Retail Dogma

How Retail Arbitrage Works

Retail arbitrage has been around for very longtime, but has come under the spotlight in the last few years with the shift to online selling and with having platforms that facilitated the process and made it easy for anyone to start a retail arbitrage operation on their own.

Read Also: Amazon Effect

What is Retail Arbitrage?

Retail Arbitrage

Retail arbitrage is buying an item below its market value from one seller and selling it at a higher price to another buyer who is willing to pay more for it.

The Steps of Online Retail Arbitrage

  1. Identify retail arbitrage opportunities at retail stores (Walmart, Target,..etc)
  2. Use apps to scan the items and check their price on Amazon
  3. Assess demand for the product and read reviews
  4. Buy the product at the store
  5. List the product on Amazon
  6. Send the product to Amazon for fulfillment
  7. Sell the item and pocket the profit
  8. Repeat with other products

The concept of arbitrage itself is not restricted to retail. It is present in many different sectors across the economy. You will find arbitrage traders in the stock market or commodities market, and even in real estate (flipping).

This is because there is always someone out there willing to sell a product below its market value, for reasons not necessarily related to the product itself.

Not All Discounts Are Retail Arbitrage Opportunities

In many times the discount will reflect the real market value of a product that has already run its course through its lifecycle and the seller is now willing to sell it at lower price to raise cash to invest in a new product.

Read Also: Why Do Retail Stores Have Sales?

What is The Real Price of a Product?

In order to know if a discount is an arbitrage opportunity or not, we need to understand what determines the real price or market value of a product.

The real price of a product is how much the highest bidder is willing to pay

If a product has been discounted because it is damaged or about to expire, chances are this discounted price is the real market value of the product, because buyers will not be willing to pay up for a damaged or expiring item.

Retailers price their products initially at a higher markups because they know that throughout the product lifecycle the item will need to be exposed to different levels of markdowns.

These markdowns are gradual in nature (e.g 25%off, then 50% off, then 75% off) and actually reflect the real value of the product at that particular stage in its lifecycle.

Some products are called NOOS (never out of stock) and represent a set of products that are essential (basics) and are restocked permanently. They are not subject to gradual markdowns and if they fall under a discount due to a certain promotion (e.g Black Friday) their price will return back to full value after the promotion has ended.

How to Find Real Retail Arbitrage Opportunities?

In order to find good retail arbitrage opportunities you first need to know how retailers go about discounting their products, and differentiate between temporary and permanent discounts.

Markdowns vs. Promotions

Retail Marketing Calendar

Any retailer will typically have a marketing calendar that lists down the events they are going to run throughout the year. Most of these events include some sort of discount, either in the form of markdown or promotion.

Markdown is usually permanent, i.e the price of the item is reduced and will stay like that after the event has ended. This is done when the product is at the end of its lifecycle and is being actively cleared out of the stores to make space for new products to come.

Markdown Events Examples:

  • Mid-seasons Sale (MSS)
  • End of Season Sale (EOSS)
  • Final Clearance

Markdowns don’t make good retail arbitrage opportunities , because this is now the permanent price of the product.

Of course you might find that someone is still willing to pay the full price online because they don’t know or for the sake of convenience, but it is a risky move, especially that we are talking about big retail stores that are scattered across the country and everyone can easily shop from them or even visit their online stores and buy from there.

The other type of discounting is sales promotions.

These are events strategically planned throughout the year to drive sales. the price drop that happens during a promotion is not permanent and the item returns back to full price after the promotion days. Also promotions are much shorter than sale periods, usually last for few days only.

This makes sales promotions much better retail arbitrage opportunities.

Sales Promotions Examples

  • Black Friday
  • Cyber Monday
  • Buy One Get One Free
  • Flat discount (30%, 40%, 50% OFF) for a limited time.
  • Cash-back promotions

Since the retail price will return back to full price after the promo has ended, you will have the opportunity to sell the item at full price and pocket the difference.

Is Retail Arbitrage Bad for Retailers?

No it’s not.

Unless a retailer gives unnecessary discounts or run excessive promotions, retail arbitrage can actually solve their problems in raising cash and clearing unwanted merchandise to invest in new products. In fact, a lot of retailers deal with bulk buyers and closeout warehouses to clear out obsolete merchandise that is due for write off.

Because the merchandise at this stage is old and has a broken range, it doesn’t affect the retailer that someone can re-sell it again, especially that the reseller will sell it at normal retail price, in order to make profit.

Retail Arbitrage as a Business Model

Many times I get contacted by distributors about “a great closeout deal” and I always end up refusing it.

A D V E R T I S E M E N T

The reason I never go for these deals is that I am not interested in a retail arbitrage operation and that’s for the following reasons:

Unsustainable Business Model

Retail arbitrage could work as a way to make quick cash on the side, but to run a professional retail operation, whether online or offline, it is very unsustainable.

You cannot predict or control the products that you are going to sell, the price that you can sell at, or the quantities you can source them in. All this makes it a bad business model.

Bad Customer Experience

In fashion, closeout deals usually consist of unpopular sizes & styles that are remaining after all the nice options have been sold out already.

This creates a bad visual experience on the floor and a bad customer experience when customers can not see any consistency or coherence in what is displayed in the store, or find their wanted size.

Before the product reached this price level it has gone through layers and layers of discounts, and this is the remaining of it. All the good ones have been sold already.

No Brand Loyalty

If I am only going to source close out deals and sell those products at low prices I will only attract bargain hunters who are in no way interested in my brand, but rather only for the current deal and that’s about it.

This type of operation is actually risky, because anyone can compete with me, just by having lower prices.

Read Also: Customer Lifetime Value

Thin Margins

Calculating the actual net profit of the operation has to include all the time, fuel & effort that has been spent on sourcing those retail arbitrage deals and factoring all this in the final P&L. Ignoring operating expenses is wrong.

Read Also: P&L Management: The Complete Guide

With marketplaces, such as Amazon, taking 40% right out of the gate, I don’t see how this operation can run on healthy sustainable margins for the long term.

Not Scalable

Since you cannot control or even predict the number of items you can source, you can not scale this operation. Scaling at some point will be critical to justify all the costs involved in the operation and return good profit.

Is Retail Arbitrage Dead?

No it’s not.

There will always be someone willing to sell below market price for many variable reasons and there will always be good opportunities to make a flip.

Actually retail arbitrage can be a very good gateway for someone interested in starting a retail business, to test the waters and get the full picture about inventory, products, marketing , selling, and all what it takes to run a retail business.

A lot of businesses start this way, and then transition into private label or boutique stores.

Read Also: How to Actually Make Money Through Ecommerce?

Conclusion

Retail arbitrage is a good opportunity to make quick money if you succeed in identifying the right opportunities and taking advantage of them.

However; as a business model it cannot be scaled and is very unpredictable. It is a good starting point for anyone who wants to test the retail world, with the aim of transitioning later on to regular retail or ecommerce operations.

Read Also: We Have Analyzed Shopify Businesses for Sale And Here’s What We found