What is Retail Arbitrage? A Simple Definition
Retail arbitrage is an ecommerce business model. You purchase products from retail stores, then list them for sale on Amazon and other online marketplaces at a higher price.
Is Retail Arbitrage Illegal?
The short answer is No. Though it may seem silly to some to buy a product from Walmart and sell it on Amazon or eBay, people have been doing it for years. Once you legally buy something, it’s yours to resell. There are caveats because only authorized resellers can sell branded products.
Here’s a perfect example:
The Walmart private label Equate brand is listed for sale on Amazon. You’d think the seller would be Walmart, right? Wrong.
For comparison, here’s the same product on Walmart.com. You’ll see the Amazon listings all have a slightly higher price and significantly higher shipping fees.
This is also a great example of how risky retail arbitrage can be. If you’re selling a brand-restricted product (the Walmart page says, “Only at Walmart”) without approval, Amazon can flag the listing. If you’re not authorized to sell it, Amazon could freeze your account.
How Retail Arbitrage Works
Find products to buy. Buy them. List them online to resell. Pretty simple, right? On the surface, yes. In practice? Not so much.
Ideally, you don’t want to list your products at higher than retail prices since people can usually purchase the same product directly from brick and mortar stores. Instead, you want to capitalize on finding clearance sales and discounted products at a low price that you can turn around and sell at the normal retail price.
There are some situations where you can buy a lot of products at retail prices and sell them for more. A common option is video game consoles – which tend to go out of stock at all retailers during the holiday shopping season. This is especially true the year the console launches.
You’ll find that some people are willing to pay over retail just to have the item. However, this approach doesn’t generally work in multiple niche markets. And is often frowned upon since it hurts the brands. And in some situations, you may find a brand-restricted product that you cannot sell via Amazon retail arbitrage.
Why Does Retail Arbitrage Work?
People are willing to pay for convenience. That’s why a 20-ounce soft drink out of the cooler at the checkout line is priced more than a two-liter of the same. You’re not paying for the product itself so much as the serving size and the fact that it is already cold. When you’re thirsty, it’s worth it.
Customers will order things online to avoid having to go to the store and stand in line. They want to save time. Some may not be able to drive to go pick up items. Some may not live in an area where services like Walmart delivery are available.
Products aren’t Priced the Same Everywhere
The product you’re buying for $2 in one city may cost $5 in another. Products that are slow to move in one area may be in high demand elsewhere. Some products, like Cheerwine and Big Red sodas, are only available regionally. Sellers can use this to their advantage and turn a profit.
Let’s take a closer look at what it takes to run your own retail arbitrage business. By the time you get to the end of this article, you should have a good idea about whether you want to use this approach to start your store.
What You Need for a Successful Retail Arbitrage Business
To get started with retail arbitrage on Amazon, you need products with a profit margin, a seller account, and apps to help you with pricing.
Some use this business model to list products they know they can purchase at a discount, then buy the product only after the order has come in. For instance, if Target has a sale on card and board games, you list various card and board games for sale in your online store. Then, when the customer purchases something from you, you go to all the local Target brick and mortar stores in your area and buy as many of the items as you can. You may even visit the Target website and buy more, shipping them all to yourself.
With this method, you don’t spend your own money to buy the product, so you don’t have to invest anything out of your pocket. There’s always the potential that you won’t be able to find exactly what someone ordered, though. That translates to wasted time and effort (and gas in your car) to track down the item, a canceled order, and an upset customer.
That’s why many conducting retail arbitrage catch the clearance and sale products first, then list and sell them.
Generally, if you don’t get a discount on the retail price, you should skip it. Profit margins are a big part of making money online. If you don’t make anything from the sale, then what’s the point?
Amazon Seller Account
To sell anything on Amazon, you must first sign up for an Amazon Seller account. You have two options: an individual seller account or a professional account.
For a step-by-step guide to creating your account, check out How to Sell on Amazon.
