Name any Brand that rolls off of your tongue, Apple, Nike, Disney, Samsung, LG, Sony or Microsoft, Duracell, Redken, Chanel, Loreal, Olaplex, Fjallraven, Samsonite, Elmers, Keds, Nature's Way, Calvin Klein, Burberry, Bounty, Hefty, Dove, and on.  We've directly sold millions of units of these brands on Amazon.com

Like many people, you've probably heard about a counterfeit problem that exists on Amazon? 

 

The unit volume using Amazon as a sales channel continues to obliterate supply chain norms. It’s possible to build a $25 million dollar Amazon Storefront in 18-24 months. Market and/or currency arbitrage, forward buying, embedded buying, blended buying and other mechanisms that infiltrate a supply chain are becoming more accessible.  With the right platform or insertion point you can acquire genuine, unaltered and authentic goods at significant quantities.  With a high breach its realistic to build a $50 or $70 million dollar Amazon storefront in 24-26 months. 


This blog post is about how these accounts are created, how they're grown and how they're policed by Seller Performance. I'm going to lift-the-hood and contribute some missing context into stories like the one in the Wall Street Journal, and in the media in general. Most of those reporting about Amazon lack some of the operational knowledge to round out the reporting. Brands, manufacturers and consumers also are under informed on the actual day to day management of third-party selling accounts.

New account registrations:
Amazon's initial processing of a new seller registration results in many denials for being related to previously banned accounts. It usually happens within an hour of submitting the selling application. Amazon uses the application information to scour 100's of public databases and somewhat easily connects people who are just not sophisticated enough in creating virtual identities.


If you're clever enough to get by these systems, you run into algorithms that build a probability score on other parts of the selling application. A selling application with an VOIP Phone, a Gmail email, a mailbox/PO address etc.,  trigger high probability that your application will scrutinized. No matter what degree of scrutiny, which can include Amazon requesting passport, utility bills, articles of incorporation and so forth, a selling application like that is automatically watch listed. All International accounts are automatically watchlisted, particularly China.


Also, important to note is that if a selling application is accepted, they give new sellers as little as 40 Cubic feet of storage in Amazon's warehouses.  To be eligible for an increase the accounts needs to sell 6% of their inventory for 8 consecutive weeks. And even then, it is only eligible, the algorithm may or may not increase it at exactly the 8-week mark as it dependent on many factors.


If the new account were to sell 100% of their inventory in a day, or a week, or a month, its SOP that the account will be flagged for a velocity review. Amazon's transaction risk algorithms trigger that. New sellers with immediate success are scrutinized. During a velocity review Amazon allows you to continue to sell, but your funds are withheld. A velocity review is the equivalent of a strip search. Some of the granular work that I have seen them do is to run a new sellers SKU convention against identical sku conventions from previously suspended accounts. Velocity reviews are intense and more duplicate accounts (previously banned) are found this way. They take anywhere from 3-30 days. On average its 10 days.

But to take a step back, just getting your selling application approved means very little at this point.  Because Amazon requires top level category approval.  Top level categories are the ones that you see on the left margin at Amazon.com.  Apparel, Health & Personal Care, Beauty, Home & Garden etc.   To acquire these approvals you need to show Amazon a commercial invoices from your supplier.  The PAT (product authentication team)  calls your supplier and verifies its authenticity.  They also use information from Manta.com, Yelp, The Wayback machine, Google Analytics and dozens of other sources to verify you and your supplier.  Amazon is in middle of creating a huge repository of good & bad suppliers.  Fabricated Invoices and Faux Websites created to look like a supplier are easily discovered by the PAT team.

Assuming you get through the application, and get category approved, now you need what are known as "designations".   For example, Shampoo, Skin Cream, Bacteria Rub, Hand Lotion are known as Topicals.  In order to sell Topicals, even if you are already approved for Health & Personal Care high level category, you still need to get the Topical Designation to sell anything that touches a humans body.  That is a anothers set of documents and review.

Another designation is HazMat or Dangerous Goods.   If your product has a lithium battery, or is flammable ( flashpoint under 140 degrees), or is an aerosol, you need Hazmat approval.  Amazon only has so many Fulfillment centers that support these items.  It takes months to get approved. And again, once approved for aerosols you get very little space to work with. Seen above, an account with standard-size footwear = 7,047.23 cubic feet, is only approved for 58 cubic foot for Flammable and/or Aerosol.  The seller needs to hit near-perfect numbers to grow these numbers.  Its enormously difficult and mainly managed by artificial intelligence algorithms that a seller must understand.   So you see, you can't sign up and sell things here on Amazon. You have to meet enormously difficult KPI's ( Key performance indicators) for the algorithm to treat you positive.  Understanding how AI interprets your seller profile is a large part of succeeding on amazon. I cover reward and punitive based algorithms in other articles.  Here I am simply highlighting another barrier (designations) to entry for a new seller. 

 If you get to this point, you're  through the application and a series of approvals.  Depending on your digital shelf, you will need another series of brand and browse node approvals to list on most high velocity products. Browse nodes are sub-categories, represented numerically in the back end, but with natural language on the front.  Infant Toddler Toys, OTC Pain Medication, Feminine Hygiene Products, Dietary Supplements, Fetal Doppler Monitors. In fact virtually all nodes that deal with Infant and toddlers have high barrier to node entry.  As shown here with the Feminine Care Node of 3779501.  Your selling account would need 3779501 to sell or list any of the underlying nodes that relate to Feminine Care. To include powders, washes and wipes.  Again, not all washes or wipes, just those that are residing under the 3779501 node of Feminine Care. 

