Earlier this month, Drinks sold Wine Insiders for an undisclosed sum to Full Glass Wine Co., which also owns the Winc retail wine ecommerce site. The sale opens the door for Drinks, or Drinks.com, to focus on selling its digital commerce technology stack, designed to enable any online merchant to add alcoholic beverages to product catalogs and such venues as “influencer” web storefronts.

Zac Brandenberg, CEO, Drinks Holdings Inc.

While ecommerce is a fast-growing channel for consumers to discover and purchase beverages, sales of alcoholic beverages through the digital channel are growing even faster, says Drinks chief executive and co-founder Zac Brandenberg.

“Consumers want to engage with brands/merchants at their convenience — where they want to, when they want to. That means from their laptop, their phone, their couch, etc.,” Brandenberg says. “As the alcohol category starts to come online, you’re going to see consumers rapidly adopt a digital shopping modality.”

To capitalize on consumers’ growing preference to purchase alcoholic beverages online, Drinks’s strategy is to focus on bridging the gap between consumers’ growing desire to purchase alcohol online and alcohol companies’ ability to scale online sales. The sale of alcoholic beverages in the United States totals about $250 billion, the company says.

“The growth in the sale of alcoholic beverages online increases the total addressable market opportunity because it expands consumer choice and access, particularly in markets where regulatory restrictions have limited shopping access points or SKUs available to consumers or created other impediments,” says Brandenberg,  adding: “The growth in the sale of alcoholic beverages online is not being fueled exclusively by the shift away from brick-and-mortar shopping.”

At the core of Drinks’s business is its Drinks app for Shopify, which provides Shopify merchants of all sizes with an embedded, real-time alcohol tax and regulatory solution. In addition, the platform helps merchants that want to sell alcoholic beverages manage regulatory compliance, required disclosures, customer messaging, product catalog and inventory management, merchandising optimization, and product fulfillment.

An app for managing online alcoholic beverage sales

“Our vision is to provide an operating system for this industry — that means any business that wants to sell alcohol online,” Brandenberg says. “Our Drinks Shopify App provides the regulatory technology for alcohol producers and merchants to sell alcohol online.”

In addition to its core regulatory tax compliance platform, Drinks offers a wine-as-a-service (WaaS) platform to develop a branded nationwide wine program and offer omnichannel shopping experiences. As a result, ecommerce merchants that don’t carry a liquor license can add alcoholic beverages as a product category in a fully compliant manner directly to their storefront, Drinks says.

Retailers such as Macy’s Wine Shop, Thrive Market and Misfits Market use the Drinks platform.

Other apps offered by Drinks include its Pair platform, which uses data-driven insights with artificial intelligence and machine learning to create personalized shopping experiences. The company also operates a customer experience and retention agency called Electriq, which helps wineries take the tasting room experience online and increase customer loyalty through lifecycle strategies, email/SMS marketing, and web design and development.

“We have a lengthy waitlist of merchants who want to add beverage alcohol products into their storefronts, covering almost any audience,” Brandenberg says. “Drinks is enabling any business that sells something online to now be in the alcohol business. We are able to power online, direct-to-consumer alcohol commerce for bellwether retailers, digital-first commerce brands, and celebrities like Martha Stewart and Geoffrey Zakarian. As we scale our technology footprint, more merchant types, as well as experts, creators and influencers will follow suit.”

One merchant segment that looks especially promising is “creator” and influencer websites, which are not part of the alcohol ecosystem in the traditional sense. Tapping this merchant segment represents new distribution opportunities for alcoholic beverage brands.

“The early innings of creator/influencer-driven marketing have operated similar to an old-school affiliate model, where an endorsement led to a transaction on a brand/merchant site,” Brandenberg says. “That’s obviously evolving, and opportunities abound for the creators themselves to be the conduit for transactions, to maintain that one-to-one relationship they have with their audience. That presents an opportunity for us to enable an ever-increasing number of consumer-facing commerce sites or outlets.”

Peter Lucas is a Digital Commerce 360 contributing editor covering B2B digital commerce technology and strategy.

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The two organizations have grown their commerce operations in recent years, fostering B2B sales to retailers from suppliers of products ranging from home décor to apparel and jewelry. They each benefitted from a temporary COVID-driven surge in demand for online marketplaces as an alternative to in-person trade shows for home and décor products. But more recently, they have become entangled in battles, trading charges of unfair business practices.

Their legal battles began in May but have only recently become more widely publicized.

Faire and Tundra trade lawsuits

Tundra v. Faire Wholesale

Tundra, in a lawsuit filed San Francisco on May 23, 2023, in the U.S. District Court for Northern California, has charged Faire with violating the federal Sherman Anti-Trust Act and California law. It charged Faire with engaging in several unfair business practices to amass a 90% market share.

These include:

• “Deploying unfair, uncompetitive and exclusionary tactics that have thwarted competition from other would-be market participants.”
• “Charging brands fixed-price commissions … making Faire the highest-cost competitor.”
• Requiring brands and retailers conducting business on Faire to refrain from transacting sales with each other outside of Faire.

“These practices violate the Sherman Act, which prohibits monopolization, attempted monopolization, and unreasonable restraints on trade, as well as California’s Unfair Competition Law,” Tundra says in its lawsuit, Tundra Inc. v. Faire Wholesale Inc. It adds: “This suit seeks to halt Faire’s anticompetitive, unfair, and illegal practices, obtain redress for the severe damage caused to Tundra, and restore fair competition in the market for online wholesale product marketplaces.”

In July, Tundra shuttered its wholesale marketplace. But on its website, it says: “We hope to be able to return to operating upon a successful resolution of our case.”

