If you’re looking to create a profitable, long term ecommerce business, then Amazon retail arbitrage is NOT the answer. This post will teach you what is retail arbitrage, how it works and why this business model is not worth the effort.
You’ve probably heard stories online from people who regularly comb the clearance aisles at discount stores like Marshalls, TJ Maxx, Big Lots etc… and sell their goods on Amazon for a profit.
On the surface, retail arbitrage sounds simple and easy. Buy cheap products at retail stores from the clearance section and then flip them on Amazon for a quick profit.
But if you dig a little deeper, you’ll realize that this ecommerce business model is not ideal for a number of reasons and will never result in a defensible, long term business.
But don’t take it from me. This post will outline the pros and cons of retail arbitrage, teach you exactly how the process works and let you come to your own conclusions.
Get My Free Mini Course On How To Start A Successful Ecommerce Store
If you are interested in starting an ecommerce business, I put together a comprehensive package of resources that will help you launch your own online store from complete scratch. Be sure to grab it before you leave!
What Is Retail Arbitrage?
Retail arbitrage is the act of buying inexpensive or clearance products from a retail store and then selling them for a higher price on marketplaces like Ebay or Amazon.
A famous retail arbitrage story was the Tickle Me Elmo craze of 1996.
In the months leading up to Christmas of 1996, a red, furry (and annoying) Sesame Street doll became the hottest selling toy in the world and was in extremely short supply.
Even though the toy only cost $30, retail arbitragers would buy and sell Tickle Me Elmo dolls for more than $1,000 on secondary marketplaces like Ebay.
Here’s how retail arbitrage works.
- You buy a product from a retail store that sells for significantly lower than the market price on Amazon or Ebay.
- You list the item on Ebay or Amazon FBA at a 3X or higher markup.
- You pocket the difference between your cost and the selling price minus marketplace fees when your item is sold.
Most retail arbitrage sellers shop the clearance section at retail shops and are constantly on the hunt for discrepancies in prices across large marketplaces like Amazon or Ebay.
Is Retail Arbitrage Legal?
A common question I get asked is whether retail arbitrage is even legal. Can I really sell popular name brand products like Lego, Sony, and Apple online? Do I need permission or a license to do so?
The short answer is that retail arbitrage is 100% legal. In fact, if you browse the listings on both Amazon and Ebay, you’ll find that there are many sellers selling other people’s brands.
A significant number of products offered on Amazon and Ebay are not sold from the same retail store where the seller originally purchased the item. Most of these sellers are not buying their products wholesale either.
In fact, the legality of retail arbitrage was tried in the US Supreme Court who ultimately ruled that retailers cannot stop anyone from selling their products if their merchandise is legally acquired.
Overall, you are allowed to sell any legally purchased merchandise online, but when it comes to selling on Amazon and Ebay, you must obey their rules.
For example, Amazon may require express approval from the manufacturer in order to allow you to sell on their platform. In most cases, your ability to sell on a marketplace is not a question of legality but more a matter of following a marketplace’s selling policies.
Today, many larger brands will not allow you to sell their products on Amazon without their approval.
Can You Make Money With Retail Arbitrage?
Before we get into the numerous downsides to retail arbitrage and why it’s a waste of time, it’s important to get both sides of the picture and understand how retail arbitrage works.
The most important question is whether retail arbitrage can make you money and whether this business model is profitable.
First off, most retail arbitrage sellers sell their goods on Amazon in order to take advantage of Amazon’s massive audience of buyers.
Amazon owns a 50% marketshare for ecommerce and can drive traffic to your product listings without spending money on advertising.
Below is a hypothetical example on how much profit you can make for a given sale on Amazon.
Let’s say you buy a product for $10 on clearance at Target and then sell it for $30 on Amazon. Do you get to pocket the whole $20 of profit? The answer is no!
The reason is because Amazon charges fees for the privilege of selling on their platform.
In order to be successful selling retail arbitrage on Amazon, most sellers use Amazon FBA to avoid holding inventory and to outsource fulfillment and customer service.
Here’s how Amazon FBA works.
- You send your goods directly to Amazon’s warehouse at discounted shipping rates
- Amazon automatically ships your product to the end customer after an item is sold
- Amazon handles all of the customer service
Sounds great right? However, all of these perks come at a cost.
