What is Retail Arbitrage and Should You Try It?

What is Retail Arbitrage and Should You Try It?

what is retail arbitrage

Searching “retail arbitrage” on Google or YouTube will unleash a bevy of flashy headlines, products, and targeted ads into your feeds.

“Make $500 an hour!”

“Check out my $1000 haul from Wal-Mart!”

These are common sentiments boasted by retail arbitrage sellers. If you didn’t know any better, you might think retail arbitrage is some sort of infallible money-printing machine.

And while we can’t deny the numbers of retail arbitrage success stories, this white-hot eCommerce trend may not be for everyone. 

In this comprehensive post, we’ll dive deep into what retail arbitrage is and a few reasons why you might want to pursue it (or steer clear from it). 

We’ll unpack in detail how to get started and best practices from the best retail arbitrage sellers. 

You may be looking for a side hustle, trying to escape the 9-5 grind, or needing to supplement your existing eCommerce business. 

Whatever your goals are, you’ll know if retail arbitrage is right for you by the end of this post. Let’s start by defining our terms.

What is Retail Arbitrage?

Retail arbitrage is an eCommerce business model centered around buying inventory at a discount from offline and online retailers, then reselling it online for a profit. 

Online platforms like Amazon and Amazon FBA (fulfilled by Amazon), as well as mobile-friendly digital scanners, make the entire process simple and straightforward. 

The low barrier to entry and almost nonexistent capital requirements make it an attractive side hustle for bargain hunters.

Is Retail Arbitrage Right for Me?

In this post, we’re going to do our best to take a comprehensive, unbiased look at the benefits and downsides of retail arbitrage. We don’t have a course to sell, a YouTube channel to promote, or any affiliate links in this content.

At SkuVault, we build software that helps eCommerce business owners succeed in inventory management and growth — no matter their business model.  

In other words, we don’t have a dog in this fight. We genuinely want to help you understand if this model is the right one for you. Let’s start with the benefits:

Five benefits of retail arbitrage

1. The barrier to entry is almost nonexistent

Low barriers to entry are two-sided swords in business. We’ll talk about the downside of this factor in the next section, but for now, let’s focus on why this is a positive.

Many people dream of becoming their own boss and running a successful eCommerce business, but they’re hindered by what they perceive as an insurmountable barrier to entry. 

Don’t you need to create a product to sell? Thousands of dollars in startup capital? A professional-looking website and social media presence? 

These are the mental barriers that prevent many folks from pursuing their eCommerce goals. However, in retail arbitrage, you don’t need any of these things to get started.

Creating seller accounts with Amazon, eBay, and Craiglist is completely free. Mobile scanner apps are also free, making the only capital expenditure the initial purchase of whatever goods you’re reselling.

2. It’s a great way to learn Amazon FBA or eCommerce

If we were in charge of an MBA curriculum, we’d require that every student start their own retail arbitrage store. There is no better way to learn eCommerce.

You can  learn distribution, profit margins, taxes, shipping costs, purchase orders, and invoicing. Not to mention how to navigate the top eCommerce selling platforms.

As you dive deeper and scale your business, you’ll need to learn digital advertising, inventory management, and wholesale partnerships. 

It’s one thing to watch many tutorials, take a course, or read a blog about retail arbitrage. It’s another thing to learn these skills out of necessity and watch real money come in as a result.

These are all topics that you could read in a book, but there’s no comparison to diving in headfirst, making mistakes as you go, and internalizing these concepts as a result.

This way, when you are ready to scale beyond retail arbitrage into selling your own products, you have all of the skills you need and significant experience under your belt. 

Retail arbitrage is a low-risk way to learn eCommerce that you can abandon at any time, making this benefit one of the most notable on this list. 

3. You can turn a profit quickly

You don’t need to wait on long sales or production cycles to see profits with retail arbitrage. You can hit the road with your free scanner app, spend a few hours finding deals, and turn around and get them to Amazon FBA before the day’s over. 

From there, Amazon does the rest. And if you’ve done your research and followed a process (more on that later in the post), you can see profits in a matter of days or weeks. 

This rapid profit turnaround is what gets people hooked — they see the revenue potential of retail arbitrage and fall in love with the hunt.

