E-commerce, brand equity and managing the Amazon marketplace: a response to the EC’s VBER consultation

The EC’s consultation on the Vertical Block Exemption Regulation (VBER) and Vertical Guidelines (VGL) closed for comments on 27 May 2019.  Euclid Law responded to the consultation, calling for greater clarity around limitations on online marketplace sales in order to preserve brand equity.  To support the response, Euclid Law submitted an expert report entitled 'Amazon and the growth in online marketplace sales' by James Thomson, formally the business head of Amazon services, and now a partner at Buy Box Experts, a managed services agency supporting brands selling online.  A full copy of our response and the expert report are available on our website here.

E-commerce is an unavoidable reality for brands and consumers alike.  The demise of Philip Green’s retail empire Arcadia is just another example of traditional brick and mortar (b&m) retail failing to keep pace with technological development and pure online only models of retail.  But even those companies that have embraced, and successfully manage, a direct to consumer (d2c) online sales presence are still facing serious issues protecting their brand equity on third party platforms.  And this is particularly the case for Amazon. 

Amazon is one of the largest online marketplaces, with over 500 million products listed for sale in the Amazon catalogue worldwide.  For the majority of companies and brands Amazon is an unavoidable trading platform. Managing the Amazon sales channel is therefore one of (if not the most) pressing issue for brands today, and not just luxury brands. 

While Amazon has some limits on what can be sold on its marketplace (e.g. guns, illicit drugs and pornography cannot be listed), it does not limit who can sell products.  Anyone can set themselves up as a third party (3P) seller, open a Seller Central account and list a product.  So, for example, if I receive a pair of branded trainers as a present that I do not want, I could simply set up a Seller Central account and list them amongst the millions of other products on Amazon.  For brands trying to manage their overall online brand strategy and content, this can be very damaging.  In reality, it is less the unwanted Christmas presents that cause a problem for brands, and more the sales from resellers failing to manage the Amazon channel appropriately.  This is usually for two reasons: (i) brand presentation and (ii) quality control, including distribution and logistics.  

Brand presentation on Amazon: poor-quality images and content

The main challenge with brand presentation on Amazon is that brands rarely manage all the content relating to their products.  When a product is listed on Amazon, it will be assigned an ASIN (Amazon Stock Inventory Number).  When a reseller lists a product that already has an ASIN assigned, that reseller’s entry will be added to the existing product listing page. However, if a product does not appear in Amazon’s catalogue, then the first reseller to create a new ASIN can submit written content and images to support that product. Those initial images and content will then be used for all future resellers.  For a brand that has not managed its sales on the Amazon channel, this could mean poor-quality images and/or inaccurate descriptions being used to represent a product.  Even if a brand does manage the ASIN content for a particular product, this content can then be leveraged by any other seller adding its offer to the same listing, even if that seller is unauthorised or not approved by the brand.

Quality control, distribution and logistics on Amazon

Customers buying products online must place significant trust in the seller and have a higher risk of receiving a poor-quality product as they cannot see or touch the product before they buy.  However, resellers on online marketplaces often do not follow adequate quality controls, which may result in damaged or degraded products being shipped to customers. Because the identity of resellers on online marketplaces is typically obscured, customers receiving such poor-quality products will usually blame the brand through negative reviews, even if it is the fault of a reseller.

These quality control problems can be exacerbated through Amazon’s fulfilment practices (so-called Fulfilment by Amazon or FBA), including its repackaging and commingling policies. Under the repackaging policy, Amazon can take a returned product with damaged packaging, repackage in generic packaging and resell the product as new.  This is highly damaging to brand image, as consumers receiving a product in unofficial packaging are likely to question the product’s quality and authenticity. Amazon’s returns policy is also administered liberally, meaning that some unscrupulous customers may return the wrong product, or damaged goods, which could then be repackaged and resold to a future customer.  These future customers are equally likely to leave negative reviews for the brand. Under the commingling policy, when a customer purchases a product from a 3P seller, Amazon may ship the customer a product from any other 3P reseller using FBA.  Consequently, even if one 3P reseller takes care of its products, a customer ordering from that 3P reseller could receive a poor-quality or even counterfeit product from a different 3P seller.

All of these problems create heightened risks for consumers when they purchase from 3P sellers who are not careful about quality control.  In its most recent  Form 10-K filed with the United States Securities and Exchange Commission, Amazon even acknowledge that 3P sellers may sell products that “are materially different from the sellers’ descriptions,” and that Amazon “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.”  The message is clear – Amazon takes no responsibility for 3P sellers, and effective management of these resellers must be carried out by the brand. 

Why the VBER and VGL need to be updated

Given the nature of the Amazon marketplace channel, and other marketplaces operating a similar model, the traditional distribution strategies adopted by brands in b&m and online d2c channels just do not work.   Although the best way to manage channel control will vary by brand, the optimal approach for online marketplaces is likely to involve selling products exclusively through a single or limited number of authorised 3P sellers for each marketplace,  and preventing other sellers from selling the brand’s products on that marketplace. The brand can then work closely with the authorised 3P seller to ensure that they follow appropriate quality controls.

However, the VBER and VGL do not currently provide sufficient clarity for companies and brands that sell on marketplaces such as Amazon.  In particular there is a lack of clarity around the ability for brands to appoint a single or limited number of authorised sellers for each marketplace, and prevent other sellers from selling a brand's products on that marketplace. The section of the VGL dealing with online sales restrictions was drafted to ensure that distributors did not try to impose unreasonable limits on online sales in order to protect traditional b&m sales, or reduce price transparency online.  However, the world of online sales has moved on considerably, and most companies are far less concerned about protecting b&m sales.  Instead, their main concern is managing the online sales environment, and specifically online marketplace sales and the potential damage that channel conflict may have on their brand value. 

The VGL recognise that a supplier may impose certain restrictions on its distributors using third party platforms.  However, the VGL need to be significantly updated to reflect the current realities of the online marketplace sales channel, and specifically to allow companies and brands to appoint a limited number of authorised 3P resellers for each marketplace. This would allow companies to select 3P sellers that follow the brand’s quality controls and branding standards, are familiar with the relevant marketplace, and can manage the very specific challenges that distributing on these channels present.  Provided that there is sufficient inter-brand competition present on the relevant marketplace, then restricting intra-brand competition by limiting the number of 3P sellers should not cause any anti-competitive foreclosure.  Importantly, resellers would not be prevented from selling through other d2c online channels where the seller’s identity is displayed more prominently, so this should not amount to a complete online sales restriction as defined by the VGL.

The growth in online marketplace sales shows no signs of abating.  The VBER and VGL must be updated to account for this fundamental change in the market, and companies must recognise the need to effectively manage their sales on these marketplaces, or risk serious harm to their brand equity. 

Sarah Long is a partner at Euclid Law, a boutique competition law firm.  Sarah has particular expertise in online markets and the digital economy, and regularly advises brands on how to manage online marketplace sales.  Views are her own and do not constitute legal advice.  You can follow Sarah on twitter @sarahklong.