by Brad Stone
Yang developed close relationships with local factories, so Anker could quickly change and improve its products based on market trends and customer feedback. It paid its employees a fraction of the wages Western sellers paid theirs, and because it was based in China, the company didn’t have to collect the same income and VAT taxes as its U.S. and European counterparts. It also enjoyed heavily subsidized shipping rates to the West, thanks to an arrangement between the China Post and the U.S. Postal Service, making it cheaper to ship from China to the U.S. than within the U.S. itself.
In other words, Anker and Chinese sellers like it had significant advantages that in a highly competitive marketplace like Amazon’s would make a material difference. Yang was friendly with Bernie Thompson, founder of the Seattle area–based Plugable Technologies, which sold similar computer accessories. Both recognized that Chinese brands selling to a global audience were going to radically tilt the e-commerce playing field. “Bernie, I’m sorry, but I’m going to run you over,” Yang once told Thompson at an industry conference, Thompson recalled (though Yang does not remember saying this).
Many Chinese sellers like Anker sold high-quality products at attractive prices. But there were also plenty of bad actors on China’s unruly capitalist frontier. To safeguard their sites and increase the cost of committing fraud, local e-commerce players like Alibaba and JD.com required safety deposits from new merchants and sometimes waited months after product sales to remit payments to sellers. They also regularly purged their sites of the worst actors. Amazon had ported over its U.S. marketplace system to China with few of those protections in place at first and had little ability to discriminate good sellers from bad. As a result, it became an appealing target for fraud, counterfeit, and sellers with shoddy merchandise.
Bezos never wanted to compromise on quality—there were no trade-offs allowed at Amazon, after all. He wanted quality and quantity, and he expected that Amazon’s engineers would create new tools to block dangerous products and counterfeits. But the wheels of change turned faster than Amazon could create systems to police its own site.
Bogus vitamins, dangerous Christmas tree lights, and other unsafe products, as well as books replete with typos, all made their way onto the shelves of the everything store. So-called hoverboards were the hot ticket during the 2015 holiday season; several Chinese models had an unfortunate penchant for bursting into flames and burning down homes. Amazon pulled the hoverboards from the site on December 12 that year and emailed buyers referencing “news reports of safety issues” and offering refunds. A Wall Street Journal investigation later concluded that faulty lithium-ion batteries in the hoverboards led to fifty-seven fires and caused $2.3 million in property damage; about half were purchased on Amazon, more than any other retailer, generating a bevy of lawsuits against the company.
Over the ensuing months, defective batteries in cell phones, laptops, and vape pens bought on Amazon also led to injuries, more lawsuits, and more news coverage. Bezos was apoplectic about the problems and the bad publicity, colleagues said, even though he had helped to create the situation with his relentless pursuit of expanding product selection and obtaining leverage. “Jeff’s tone was ‘how can you guys not have foreseen this?’ ” said Adrian Agostini, the marketplace VP. “There were tough lessons learned.” In response, Amazon execs rushed to expand the trust and safety team, which developed tools to scan the site and identify fraud and policy violations. But the program was ineffective at first, since abusers were often booted from the site only after their abuse was detected and had impacted customers.
Western sellers were afraid of crossing the line and getting into trouble with Amazon. But in China, they didn’t know where the line was and often didn’t care. Scrappy Chinese sellers adopted deceitful tactics, like paying for reviews on the Amazon website, which at the time—before Amazon embraced advertising within search results—was the only way to boost their products to the top of the page. If they got caught and their accounts were shut down, they simply opened new ones.
Amazon execs saw what was happening but struggled to tame the chaos; the marketplace team considered sellers their customers, after all, who were innocent until proven guilty. “We were all very idealistic,” said a former Beijing-based Amazon executive. “I feel like I should have moved much faster and more aggressively. I bought into a narrative that all sellers were good.”