In the meantime, however, Tundra is continuing to operate its Wholesale Co-op platform. It lets retailers buy from more than 100,000 brands. It also lets them earn “cash back” rewards of up to 10% of the value of each wholesale purchase. Tundra forwards the orders it receives to Faire and several other marketplaces.

Tundra charges retailers no set fees but keeps a 10% share of each cash-back reward. It charges brands a 15% commission on the initial order they receive from a retailer.

Faire Wholesale Inc. v. Tundra Inc.

Faire, however, accuses Tundra of arbitrage in trying to use Faire’s business operations to expand the sales transaction volume on Tundra’s Wholesale Co-op.

Faire followed with its own lawsuit against Tundra the same day, May 23, 2023. It charged Tundra with “unauthorized solicitation, storage and use of Faire’s users’ credentials for logging into Faire’s online marketplace.”

Faire argues that Tundra uses those credentials to access such information as available inventory, prices and order lead times that Faire only makes available to the retailers and brands that maintain Faire business accounts.

“Despite Faire’s demands that Tundra stop its unauthorized access, Tundra continues to carry out this scheme to copy data from Faire’s computer systems for Tundra’s commercial benefit,” Faire says in its lawsuit, Faire Wholesale Inc. v. Tundra Inc.

The details

Faire charges no fees to retailers. But it charges brands a 15% commission (recently reduced from 25%) on initial orders from new customers. It also charges 15% on reorders. To encourage brands and retailers to conduct more business on its marketplace platform, the Faire Direct program lets brands send a special link to retailers for purchasing products in transactions not subject to commissions.

Founded in 2017, Faire says on its website that 700,000 retailers use its marketplace platform to find and purchase products from 100,000 brands.

Faire says in its lawsuit that Tundra engages in arbitrage by encouraging brands on Faire to also join Tundra and provide their Faire Direct links to retailers in Tundra’s Wholesale cooperative.

An attorney representing Tundra said they could not comment on the ongoing case.

“These desperate claims have no merit, and are a defensive attempt to retaliate against Faire’s own complaints regarding Tundra’s harmful practices,” Faire said in a statement to Digital Commerce 360. “We look forward to resolving the matter swiftly, and remain committed to giving small business owners around the world the tools and technology they need to compete and succeed.”

Faire has filed a motion to dismiss the litigation and a hearing has been set for Dec. 8

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Paul Demery is a Digital Commerce 360 contributing editor covering B2B digital commerce technology and strategy. paul@digitalcommerce360.com.

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The social media app’s Shop option, prominently displayed between the For You and Following feeds where users watch videos, presents a never-ending scroll of “recommended” random products, according to an early version Bloomberg has reviewed. It includes products from a $2.99 Nike sweatshirt that appears counterfeit to a $6.99 statue of a “naughty dwarf” sitting on a toilet. Many of the listings, including a budget planner and a waist-trainer vest, say they’re shipped from China, where TikTok’s parent company ByteDance Ltd. is based. That could reignite U.S. regulatory concerns if it puts user data in the hands of Chinese sellers.

The TikTok Shop marketplace will be competing with Amazon.com Inc. to sell a target of $20 billion in merchandise this year, Bloomberg has reported. The effort has been discussed internally as a “community commerce” effort, according to people familiar with the matter. That means it’s meant to capitalize on the app’s potential to bring people together through their niche interests. But the early version of the experience shows no evidence of the ultra-personalized algorithm TikTok is known for in its video feed, which has been key to its success in capturing users’ attention.

Amazon is No. 1 in the Top 1000, Digital Commerce 360’s ranking of the largest North American online retailers. Amazon is also No. 3 in the Global Online Marketplaces Database. The Digital Commerce 360 database ranks the 100 largest marketplaces by 2023 third-party GMV.

TikTok Shop marketplace listings

Instead, Shop is plagued by the same problems with a free-for-all marketplace that Amazon has faced. Categories and sub-categories of products are filled with overwhelming choice. The Home & Kitchen section shows a 37-cent-mini-car trash can next to a $16 four-foot computer desk and an $8.43 three-piece polyester satin sheet set. Misspelled brand names and implausible prices on many of the listings raise red flags for potential counterfeit sales.

TikTok said the article is “misleading” and that it doesn’t “represent the TikTok experience.”

The TikTok Shop marketplace highlights prices — which are remarkably low and listed in large font. It highlights coupons and free shipping offers in red and green, respectively. TikTok creates a sense of urgency by listing next to a product how many times it’s been sold. It also lists a countdown clock with the hours, minutes and seconds left of a sale.

The TikTok Shop marketplace does not list brands before users click on a product. The majority of product names seem more tailored to search engines and algorithms than human shoppers. One listing, for instance, touts “Women’s 3 Piece High Waist Workout Shorts Butt Lifting Tummy Control Ruched Butt Smile Yoga Short Pants.”

2023 Global Online Marketplaces Report

Analysis of the 100 leading global online marketplaces. Includes over 30 charts, rankings of the world’s Top 100 online marketplaces by 2022 third-party GMV, tips for marketplace sellers, and findings from a new consumer survey. 

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Where are the products from? Are they real?

The most prominent section is for “Today’s Deals.” On the feed Bloomberg has seen, the top promoted product was a snail mucin-based face serum. The serum has recently gone viral on the app: a COSRX-brand Advanced Snail 96 Mucin Power Essence. The seller, listed as FIFTHLINYOUNG-4, advertised the serum for for $7.99, down from $39. But neither number aligns with the $25 price the brand COSRX offers on its website. The TikTok seller also says the product is manufactured in China, when COSRX products say on the packaging that they are made in Korea.

“Dear, yes, it is genuine,” the seller said in a message on TikTok. “The new store is offering discounts during events.”

The seller didn’t respond to questions about why the product says it is manufactured in China. CORSX didn’t immediately respond to a request for comment.