The individual seller account is ideal for a retail arbitrage seller just getting started and testing the waters. Instead of a flat monthly fee, you’ll pay $0.99 per item plus sales commissions. The commission is based on the product category.
The default option is the professional account. You’ll pay a flat rate of $39.99/month. In exchange for this monthly fee, you will not have to pay any per-item fees. You will still have to pay sales commissions to Amazon, along with any other costs specific to that category.
If you think you’ll sell more than 40 items in your first month, save yourself time and money and opt for a professional account. It will also make it possible for you to take advantage of Amazon Prime promotions, so your customers get fast fulfillment.
The Amazon Seller App
After you sign up for your account, you can start listing products right away. Before you do anything else, though, you should download the Amazon Seller App. Use this app while shopping in a local store. Use your camera to scan product barcodes of the items you see on the sales rack and any other clearance items you may find.
This app is free and gives you all the information you need to decide whether or not a product is worth selling. It will tell you:
- The item’s selling price on Amazon
- The fees for selling the item on Amazon
- The sales rank
- Whether your account has permission to sell the item
When you first start selling products, it’s best to stick with items with a best-seller ranking below 250,000 in their respective product categories.
If you find an item within that sales rank and you’re eligible to sell, move to the next step.
Buy anything you notice has at least a $3 profit and 50% return on investment (ROI) after sales tax, seller fees, and shipping costs. Be careful about purchasing large quantities of any particular item until you see how customers respond.
You, of course, are free to adjust the minimum profit threshold to anything you want, but $3 is a good starting point for even the most successful resellers.
It’s also worth mentioning the Amazon seller app isn’t the only scanning app available. Because it’s free and connected directly to the platform, it’s often the best choice for beginners.
Other Product Research
Of course, these are optional steps, but the more product research you do, the better off you’ll be.
- Keepa: Look at the item’s graph. This tool tracks prices and sales ranking for millions of Amazon items. Though it’s far from perfect, it does an excellent job at giving you a big picture look at your products.
- Read customer reviews: Look at the customer reviews overall, and pay attention to recent reviews. If a product hasn’t been reviewed in a while – it’s a sign the majority of the content is old. You need frequent and recent reviews to validate your product. Don’t let negative reviews scare you, but let that influence your decision if you notice a trend.
- Are you competing with Amazon? Some products may put you in direct competition with Amazon. Do you match their price or go lower? If you match, you’ll have to wait for Amazon’s stock to sell out before you start t get the sales.
Products from a Retail Store
You can’t run any store without an inventory of some kind. Retail arbitrage sourcing is easy if you know what product you’re looking for and the mortar retail stores you’ll buy it from. Common stores to scout product options include:
- Barnes & Noble
- Bed Bath & Beyond
- Best Buy
- Big Lots
- Hobby Lobby
- Home Depot
- Office Depot
- Rite Aid
- TJ Maxx Home Goods
- Tuesday Morning
- Any other local retail outlet store
Of course, Amazon isn’t the only online marketplace where you can list products for sale. Other options include eBay, Walmart.com, Jet, Craigslist, Facebook Marketplace, Let Go, OfferUp, etc.
And if you don’t live in an area where there are many local retail stores available, you can use online arbitrage to source your products. Instead of visiting local stores to source your products, you order the products from online retailers.
However, keep in mind that unless you have warehouse space to stock inventory, you’ll have to start small. If your tiny bedroom closet is the only storage you have available, then you obviously can’t buy a huge quantity of bulky items.
When it comes to fulfillment, you can handle it yourself – packing and shipping the items as you receive orders. Or, you can enroll (for an extra fee) in the Fulfillment By Amazon (FBA) program. This allows you to send the items you sell to the Amazon warehouse. Then, they take care of packing and shipping the items on your behalf. Plus, they’ll even handle customer service and returns. I’ll talk about this more in a bit. Or, you can dropship.
