What Is Retail Arbitrage?

What You Need to Know about Retail Arbitrage

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Retail arbitrage is when you buy a product from a store or brand and resell it at a higher price to profit from the difference. If you’re thinking about getting into retail arbitrage or online arbitrage, it’s important to know what it is and how it works. 

Retail Arbitrage Explained in Less Than a Minute

Retail arbitrage is buying goods from traditional brick-and-mortar shops, like outlet stores and retailers, and reselling in another market, such as Amazon, for more money than you paid for it. Retail arbitrage is really about finding a deal on an item and selling it for more than what you paid for, then pocketing the difference.

While similar, retail arbitrage is not the same as trading arbitrage—the practice of buying and selling two related stocks or other types of assets in varying markets at two different prices to profit on the differing costs.

How Does Retail Arbitrage Work?

Retail arbitrage requires you to search through many different markets and compare the cost of a certain product. If you find a huge markdown in an unknown place, like a local wholesaler, you can buy a product in bulk and then resell each item for a higher price online. Since not everyone has access to the same local wholesaler you do, you get to take advantage of the deal. 

People that have direct access to stores others don’t might find retail arbitrage appealing. Trader Joe’s, for example, sells the niche product of Trader Joe’s Dark Chocolate Peanut Butter Cups for $4.29 at a Trader Joe’s store or on its website. On Amazon, the price of one pack of the same product is $10.74 and a pack of four is listed as $42.97. 

Anyone can get into retail arbitrage. Amazon offers Fulfillment by Amazon, a platform where third-party sellers can showcase and sell their own products, and Amazon will handle everything else. You’ll store goods at the company’s fulfillment centers and pay a couple of fees—like inventory and fulfillment fees—from each item sold. Amazon charges $39.99 per month for a professional seller account, as well as a referral fee of about 15% on every sale. 

You can use Amazon Seller as a business, where Amazon handles shipping out your goods, returns, and customer service, while you monitor fees and inventory. In 2018, third-party sellers accounted for 58% of Amazon’s physical growth merchandise sales, according to an April 11, 2019 8-K letter to shareholders. In 1999, for comparison, third-party sales accounted for just 3%.

Amazon isn’t the only platform where you can participate in retail arbitrage. You can buy from wholesalers, outlet stores, retailers, and any other place that sells products, and then turn a profit by selling them at organizations like Craigslist and eBay. 

In the early 2000s, now-famous Kim Kardashian turned used clothes of celebrities, as well as her own items, into a profit via eBay. 

Since many retailers only carry a certain amount of each product, many shoppers miss out on heavily discounted items they were looking forward to. Disappointed shoppers head to other websites on the internet to find the items they missed out on, which often happens during the holiday season, only to see them highly marked up. If they really want the item, like a hot new toy or electronic device, they might buy it for a higher price. That’s when you make a huge profit off of retail arbitrage. 

Pros and Cons of Retail Arbitrage

There are many people who are professional arbitrageurs, but that doesn’t mean it’s the right move for everyone. Carefully weigh the pros and cons before you start reselling as a side hustle or turn it into a full-time venture. 

Pros
    • Quick cash
    • Little starting capital
    • Easy side hustle
Cons
    • You could lose money
    • You’re in constant competition
    • Not everything sells
    • It can be time consuming

Pros Explained

  • Quick cash. A fast way to make a few dollars is to sell goods. Many people will sell their own things, whether it’s through a yard sale or apps like OfferUp. But selling new things can help you cover relatively immediate costs, especially if the product at hand is an in-demand item.
  • Little starting capital. You don’t need a lot of money to start your own retail arbitrage business, as the products you purchase should be at a relatively low price to begin with. All you need is to buy one of something and resell it for more than you invested in it. You can use the extra cash to pay off debt, save for a home, college expenses, or whatever else you need.
  • Easy side-hustle. You don’t have to leave your day job or even your other side hustles for retail arbitrage. If you use Fulfillment by Amazon, for example, you can monitor sales and inventory on your own time with very little extra cost to Amazon.

Cons Explained

  • You could lose money. With retail arbitrage, you’re betting that you have a hot enough item that will resell for a lot of money. But if you buy an item (or a bulk amount of items) that isn’t in demand, you’ll have to sell it at a competing price, potentially cutting into your earnings—and possibly costing you money. Also consider fees and the cost of shipping. If you didn’t have a lot to begin with, any loss could be substantial.
  • You’re in constant competition. There are thousands of people who are doing the same thing you are, which doesn’t really make the job special. Unless you have a stronghold in a particular niche or market, most people are trying to sell the same products as you, creating constant competition
  • Not everything sells. What happens if you bet on a product that isn’t selling fast enough? You’ll either need to hold onto it until the price comes back up or you’ll need to sell it for a loss.
  • It can be time consuming. There’s still plenty of work involved, including sourcing your purchases, finding the best deal, and packaging and selling your items. Even those that do it don’t necessarily earn five figures every month like some do, including a couple from Scottsdale, Arizona who have their own YouTube channel on the subject with over 20,000 subscribers. Don’t set high expectations for this job. Go into it with plenty of security and backup plans in case it doesn’t work out.

Key Takeaways

  • Retail arbitrage is when you buy an item below market value and sell it for a higher price, profiting from the markup. 
  • It’s a good way to make some extra cash but it’s not a great option for everyone, especially someone who can’t afford to take a loss.
  • You can easily manage sales through Fulfillment by Amazon, but there are other ways to take part in retail arbitrage, including Craigslist and eBay.