What is retail and online arbitrage?

WHAT IS RETAIL AND ONLINE ARBITRAGE?

By Joshua Moayer | November 2nd 2016

Do you want a job where you control the hours? A job where you can work from home and be your own boss? A job where you can turn a hobby into a business?

Retail arbitrage is a term for all those things.

You may have heard the term ‘retail arbitrage’ or ‘online arbitrage’ (“RA” and “OA”) and assumed it was something fancy you wouldn’t understand even if you tried.  The truth is it’s a very simple concept.  RA / OA is the practice of buying one or more product(s) from a retailer for a certain price and selling it for a higher price.  That’s it.  

Understanding arbitrage

arbitrage.jpg

So what does ‘arbitrage’ mean, then?  The classical definition is to profit from a transaction without taking any risk and without using any of your own capital.  But in practice, this really applies more to the financial markets than to retail and online arbitrage.  

For our purposes, arbitrage is when similar products are priced differently across various marketplaces.  In RA / OA, that could mean you’re walking the clearance isle at Kohl’s and see a nice dinnerware set on clearance at 70% off.  You look the item up on Amazon and see it’s listed at full price there.  If you buy that dinnerware at Kohl’s you could sell it on Amazon for a profit!  That’s arbitrage.  

An example of retail arbitrage many people will recognize is the ‘Tickle me Elmo’ craze -- when savvy shoppers trying to make some extra money bought out stocks of the popular toy before Christmas, and then resold them at higher prices to parents desperate to deliver the hottest gift of the season. There were reports of the toy selling for $1,500 -- more than 50 times its original retail price.

For other people, a better example might be the release of the Playstation 3. Or scalping tickets for a sold-out concert. The business of reselling sneakers has become so large a company called StockX has created an online brokerage just for sneakers.  It’s all arbitrage.

Courtesy of Instagram/@norvina

Earlier this Fall, Mario Dedivanovic, Kim Kardashian's makeup artist, released the “Master Palette By Mario”. The palette sold out within minutes on the Anastasia by Beverley Hills’ website.  It later released in stores and online in larger quantities, but we think there’s a decent chance it will stock out eventually before peak holiday demand hits. It’s currently trending on eBay at up to 70% higher than the retail price (the authentic ones). When an item is selling on eBay for even a few points higher than retail heading into the holidays, it’s usually a sign the item has a chance to stock out at retailers and drive up resale prices even higher.  Why is this item trending? Mainly because it’s got celebrity status behind it. We’ll talk more about how to identify these types of items in the future.

IS ARBITRAGE A SUSTAINABLE STRATEGY?

But surely arbitrage itself isn’t a strategy one can rely on, right? On the contrary -- arbitrage is used by all kinds of professionals as a legitimate and sustainable business strategy.  In fact, the premise behind many hedge funds involves some form of arbitrage.  Most large banks have an entire department they call “Sales and Trading”.  A portion of what happens on these trading floors involves arbitrage of some kind.  You may have heard of it called “proprietary trading” in that context. Professional gamblers even use arbitrage in sports betting by exploiting different odds from various odds makers for the same event.  By placing a series of bets of carefully calculated amounts, these sharks can lock-in bets that avoid losses regardless of the outcome.  

Even the CFA, a certification exam taken by financial professionals, has a section dedicated to arbitrage. So yeah, it’s a legitimate practice -- tried and true.

RA / OA on AMAZON

The Amazon marketplace for third-party merchants is a rapidly growing segment of the retail space, and merchants who do RA / OA represent very significant portion of Amazon's business.  Since RA / OA is a business strategy that's defined by the method of sourcing your inventory, it's tricky to know just how big the RA / OA market on Amazon is.  However, we do know there are over 2 million merchants who sell products on Amazon, and a big chunk of that is probably RA / OA.  Pretty much whenever you see multiple sellers on an item's offer page selling a recognizable brand, and those sellers aren't big box retailers, nearly all them are doing RA / OA .  Pay attention next time you're looking at an item and you'll get a feel for just how big of a market it is. To put things in perspective, the number of units sold through sellers account for up to 40% of the total items sold by Amazon. The number of active sellers who use FBA  grew by more than 50 percent worldwide in 2015.  That's pretty crazy considering Amazon is still growing at 20% annually! (Amazon reported 2015 revenue of $107 billion, compared to $89 billion from 2014).  

WHY RA / OA OPPORTUNITIES EXIST

There’s many reasons why RA / OA arbitrage opportunities exists, but these arbitrageurs are often exploiting the law of supply and demand. People will pay higher prices to have an item shipped to them if it isn’t available where they live. Not every city has a Whole Foods or a Sephora. Birthdays and holidays are another reason people will spend more for an item -- they need it within a certain time frame.

Arbitrageurs are also taking advantage of different prices across the market for a particular item -- what economists call “price inefficiency.” For instance, all retailers don’t run their sales at the same time. An item that is half price at Kohl’s might still be full price on Amazon.  In fact, it can be in their best interest to run a sale when their competitor isn’t -- they’ll steal business away from them.

There’s a whole slew of tricks that make RA / OA even more viable.  Store credit cards with rewards and coupon/promo codes can reduce your cost significantly.  Sites like Gift Card Granny will help you find reduced price store gift cards offered by those, often the recipient of a gift, who’d rather have the cash in their pocket, even if it means only 80% of the card’s value.  Dubli and Ebates will provide you with up to 15% cash back on purchases from nearly every retailer.  Cash back sites work because they get paid an affiliate commission when you buy through their link, which allows them to share some of that money with you -- a win-win.  

Using all these methods together is what those in the biz call "stacking deals". Many times, stacking deals alone can be enough to turn a respectable profit.  Nevermind the fact that you could just find a product that’s simply cheaper at one retailer than it is on eBay or Amazon.

SO RA / OA IS EASY MONEY THEN, RIGHT?

We strongly believe that no sustainable profitable business is “easy”.  RA / OA  isn’t a get rich quick scheme.  Anyone who makes it sound like it is, clearly has an agenda, so beware.  If you want to consistently make money doing RA / OA, you have to be willing to consistently put in the hours, until you have a model in place that scales. Like many things in life, it’s easy to learn and hard to master.  But be thankful, you don’t want it to be too easy, else you’ll have more competition than Ciara has Instragram followers.

You probably already pay attention to prices when you shop. Are you good at finding deals? Then you’ve already begun to master the first part of retail arbitrage.  The internet and the availability of work-for-hire labor (virtual assistants) has made the possibilities for arbitrageurs almost limitless, and our goal is to help you capitalize on that.  

Our upcoming articles will give you a super simple step-by-step guide on exactly how to get started building your fully scalable RA / OA business today.  In the meantime, leave us any questions you have below and we’ll gladly answer them.

Stay in touch with latest news, webinars and updates!