4. You’re capitalizing on the groundwork of trusted brands

Have you ever thought about why you don’t need to convince someone of the quality of a pair of New Balances? Or the fun of a brand-new LEGO set? Two words: brand trust.

There are billions of corporate dollars earmarked every year for the monumental task of building brand trust. Any entrepreneur who’s sold their own product will tell you that the most valuable currency in the world of eCommerce isn’t money but trust. 

Trust means repeat business, word-of-mouth evangelism, and a higher lifetime customer value across the board. 

A benefit of retail arbitrage is that this step has already been done for you. When you’re reselling household names like Nike, L’Oréal, and Vtech, you’re standing on the shoulders of giants. 

These brands have already done the spadework of building brand trust so you don’t have to.

5. Retail arbitrage can be done from anywhere

Many full-time sellers love retail arbitrage for the flexibility and freedom it affords them. 

The 2010s saw a meteoric rise in the “gig economy,” a multi-faceted web of freelancers who make a living through skill-based “gig” jobs — usually from anywhere in the world. 

The gig economy has spawned a new generation of professionals who place a high value on freedom, both professionally and personally. 

However, If you don’t have monetizable, in-demand skills, retail arbitrage is a viable option for dipping your toes into the gig economy. 

This freedom is a huge motivating factor for many sellers, including this one runningher retail arbitrage business out of her RV while traveling the country.

Five downsides of retail arbitrage

1. You can’t build a tribe of loyal customers

Many visionary entrepreneurs will tell you one of the most rewarding things about their work is seeing a loyal group of happy customers form around their brand. It provides a sense of fulfillment to see real people positively impacted by whatever you’re selling.

Not to mention the monetary and word-of-mouth benefits of loyalty to your business.

Unfortunately, this is something retail arbitrage sellers will never be able to experience. Even if you’re the most successful seller on Amazon, you’re only fueling further brand loyalty into the products you’re flipping, not your own business.

For many sellers, this simply isn’t a concern. They’re only in it for the profits.
Fair enough, but for entrepreneurs looking to build a community of loyal customers, it may be best to look elsewhere. 

2. You’re at the mercy of the retailers

When your entire business model is at the mercy of retailers, you lose a level of control. This isn’t as scary as it sounds. Almost every business in existence is contingent upon another business to some degree. 

The PC software industry assumes that Microsoft will continue to support Windows. Grocery delivery services like Uber Eats rely on grocery chains to sustain their business.

However, there’s no getting around the fact that you’ll never be able to “outgrow” whatever retailer you’re sourcing from. You can’t control their supply or how they stock their shelves.

We’ve heard horror stories of arbitrage sellers accepting sales on a particularly hot item, just to realize that their normal sourcing retailer was sold out of the item and wouldn’t replenish for weeks.

When you’re in charge of the manufacturing and distribution of your products, you can scale production accordingly. Not so with retail arbitrage sellers dependent on big-box chains. 

3. Scaling can be a headache

Retail arbitrage is a “time for dollars” business model. This is the critical difference between a freelancer and a business.

When you build a business, you’re creating a cash-producing asset. Meaning, if you’ve set up the proper systems and processes, you could walk away for a week, and the business would still generate revenue. Not so with retail arbitrage. 

You have to be constantly hustling. When you stop scouting, buying, and flipping, you stop generating income. That can feel constraining to many visionary entrepreneurs who want to grow their income and impact beyond just their own efforts.

It’s also important to consider your opportunity cost. Don’t buy into a pipe dream of endless cash until you calculate your dollar-per-hour income. 

For example, let’s say you stop at TJ Maxx, scan a few items, and find a pair of shoes that can turn a decent profit — maybe $10 each (a fairly conservative estimate). So, you purchase all 15 pairs on the shelf. You head home, list the items, box them, and send them to Amazon FBA. 

A few weeks later, you manage to sell them all, turning a $100 profit after taxes and shipping. Not bad! 

But how many hours did you spend driving, scouting, scanning, and packing? Let’s say the entire process took you five hours. That’s $20/hour. A respectable wage, no doubt, but let’s remember our opportunity cost.

