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May 26, 2017

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Brands cry foul over unauthorized Web sellers

SAN 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

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