The snail mucin is also the only skincare item FIFTHLINYOUNG-4 has listed.

The other items by that shop include:

• A drone marked down from $999 to $88.
• Alisting featuring photos of the internet-favorite tumbler from Stanley without listing the brand name in the title or description.
• An LED tooth-whitening kit with photos that don’t match the brand name in the listing.

“Even in testing, there are over 200,000 verified U.S. merchants on TikTok Shop selling legitimate products — including over 150,000 beauty products that have been validated through our process and represent some of the biggest names in the beauty business,” a TikTok spokesperson said.

Sketchy sellers previously booted from Amazon marketplace

In June, a person familiar with the company’s U.S. Shop strategy said the company was focusing on American sellers. That strategy appears to have changed. A quick search reveals a number of Chinese brands on the TikTok Shop marketplace that Amazon has kicked off its platform for faking customer reviews. Amazon booted Guangdong SACA Precision Manufacturing from its marketplace in June 2021. Products from its brands Taotronics and VAVA are currently available on TikTok. So is the hot-selling headset brand Mpow. Amazon also removed its parent, Shenzhen Qianhai Patozon Network & Technology Co., from its marketplace.

In its terms that a user can click on before checkout, TikTok says “we make no representations, warranties, or guarantees, whether express or implied, that any content on TikTok Shop is accurate, complete, or up to date. We have no visibility or control over the contents on or available through those sites or resources and you acknowledge and agree that we have no liability for any such content.”

When a user checks out from the Shop tab, she can make purchases from multiple sellers at the same time in the same checkout. TikTok is processing payments through its app, Bloomberg has reported.

That means the company will also be collecting additional information about users, including:

• Card details.
• Billing address.
• Shipping address.

TikTok regulatory concerns

That may eventually lead to extra regulatory scrutiny for the company. TikTok has been under pressure from federal, state and local governments for its data privacy practices. The app’s Chinese ownership has sparked national security concerns over whether it can track or influence Americans on the app. The company has said it is working to isolate sensitive data from its American users so that only staff in the U.S. can access it through a separate unit called USDS.

“TikTok US protected user data is stored in the U.S. and managed by USDS,” a company spokesperson said. “And we work with third-party payment platforms to facilitate transactions on TikTok Shop, with all data managed by the payment partner.”

Lawmakers have been particularly sensitive to whether the app collects location data on users. Prior to the launch of Shop, the company said it updated its app so it no longer collects precise or approximate GPS data, only approximate location information.

But the TikTok Shop marketplace appears to open up some user data to its sellers. In TikTok’s Buyer Policy, the company says that “Sellers are independent controllers of the data that they collect about you via TikTok Shop, and TikTok is not responsible for their compliance with applicable law.”

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C&S will pay $1.9 billion in cash for the stores, which are mostly located in the West and middle of the country, the companies said in a Sept. 8 statement. This confirmed a Bloomberg News report from earlier that week. Closely held C&S is a major grocery wholesaler that also operates Grand Union and Piggly Wiggly stores.

The same day, the United Food and Commercial Workers International Union released a statement in response. It said its “team of experts will be analyzing every aspect of this proposed deal and will assess the impact, positive or negative, that it may have on our UFCW members, the customers we serve, and the communities we call home.”

The Kroger Co. is No. 8 in the Top 1000. The database is Digital Commerce 360’s ranking of the largest online retailers by web sales. Albertsons ranks No. 26.

Fighting for (antitrust) approval

Kroger is betting the store sale will help it persuade the U.S. Federal Trade Commission to allow the Albertsons transaction. The transaction is the centerpiece of the retailer’s push to keep up with Walmart Inc. and Amazon.com Inc. The FTC, which has recently challenged high-profile deals in video games, pharmaceuticals and mortgage software under Chairman Lina Khan, is scrutinizing the merger’s impact on grocery competition.

Amazon ranks No. 1 in the Top 1000. Walmart is No. 2.

“This comprehensive divestiture plan marks a key next step toward the completion of the merger by extending a well-capitalized competitor into new geographies,” Kroger and Albertsons said in the statement.

Frontline workers will remain employed and existing collective-bargaining agreements will continue, they said. Kroger may require C&S to buy a further 237 stores in connection with efforts to win regulatory approval of the Albertsons deal, which would bring the total divestitures to 650. That’s the number Kroger had earlier defined as the ceiling for store divestitures.

The Cincinnati-based company also released financial results for its fiscal second quarter. Kroger grew digital sales 12% in the quarter.

The FTC still could sue to block the deal. Labor unions including UCFW and officials from a range of states have urged the regulator to oppose the merger. They say it would hurt wages and competition. Some senators and members of Congress have also criticized the transaction.

Kroger said the Albertsons acquisition remains on track to close in early 2024, with CEO Rodney McMullen having vowed to fight in court if necessary.

Store footprint

The agreement with C&S covers stores in 17 states and Washington, DC, along with eight distribution centers and five private-label brands. The sale also includes the QFC, Mariano’s and Carrs banners, plus exclusive licensing rights to the Albertsons brand name in Arizona, California, Colorado and Wyoming.

On a combined basis, Kroger and Albertsons currently have a footprint of about 5,000 stores. Walmart has roughly 5,200 retail locations in the U.S., including about 600 Sam’s Club warehouse stores. Amazon, which is already a force in categories such as diapers and some packaged goods, recently began the biggest overhaul of its grocery business since it acquired Whole Foods Market six years ago.

When Kroger announced the Albertsons acquisition in October, the companies said they would spin off as many as 375 stores if they couldn’t find buyers. Kroger later suggested in a merger agreement that 650 was the upper limit for divestitures.

