—some of them unsafe—on Amazon.

"Online counterfeiting is never going to go down," said Stuart Fuller, director of commercial operations at NetNames, which helps brands identify marketplaces and websites where counterfeit products are sold. "Amazon is the most trusted marketplace in the world. That in and of itself attracts this nefarious element because they know shoppers go there and trust what they are buying is genuine."

Bret Rosenzweig is another inventor who has felt the sting of counterfeits on Amazon. His company, DC Innovations, makes the Urban Shelf, a collapsible plastic nightstand that wedges between a mattress and box spring. Bachelors and college students are the target market, and Amazon was the perfect place to introduce the product to the masses in 2009. Once his sales on Amazon started picking up around 2015, counterfeiters took notice, mimicked the design with cheaper materials and offered it for less. That's a double-blow to Rosenzweig, who loses a sale and now has a potential customer unimpressed with his brand (or what the customer thinks is his brand).

Rosenzweig checks Amazon each day, scouring the marketplace for counterfeiters selling his product. The process of reporting the fakes to Amazon has been a time-suck. He spots a knock-off, buys the item and when he receives it, he takes photos and submits a report to Amazon. The company is usually quick about suspending the counterfeiters, but new accounts quickly spring up in their place and the game of whack-a-mole continues, Rosenzweig said.

He can no longer order phony items to his home address because his adversaries know he is conducting a test purchase, so he has his business partner order them. Rosenzweig said he’d welcome any new effort from Amazon to crack down. "Buying the fakes and reporting them is a waste of my time," he said.

Amazon, eBay and Alibaba are largely shielded from legal liability as long as they have processes in place for brands to report fake goods and take timely action to suspend their sale once notified. The online marketplaces often don’t have the inventory, so there is nothing to seize. The result is an endless loop with brands buying and reporting fakes, marketplaces suspending accounts, and the fraudsters creating new accounts to hawk the same fake goods under new pseudonyms. EBay lets registered brand owners report suspected counterfeit listings for removal, as does Alibaba.

But the retailers can only do so much. Shoppers worried about buying fakes during the holidays have to bear some responsibility, said Akino Chikada, senior brand protection manager at the firm MarkMonitor, which helps brands find online sources of counterfeits. She suggests looking closely at web addresses for subtle variations from brand names and probing websites for sloppy privacy and return policies, which can signal a phony. Bargain basement prices are another tell-tale sign, though sophisticated counterfeiters try to make the price difference less suspicious by coming in at 10 or 20% below other offers rather than half price, she said.

"Counterfeiters do a good job mimicking the look and feel of a brand," she said. "It's so easy for people, in just a few clicks, to unknowingly buy counterfeit goods."

 

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