Retail Arbitrage: An Ecommerce Strategy
Retail arbitrage is the practice of buying products from retailers and then reselling them on Amazon and other online marketplaces. Obviously, to make a profit, retail arbitrage resells these products at a higher price point. Equally obviously, no one will buy a product online that is cheaper to buy directly from the retailer. The trick is finding clearance and promotional products sold at a low price that you can mark up and sell somewhere around the original retail price.
That in essence is the basic concept of retail arbitrage. Execution of a retail arbitrage strategy is a little more involved. In this post we look at:
- How retail arbitrage works
- The differences between retail arbitrage, dropshipping and wholesale
- Retail arbitrage pros and cons
- Amazon’s retail arbitrage restrictions
- Amazon Seller app
- Retail arbitrage strategies
- List products on Amazon
- Retail arbitrage and Amazon FBA
How Retail Arbitrage Works
Find products that retailers are selling at low rates. Then resell the products at a higher price, usually at or near the original retail price.
For example, let’s say Wal-Mart has a sale on brand-name sports watches that normally retail for $25, but you can buy them for $15. You purchase 20 watches and sell them on Amazon for $20. If you are an Amazon FBA seller, you are charged a fee of something around a dollar for each unit. That’s a $4 profit per unit (before calculating shipping costs), or $80 if you sell the entire lot.
You could try selling the watches for the original retail price, or even a bit higher, to increase your profit margin. The downside of that approach is your inventory might not move as quickly as you are not differentiating yourself from other sellers at the same price point.
You could even opt to sell a product higher than the original retail price. This is a common practice during holiday shopping seasons, particularly if product availability is scarce when consumers are more willing to pay more to ensure they have the item in time for Christmas or other special occasions.
People are also willing to pay for convenience. That’s the underlying advantage of eCommerce over retail brick and mortar. You can sell a product online for about the same price as in the store because many people don’t want to drive to the store to get it. Of course, this is only a competitive advantage if the retail store lacks an online outlet.
The Differences Between Retail Arbitrage, Dropshipping, and Wholesale
Though similar in some ways, retail arbitrage is different from dropshipping and wholesale (which is why they are separate terms).
Dropshipping is partnering with a supplier. When you sell a product, the supplier packs and ships it. You do not maintain inventory. You make money by earning a commission for orders transferred to your dropshipping supplier. Dropshipping has lower startup costs and lower risk but also has lower returns. In addition, while you have no control over product quality and shipping efficiency, you are responsible to appease customers who do not receive a quality product in a timely manner.
Wholesale is the practice of buying products in bulk for a discount directly from the manufacturer or middleman suppliers. You in turn sell both to retailers as well as end-consumers; your profit is the difference between the discounted price and the price point of individual units sold to the retailer or end-consumer. Buying in bulk requires upfront cash outlays, warehouse space and expense to store products, and the risk of getting stuck with slow-moving inventory.
Retail Arbitrage Pros and Cons
The pros of retail arbitrage include:
- Easy to get started, no upfront investment is required for marketing or branding since you are selling known brands
- Because you aren’t dealing with manufacturers or suppliers, it eliminates the need to develop product specs or engage in contract negotiations.
- No minimum order quantities.
- A quick and easy way to get familiar with Amazon Marketplace if your eventual goal is to run a business with products you source and create for your own branded store.
- Keep your day job; the ideal way to make extra money on the side, particularly if you outsource fulfillment to Amazon FBA.
- High profitability potential.
The cons of retail arbitrage include:
- You must adhere to all Amazon policies that require you to provide manufacturer invoices for the following “gated” categories:
- Automotive & Power Sports
- Collectible Coins
- Entertainment Collectibles
- Fine Art
- Gift Cards
- Major Appliances
- Seasonal and Holiday (notably Toys & Games)
- Sports Collectibles
- Streaming Media Players
- Video, DVD & Blu-ray
- There are certain brands you can’t resell on Amazon (see below).
- Profit margins vary. Some items are going to provide high margins, others not as much. Consequently, you need to invest time in researching and obtaining a wide range of products with varying levels of availability.
- You need to ensure stock is in hand before trying to sell it. Unlike dropshipping or wholesaling, you can’t be sure of product availability; you want to avoid going back to customers to say, sorry, we don’t actually have the product. This leads to bad reviews that could affect your Amazon selling account.
