Ecommerce

What is Retail Arbitrage? Pros & Cons for Amazon Stores

By Tinuiti Team

Apr 08 2020

From startups to household brands, retail arbitrage impacts most retail businesses at some stage in their development. Here’s what you need to know.

What is retail arbitrage?

Retail arbitrage is the practice of buying an item from one market and reselling it on another market at a higher price. The item is usually bought from the original seller at a discount, usually in bulk, and resold for a profit elsewhere.

For instance, someone might buy a few discounted books at Target for $5 and put it on Amazon for resale at $12. The reseller would still make a profit, even with shipping.

Is retail arbitrage Amazon-friendly?

Amazon currently does not have any policies that technically forbid retail arbitrage, but certain categories are “gated.” This means Amazon requires resellers to provide invoices from the manufacturer or from approved distributors. Products that aren’t backed by manufacturer’s invoices will be approved for posting on Amazon.

Gated product categories include:

Automotive & Powersports
Collectible Coins
Entertainment Collectibles
Fine Art
Gift Cards
Jewelry
Music & DVD
Major Appliances
Sports Collectibles
Streaming Media Players
Video, DVD, & Blu-ray
Watches

Some categories that are not normally gated become so on a seasonal basis, such as Toys & Games.

The top 3 avenues resellers obtain discount products from are:

The Brand (as a wholesale client)
Liquidation Events
The Brand’s Supplier

What are the advantages of retail arbitrage?

If done right, retail arbitrage can provide several advantages for a reseller.

Low barrier to entry

It’s relatively simple for someone to visit a Walmart or Target, buy a few clearance items, and resell them on Amazon at the original market value. It’s easy and fast, as long as you have an Amazon seller account and take shipping fees into consideration.

No marketing investment

In retail arbitrage, the reseller is leveraging the brand power of the item’s manufacturer to attract buyers. Products that already have a strong brand presence and are in demand are thus easier to sell.

Quick profits

Resellers that pick the right product are able to move inventory fairly quickly. This leads to quick profits over a short period of time, even after taking shipping into account. Amazon FBA seems to be the fulfillment option of choice for many.

What are the disadvantages of retail arbitrage?

From the brand perspective (as well as the seller committing retail arbitration), we’ve seen several disadvantages including:

Negative impact on brands

“Amazon is predominantly a concern when brands do not have tight control of their supply lines and distribution lines.” – Nick Sandberg, Strategist, Marketplace Search at Tinuiti

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.

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.

Negative impact on arbitragers include:

1. Supply chain problems

Arbitragers are entirely reliant on other retailers for their supply chain. If they are not able to find a source of products or the retailer does not want to sell to them, then they have no inventory to sell–and therefore no income.

Resellers also have no control over the quality of their products. Resellers have limited choices if the products in their inventory are damaged or defective and sold to a customer. Even if the customer complains, many manufacturers and retailers won’t honor a return or replacement if the product was not purchased from an approved distributor.

2. Inconsistent inventory

Because resellers are only hunting for discounted products, they tend not to have a consistent inventory. They might stumble on a product that sells very well, but their profits will be limited by how much stock they are able to secure from retailers. Once they run out, they cannot order more from the manufacturer.

This also applies to the variety of products being sold. Arbitrage inventory varies wildly, from batteries to baby wipes to notebooks, without any rhyme or reason beyond whatever Walmart or Target has on sale.

3. No control over profit margins

Arbitrage resellers have no control over their margins. Their costs are defined by how much a retailer discounts an item, and their revenue is determined by the Amazon selling price. The profit margin is already smaller than that of the actual retailer–and that doesn’t take Amazon’s 15% commission and shipping costs into account.

4. Retail arbitrage is time-consuming

It takes time to buy up enough inventory to make decent revenue numbers. A reseller will have to travel to multiple stores in order to buy up stock, apply the appropriate labels to the product, and then travel to a nearby Amazon fulfillment center to drop the items off (if they are enrolled in Amazon FBA). That’s a lot of time–and fuel–for a single inventory SKU.

5. No customer loyalty

An arbitrage reseller will not be able to build a reliable and loyal customer base, because the reseller is not focusing on a single category or product. Instead, the reseller is prioritizing whatever product they can find that’s on sale–items that can just as easily be found elsewhere.

Is retail arbitrage on Amazon worth it?

Although retail arbitrage can offer some quick profits, resellers looking for long-term growth should explore other options like white labeling instead. The many businesses that shop around for liquidation and clearance sales and turn around and sell items for higher prices on Amazon now have to consider what happens if the e-retailer only allows listings that come from authorized resellers.

For now, retail arbitrage is still permitted on the Marketplace but as Amazon continues to invest in programs such as Transparency by Amazon, brand gating, and Brand Registry, resellers should be mindful of long term goals.