For C&S, the deal will further an expansion into retail grocery stores. The Keene, New Hampshire-based company bought 12 stores from Tops Markets in 2021 when the latter grocer merged with the Price Chopper/Market 32 chain. The FTC approved that divestiture.

“C&S recently expanded its retail operations with the acquisition of 11 Piggly Wiggly Midwest retail stores, and hired a former retail grocery executive with significant retail experience to lead retail efforts,” the regulator said at the time.

In its sprawling wholesale business, C&S supplies more than 7,500 independent supermarkets, chain stores, military bases and institutions with over 100,000 different products.

Aldi opens 1,000th UK store

Aldi opened its 1,000th UK store on Sept. 7 and committed to a further 500 outlets in the country as the German discount grocer snatches market share from rivals.

The supermarket had previously aimed to have 1,200 stores by 2025 and is now targeting 1,500 over the long term, Aldi said that day. That’s ambitious growth for a company that opened its first store in Britain in 1990.

“We’re looking for new Aldi stores from Hackney to Harrogate and Bath to Brentwood,” Giles Hurley, chief executive officer of Aldi UK and Ireland, said in a phone interview. “We’ve had an unwavering will to grow in the UK and that’s been backed up by capital.”

U.K. shoppers have been flocking to Aldi as inflation erodes their purchasing power during the cost-of-living crisis. The discounter became Britain’s fourth-largest grocer last year, knocking Morrisons off the spot. Now, £1 in every £10 spent at U.K. supermarkets is at Aldi.

Shoppers are turning more to store-brand goods to tackle rampant food inflation, a trend that favors Aldi. The grocer also stocks fewer big brands than competitors. The grocer has served more than 1.1 million new customers over the past 12 months, said Hurley.

“We’ve seen customers switch their shopping” to Aldi, he said. “Existing customers are consolidating their spend with us and treating us as a first-stop shop.”

The grocer is growing sales at the fastest pace among supermarkets, seeing an increase of 21% in August from a year earlier, according to Kantar data. Sales at fellow discounter Lidl rose by almost 20% in the same period, while revenue at higher-end rivals Waitrose and Co-op rose by 4.4% and 3.4% respectively.

Competitors are watching Aldi’s rise closely. Both Tesco Plc and J Sainsbury Plc have pledged to match Aldi’s prices on hundreds of goods, while grocers are increasingly doing away with in-store food counters and delis in favor of the discounters’ simpler approach.

More reductions

Food inflation has begun to ease in the UK, though remains at a high level, with the Office for National Statistics reporting a rate of 14.9% in July. Supermarkets are keen to demonstrate they are cutting prices where possible.

“I’m quite optimistic that between now and Christmas there will be more price reductions in our stores,” said Hurley. “When it comes to the longer-term picture on inflation it’s definitely more difficult to read. There are a lot of influences on the grocery sector.”

This year, Aldi will open 20 stores as part of its existing £1.3 billion ($1.6 billion) expansion plan. The new one opening in Woking, Surrey, is one of more than 150 that Aldi has in the South East, as it seeks to attract customers in the affluent region.

Aldi also relaunched its website, priming it for ecommerce growth. The grocer is not currently ranked in any Digital Commerce 360 databases.

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The Microsoft Copilot Copyright Commitment will protect customers as long as they’ve “used the guardrails and content filters we have built into our products” Hossein Nowbar, General Counsel, Corporate Legal Affairs and Corporate Secretary at Microsoft, said in a Sept. 7 blog post. Microsoft also pledged to pay related fines or settlements and said it has taken steps to ensure its Copilots respect copyright.

“We believe in standing behind our customers when they use our products,” Nowbar said. “We are charging our commercial customers for our Copilots, and if their use creates legal issues, we should make this our problem rather than our customers’ problem.”

Microsoft ranks No. 88 in the Top 1000. The database is Digital Commerce 360’s ranking of the largest North American online retailers.

Microsoft connection to OpenAI and generative AI technology

Generative AI applications scoop up existing content such as art, articles and programming code. They then use it to generate new material that can simplify or automate a range of tasks. Microsoft is baking the technology, developed with partner OpenAI Inc., into many of its biggest products. That includes Office and Windows, potentially putting customers in legal jeopardy.

Artists, writers and software developers are already filing lawsuits or raising objections about their creations being used without their consent. In one complaint, lawyer and computer programmer Matthew Butterick accused Microsoft’s GitHub partner of allegedly violating open-source software development licenses. A group of anonymous individuals seeking class action status also has filed suit against OpenAI and Microsoft. They claiming the companies are stealing “vast amounts” of personal information to train AI models in a heedless hunt for profits.

News organizations are mulling their own complaints, comedian Sarah Silverman has filed suit against OpenAI and Meta Platforms Inc., and artists are suing AI image generators Stability AI and Midjourney in a San Francisco court, although the judge has expressed skepticism about aspects of the case.

Copyright infringement and generative AI

Generative AI could raise novel questions about the fair use of copyrighted materials, a legal defense that allows the use of content in certain cases. Fair-use doctrine itself has been further complicated by a May Supreme Court ruling in favor of a photographer who accused the Andy Warhol estate of improperly using her work to create 16 images of the late musician Prince.

It’s not the first time Microsoft has deployed a legal shield to keep customers loyal. In the 2000s, the company offered indemnification to partners and later customers using or reselling its software, a bid to differentiate Microsoft from Linux and other open-source software makers. In 2017, Microsoft, by then a seller of open-source software itself, offered to protect customers of its Azure cloud products from legal claims.

The company in June announced a program to help customers ensure the AI programs they run on Microsoft platforms meet global laws and regulations. Earlier this year, Adobe Inc. also offered subscribers of its AI tools legal protection against copyright infringement.

