What is Retail Arbitrage?
From startups to household brands, retail arbitrage impacts most retail businesses at some stage in their development.
Retail arbitrage is when a reseller buys a product (or products in bulk) and resells them online for a profit. Some resellers make their entire living off of this strategy by leveraging the price difference between two markets.
“I would say almost 80 percent of my clients have encountered or are currently dealing with some form of retail arbitrage,” Sprigley Allan, Head of Amazon Program Development at CPC Strategy said.
Historically, resellers buy products from local stores and resell them online but today many resellers can purchase and resell products without leaving Amazon.
“Some resellers don’t ever physically come into contact with these products – they buy products off Amazon and resell them through FBA (Fulfillment by Amazon),” Allan said.
According to Nick Sandberg, Marketplace Channel Analyst at CPC Strategy the top 3 avenues resellers obtain discount products from are:
- The Brand (as a wholesale client)
- Liquidation Events
- The Brand’s Supplier
“Amazon is predominantly a concern when brands do not have tight control of their supply lines and distribution lines”, Sandberg said.
As the largest online marketplace, Amazon provides a favorable environment for resellers, but for brands – retail arbitrage can be devastating, diminishing the credibility of a brand not to mention the undercuts in pricing, which can lead to revenue loss.
Unfortunately, Amazon keeps a percentage of third party sales within their marketplace and is hesitant to enforce seller pricing agreements and risk losing revenue. In some circumstances, Amazon will step in to assist brands if they meet specific criteria (example: selling at a high volume) but for most vendors this is not the case.
Retail Arbitrage Can Negatively Impact:
Brand Credibility – Without brand control, a reseller could deliver a product late, damaged, in poor condition or expired. This opens up the door to negative product reviews, which will ultimately devalue a brand and ruin the customer experience.
Buy Box – Pricing items against a brand increases Buy Box competition. With more resellers competing against brands, the opportunity to win the Buy Box becomes more difficult.
“At the end of the day the only way brands can control retail arbitrage is not going to be through policing effort but through better comprehensive strategy and how they price items at the wholesale level. They need to be aware that retail arbitrage is likely to happen if they do business with companies like Walmart or Target,” Allan said.
4 Ways Brands Can Prevent Retail Arbitration:
Best practices brands can leverage against retail arbitrage:
1) More Control on Pricing, Wholesalers & Distributors – According to Allan, if a brand sells their product for more than 30 percent off a manufacturer’s suggested retail price (MSRP) they are susceptible to retail arbitrage.
A good way to prevent retail arbitrage is to work backwards and look at brand – supplier relationships. Without these relationships, brands ultimately have no business, so it’s important to focus on communication. Many sellers look to Amazon for help, when they really should look further up the chain. Brands shouldn’t rely on Amazon for help, prevention starts before the Marketplace.
2) Implement Preventative Resale Clauses– Having the appropriate documentation around pricing is a key element if any brand hopes to take down unauthorized resellers. Unfortunately, without this type of documentation – brands will find it extremely difficult to get resellers removed from the marketplace.
3) Promotional Code Limitations – Brands should include promo code limitations to prevent bulk purchases when offering discounts. Resellers target these discounts to obtain bulk orders for reselling purposes.
For example, an Amazon Lightning Deal is a promotion with a limited number of discount offers on an item for a short period of time.
These premium deals can be found throughout Amazon.com, including the Gold Box page and are available one per customer, until either the promotional period (typically 4 hour blocks) for the deal expires or all the available promotional discounts are claimed.
Products that are featured in Amazon’s Lightning Deal spaces typically enjoy a bump in sales throughout the duration of the deal.
According to CPC Strategy’s Amazon Team, although the seller sacrifices profit in the form of the discount, it is a great marketing tool for raising awareness around a product and/or brand
Brands don’t want their Buy Box share to suffer as a result of a poorly executed promotion, so be sure to implement limited number of offers per customer.
4) Frustration Free Packaging (FFP) – While there is no perfect solution for brand protection, marketers have discovered a unique opportunity with Amazon’s Frustration Free Packaging.
Amazon works with manufacturers to box products in Certified Frustration-Free Packaging (FFP), which reduces the overall amount of packing materials used.
Additionally, FFP can also improve a brand’s Buy Box percentage and help protect them against unauthorized resellers. FFP ASINs are restricted and only manufacturers or authorized sellers are allowed to sell FFP products on Amazon.
If you are an authorized seller of an FFP product, you can request authorization to sell the FFP product on Amazon. If you are not the brand/manufacturer, you need authorization from the brand/manufacturer to list against the FFP ASIN.
Essentially, if a brand’s existing packaging qualifies for FFP, Amazon will not allow any other unauthorized sellers to bid against that listing (without their approval under FFP). As a result, FFP can provide brands with a significant advantage over the Buy Box and help protect them against unauthorized sellers.
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