Briefly answer the questions at the end of the case.

1. Why is counterfeiting such a large and important issue for the global fashion industry? And, specfically, for Amazon?

2. Should Amazon cancel its third-party vendor system, since it is so difficult to police for counterfeit merchandise? What are the benefits and drawbacks to eliminating the third-party vendor system?

3. Propose some strategies Amazon can use to protect against counterfeits, and how they can measure their success.

4. What strategies can fashion brands use to assure that counterfeit merchandise is not being sold through Amazon?

E-COMMERCE AND COUNTERFEITS: AMAZON'S DILEMMA

Alexis Dowell, Lorynn Divita

Introduction

e-Commerce has disrupted the retail industry and continues to rise in popularity. Consumers around the world purchased $2.86 trillion worth of retail goods online in 2018this represents 15.2 percent of all global retail spending (Young 2019). Within this rapidly growing retail channel, one company dominates the market: e-commerce marketplace, AI assistant provider, and cloud computing platform Amazon. In 2018, Amazon's sales were more than four-and-ahalf times greater than the online sales of Apple, its closest competitor in the United States, and almost two-and-a-half times higher than the online sales of its biggest rival, China's JD.com Inc. (Young 2019). Amazon pioneered the concept of global online selling; in 2018 the company had a presence in fifty-eight countries and the largest international reach (1.2 billion people) of any online retailer including China's Alibaba, which reaches 1.1 billion people and operates in only fifteen countries (Alaimo 2018). Amazon's popularity also stems from its mobile app; according to the 2017 Love List Brand Affinity Index survey sponsored by Cond Nast and Goldman Sachs, Amazon was the second most downloaded app by millennials and teens, only behind Snapchat (Castillo 2017).

When viewing products, consumers are provided with the option to choose from among hundreds of vendors, all categorized by price and consumer reviews. Consumers have used this abundance of information to their advantage to comparison shop and get goods at the lowest price possible, making competition cutthroat. Not only does Amazon give the consumer a vast number of options, they are also changing the package delivery industry and have significantly increased the speed at which individuals receive items bought online. For example, by opting for an "Amazon Prime" membership, consumers can pay a yearly fee to have shipping as quickly as possible (sometimes as quickly as same-day delivery) on certain products that Amazon keeps stocked in its warehouses. Given that Amazon's warehouses can be up to twenty-three acres in size and can employ more than 40,000 employees each, this leaves Amazon with the room to keep hundreds of thousands of products within easy reach of its customers (Hullinger 2015).

Business Problem

Despite its global dominance, one of the most pressing challenges for Amazon going forward is the issue of counterfeit merchandise. Counterfeit merchandise fraudulently uses a brand's logo or registered trademark in an attempt to confuse or fool a consumer into mistakenly believing they are purchasing an authentic product. Counterfeiting is not a victimless crime in that lowquality counterfeit merchandise can represent a potential health hazard. As consumers who purchase counterfeit items often do so instead of purchasing legitimate copies, counterfeits increase competition between legitimate and illegitimate companies selling the same intellectual property (IP), who often do not pay taxes or comply with the regulations and quality standards of the legitimate company; in this way, the perception of brands can be harmed, especially in the case of consumers who unknowingly purchase counterfeits. Related to this, counterfeiting companies frequently do not pay taxes and thus result in less money being paid to local governments and councils. Moreover, not only are counterfeiting and piracy criminal activities but they can also result in the payment of money to further criminal activities. Counterfeiting is thus incredibly detrimental to the global economy (International Chamber of Commerce [ICCWBO] 2017).

According to 2016 customs seizure data used in a report from the Organisation for Economic Cooperation and Development (OECD), sales of counterfeit merchandise amounts to as much as $509 billion annually and accounts for 3.3 percent of global trade (OECD 2019). This figure represents a significant jump from 2008, when the OECD estimated its size at $200 billion. The top three counterfeited merchandise categories are footwear, electrical machinery and equipment, followed by clothing. China is responsible for the biggest share of counterfeit production; it is the country of origin for nearly two-thirds of fake goods sold, far more than in any other country (Picchi 2016).