First off, Amazon takes a 15% cut of your sales right off the top. And if you choose to use Amazon FBA, the FBA fees will usually amount to another 15-20%.
All told, Amazon takes approximately a third of your revenue whenever you make a sale.
As a result, in order to be successful selling retail arbitrage on Amazon, you must be able to markup your goods at least 3X! This way, your product costs you a third, Amazon takes a third and you get to keep a third.
For example, if find a cheap widget in the clearance section of Target for $10, you better be able to sell it for $30 on Amazon, otherwise you won’t make much money at all.
In our hypothetical example earlier, you would make roughly $10 in profit from a $30 sale.
With these numbers in mind, you absolutely can make money with retail arbitrage, but it’s going to be tough to consistently find clearance items that you can markup 300%.
Here are the main advantages of retail arbitrage.
- Getting set up is quick and easy – All you have to do is buy a product in a store and list it online. There’s no setup required, no website needed and no marketing whatsoever. Heck, you don’t even have take any product photos.
- Low up front cost – Retail arbitrage is an extremely low risk way to sell online. You can sell as few or as many products as you want and your only upfront cost is the price of your goods.
- Great for learning – Retail arbitrage is often a good starting point for new sellers who want to learn how to sell on Amazon or Ebay before selling their own private label products.
How Retail Arbitrage Sellers Find Products To Sell
Before we delve into the disadvantages of retail arbitrage, it’s important to show you the process by which sellers find profitable products to sell online.
The majority of retail arbitrage sellers spend most of their time physically shopping at retail stores in the clearance section.
Here are some of the most popular places where they shop.
- Frys Electronics
- Home Depot
- Best Buy
- Big Lots
- TJ Maxx
- Trader Joe’s
- Office Depot
Basically if a shop has a clearance section, then it’s fair game.
Once you find a potential product in a retail store to sell on Amazon, the next step is to look up the sales for that product using a tool like Jungle Scout
Jungle Scout will give you sales information for any product sold on Amazon including average selling price and monthly sales revenue.
Jungle Scout will also provide you with historical sales data so you can determine whether a product is worth selling on Amazon.
If you can find a product that you can markup 3X with a good track record of sales, then it might be worth selling but finding these products is going to take a lot of leg work!
The Disadvantages Of Retail Arbitrage
While retail arbitrage sounds like a great way to start your ecommerce journey, the reality is that this business model will never make you life changing money and is completely unsustainable in the long run.
The primary problem with retail arbitrage is that you are at the mercy of 2 opposing forces, the retailers where you source your products and marketplaces like Amazon and Ebay.
The retailers control your product supply and the prices you can buy your goods. Meanwhile, Amazon and Ebay control your selling platform and can even prevent you from listing a product for sale altogether!
Below is an in depth analysis why retail arbitrage is a waste of your time and why it’s completely unsustainable in the long run.
You Don’t Control Your Product Supply
I’ve been selling online for over 13 years with my ecommerce store over at Bumblebee Linens. We sell handkerchiefs and linens and we have many wholesale suppliers who keep our inventory flowing from month to month.
Over time, we’ve developed strong relationships with our vendors and we have full control over our supply chain. This means that we don’t have to physically go hunting for new deals everyday like a retail arbitrage seller.
When we’re about to run out of inventory for a particular SKU, we simply place another order and it arrives at our doorstep.
With retail arbitrage, you have zero control over your products or your inventory. Once you’ve sold out of a product, you have to physically go shopping again for more inventory.
And if your local retail store no longer carries your product? You’re out of luck.
You Don’t Control Your Pricing Or Your Margins
When you source your products from a factory or distributor, you own your product and you have a fixed cost of goods. This gives you the ability to set prices and control your margins.
For example, because I own my own brand at Bumblebee Linens, I can set my prices however I want and no one can comparison shop because I’m the only seller of my products.
When you do retail arbitrage however, you are selling someone else’s product and there are likely hundreds of other sellers offering the exact same item. As a result, you have less control over pricing and margins because you don’t own the brand.
Retail arbitrage sellers will never get the lowest price for their goods either.
Because you are buying your products from a retail store, you are already paying more than the wholesale cost. As a result, you are at a pricing disadvantage compared to a traditional retailer who buys their products wholesale to sell on Amazon.
