Amazon used a secret algorithm that essentially helped the company raise prices on other online sites and ‘destroyed’ some internal communications as the Federal Trade Commission was investigating the company, according to a newly unredacted portions of the agency's antitrust lawsuit against the ecommerce giant unveiled Thursday, Nov 2. — AP
Heading into the holiday shopping season a few years back, ecommerce upstart Zulily mounted a bold challenge to Amazon.com Inc: Zulily would beat or match the prices of its cross-town Seattle rival, on any product.
Amazon moved quickly to eliminate the threat. The company trained its pricing algorithms and competitive monitoring teams on Zulily, and began punishing merchants who offered lower prices on the rival site by limiting the visibility of their products on Amazon, according to newly unredacted portions of a Federal Trade Commission lawsuit. “Because they could not afford the retaliation meted out by Amazon’s anti-discounting scheme, several suppliers stopped selling to Zulily altogether,” the FTC said.
Zulily quietly wound down its comparison-shopping effort and subsequently abandoned ambitions to transform itself from a moms- and kids-focused retailer into an online superstore.
The clash between the two retailers, outlined in the FTC complaint and by former employees interviewed by Bloomberg, could be seen as evidence of Amazon’s famously competitive zeal.
The agency has a more sinister interpretation. Amazon, it says, stifles competition by effectively preventing suppliers from selling merchandise for a lower price on competing websites – an allegation also levied in a separate antitrust case brought by California. Because brands are loath to risk angering the largest US online retailer, many treat prices on Amazon as a de facto floor, even when they could profitably offer lower prices on their own site or at others stores, the regulators say.
Amazon says its conduct doesn’t violate the law, and that it will defend itself in court. An Amazon spokesperson didn’t immediately comment on the Zulily episode. The company has said that the FTC’s logic would force Amazon to feature products that aren’t priced competitively, resulting in higher prices.
Buried offers
In addition to Zulily, the FTC complaint alleges that Amazon also buried offers from sellers whose items were on sale for lower prices on Jet.com, an ambitious ecommerce startup that was later acquired by Walmart Inc. Following Amazon’s campaign, Jet abandoned its own efforts to offer the lowest prices online, and instead simply began matching the lowest price elsewhere on the Internet, the FTC says.
FTC Chair Lina Khan says the two companies are among a generation of would-be ecommerce players that never made it thanks to Amazon’s monopolistic practices. “These are a set of tactics that ultimately Amazon has pursued to deprive actual and potential competitors of the ability to gain the scale and momentum needed to effectively compete online,” she said in September in comments at Bloomberg’s Washington office.
Zulily was a darling of an earlier era of ecommerce. Founded in 2009 by two veterans of online jewellery seller Blue Nile, the company dared to attempt an unconventional business model that set it apart from Amazon and other ecommerce incumbents. Rather than offer one- or -two-day shipping, the company bet that customers would be prepared to sacrifice speed in exchange for deep discounts during heavily promoted flash sales.
Where Amazon stocks millions of different products to ensure it is ready to fulfill just about any order, Zulily only bought merchandise once it knew how many customers would buy a product – a strategy that helped keep costs down. To figure out what shoppers wanted, Zulily’s personalisation engine recommended items that would go well with a certain garment rather than simply bombarding customers with ads for similar apparel. It was a radical approach at the time.
Human touch
The company also deployed old-school retail know-how and a human touch. Its headquarters, a former warehouse on Seattle’s waterfront not far from Amazon’s skyscrapers, doubled as a 350,000-square-foot walk-in closet.
Much of the cavernous space was divided into studios, each full of racks of clothing and merchandise that teams of photographers, videographers and writers used to create a digital version of a shop window. Hundreds of Zulily employees hunted for unique items or brands’ excess stock that were featured prominently during a multiday sale, called an “event” in Zulily speak.
The company broadcast daily deals by email and quickly developed a loyal following. Zulily went public in 2013 and was acquired less than two years later by Qurate Retail Inc, the owner of the QVC television shopping channel.
Seeking to reignite its growth, the company in 2018 poached an Amazon executive, Jeff Yurcisin, and adopted a strategy to expand beyond its comfort zone in clothing, home goods and toys, and compete with its bigger rivals in more categories such as groceries and pet supplies.
In October 2019, Zulily offered the price-matching guarantee with Amazon and Walmart, which three former employees recalled as Yurcisin’s signature initiative. “We have a unique supply chain that’s different from Amazon or other Internet giants, one that’s optimised on cost rather than speed,” Yurcisin told Bloomberg at the time. “So, from our point of view, it’s not about next-day shipping, it’s actually about passing along those savings to customers.” (He left in the company in February 2022.)
Buy box
But that strategy didn’t pan out, which the FTC says is partly the result of Amazon’s influence with suppliers. In one episode highlighted by the agency, an unnamed supplier of infant-care products reported to Zulily that Amazon had removed the so-called Buy Box from almost 2,000 products because the company had participated in flash sales on Zulily.
Almost 98% of Amazon sales are made through the Buy Box, also called the featured offer, the FTC says, and losing that designation can cripple a seller’s sales. And that’s exactly what happened to the infant-care supplier, according to the complaint.
Four former Zulily employees told Bloomberg that the company's suppliers reported being pressured by Amazon to offer the same or lower prices there as on Zulily. The risk of angering Amazon made some brands reluctant to participate in Zulily’s discounts at all, said the people, who spoke on the condition of anonymity because they had signed confidentiality agreements. One of the people said Zulily started seeking out suppliers that didn’t already have a relationship with Amazon.
Amazon also worked to match Zulily’s prices on products it sold directly, leading to rounds of price cuts that resulted in Zulily dropping the products in question from its store altogether. After the ecommerce giant began targeting Zulily, Amazon noted a “consistent drop” in shopper visits to its smaller rival, the FTC says. An Amazon vice president told his team to “keep going...even though their traffic is trending down”.
Zulily’s sales fell 18% during the 2019 holiday quarter. Like most online retailers, the company enjoyed a sales surge during the pandemic but those gains were fleeting. Zulily has held three rounds of layoffs in the last year and a half and backed away from the superstore concept.
In May, Qurate sold Zulily to Regent, a private equity firm. At the time, the company was on track for the lowest quarterly sales in a decade. It has since put its headquarters up for rent. Zulily didn’t immediately respond to a message seeking comment.
The former employees point to other reasons behind Zulily’s struggles. Many consumers who found the site through a daily deal didn’t become regular shoppers, a problem that also hampered Groupon and other startups targeting bargain hunters. Finding more shoppers with ads grew increasingly expensive. Quick shipping, which Zulily was never able to offer, became a baseline expectation for many consumers.
Ben Narasin, a general partner with Tenacity Venture Capital who has founded and invested in ecommerce startups, is critical of the FTC’s approach and thinks Amazon’s marketplace for third-party sellers has created more business success stories than it has harmed.
But he’s aware of the power of the company to dissuade retailers and investors from even trying to compete. “They’re so entrenched and have been around for so long,” Narasin said. “There are many reasons people don’t fund ecommerce. Amazon is one of them.” – Bloomberg
