Zulily sues Amazon

Zulily, the Seattle-based online retailer that recently said it is going out of business, has sued its one-time rival Amazon — placing the blame for its downfall on Amazon’s policies that pushed merchants away from competitors. 

In a lawsuit filed Monday in Seattle, Zulily accused the e-commerce giant of using the same anticompetitive business practices at the center of the Federal Trade Commission’s antitrust lawsuit brought against Amazon earlier this year.

In that case, the FTC accuses Amazon of preventing rival retailers from gaining a foothold in the industry through several tactics, including punishing third-party merchants who sold their goods for lower prices on platforms other than on Amazon.com. Amazon disputes those allegations, maintaining that it uses the same tools to highlight low prices on its website as other retailers. 

Zulily, which initially focused on children’s apparel, evolved into an online platform marketing vendors’ products through thousands of flash sales each year. The company announced Friday that it was laying off hundreds of employees and shuttering its Seattle headquarters.  

In its complaint, Zulily said Amazon punished sellers who used both platforms, leading those merchants to raise their prices on Zulily’s website, take some products off Zulily or stop selling on Zulily altogether. In some cases, the sellers never contacted Zulily, the company alleged. 

In the span of one year, Zulily lost half of its sellers who sold on both Amazon and Zulily, according to the complaint.

Amazon disputed Zulily’s allegations Tuesday, having addressed similar claims Friday in a motion to dismiss the FTC lawsuit. 

In court papers, Amazon argued the agency has relied on “vague allegations” and is targeting business practices that benefit customers. It “defies common sense” to think Amazon has “marginalized” other heavyweight competitors — like Walmart and Target on the retail side, and UPS and FedEx in the shipping business — Amazon wrote in its motion.

“Amazon competes every minute of every day with thousands of online and brick-and-mortar retailers,” Amazon attorneys told the court. “To meet that competition, Amazon has relentlessly innovated, delivering previously unimagined benefits for consumers and pushing competitors to do likewise, all to make every penny of a consumer’s purchase count for more.”

But, Zulily alleged, just a few months after Amazon began focusing on the burgeoning startup four years ago, Zulily had to change its business strategy. It abandoned its “Best Price Promise” and a price comparison tool that it hoped would offer consumers discounts. That led to decreased revenue and consumer traffic to the site.

Once seen as a success story — one of the rare startups that crossed the billion dollar valuation threshold — Zulily said Saturday it was going out of business. It was “one of Amazon’s victims,” attorneys for the company wrote in the lawsuit, and “the plot against [it] was part of Amazon’s overall scheme.”

Price wars 

Starting in 2019, Amazon began to clock Zulily as a potential competitor, according to the complaint. The e-commerce giant used an algorithm to constantly scrape Zulily’s website, searching for lower prices from the same sellers featured on Amazon’s digital store.

If it found a lower price, Zulily alleged, Amazon would punish those sellers on its own platform by putting their listing lower on the results page or hiding the crucial “Buy Box” that lets shoppers immediately make a purchase. The “Buy Box” accounts for up to 98% of sales on Amazon, according to lawsuits from the FTC and Zulily. Losing access can be a significant hit for independent sellers. 

Zulily said sellers asked to raise prices on its platform or remove specific products in order to comply with Amazon’s policies. Some stopped selling on Zulily altogether. In one case, Zulily said it worked with a seller to hide its lower price from Amazon’s algorithm — but the e-commerce giant later tracked it down. 

In its complaint, Zulily cited five sellers who asked for changes to their product listing in order to appease Amazon. One seller told Zulily it could not afford to lose the Buy Box on Amazon anymore. Another reported that Amazon “told us indirectly that [you are] the issue.” 

“As much as I dislike Amazon, and like [you], the fact is we sell more on Amazon,” that seller wrote.

Because Zulily also wanted to boast the lowest prices on the internet, the two companies found themselves locked in “continuous price spirals,” according to the complaint. Once Amazon’s algorithm picked up on a lower price on Zulily, it would match that price on its own platform. Zulily would then pick up on the change and drop its price. 