In 2016, Faricy and his deputies traveled to China to try to better understand the complicated seller dynamic. They traveled to Hong Kong and Shanghai, then split up into groups focusing on electronics and apparel. The former went to Shenzhen, the latter to Guangzhou, Zengcheng, and Beijing, among other cities. Then they all met back in Shanghai to compare notes.
The executives on the trip were amazed by what they saw. The group on the fashion leg visited an apparel factory that was making $9 sport coats for the retailer Abercrombie & Fitch, which then sold them at retail for $500. The same factory was also selling the coats with a different button pattern directly online for $90—and still making a fat profit. They also visited a factory that made women’s tops for the retail chain Zara. As the Amazon execs looked down from a balcony onto the factory floor, one asked their host about a group of workers separate from the rest, making similar clothing as the others. They sold on Alibaba, the host said, under the factory’s own private label.
Execs on the electronics leg of the trip saw similar things. Factories across China were going straight to shoppers online, bypassing traditional stores, and providing great value for consumers. In other words, massive disruption was coming to retail, despite the problems of fraud, counterfeits, and low-quality items. “It was unbelievable what we saw,” Faricy said. “We realized that people charging ten to fifty times what products actually cost to make, based on a brand name, wasn’t going to last and consumers would be the winners.”
* * *
On the last day of May 2016, a hundred or so apparel sellers gathered in Seattle for Amazon’s first Fashion Seller Conference. Held in the company’s brand-new meeting center on 7th Avenue, a block from the new Day 1 tower, the summit consisted of a day and a half of speeches, seminars, and meetings. Sebastian Gunningham kicked off the festivities with a fireside chat.
Gunningham had predicted that the “avalanche” of Chinese sellers would alienate U.S.-based merchants. Now he reaped that expected harvest. During his Q&A session, the sellers stood up, one after another, took the microphone, and leveled a blistering set of questions and accusations at him: How did Amazon expect them to compete with Chinese sellers? They didn’t play by the rules! Why was Amazon not protecting authorized rights-holders and resellers and booting infringers? Why did the search results always favor their competition?
Several attendees recalled that one woman commandeered the microphone for fifteen minutes. She described herself as a T-shirt seller from the Midwest and said that every time she had a successful design, a Chinese seller quickly copied it, undercut her on price, and pilfered her sales. She asked how many of her fellow merchants were having such problems; a collective murmur intimated at an angry consensus.
Gunningham stood patiently onstage, addressing the complaints, and pledging to fix what he could. But the inexorable forces of cross-border trade and globalization were part of the problem, and he couldn’t alter those. “It was extremely tense,” said Brad Howard, CEO of the online retailer Trend Nation, who was in the room. “It was a revolt in their building, on their dime, as they were asking us to send questions their way.” Amazon execs and attendees of the fashion conference still talked about the near mutiny years later.
Many apparel brands echoed the frustration of the merchants. In July 2016, the sandal maker Birkenstock loudly pulled its merchandise from Amazon and banned all of its authorized third-party resellers from selling its products on the site. Companies like Nike and Ikea would follow suit, provoking speculation that Amazon’s inability to stop counterfeits was damaging its relationship with brands.
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p; Inside Amazon, the employees in charge of the retail fashion business, where Amazon bought merchandise at wholesale from established brands, were now in a difficult situation, caught between angry vendors and the unbridled growth of the marketplace. With fanfare back in 2009, Jeff Wilke had hired Cathy Beaudoin, a senior executive from The Gap, and tasked her with bringing high-end fashion to a site that was barely even considered a destination for buying clothes. Beaudoin had opened a forty-thousand-square-foot factory in Williamsburg, Brooklyn, where photographers and models churned out high-quality imagery for the site. She also enlisted Jeff and MacKenzie Bezos to attend the Met Gala in 2012, their first highly publicized encounter with the celebrity elite. At the ball, they hobnobbed with celebrities, sitting at a table with Mick Jagger and Scarlett Johansson.