Overall, when you don’t have the lowest sourcing costs, you are at the mercy of other sellers and it’s often a race to the bottom in terms of price.
Retail Arbitrage Is Not Scalable
Retail arbitrage sellers must physically shop for their inventory and shopping takes a tremendous amount of time. Finding great products to sell via retail arbitrage is like running on a hamster wheel.
Once you’re sold out, you have to go out and find more product which means physically driving to the store, getting a truck and bringing your products back to your house.
Successful retail arbitrage sellers often spend 40 hours per week shopping. Are they making a profit? Yes, but it’s at the expense of their time.
If you want to make more money, you have to shop more and constantly find new deals. Personally, I would rather work a day job than shop all day long.
Amazon Can Ban You Or Prevent You From Selling
Amazon is constantly changing the rules and they can dictate what you are allowed to sell and when.
An acquaintance of mine once found a great deal on Nike shoes that he promptly listed on Amazon. But right around that time, Amazon started allowing big brands to stop other sellers from selling their products.
Unfortunately, Nike was one of those brands and as a result, he could not list his Nike shoes on Amazon and was stuck with a bunch of inventory that he could not sell.
Events like this happen all the time on Amazon. The truth is that Amazon does not like retail arbitrage sellers and has taken measures to reduce retail arbitrage on their platform.
Today, any large brand can prevent secondhand sellers from selling their products on Amazon. Furthermore, many categories on Amazon are gated and require an invoice from an authorized distributor or wholesaler in order to sell on the platform.
Bottom line, you can’t just sell anything that you find from a retail store. Amazon is cracking down on retail arbitrage sellers and will often ask you where you are getting your products from.
You Can’t Get Repeat Business
The nature of retail arbitrage is that you are constantly selling random, disparate products online. If a product you find in a store can make you money, then you sell it, period!
So what often happens is that you end up selling commodity items that can be found anywhere and you rarely sell the same product twice. Furthermore when you sell on Amazon, you don’t receive any of your customers’ information and you can not build a following.
But even if you do somehow manage to build an audience for your business, it’s impossible to establish customer loyalty or repeat business because your inventory is completely random and not within your control.
For my online store (non retail arbitrage), repeat business makes up 36% of my revenue every single year. And our best customers provide a solid base of sales that we can easily expand upon from year to year.
With retail arbitrage, you are always fighting for new sales from ground zero.
Retail Arbitrage Alternatives
Retail arbitrage is a not a good long term business model and with the amount of time that it takes to make money, you make as well keep your day job.
When it comes to selling physical products online, there are far better ecommerce business models to choose from that you can eventually grow to a 6,7 or even an 8 figure business.
With retail arbitrage, you will be lucky to hit 5 figures per year and it requires a tremendous amount of time that can be better utilized elsewhere.
Here’s a list of ecommerce models that are superior to retail arbitrage in the order of highest to lowest in terms of sustainability.
Click on any of the links below and you’ll find in depth tutorials on how each business model works.
- Selling Private Label Products On Your Own Website – If you own your own brand and can drive your own traffic, you can build a customer list and run a long term sustainable company. This is by far the best ecommerce business model to pursue.
- Selling Private Label Goods On Amazon – The main difference between retail arbitrage and selling private label on Amazon is that you own your brand, your products and no one else can undercut you on price. This allows you to have far greater control over your supply chain and sales.
- Selling Wholesale Products On Amazon Or Your Own Website – Selling wholesale is different than retail arbitrage in that you don’t have to constantly shop for new goods to sell. By finding a good wholesale supplier, you can consistently sell the same products on Amazon or your own online store.
- Dropshipping – Dropshipping is where you take orders from your own online store and your supplier stores and ships your product to the end customer. As a result, you do not have to carry inventory. This business model has low startup costs and is a much better way to get started in ecommerce than retail arbitrage.
Have you read these?
- Shopify Blog – Should I Use WordPress For My Shopify Or BigCommerce Blog?
- Where To Buy Wholesale Clothing In The USA And My Trip To The LA Fashion District
- MOQ Meaning – How To Get A Lower Minimum Order Quantity With Suppliers
- How Cheap Shared Hosting Companies Are Lying To You
- The Cheapest Credit Card Processing Option For Small Business – Stripe Vs Paypal Vs Authorize.Net