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Shein and Temu, owned by PDD Holdings Inc., are two of the rising powers in online retail. They are growing threats to the likes of H&M and Zara. The lawsuit offers a rare glimpse into the business models of the two secretive companies — and their fierce competitive practices.

Shein Group Ltd. ranks No. 2 in the Asia Database. That’s Digital Commerce 360’s rankings of the largest online retailers in Asia by web sales.

Pinduoduo offers an app-only marketplace to Chinese consumers but does not operate an ecommerce website, so it is not included in Digital Commerce 360’s Asia Database rankings. Temu, which launched in September 2022, did not have a significant impact on Pinduoduo that year. Moreover, it didn’t have a high enough gross merchandise value (GMV) to make the global online marketplace rankings this year.

Temu and Shein are growing rapidly in US market

Shein has grabbed more than 75% of the U.S. “ultra fast-fashion” market since entering the market in 2017, according to the suit. After Temu entered the U.S. in 2022, Shein responded by forcing clothing manufacturers into supply arrangements that excluded Temu, the suit alleged.

“Shein has engaged in a campaign of threats, intimidation, false assertions of infringement, and attempts to impose baseless punitive fines and has forced exclusive dealing arrangements on clothing manufacturers,” according to Temu’s complaint filed July 14 with the U.S. District Court for the District of Massachusetts.

The allegations come after Shein sued Temu in the U.S. Shein alleged trademark and copyright infringement as well as “false and deceptive business practices.”

Shein led the way in pioneering ultra fast-fashion. It offered consumers the latest fashion products at bargain prices, with shirts and swimsuits as low as $2. That helped the company become one of the most successful startups in the world, with a valuation of $66 billion, according to the market research firm CB Insights.

“We believe this lawsuit is without merit and we will vigorously defend ourselves,” a Shein spokesperson said in an email statement.

Allegations in Temu Shein lawsuit

Temu alleged that Shein engages in at least four strategies to stifle competition. Those include levying fines and penalties on suppliers that work with Temu and forcing suppliers to sign “loyalty oaths.” Shein also issues “public penalty notices and imposes extrajudicial fines on disobedient manufacturers for supplying product to Temu.”

Temu alleged in the suit that, as of May, “Shein has required all of the approximately 8,338 manufacturers supplying or selling on the Shein Platform to execute Exclusive-Dealing Agreements, which prevent those manufacturers from offering products on the Temu Platform or supplying products to sellers on the Temu Platform.”

The 8,000-plus manufacturers that supply Shein represent 70% to 80% of the total number of merchants capable of supplying ultra-fast fashion, Temu said.

Temu said merchants have pulled more than 10,000 listings as a result of Shein’s actions. In the lawsuit, the PDD unit cited examples of clothing manufacturers that had cut their presence or stopped business on the platform, “to appease” Shein.

“Shein knows that manufacturers need Shein’s volume and its access to the U.S. market and it is, therefore, able to coerce manufacturers into arrangements that force manufacturers not to do business with Temu,” the company alleged.

The case is Whaleco Inc. v. Shein US Services LLC, D. Mass., No. 23-cv-11596, 7/14/23

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In the coming weeks, the agency plans to file a far-reaching antitrust suit focused on Amazon’s core online marketplace, according to documents reviewed by Bloomberg and three people familiar with the case. The main allegation is expected to be that Amazon leverages its power to reward online merchants that use its logistics services and punish those who don’t.

FTC investigators and Khan’s office have been honing the complaint for several months, two of the people said, and finalizing key details such as where to file suit. Khan and her colleagues are keen to file before personnel changes in August, according to the people, who cautioned that the timing could slip.

Based on her public comments, Khan is unlikely to accept compromises from Amazon and could seek to restructure the company — a dramatic outcome that Amazon would surely appeal.

Amazon is ranked #1 in the 2023 Digital Commerce 360 report, which ranks North American retailers by web sales.

Taking on Amazon promises to be a career-defining moment for the 34-year-old Khan, who rose to prominence articulating fresh analysis of how the Seattle-based company abuses its market power. In a prominent law review article, Khan argued that the existing antitrust enforcement framework was ill-equipped to tackle the potential harm Amazon poses to competition.

Big Tech in Khan’s crosshairs

Khan’s appointment to lead the FTC supercharged the Biden administration’s crackdown on Big Tech, which already includes complaints against Alphabet Inc.’s Google and Meta Platforms Inc., along with an investigation into Apple Inc.

Amazon says Khan should recuse herself, owing to her public statements about the company. But when Meta made a similar demand, Khan continued to lead the case, ignoring a non-binding recommendation from the agency’s top ethics official that she step aside. A footnote in a memo from the ethics counsel, earlier reported by Bloomberg, said Khan had been authorized to serve as a prosecutor on Amazon’s cases.

The ethics memo said Khan’s prior statements about Meta are enough to warrant recusal for cases in the agency’s administrative court where commissioners ultimately have the last say, but contained no conclusions about Amazon, Still, that may require the FTC to sue in federal court instead. Doing so would avoid drawn-out litigation on whether Khan has a conflict of interest, but could make the case harder to win.

Amazon executives will get a final chance to argue their case before the FTC’s three commissioners, including Khan, but that “last rites” meeting hasn’t been scheduled, said one of the people and another individual who requested anonymity to discuss the situation.

Both Amazon and the FTC declined to comment.

The Big One

Amazon’s sprawling marketplace is the heart of the company’s e-commerce operations. Third-party merchants, who now account for more than half of the company’s online sales, pay a commission on each sale and can also pay Amazon for services that range from warehousing and shipping to advertising.

These fees are optional, but most merchants consider them necessary costs of doing business. Amazon’s average cut of each sale on its marketplace has increased in recent years, surpassing 50% in 2022, according to a study by Marketplace Pulse, up from 35% in 2016.