Retail Arbitrage vs Dropshipping
With retail arbitrage, you buy the products yourself and send them to your customers.
With dropshipping, you place orders on a website but don’t carry inventory. Instead of taking care of your own fulfillment, you send the orders to your seller, who then sends the orders to your customers.
To take advantage of dropshipping, you have to establish yourself with wholesalers, so you can sell products. You’re in control of the products you sell.
Retail Arbitrage Pros
With the basics of what retail arbitrage is and how to get started with it, now let’s talk pros and cons.
No Marketing Investment Required
When you start your own online store with your own products, you have to spend more money on marketing and advertising than with this approach. Since people are already searching Amazon for the types of products you’re buying and reselling, there’s not much marketing to be done.
Easy to Get Started
There’s nothing more to do than sign up for a selling account, find the products that will turn a profit, list them, and sell them. And because there are likely already other sellers with the same items, you won’t even have to put much effort into your product listings. It’s a quick way to get started with online retail.
If you’re interested in running a business with products you create later, it is a great way to familiarize yourself with the Amazon Marketplace. You can get used to the tools and functionality that are available before you launch your own store.
If you buy and sell one item, you’ll already have profit in your pocket. Compared to building a brand with private labels on another ecommerce platform, you’ll earn money faster.
Low Startup Costs
Since there’s no inventory to store, you don’t have to spend capital on the inventory itself. And you don’t have to spend money on the warehouse you’d use to store said inventory.
Low Inventory Costs
Inventory is one of the most expensive parts of starting a business if you’re dealing with your own product. You may end up with inventory you can’t use, which costs you money. Dropshipping allows you to avoid this because there’s no need to keep any kind of inventory on hand. You can change products around as needed.
Low Fulfillment Costs
Traditionally, order fulfillment requires that you have a warehouse to organize and track your inventory. Then, you have to label it, pick it, and pack it up before you can ship it to your customer. With dropshipping, a third party handles all of that for you. The only thing you have to do is send the orders.
Sell and Test Products with Less Work
Since you don’t have to invest in inventory and the physical space to store it, you can test a variety of product options without as much risk. You don’t have to worry about carrying an obsolete inventory because you only pay for the items you sell.
Retail Arbitrage Cons
Certain Amazon Product Categories are Gated
Although there are no current policies that technically forbid retail arbitrage on Amazon, resellers cannot sell certain items. This is due to a brand gating policy. Amazon requires resellers to provide manufacturer invoices or invoices from approved distributors. If your products aren’t backed by the manufacturer’s invoices will be authorized to sell on Amazon.
The gated categories include:
- Automotive & Powersports
- Collectible Coins
- Entertainment Collectibles
- Fine Art
- Gift Cards
- Music & DVD
- Major Appliances
- Sports Collectibles
- Streaming Media Players
- Video, DVD, & Blu-ray
Seasonally, you may find that other categories become gated – notably Toys & Games – around the holidays.
The Brand Registry
Amazon has a Brand Registry program. This program protects enrolled brands from bad listings and trademark infringements. It also gives them access to additional tools that sellers outside of the program don’t have.
What does this mean for you?
Brands that are part of the registry (like New Balance, Braun, Garmin, GoPro, etc.) have control over listings for their products. As a reseller, Amazon doesn’t allow third-party sales of products in the brand registry without proof that you’re an authorized retailer. That means you can’t buy a bunch of New Balance shoes on clearance and list them on Amazon.
That’s another reason why using the seller app to check your account’s eligibility to sell items is important.
No Control Over Product Supply
Since you’re buying items from other retailers, you have no control over the product supply. When a sale is over, it’s over. When the stock is gone, it’s gone. If you find that a particular item was popular with your customers, you can only ride the wave so long.
By the time the product deal comes around again, if it ever does, your customers may have moved on. In normal retailing, you are in complete control of your product supply. Lack of control here makes it hard to compete sometimes.