Opportunity cost is the cost of choosing one alternative over another. Meaning, you spent four hours generating $20/hour at the expense of four hours of work elsewhere. That four hours could’ve been spent building up another eCommerce business or investing in yourself.

This isn’t at all to say that the choice to pursue arbitrage was a poor one. It’s just important to take the dopamine hit of a profit out of the equation and use cold, hard math to determine your real ROI.

4. You may face steep competition and market saturation

This is the dark side of low barriers to entry. A trendy, free, and approachable eCommerce model means very high market saturation and competition. 

This is especially true when you consider the fact that arbitrage sellers are sourcing their products from the same places. 

Due to the popularity of reselling products on Amazon, the platform gates certain brands — and even entire categories —  to new sellers. This mitigates the risk of bad actors selling counterfeit goods to make a quick buck. 

If you don’t get “ungated” (a topic we address later in this post), prepare to face fierce competition.

Here’s a list of all the brands Amazon is currently gating to new sellers as of this post. 

5. Brands are restricting products and establishing exclusive deals

Piggybacking on the previous point, more and more brands are creating exclusive distribution deals with Amazon. How is this relevant to retail arbitrage sellers?

This affects sellers in two significant ways. 

First off, any brand in league with Amazon will automatically be on the restricted list — no questions asked. 3rd-party resellers that want to flip gated brands must prove to Amazon that they’re a verified wholesaler or sometimes even obtain written permission from the manufacturer.

The specific requirements vary from category to category and brand to brand.

Secondly, distribution deals with Amazon means the platform will prioritize its own fulfillment centers over any 3rd-party retailers. 

They do this by burying sellers deep on the page and making it much more attractive (through prominent calls to action and prime shipping) to order from Amazon.

FitBit, for example, struck up an exclusive deal with Amazon. Now, when you search for any FitBit product, the “Buy Box” on the right side of the screen will always say “Ships from Amazon, Sold by Amazon.”

Other authorized resellers are shoved down the page and subject to lots of “buying friction.”

As the pool of ungated items gets smaller and smaller, that leaves less room for sellers and only further saturates the market.

How Do I Get Started in Retail Arbitrage?

Alright, so let’s say you’ve weighed the pros and cons and decided you’re going to give retail arbitrage the old college try. Where do you begin? 

Let’s walk through your first steps in getting started as a retail arbitrage seller. We’ll use Amazon as our platform of choice due to its popularity and rich suite of free tools for resellers. 

1. Create your Amazon Seller Account

The first step is to sign up for Amazon’s selling platform by creating a seller account. We wrote an in-depth post on how to do this here, including some of the differences between signing up as an individual versus a professional.

2. Download your scanners

There are lots of popular scanning apps that seasoned sellers use when they make their scouting runs, but most sellers acknowledge that the Amazon Seller App is more than sufficient for newbie sellers. 

Simply snap a picture of a product’s barcode, and the app will tell you:

  • FBA fees
  • Approximate profits
  • Best Sellers Rank (more on this in a bit)
  • Total number of sellers
  • Official Amazon category

Some other apps and sites give you more in-depth analytics on particular items, such as Keepa and Jungle Scout. These are helpful to have on your mobile browser, but not essential when you’re just starting. 

3. Give yourself a budget

If you’re just starting  in retail arbitrage, it can be easy to get excited, binge-watch a YouTube playlist of Lambo-driving arbitrage sellers, and  spend your entire stimulus check at Wal-Mart. 

This is a big mistake when you’re testing the waters. You’re excited about arbitrage right now, but you may not be excited about it in a week.

Starting with a small budget and then reinvesting your profits into your arbitrage business is a better way forward.

A recommended starting amount is anywhere between $50-100 to make your retail scouting trips worth your while, but  make do with whatever disposable income you’ve got.

4. Plan a shopping route and stick to it

Before you head out on your first scouting adventure, it’s important to have a plan of which retail stores you’re going to hit. 

As you get more experienced, you’ll also want to study clearance schedules and discount patterns, but in the beginning, most sellers say it’s better just to get started than to get paralyzed by details.

To add an even greater level of preparation to your product hunt, utilize deal aggregator sites like Brickseek or Slickdeals. These sites collect discounted products in real-time from retailers like Best Buy, Walmart, Target, and Bed Bath & Beyond. 