The FTC has amassed evidence that the company disadvantages sellers that don’t use these services, and the agency is investigating an algorithm that selects merchants for the web store’s coveted “Buy Box,” where consumers can add products to their cart with one click. 

The expected allegations are similar to a 2020 report from a US House subcommittee — which counted Khan as a staff member — and overlap with a European antitrust case that charged Amazon with rewarding sellers that use its fulfillment services and using merchants’ sales data to boost its own retail business.

Amazon settled the European case by offering to change its Buy Box practices and restrict how it uses data from third-party sellers on its European web stores. While Amazon could make a similar offer for the US market, Khan has signaled opposition to such compromises, telling a Senate committee last year that the FTC would “strongly disfavor” such remedies.

Customer Obsessed

Amazon has long said it puts customers first — a credo employees are taught to espouse in antitrust training, according to documents viewed by Bloomberg. This antitrust suit would be the FTC’s fourth case this year that seeks to call the company’s famous focus on customers into question.

In May, the agency sued the e-commerce giant in two separate cases for failing to delete data about kids collected by its Alexa speakers and illegally spying on users of its Ring doorbells and cameras. Amazon said it disagreed with the FTC’s allegations, but agreed to pay $30.8 million to resolve the cases.

Last week, the FTC again sued Amazon in a consumer protection case, alleging the company duped consumers into signing up for Prime membership and deliberately made it hard to cancel. The FTC’s filing of that case took Amazon executives by complete surprise, according to two people familiar with the situation.

The FTC is separately investigating Amazon’s proposed $1.65 billion acquisition of Roomba vacuum maker iRobot Corp.

Antitrust Probe

The FTC’s big antitrust case has been a long time coming. Amazon received the initial investigation notice in June 2019, according to documents viewed by Bloomberg. The first request for records followed two months later.

That letter, a copy of which was obtained by Bloomberg, included several questions about how using Amazon warehousing and delivery services “affects the third-party seller’s product placement,” including boxes on the website that give products additional prominence.

The document request also sought records regarding any arrangements with Apple Inc., including proof of the “rationale for entering into such agreements.” The two companies agreed in 2018 to allow the iPhone maker to sell its products directly on Amazon’s marketplace — a deal later scrutinized by FTC for the impact on Apple resellers.

In February 2020, the FTC sent compulsory document requests seeking more information on those issues and the Amazon Web Services cloud computing division, according to internal agency documents obtained by Bloomberg through a public records request.

Amazon responded with a slew of information throughout 2020 and 2021. At the time, the FTC had only a few investigators on the probe because it was focusing most of its antitrust resources on Meta.

Khan’s FTC

In June 2021, Khan took over the agency and began recasting the Amazon probe. She personally helped draft some lines of questioning for investigators and handpicked a fellow academic with Justice Department experience, John Newman, to help lead the investigation. Newman further bulked up the team.

Over the course of 2022, the FTC interviewed almost 30 Amazon employees under oath, according to the people.

When the complaint is finally filed, the FTC anticipates a barrage of criticism aimed at Khan, already the focus of business interests wary of her hardline approach and management of the agency. One person familiar with Amazon’s strategy pointed to its broad attacks on Congress’s tech-focused antitrust legislation. Last year, the company and its subsidiaries spent $20 million on lobbying, in addition to launching an ad campaign and an effort to mobilize sellers in lawmakers’ home states to publicly oppose the bills.

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I don’t — unless it’s just the opening volley in a much larger antitrust action against the No. 1 online retailer.

The lawsuit alleges that Amazon.com Inc. tricked consumers into signing up for Prime and then made it hard for them to cancel. The big problem with this charge is that there’s ample evidence consumers like the benefits they get from Prime, including free and fast shipping, streaming movies and TV shows on Prime Video, and other perks.

For example, a survey by Consumer Intelligence Research Partners found 94% of consumers who have subscribed to Prime for a year renew and that the two-year renewal rate was 98%.

Plus, it’s not hard to cancel Prime, at least not now. I tried today and it would have taken five clicks if I completed the process. The Wall Street Journal article does note, however, that Amazon made it easier for some subscribers to cancel in April, knowing the FTC lawsuit was coming.

Amazon, for its part, called the FTC action “false on the facts and the law” and complained that Amazon wasn’t given the usual opportunity to respond to the charges before the FTC filed the lawsuit.

The real antitrust case against Amazon

There is a real antitrust argument to make against Amazon, but it would be a tough case to win in today’s legal environment.

That case would argue that Amazon is engaged in predatory pricing by offering free and fast shipping at below cost, thus driving competitors out of business.

As evidence, trustbusters could point out that Amazon by its own accounts appears to be losing money in its retail operation. Contributing to the losses are the tens of billions of dollars Amazon has spent building out an extensive fulfillment network so that it can deliver online orders quickly to shoppers, and for free to Prime members and anyone who spends more than $25.

Amazon is only profitable, this argument goes, because of its hugely successful Amazon Web Services cloud computing unit. In 2022, Amazon reported AWS operating income of $22.8 billion and total operating income of only $12.2 billion. Part of that low total operating income stems from the e-retailer’s write-down of $12.7 billion in its shares of electric vehicle maker Rivian.

But, even excluding that Rivian write-off, AWS would have represented more than 90% of operating income. Add in the $37.7 billion Amazon reported in advertising revenue in 2022, most of which goes to the bottom line, and it’s easy to argue that the rest of Amazon’s operation —notably its retail activities  — lost money.

This is significant because Amazon’s free and fast shipping for Prime members puts pressure on rivals to match those offers. That no doubt contributes to the decline in the profitability of U.S. retailers over the last decade that has been documented by accounting and consulting firm Deloitte.