- When stock is gone, the stock is gone. Therefore it is not possible to develop customer loyalty and repeat purchases.
- When a store does a clearance sale, there is always the risk that the product is damaged or somehow defective, even if it is only a minor cosmetic defect. You can take the risk that people are willing to buy a less-than-perfect product, but you need to clearly specify the issue and you also can’t expect to get full retail for it.
- You are limited only to what retailers don’t want or need to dispose of. There’s almost no ability to take advantage of hot trends or certain customer bases.
- In most cases, you are buying products at higher wholesale prices. If you can’t move inventory, you won’t be price competitive with retailers who can afford lower price points to at least a break-even at a loss to clear inventory. Either you are going to lose money on sales or get stuck with a product you can’t sell.
Amazon Brand Restrictions
You cannot sell brands that are part of Amazon’s Brand Registry program. The purpose of the Brand Registry program is to protect brands from trademark infringement and bad listings, as well as provide exclusive tools to registered sellers. If you are not an authorized seller in the Brand Registry, you cannot resell any listed brands.
For example, Nike is in the Brand Registry; you can’t buy Nike shorts on a clearance sale and list them on Amazon. You have to invest time to ensure you do not violate Amazon policies; failure to do so can result in account suspension or removal.
Fortunately, the Amazon Seller app is an easy way to determine if a brand is restricted.
Amazon Seller app
Use the Amazon Seller app to check if a brand is registered; scan the product and a green check appears if it is eligible. Other features of the app include:
- The product’s selling price on Amazon
- Fees for selling the product on Amazon
- The Amazon sales rank
There are other scanning apps, but from retail arbitrage on Amazon, this is the best pick for ease of use and because it is free.
Retail Arbitrage Strategies
Best tips to retain arbitrage include:
- Due diligence; research products to determine likely customer demand; e.g., read customer reviews and pay particular attention if reviews are recent (could be a red flag customer aren’t interested if there aren’t frequent and recent reviews).
- Use the Amazon seller app to determine the sales ranking of potential products you know you can obtain on clearance or at a significant discount.
- Stick with products that rank below 250,000 to minimize potential competition.
- As a general rule, the best product selections have at least a $3 potential profit margin and a 50% ROI, figuring after sales taxes, Amazon fees, and shipping costs.
- Avoid purchasing large quantities so as not to get stuck with inventory.
- Don’t try to compete with Amazon. In most cases, they beat you on price and brand recognition.
- Visit multiple retail locations during chain store sales to get the best prices and sufficient inventory.
- Sign up for retailer email newsletters that offer advance notice of coupons and exclusive deals that aren’t available to regular customers.
List Products on Amazon
All you need is an Amazon Seller account. There isn’t any special retail arbitrage category. However, you have to decide whether you want a professional account ($39.99 monthly fee) or an individual account ($0.99 per item sold). If you’re just starting out, it’s best to opt for an individual account and see how things go from there.
Retail Arbitrage and Amazon FBA
To keep things simple, and particularly if you are just starting out, it’s best to sign up for Amazon FBA. This way you don’t have to worry about warehousing inventory and fulfilling orders. There is an Amazon FBA fee for them to handle your logistics, it works out less expensive and less time-consuming than for you to manage on your own, particularly since you aren’t likely to have high inventory levels.
Watch for FBA Reimbursement
One thing that can eat into your retail arbitrage profits as an FBA seller is when Amazon makes mistakes managing inventory, shipping orders, and/or processing returns. Amazon does this on a global basis for literally billions of transactions, so it’s not surprising mistakes are made.
What is a surprise is that Amazon doesn’t always automatically reimburse you for these mistakes, which can add up to anywhere between 1% to 3% of your annual sales revenues.
As a retail arbitrage side hustle, do you have the time or inclination to track the highly labor-intensive and frustrating bureaucratic process of Amazon reimbursement? Probably not.
GETIDA makes the whole process of obtaining your FBA reimbursement simple, easy and cost-effective. GETIDA software reviews the previous 18 months of transactions to flag instances that qualify for FBA reimbursement. If there are sufficient grounds to file claims, and only with your approval, a team of former Amazon employees will work on getting your reimbursement.
There is no charge for this. The only charge is a percentage of approved claims. And the first $400 in FBA reimbursement is free.
Sign up with GETIDA to get your FBA reimbursements and make your retail arbitrage business as profitable as possible.