In conclusion, its virtually impossible for anyone to simply register and sell counterfeit, or expired, or materially different goods.  Can it be done?  Yes, and we discuss bad actors in our Blog Post: Amazon's Punitive Algorithms Outlined.

There are thousands and thousands of small businesses, brand owners, entrepreneurs and dreamers that got this far, only to fail in next phase of development.  Amazon has all new sellers on watchlist and they have ZERO TOLERANCE for certain mistakes. There are many SMBs with deep seeded resent towards Amazon for being essentially banned for life for minor transgressions.  Such as missing 2 orders of your first 10, or asking family and friends for reviews, or inadvertently giving an amazon buyer a link to their website, or communicating with a buyer outside of Amazon's buyer-seller messaging service.  Those are death penalty offenses for new sellers. 

 


 

So if it's not the new sellers selling the counterfeit then it must be existing sellers?  Birkenstock via Ari Levy at CNBC certainly gave that impression with this article in 2016.  Pretty damning headline that proved to be inaccurate.  And the CEO so much as admitted that last month in NYC.

David Kahan, CEO of Birkenstock Americas, who spoke at the Code Commerce event in New York this week, said the decision to pull products from Amazon was an “awakening of where we want the brand to be” after Birkenstock chose partners and points of distribution that were not consistent with the brand itself.   

Now its 2019, and Birkenstock is launching a skin care line, presumably on Amazon.   In that same Adweek article from September of 2019, “We are brand stewards. Brand management is an art … Unfortunately, right now the market is so dynamic, Amazon might be the most visible, but it’s become a martial art, and, if you’re managing a brand, you better be Bruce Lee. That’s how you have to think about this.”David Kahan, CEO of Birkenstock Americas.

*Porous supply chains, adversarial or one-sided relationships with distributors, outsourcing manufacturing, weak agreements, and abuse of a distribution chain are not topics for this blog post. Neither are the settled laws of the First Sale Convention, The Latham Act, nor the Commerce Clause, of which most Brands have violated with Amazon. These subjects will be covered in other blog posts. ( soon ).  

For the record, when Mr. Kahan says Amazon is similar to martial arts and you need to be like a "Bruce Lee" : He's talking about me.   And when Jeff Bezo's said in 2018:  "Third Party Sellers are Kicking Our Butt!, he is speaking about me also.  

When a product from Disney or a similar brand is listed on Amazon by a 3rd party , within 24 hours and among its first buyers are Disney's patent attorney, Disney's trademark Attorney, Disney's Category manager, Disney's brand manager, Disney's brand agency.   The day after any seller lists any branded item, that product is on the desk of all of these stakeholders the following morning.  And not only does Amazon provide tools for these stakeholders to make an infringement or counterfeit report, Amazon, by default, defaults to the brand.  Any infringement report, and any counterfeit report is treated as a TRUE+.  

So in an account like this with one million FBA orders a year, the seller is dealing with approximately 1000-5000 direct requests by Amazon Seller Performance to prove authenticity of product and supply chain.  So when Birkenstock tells Ari Levy at CNBC that his products are being counterfeited on Amazon and that Amazon is doing nothing about it.   The truth is, the third party seller has shown Amazon the product and supply chain pedigree including invoices from Birkenstock to the Supplier. The same supplier that Mr. Kahan now admits, were partners and points of distribution.

The store below is 10,000 Square feet, 48 bays, 3 high velocity shrink wrap machines, 25 warehouse employees and 5 clever managers to turn it 9 times in 12 months.  This was year three, of a growth track that went $5 million-$12 Million-$22 Million-$35million.  I'll draw your attention to a few things that can be extrapolated with this data.  BuyBox % is +/- 25%Average Order Value +/- $27.00 That indicates a hyper competitive environment when you are doing one million orders, but still only getting 25% of the sales.  Parent Iem Count +/- 800,  Total Count +/- 1000 indicates 20% of the stores listings are variations.  Seller Reviews +/- 8000 is only .08% of orders.  Not the 5%-25% that many publications incorrectly assume is an indicator of size.  

Previously we've asserted that no matter how authentic or optimum that the Amazon buyers experience is, 2%+ have less than perfect experiences that result in returns and refunds.  The 2% reasons range from buyers reporting the item as inauthentic, stolen from their porch, damaged by carrier, found it cheaper, changed their mind, does not fit, or doesn't meet their expectation.   So in this accounts case, that is 20,000 occurrences that Amazon's Artificial Intelligence attempts to assign a reason code to the less than perfect experience.  

That results in a minimum of 5000 individual policy violations in a 12 month period for this account.  It requires a team of 3 full time people simply to handle the RMI's ( request for more information ) sent from Seller Performance.  Each one has the potential to be fatal to the entire operation.  And each of the 5000 , no matter what the path to correct, degrades the stores health, and directly affects your ability to win a 25% buy box share.  In fact, for the vast majority, your listing is removed, and its up to the seller to address these or at a minimum, you lose the ability to sell the item that caused the RMI.

The Wall Street Journal and others assert that third party sellers are selling counterfeit?  Not only are third party sellers not selling counterfeit, the enforcement environment on Amazon is so overbearing that you can barely sell authentic goods!  That is not an exaggeration, this platform is policed and managed by Amazon in unbearable ways.  Its enormously difficult to operate stores simply due to the natural occurring 2% and the AI that Amazon deploys into those.