And if for some reason, you get lucky enough to land in the buy box, you’ll run out of product faster. Sure, it will be great for your bottom line, but you’ll have a hard time holding onto the momentum.
No Control Over Profit Margin
While you can set the margin on what you’re willing to invest in and resell, you don’t have much control. Amazon charges variable closing fees for each sale. You’ll have the commission based on the kind of item it is, plus shipping fees.
It’s all going to depend on the deals you can find. Some items you may get a $3 profit margin on. Others you may get $6. And others could be much lower. Success in retail arbitrage comes in a wide range of products, lots of research, and patience.
In traditional retail, there’s wholesale pricing that gives you control – and the fact that you own the product. With retail arbitrage, you’re already paying that retail markup – even if you’re buying the product on sale. You’re at a distinct disadvantage compared to those who purchase wholesale and add a small markup.
Finding Inventory Takes Time
Even if you do your research before you head to the store, you’ll still spend time driving from store to store and doing the shopping. Many retailers now offer buy-online pick-up-in-store options that make it easier for you to get the things you need. That, however, comes with drawbacks.
One – you have to place the order, wait for it to be picked, then arrive within a specific window of time for pickup. You may end up waiting a while to get your order, depending on how busy the store is at your chosen pick-up time.
Two – just because something says it’s available in the store doesn’t mean it will be. Sometimes stock gets messed up. If you’ve already got an order for the product and can’t find it anywhere locally, that spells trouble for your customer.
You can save time by visiting shopping centers with multiple retailers and making lists, but you may still end up having to visit numerous store locations of the same chain to find what you need.
Difficult to Impossible to Foster Customer Loyalty
Since your retail arbitrage efforts aren’t specialized and focused on a product you make that customers love, you’ll struggle to build customer loyalty. Since you’re basically trying to sell anything you can find at a low price so you can earn a profit – you’re mainly dealing with commodity items. You can find those in various other places, so there’s nothing to draw customers away from your competition.
On the off chance you manage to build some kind of following, the second you fail to find more products at lower prices, you’ll start to see customer loyalty decline. If people who’ve come to rely on your store find that your supply is inconsistent, they’ll begin to look elsewhere.
Bad Inventory is Always Possible
Getting a great price on a product isn’t always a good thing for business. When a big box store has inventory that’s not selling and cannot be returned to the supplier, that’s a reason to discount it. Those discounted items are the prime source of your inventory.
If you end up with bad inventory, you’ll suffer a larger loss with retail arbitrage. You’ve already bought it for more than a business getting it directly from a supplier. If you spend a lot of money on items that aren’t selling, you’ll have to lower your price point more to offload them. At that point, you risk only breaking even, or worse, losing money.
Switching Gears isn’t Always Practical
When customers want something new, traditional retailers have the upper hand. You’ll have to find a deal, buy it, then mark it up even more so you can make a profit. When something is popular and brand new, chances are slim to none that you’ll be able to secure the product at a price that allows for profit.
That means you’ll be unable to reach certain customer bases. You won’t always be able to follow what your customers or market wants when you’re stuck with only what the retailers have for sale.
If a product is ever discontinued, you’re out of luck because you don’t own the product or have a supplier relationship.
Relying on Other People’s Stock
Though you have the option to offer new items quickly and to stop selling products that don’t do well, you still don’t control the overall stock. If the wholesaler runs out of stock, so do you. This translates to longer lead times, which may translate to lost customers.
Little Control Over Lead and Fulfillment Times
Though you don’t carry the cost of holding on to stock, you’ll pay if customers aren’t happy. The wholesalers you work with are the ones liable for managing stock and shipping orders. If they mess up, customers complain to you – not them.
You don’t have the upfront costs of buying inventory, but you’ll still pay for it. You’ll end up paying more in per-item costs, which ends in less profit overall. If you want to make a lot of profit with dropshipping, you’ll need to sell more products than someone who has a warehouse.
