Amazon's third-party seller business is booming as it pours billions into the effort, but is it enough to stem backlash.....

Thanks to a network of third-party sellers, Amazon (NASDAQ:AMZN) is able to offer everything under the sun on its eCommerce platforms. 

Aiming to expand that further, it's investing more than $15 billion this year to develop digital tools to help that group sell more. The investments are also designed to protect its reputation as the place to go to purchase everything. 

It may be necessary. With backlash mounting over counterfeits, its third-party seller business is coming into the spotlight. A recent investigation by the Wall Street Journal found the eCommerce giant is selling thousands of products through these independent sellers that are either labeled wrong, banned or determined to be unsafe by regulators. The Wall Street Journal said it identified more than 4,000 items that fell in one of those three categories. Especially as the number of these third-party sellers surge, it's hard for it to maintain control.

That poses a risk for Amazon and its shareholders. While third-party sellers are extremely important to enable it to offer a product selection unmatched by any of its rivals, a string of problems could shake customer confidence. If consumers begin questioning the legitimacy of the products sold on Amazon it could hurt sales at third-party sellers as well as on its main eCommerce site. Earlier this year Amazon acknowledged publicly for the first time the risk it faces from fake products. In its most recent 10-K, Amazon said its platforms could be found liable for counterfeits sold by those third parties.

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Image Source: Getty Images.

 

Amazon tries to take on the counterfeiters

Amazon has taken steps to stop counterfeits on its platform, spending hundreds of millions of dollars annually on technology and staff to try to fight the fakes. Amazon pointed to Project Zero, which it rolled out this year as one example. It relies on machine learning, artificial intelligence, and other advanced technology to detect counterfeits.

In response to the Wall Street Journal report, Amazon said in its own blog post that more than $400 million went to protect customers last year. "Amazon offers customers hundreds of millions of items, and we have developed, and continuously refine and improve our tools that prevent suspicious, unsafe, or non-compliant products from being listed in our store," wrote the company. "Our new seller account vetting includes a number of verifications and uses proprietary machine learning technology that stops bad actors before they can register or list a single product in our store."

Third-party sellers an important part of the Amazon business 

Amazon's focus on what it calls the small and medium-sized business market isn't only about protecting its reputation. It's also aimed at boosting sales, which means more profits flowing Amazon's way. According to the eCommerce giant, independent third-party sellers accounted for 58% of all the physical gross merchandise sold on Amazon's stores last year. During this year's Prime Day, Amazon's shopping event in which products are deeply discounted, sales from this group surpassed $2 billion, setting a new record. The number of small and medium-sized sellers that have more than $1 million in sales on Amazon's stores grew 20% in 2018 on a worldwide basis. 

The tools Amazon highlighted makes clear it wants its third party network to grow further. After all, they cover everything from tracking inventory to setting prices in real-time. They also include branding and marketing tools as well as educational videos and webinars. 

What remains in question is what effect the counterfeiters (and Amazon's countermeasures) will have on these growth plans.