Zulily said those “real-time price wars” would cause both companies to lower their prices multiple times per day.

Eventually, the spirals caused Zulily to “drop products from its online store,” according to the complaint. “Zulily experienced rapid growth and growing market share for several years before it landed on Amazon’s radar, at which point Amazon’s anticompetitive conduct caused a sharp reduction in Zulily’s sales.”

Two spins on “customer trust”

Zulily and the FTC both accuse Amazon of raising prices across the digital retail industry by asking sellers to agree to contracts that prevented them from offering lower prices off Amazon.

The company has changed that contract language in recent years but, the complaint alleged, still holds sellers to the same standards.

Amazon did not tell sellers when it dropped a specific price parity clause in its contract in 2019, according to the complaint. 

Now, sellers must still agree to a “Fair Pricing Policy” that allows Amazon to remove the Buy Box, the ship option or the merchant’s selling privileges altogether if Amazon sees a price on a different platform that “harms customer trust,” according to the complaint. 

A price below Amazon’s could harm that trust, Zulily alleged.

Maintaining customer trust has come up several times in Amazon’s responses to the FTC’s antitrust allegations. Reserving the Buy Box only for the lowest price offering is a way to ensure Amazon doesn’t lose customer trust, the company wrote in its motion to dismiss the FTC’s lawsuit. 

“Just like any store owner who wouldn’t want to promote a bad deal to their customers, we don’t highlight or promote offers that are not competitively priced,” David Zapolsky, Amazon’s senior vice president for public policy, wrote in a blog post.

On Tuesday, Amazon spokesperson Tim Doyle said the company is “proud of the substantial investments we make to provide entrepreneurs with tools and resources to establish and build their brands, connect with more customers, and create jobs in their communities.”

Meanwhile, Amazon introduced yet another new policy to hold sellers to price parity in 2022, Zulily alleged. The Account Health Rating Policy would show if a merchant was at risk of deactivation due to noncompliance, including offering a lower price off Amazon.

For wholesale retailers, Amazon had a different punishing tactic, the complaint alleged. In some cases, it required sellers to pay Amazon if the online superstore lost revenue by lowering the price of the seller’s product to match lower prices found on competing websites. 

Those “true-up” payments did not result in retailers lowering their prices across the board, Zulily’s complaint alleged, but instead created a disincentive to offer lower prices anywhere. 

“Amazon is the world’s largest online marketplace,” attorneys for Zulily wrote in Monday’s lawsuit. “But it has achieved that distinction, and maintains it, through anticompetitive conduct that destroys its competitors and raises prices for consumers everywhere.” 

The “real prize”

Amid its battle with Amazon, Zulily is also facing its own legal trouble, including allegations from vendors that the company has not paid invoices or responded to sellers looking for more information.

Launched in 2010 by two former executives with online jewelry retailer Blue Nile, Zulily dazzled the tech world with a multibillion-dollar IPO in 2013. The next year, it had about $1 billion in annual sales and a market valuation around $7 billion. 

But it couldn’t sustain its early growth and went through rounds of job cuts, moved its headquarters and changed ownership. In May, Los Angeles-based private equity firm Regent bought Zulily for an undisclosed sum. Last week, it laid off more than 800 employees, including 292 in the Seattle area.

David Tawil, a lawyer who has followed retail distress cases, said Monday’s lawsuit puts Zulily’s sale and closure in a new light. 

Regent’s decision to shut the company down after just seven months, and before the holiday season that many retailers rely on for a bump in sales, doesn’t show a “good faith effort” to turn the business around, Tawil said. 

“At the end of the day, the real prize is the litigation,” he said. 

There won’t be a resolution any time soon in either lawsuit, Tawil continued, but the legal actions do raise more questions. 

“If Amazon did do this to Zulily, they certainly didn’t execute this playbook with respect to one business,” he said. “If that strategy worked, they’d use that playbook over and over again.” 

This article was originally published by a www.seattletimes.com . Read the Original article here. .