As Deloitte retail, wholesale and distribution leader Lupine Skelley put it in a recent interview with Digital Commerce 360, “Free shipping can’t last. It’s getting to a breaking point.”

The problem for retailers competing against Amazon is that consumers love free shipping, so many online merchants feel they have to offer it. In fact, the forthcoming 2023 Top 1000 Report from Digital Commerce 360 will show that 77.2% of North America’s online leaders offered free shipping in at least some cases in 2022, up from 70.1% in 2019

The broader problem for most retailers is that they must turn a profit as retailers, while Amazon can lose money in retail and make so much money from AWS and advertising that it still generates the kind of healthy profit that makes it one of Wall Street’s darlings.

The obstacle to antitrust action against Amazon

None of this is news to FTC chairperson Lina Khan, who came to prominence in 2017 while still a law student at Yale for her article entitled “Amazon’s Antitrust Paradox.” That article argued for more aggressive action against Amazon and other technology giants that achieve dominant positions in their markets.

But in the article, Khan also explains what’s blocking such antitrust action. It is the prevailing view among federal judges, dating back to law professor and later judge Robert Bork’s 1978 book “The Antitrust Paradox” that argues antitrust litigation is only justified when a company’s actions harm consumers.

That point of view has been widely adopted by conservative judges, and it’s helped big companies fend off antitrust action. After all, Amazon, and for that matter Walmart Inc., can present plenty of evidence that they offer consumers low prices.

Those low prices — and, in Amazon’s case, free shipping offers — may drive competitors out of business. But in the Borkian view, antitrust law is not meant to protect business competitors, only consumers.

Opponents of that view argue that the market dominance of the likes of Amazon prevents the emergence of new, innovative companies that might offer even greater value to consumers. I know from my own reporting that venture capitalists frequently pose this question to aspiring online retail entrepreneurs: “If you’re successful, what’s to prevent Amazon from copying your business model?” Often, they have no answer, and don’t get the money to test out their ideas.

That brings me back to the reference I made above about this FTC lawsuit over Prime possibly being just the first in the agency’s planned actions against Amazon. The Wall Street Journal reported in February that the FTC was considering possible litigation against Amazon on a number of fronts, with the alleged Prime membership trickery being just one possible cause of action.

Perhaps, there will be a much more far-reaching FTC action in the future. Amazon’s rivals can dream of a successful lawsuit that would force Amazon to divest itself of AWS, which would force Amazon to actually try to make money as a retailer.

Don’t count on it. But anything short of that outcome, including whatever tweaks Amazon agrees to make in Prime membership signup and cancellation procedures, won’t undermine Amazon’s e-retail dominance or the costly pressure on rivals to offer margin-eroding free shipping offers.

The post Will FTC back up a wet noodle lashing of Amazon with a big club? appeared first on Digital Commerce 360.

Temu, owned by PDD Holdings Inc., which operates Chinese ecommerce site Pinduoduo, launched in the U.S. in September. It quickly became the most downloaded app on Apple Inc.’s U.S. App Store. Its marketplace carries clothes and home decor at rock-bottom prices. The company is aiming to take on global retail behemoths like Amazon.com Inc. and Ebay Inc.

But Tel Aviv-based Ultra Information Solutions says it found at least 10 items made or sold by businesses located in Xinjiang that are also available in the U.S. on Temu, where their company links and origins are obscured. Ultra used its digital vetting platform Publican to compare products sold on Temu, such as sandals, sunglasses and other items, with those sold by the parent company inside China.

“It’s a systematic violation of U.S. trade policies,” said Ultra co-founder Ram Ben Tzion.

Representatives for Temu and PDD didn’t reply to multiple requests for comment.

Import bans in the US

Citing what the U.S. State Department has called “horrific abuses” against the Uyghur people of Xinjiang, who are predominantly Muslim, federal officials banned the importation of cotton from the region in 2021. It expanded the law and its enforcement to all Xinjiang products last year under the Uyghur Forced Labor Prevention Act. Statements from former detainees and reports from an array of researchers and advocacy groups have alleged that the Chinese government put more than 1 million people in detention camps in the region and that laborers in fields and factories were forced or coerced. The Chinese government has said the camps are for re-education purposes.

In the U.S., Temu has grown in popularity with two advertisements aired during the Super Bowl in mid-February. Its 30-second spot — which cost millions to produce and air — features a trendy shopper twirling and dancing in an array of outfits with the tag line “Shop Like a Billionaire.” The ad has since been viewed on YouTube 341 million times. Temu is chasing Shein, the Chinese fast-fashion behemoth with estimated U.S. sales of $8 billion last year. If it succeeds, it would join only a handful of Chinese internet services to have become popular in the U.S. market, including Alibaba Group Holding Ltd.’s AliExpress and ByteDance Ltd.’s TikTok.

Alibaba owns Taobao, No. 1 in the Digital Commerce 360 database of Global Online Marketplaces. It also owns Tmall (No. 2). Amazon ranks No. 3, and Ebay is No. 6.

Temu’s growth

PDD became successful in China as a dollar-store version of Chinese online retailers Alibaba and JD.com Inc., selling lower-priced goods. Its domestic app Pinduoduo is a marketplace that recruits suppliers to offer various products. Temu operates a similar model but goes a step further and handles delivery, promotion and after-sales services for merchants on its platform, as its Chinese parent seeks to expand in the U.S. and European markets quickly.

It opened an office in Boston to serve the U.S. and Canada, where it launched in February. Temu also operates in Australia and New Zealand. According to data analytics firm YipitData, U.S. Temu sales grew 6% on a weekly basis during the last week in May, the most recent data available, with an average of $34 an order.

Product origins

The vetting platform Publican couldn’t find conclusive evidence that any of the products sold on Temu and PDD were made with forced labor, only that the companies that produced them are located in Xinjiang.