Now the unruly marketplace was undoing all that meticulous relationship building. Generic handbags, jeans, and evening gowns that all looked uncomfortably similar to established makes and styles led to an endless series of tense conversations. In meetings, Beaudoin railed against the poor customer experience of the marketplace, colleagues recalled; she believed that the third-party merchandise cheapened the site and alienated Amazon’s partners. She left the company in 2017, just as Amazon became one of the leading apparel retailers in the U.S. on the back of its extensive, low-priced selection.
Despite its success, Amazon still had a significant problem. Counterfeits, unsafe and expired items, and shoddy products threatened to tarnish its reputation and destroy the trust it had cultivated with its customers. In 2017, Amazon introduced an initiative called Brand Registry, which allowed brands to claim their logos and designs, and to report potential violations to Amazon. Amazon executives insisted the project was already underway before the seller mutiny at the fashion conference. But in the months after the revolt, they hired a senior manager for the effort, grew its team of employees to review complaints, and spared little expense in improving its fraud detection tools. Over the next few years, three hundred and fifty thousand brands would sign up.
That was only a start. Brand Registry would lead to an entirely new set of complaints about the length of time it took Amazon to address claims, and it still didn’t solve the problem of abusive Chinese sellers who, once their accounts were closed, simply signed up for new ones. “Brand Registry improved things, but it was a pretty low bar,” said Larry Pluimer, a former Amazon executive who started a digital retail consultancy to help brands navigate these problems.
By that point, the marketplace division was losing its influence on the S-team. Sebastian Gunningham, who had reported directly to Bezos for years, was moved underneath Jeff Wilke, a former peer, after Wilke and Andy Jassy were promoted to CEOs of the retail and AWS divisions in a 2016 company-wide reorganization. In 2018, Gunningham left Amazon and, ruining his streak of working for visionary tech leaders, headed to the ill-fated office-sharing startup WeWork.
With the champion of third-party sellers gone, along with Gunningham’s direct access to Bezos and Wilke, Peter Faricy and his team were moved under Doug Herrington and the retail group—their intellectual foils in the perennial debate between the first- and third-party businesses, and between quality and quantity. Bezos had incubated the two divisions separately for more than a decade; now he was merging them, with retail asserting itself over the marketplace.
That fall, Faricy also left Amazon, along with many of Gunningham’s longtime deputies. They described an environment that was no longer as much fun; too much time was spent on taming the marketplace rather than growing it, and on giving depositions for the legal cases that were one legacy of the service’s unrestrained expansion. The team was also subject to an unrelenting barrage of escalation emails from Bezos, highlighting the marketplace’s problems and demanding immediate answers. “I think I received a question mark from Jeff on a weekly basis,” said Ella Irwin, general manager of a team that worked on seller abuse.
Amazon executives were now in an awkward position. They wanted to boast about the achievements of the marketplace and the way in which Amazon supported hundreds of thousands of independent entrepreneurs. In his shareholder letter published in April 2019, Jeff Bezos wrote that independent merchants were now responsible for 58 percent of all units sold on the site. “Third-party sellers are kicking our first-party butt,” he wrote.
But executives also had to frequently defend the marketplace. “The facts are that the vast majority of the merchandise is great, but there’s a small fraction of sellers who are gaming the system or committing fraud in some way,” Jeff Wilke told me. “Our job remains to protect customers and root out the fraud as fast and as completely as we can. Look, our reputation is built on customer trust, and it’s something we have to earn every day because it’s so easy to lose it.”
In 2019, Amazon spent $500 million on fraud prevention; it said it stopped bad actors from opening 2.5 million accounts. It also introduced a new anti-counterfeit tool, called Project Zero, that allowed approved brands to zap suspected infringers automatically, without going through an approval process. And it started testing a system aimed at verifying sellers one by one, via video-calls. Amazon, it seemed, was quietly retreating from the idea of a completely frictionless and self-service selling platform.
