Rex Jacobsen, one of my top managers, has been recommending Amazon since May of last year. Recently, however, there has been an influx of Amazon third party sellers who are not shipping the products they sell.
Third party sellers account for about 44% of all items sold on Amazon worldwide so these sellers could put more than a small dent in Amazon’s stock price. For most of great and once great stocks-- from Apple and Disney to Chipotle and Wells Fargo--brand reputation makes a up significant portion of the company's overall market value. The problems with Amazon's third-party marketplace have the potential to undermine its otherwise excellent brand which is arguably its most valuable asset.
A key element in my investment strategy, dating back to my time as a co-founder of Firsthand Funds, is tapping the sources of information closest to a company and its products. This is the kind of edge many successful hedge funds look for. Rex Jacobsen is bullish on Amazon but the best investors continually test their thesis. So gaining more "firsthand" information on Amazon's third party seller experiences is critical.
If you have experienced Amazon's third-party seller problem firsthand, as I have, there are 3 questions I would like to ask you.
How To Tell If You’ve Been Duped
Log into your Amazon account and check the status of all of your open orders. Are there any orders you may have forgotten about that are not yet delivered?
If you placed an order more than 6 weeks ago and it is still not delivered, check the tracking number. If no tracking number is provided, or it turns out to be bogus, it could be lost in transit but you have likely been scammed. Time to contact Amazon customer service.
How The Scam Works
The scammer offers a popular item on Amazon at a price that is too good to be true. The seller says the product is shipping from overseas – France, Korea, China, etc. – so expect it to arrive in 6 weeks. Soon after you place your order, the seller will mark the order as “shipped” which then triggers Amazon to charge your credit card.
See Amazon Offers LG's 32-Inch IPS Monitor For $4.89, But I'm Not Buying It and 6 More 'Too Good To Be True' Deals That Are Tarnishing Amazon's Brand to see more examples of suspicious deals.
Amazon pays the seller every 2 weeks, so the scammer has to keep you from complaining for at least 2 weeks. This is why it was important for them to tell you not to expect delivery for 6 weeks.
In 6 weeks, the scammer will have gone through 3 payment cycles before anyone notices there is a problem. If you call Amazon customer service before the expected delivery date, the customer service rep will (quite reasonably) tell you to wait until then to file a complaint.
When the first customers notice that they have not received anything by the delivery date, Amazon will offer to file and A to Z guarantee claim on their behalf. When Amazon sees enough claims they shut down the scammer’s account.
At this point, the scammer has been paid by Amazon 3 times. They expect their account to be shut down so they set up a new seller account for the next 6 week cycle.
After the scammer is shut down, Amazon is quick to provide full refunds to everyone who files an A to Z claim. However, if you forget that you placed the order, and don’t notice that it never arrived (so you never filed a claim), Amazon will not contact you about your open order to see if you are due a refund since your credit card was charged a while ago when the seller marked the item as shipped.
Did Amazon Handle The Problem Well?
Amazon’s brand promises an excellent online shopping experience. Admittedly this is a worse case scenario for Amazon, but did they live up to their brand’s promise? Did they treat you as you expect to be treated when something goes wrong? Click here to tell me about your firsthand experience or leave a comment below.
Did You Get Your Money Back?
Did Amazon refund your money? How much time and how many phone calls did it take? I would be particularly interested to hear of any cases where Amazon took the initiative to refund your money.
It seems to me Amazon should make an effort to contact customers who have already been charged for orders that are still open with sellers that have been shut down.
Has The Experience Changed Your Shopping Preferences?
Many of Amazon's third party sellers have a long history with great feedback, a track record if you will. Just as I would never choose an investment manager with no track record, I will now avoid third party sellers who do not already have a superior track record.
It will be hard for Amazon to grow this rather significant part of their business if everyone avoided new sellers who have ‘Just Launched.’ But I would rather have Amazon vet new sellers with someone else’s business, not mine.
Bottomline
Rex Jacobsen has an excellent long-term investment track record but he and I don’t have all the answers. However, we believe we are asking the right questions that will determine whether third party sellers are a risk that Amazon’s investors need to worry about.
Disclosure: Marketocracy, its affiliates, clients, and I may have material financial interests in the stocks mentioned and may hold or trade them contrary to these opinions when, in our view, market conditions change.