Customer Service Tends to Suffer
If your supplier causes a delayed delivery, sends damaged goods, or delivers the wrong items, you’ll be the one who has to deal with it. The customer doesn’t know you’re using a third party to handle everything, so it reflects poorly on you and your brand. Because you don’t manage your inventory, you won’t be able to give a personal touch that many retailers can. You’ll have to deal with the suppliers to make things right for your customers, which may take longer. Because you won’t be able to resolve issues as quickly, customers may get more frustrated.
Retail Arbitrage Strategies
Keep an Eye on Prices and Markdown Schedules
Visit your selected stores often. Pay attention to the prices, with emphasis on how the prices change over time. Major retailers run promotions on a regular schedule based on what corporate says. If you can determine the markdown schedules, you’ll be able to get a head start on what will be on sale. This way, you can go ahead and list products and develop a more detailed strategic approach.
Sounds pretty easy, right? The truth is, these stores don’t want you to find out their markdown schedules. It’ll be up to you to research, though much of what’s out there is old. Watch how the prices change over a month or two, then make a graph. The longer you chart the data, the more accurate you can expect it to be. Remember, nothing is set in stone.
Visit Multiple Locations During Chain Store Sales
If you find a killer sale that you know you’ll have no problem turning around – don’t limit yourself to the location closest to your home. Give yourself a certain radius – whatever you’re comfortable with driving based on the time you have available. Then, visit all the stores within that radius to buy the products, so you have plenty of inventory.
Sign Up for Retailer Email Newsletters
Subscribe to email newsletters for the most popular retailers you’ll be shopping with. You’ll be able to take advantage of coupons and exclusive deals not available to regular customers. Kohl’s, in particular, sends advance notice of their sales in postal mailers. Having access to this early information makes it easier for you to plan your listings in advance.
Combine with Dropshipping
Some retail arbitrage sellers opt to combine this approach with dropshipping – ordering products from retailers and shipping them directly to the customer. This approach doesn’t work with Amazon retail arbitrage, though. Why?
According to Amazon’s terms and conditions, dropshipping is allowed. However, to comply with the rules, you have to:
- Be the seller of record of your products.
- List yourself as the seller of all of your products’ documentation, including invoices, packing slips, external packaging, and other information that’s included or provided with them.
- Remove any mention of third-party shipping on the documentation mentioned above before it is shipped to a customer.
- Take responsibility for accepting and processing customer returns
- Abide by all other terms of the Amazon Seller agreement and Amazon policies
Amazon does not allow you to purchase products from another online retailer and then have you ship those items directly to customers because it does not remove identifying information of the third party.
Running Retail Arbitrage with Amazon FBA
If you want to use FBA to handle your order fulfillment, it’s pretty simple. You’ll sign up for FBA separately from your seller account.
When you buy products to list for sale, you’ll send them to the Amazon warehouse. Amazon will store it for you. You’ll pay storage fees based on the number of items and/or the amount of square footage your product takes up. You’ll also pay a fee for each order packed and shipped.
You’ll get instructions from Amazon on how to pack and ship your items to them. Follow those instructions whenever you have new inventory.
You’ll remove the hassle of storing and shipping items yourself. And, you’ll be able to offer your customers Prime benefits on your products – which puts you ahead of the resellers who don’t.
Once you’re signed up with FBA, you can change fulfillment options from your item listings in Amazon Seller Central. This way, if you have a few items you don’t want to send to FBA, you can still take care of the fulfillment yourself as needed.
The Verdict on Retail Arbitrage
Retail arbitrage works well for some – but it’s really more of a side hustle. It’s all about your goals for making money online. I’ve done it successfully in the past, but I understand it’s not for everyone. The good news is that other business models offer more sustainable alternatives. If you’re ready to sell online, you can start your own brand with private label products or wholesale suppliers, run an affiliate business, or a dropshipping business.