What execs still didn’t like to admit, particularly at a politically sensitive time in bilateral trade relations, was that 49 percent of the top ten thousand largest sellers on Amazon were based in China, according to Marketplace Pulse, a research firm that monitors the site. In April 2020, the Office of the U.S. Trade Representative listed Amazon sites in five countries as “notorious markets” with dangerous levels of counterfeit and pirated products. Amazon called the report a “purely political act” and part of a vendetta by the administration of Donald Trump.
Despite all these tribulations, the selection machine had met Jeff Bezos’s lofty goals and positioned Amazon at the forefront of a rapidly globalizing retail landscape. The higher-margin proceeds from the third-party marketplace, which were at least double the profits from Amazon’s own retail efforts, would go on to nourish other parts of his business empire, such as Prime Video and the construction of new fulfillment centers, just as Bezos had always hoped.
They would also help to fund Amazon’s unprofitable, multiyear effort to finally crack the $700-billion-a-year domestic market for groceries. There was, it turned out, a whole lot you could do with leverage—even when the journey to obtain it was difficult and the costs to society were unexpectedly high.
CHAPTER 8 Amazon’s Future is CRaP
John Mackey was in trouble. By the spring of 2017, same-store sales in his 460 Whole Foods supermarkets had steadily declined for two years while the company’s stock price had plummeted by half since 2013. Things were going poorly for the entrepreneur who was perhaps most responsible for popularizing the manifest notion that humans should be more mindful about what they eat.
I had met the iconoclastic Mackey a few years before, when he took me on a tour of the eighty-thousand-square-foot flagship store that adjoined Whole Foods Market headquarters in Austin, Texas. Even back then the founder and CEO, a vegan with habitually tousled hair, seemed frustrated with how things were going—particularly when I referred to the chain’s disparaging moniker, “Whole Paycheck.” Journalists “always want to take pictures of our $400-dollar bottles of wine, not the $2.99 wine,” he said, walking through the market with a slight limp, the result of osteoarthritis after years of jogging and basketball. “We are meeting all these price points, but the story they want to tell is about the expensive things. That’s become our narrative—that Whole Foods is broken.”
Over four decades, Mackey had charted a path between the natural food purists (who couldn’t abide selling alcohol or white sugar) and the supermarket industry’s pragmatists (who wouldn’t know an organic carrot if they bit into one). He had occasionally violated the bounds of CEO decorum—for example, by adopting an alias on internet bulletin boards and posting hundreds of message
s over the years attacking rivals and critics. But he always stuck to his principles: Whole Foods would never sell Diet Coke, Oreos, Cool Ranch Doritos, or other popular but unhealthy fare. Along the way, he built a company worth $21 billion at its peak that promoted the once-fringe notion of selling healthy food to the masses.
But Wall Street can be an unforgiving place for stagnating public companies that are “grounded in an ethical system based on value creation for all stakeholders”—as Mackey’s 2013 book, Conscious Capitalism, put it. One problem was that Whole Foods was no longer unique: Walmart, Costco, and Kroger were expanding the number of aisles devoted to organic and natural products. Another was that the company had grown over the years by acquiring regional chains, which led to an unwieldy patchwork of back-end technology systems. Without a frequent shopper program, which Mackey refused to implement, it knew next to nothing about even its most loyal customers. A decentralized operating structure limited the company’s dexterity at precisely the time when it needed to evolve quickly to meet changing tastes, as well as to introduce home delivery and new digital payment methods.
In an unusual arrangement, Mackey was running the company at the time with a co-CEO, Walter Robb, who managed day-to-day operations. They recognized the looming challenges, and hired teams of data scientists in Austin and contracted with the San Francisco–based grocery delivery startup Instacart. But things were progressing slowly—and then they ran out of time.
In 2016, the New York investment firm Neuberger Berman started sending letters to Whole Foods leadership and to other shareholders, complaining about complacent management, the unconventional CEO structure, and highlighting deficiencies like the absence of a rewards program. Their letter-writing campaign didn’t get much traction until that November, when Mackey responded to the pressure by taking over as sole chief executive—exactly the opposite of what the firm wanted.