Amazon's corporate structure has allowed counterfeit merchandise to flourish on its website. Amazon permits third-party vendors and independent sellers to conduct business through its "Marketplace." This arrangement benefits Amazon financially through the fees it collects from those sellers, and they in turn have grown in popularitycurrently, in 2019, there are over 2.5 million independent merchants with goods for sale on Amazon's Marketplace (Matsakis 2019). Vendors pay to list their products with the retail giant and may also purchase additional services such as advertising, shipping, and warehousing. In 2017 more than half the products sold on Amazon were conducted via Marketplace listings rather than from Amazon itself (Bain 2019).

The ease of Amazon's selling and vendor portals have made Amazon a growth success, but it has also made it easy for people to sell counterfeit and sub-par quality goods, much of which is illegal. Journalist Deborah Copaken (2019) describes how she purchased a $925 counterfeit Canada Goose coat from Amazon. The seller for this coat was listed as "Canada Goose" and seemed to carry official pictures of the product; Copaken describes discovering in the small print after purchase that the coat's seller was in fact not Canada Goose, but "someone named Greg Adamserf," and that the Canadian-made Kensington coat that she was expecting to receive was being shipped from Hong Kong. After the coat arrived Copaken found that there were issues with the color (it was army green instead of forest green), the weight, and the fit of the jacket, which also smelled of chemicals. This is not an irregular story for Amazon, people frequently describe purchasing garments that are of poor quality and that bare little resemblance to seller pictures. When vendors receive negative reviews stating that their products are counterfeit, they often simply disable their vendor profile and start another one selling the exact same product. In 2017, for example, the publisher of William E. Shots Jr.'s popular computer programming book for children, Python for Kids, was alerted that negative reviews were featuring on Amazon from the book. When they looked into the problem, they noticed that multiple vendors were selling counterfeit copies. When the publishing company contacted Amazon to resolve the issue Amazon took the counterfeits down. Later, however, the counterfeits were back up again on the website through new "vendors," none of which were the publishing company (Mann 2017). Employees of Amazon have consequently likened trying to find counterfeit goods to playing a game of "whack-a-mole" (Pathak 2017). Some have argued that in instances such as these Amazon is merely just a "package and deliver" service and consequently are not breaking any laws. Amazon declined to comment on the matter and still sells thousands of counterfeit books alone (Mann 2017). Sonya Mann (2017) describes how sellers on Amazon are not only copying products on the marketplace, but also exploiting legitimate brands selling on Amazon by taking advantage of Amazon's logistics, which often combine products from different sellers on listings: Essentially, Amazon assigns a unique ID to each product on its platform. Depending on which programs the brand participates in, a variety of sellers can provide inventory for each SKU (stock keeping unit). For example, if you buy Huggies diapers on Amazon, you may be buying diapers that the manufacturer shipped directly to Amazon, or you may be buying diapers that a third party procured and shipped to Amazon. The problem arises when that third party sends in fake goods. (Mann 2017) Due to its sustained inability to effectively control counterfeits, Amazon has become the target of criticism from brands such as Birkenstock and Mercedes Benz. The problem is elevatingnot only are counterfeits causing Amazon to lose sales, the company may also be held responsible for the fraudulent activities of some of its third-party vendors. In Amazon's 2019 annual earnings report to investors and the US securities and exchange commission, it was acknowledged for the first time that sales of counterfeits and pirated items are a risk to the company (Bain 2019). As the report states: We also may be unable to prevent sellers in our stores or through other stores from selling unlawful, counterfeit, pirated, or stolen goods, selling goods in an unlawful or unethical manner, violating the proprietary rights of others, or otherwise violating our policies. Under our A2Z Guarantee, we reimburse buyers for payments up to certain limits in these situations, and as our third-party seller sales grow, the cost of this program will increase and could negatively affect our operating results. (United States Securities and Exchange Commission 2019) Amazon must take drastic action in order to prevent their business and reputation being further damaged by vendors selling counterfeit goods.