“However, their proximity means there is a probable risk, not just a theoretical risk,” Ben Tzion said.

Publican’s supply-chain vetting has been contracted to more than 35 government agencies, including tax, customs and law enforcement in South America, Africa and elsewhere with a goal of interdicting fraudulent and illegal shipments, he said.

In addition to sunglasses and sandals, Publican also found children’s clay, a ring, wall paneling, rice storage containers, a car-window ice scraper, colanders and a bathmat sold on the PDD and Temu sites. The PDD-available items were identified as coming from companies in Xinjiang.

Ultra said it wasn’t paid for its research and it wasn’t commissioned by any third party.

“It was our initiative to illustrate how our technology can be a critical component in the enforcement of UFLPA as well as other trade-related compliance challenges,” Ben Tzion said.

Compliance

Shipments from China sold directly to consumers can bypass the U.S. ban on Xinjiang products because they fall below an $800 value threshold that triggers reporting requirements to U.S. Customs and Border Protection. Bloomberg testing on Shein garments shipped to the US on two occasions last year found that their cotton came from Xinjiang.

US lawmaker response

An April report from the Congressional U.S.-China Economic and Security Review Commission said Shein and Temu pose “risks and challenges to U.S. regulations, laws, and principles of market access” resulting from such direct-to-consumer sales. Republican Representative Mike Gallagher, chair of the House Select Committee on the Chinese Communist Party, and the panel’s top Democrat, Raja Krishnamoorthi, sent letters to Temu, Shein and two other companies in May seeking to determine whether they are importing products derived from forced labor in China.

The U.S. Department of Homeland Security named two new Chinese companies it will be restrict from sending goods to the U.S. under the UFLPA. The additions bring the total to 22 Chinese firms. Customs and Border Protection began enforcing the UFLPA in June 2022. In its first year, the CBP has reviewed more than 4,000 shipments valued at over $1.3 billion, according to the DHS.

Responding to the revised entity list, Republican Representative Chris Smith and Democratic Senator Jeff Merkley said the list is only one part of enforcement. They are co-chairs of the Congressional Executive Commission on China. Forced labor goods with ties to Xinjiang, “such as car parts, solar panels, rayon, and garments from fashion companies such as Temu and Shein continue to enter the US market.”

The representatives said they will work “toward the goal of stopping imports of forced labor-made goods. American consumers should not be unwittingly subsidizing the PRC’s genocide” in Xinjiang.

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Legal requirements vary

The lawsuits UsableNet tracked involve the 1990 Americans With Disabilities Act (ADA). Different courts adopted various interpretations of the law, but the general consensus under the ADA and many state and local laws is that ecommerce websites must be accessible to users with disabilities, Tim Springer, CEO of digital accessibility solutions company Level Access, said in an interview. 

Blind customers who use screen readers to access the web bring the majority of these lawsuits, UsableNet says, but they also include people with auditory disabilities who file lawsuits over videos that lack captions.

Lawsuits are up, but things are slowing down

There were more ADA ecommerce lawsuits in 2022 than in any of the four previous years, UsableNet found. Plaintiffs filed about 100 lawsuits each week, totaling 4,061, more than 70 cases per week. That number roughly kept pace with 2021, which recorded just slightly fewer with 4,011 cases. Filings seem to have leveled off after larger jumps in 2019, 2020, and 2021.

Data courtesy of UsableNet

More than 600 lawsuits in 2022, about 19% of total filings, named companies that were previously named in other ADA-related lawsuits. Sometimes the same plaintiff files a lawsuit about an ecommerce website and a second about the accompanying app, sometimes the suits are from another plaintiff, and sometimes they are against sister brands under the same parent company.

Ecommerce companies are by far the biggest risk for these lawsuits, amounting to 77% of cases, UsableNet found. The food service industry was in a distant second place, at 8% of cases.

Lawsuits target big and small retailers

The biggest ecommerce players face the most lawsuits, but retailers of all sizes are at risk, according to UsableNet. Lawsuits against companies with revenue of less than $50 million per year are on the rise, though they still make up less than one-third of total filings.

Many of the largest ecommerce retailers have already been the subjects of lawsuits and now have accessibility programs. That means plaintiffs have moved on to smaller ecommerce firms that don’t have those policies in place yet, UsableNet reported. The pandemic also pushed retailers to conduct more business online, so there are more companies to file potential lawsuits against.

Big companies are still the most at risk

The biggest ecommerce retailers remain the most likely recipients of lawsuits, according to UsableNet’s data. 20% of Digital Commerce 360’s Top 500 online retailers in 2022 were named in ADA lawsuits in 2022, and 78% of them, 391, were named in ADA digital lawsuits since 2018. Gap (No. 19), Zola (No. 326), Barnes and Noble (No. 109), and Goop (No. 156) were each named in ADA lawsuits in 2022.

Larger companies have an outsized risk of lawsuits because they tend to be more complex, with frequently changing code, and often have a physical location that makes more accessibility requirements apply, per UsableNet.

A holistic approach is best

Making an ecommerce website truly accessible is “more of an art than a science,” Level Access’ Springer told Digital Commerce 360. There’s a misconception among retailers that there’s an exact set of technical requirements that companies can meet to become totally accessible, Springer said, but that’s often not the case. 

This plays out in the data, too. Some retailers use accessibility widgets to outsource making websites accessible, but that’s no guarantee that it works, or that they are safe from lawsuits. 575 of web accessibility lawsuits in 2022 named businesses using widgets, a 36% increase over 2021.

Springer says the solution must be both technical and human. Businesses will often “only get the bare minimum by focusing on compliance with the law,” he said. Instead, retailers should make a genuine effort to make a website as accessible as possible, with a goal of usability rather than simply complying with the law. 

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