Simply scan the discounted products from these retailers on the Amazon Seller App to discern their profitability. Most large-scale distributors have apps or store databases that allow you to check if particular items are in stock — all this before leaving your desk.

You remove almost all risk by ensuring that items are profitable (if sold) and that stores have them in stock. It might even be possible to buy the products online and pick up at the store.

For more detail on this topic, check our previous post on some of the best places to source items for retail arbitrage. 

Retail Arbitrage Best Practices

Look for ranks and reviews

A scanner app may tell you the hypothetical profitability of an item, but it doesn’t tell you if people will actually buy it.

One of the biggest mistakes newbie sellers make is buying a product purely for its profit potential without assessing the market demand.

That’s where the Best Sellers Rank (BSR) comes in. Items can have BSRs for multiple categories. For example, one particular set of clothing organization bins had a BSR of #1 in Under-Bed Storage and #64 in Home and Kitchen. 

It’s important to note that some categories are much more competitive than others. For example, it’s much harder to rank high in Home and Kitchen than in Under-Bed Storage. 

Therefore, it’s important to study the ranking structures of specific categories. This BSR calculator will help you better understand how revenue correlates to BSR. 

Using the above product as a case study, a BSR of 64 in Home and Kitchen produces an estimated 18,096 monthly sales. 

Exhaust a single store before moving to the next one

A big mistake new sellers make is trying to hit as many stores as possible in a single day. Seasoned sellers believe that it’s much better to scan all clearance aisles in a single store, even items that weren’t on your radar (like beauty products, toys, books, and household items). 

That means spending anywhere between 30 minutes to two hours scouting a single store. It’s better to leave no stone unturned in one store than superficially run through five stores and potentially miss out on hidden gems.

Know when to use Amazon FBA (and when not to)

Sending your orders to Amazon FBA costs more, but you don’t have to deal with returns or customer service. Sellers often say that single items are better to fulfill as an individual or merchant. When you’re selling in bulk, though, it’s almost always smarter to go with Amazon FBA.

Have a minimum ROI and profit in mind

Based on our research, you’ll want to look for a profit of at least $3-$5 per item sold with an ROI of 50% or more. This is more on the conservative end, however. It’s up to you to decide on your allowable opportunity cost and desired hourly income.

Get ungated as soon as possible

Due to many of the factors mentioned above, the retail arbitrage community puts a high emphasis on getting ungated. 

There’s less competition and higher profit potential. Plus, in the case of gated categories, thousands and thousands of products will immediately become sellable.

So how do you get ungated? Unfortunately, it’s not a one-size-fits-all approach and often varies across each category.

For example, getting ungated to sell Nike is tough, while getting ungated to sell in a particular Health and Personal Care sub-category is much easier.

The good news is that, in most cases, once you get approved to sell one item in a particular category, you’re ungated for that entire category. 

When you submit your request to lift a given restriction, you’ll likely be asked to provide at least two things, maybe three:

  1. An EIN. This is a tax code that you receive when you create an LLC or Sole Proprietorship
  2. An invoice proving the purchase of at least 10 units from a wholesaler
  3. A reseller’s certificate authorizing you  to resell a particular brand

These things require an investment of money and time. But sellers unanimously agree that you should make this a priority if you want to take arbitrage seriously.

Manage Your Inventory With an IMS

To bring this post full circle, we’ll echo one of the biggest benefits of retail arbitrage mentioned in this post: it’s an excellent introduction into the world of eCommerce.

As you grow your eCommerce business, you’ll quickly realize that trying to manage your inventory with manual processes — especially when you should be scanning and flipping products — is a costly and cumbersome endeavor.

SkuVault is a one-stop-shop for all inventory management needs. It allows you to focus on growing your business through automatically-generated purchase orders and eliminates stock-outs through reorder reminders.

Whether you want to scale a retail arbitrage business or use retail arbitrage to pivot into your own eCommerce venture, SkuVault gives you the tools to track the ROI of your efforts and scale effectively. 

We’d love to show you how SkuVault improves all aspects of eCommerce. Reach out to our team today for a live demo.

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