It is by far their biggest problem. Personally, I find 'ships and sold by amazon' to be a brand I trust; outside that? yeah, it's like buying from a shady ebay seller.
Personally, I think amazon needs to distance themselves from those third party sellers; if it's hard to tell the difference between amazon and joe rando, the amazon brand is going to become worth significantly less, and they will not be able to charge the premium that I'm sure their investors are expecting.
I flat out won't buy from Amazon unless I'm already in the market to get something that I know is cheap and may or may not work- which turns out is not very often. Because of this I very much doubt the reality of the retail apocalypse in the long term.