Retail Arbitrage: What It Is, How It’s Possible, And Why It’s So Damn Easy
What is retail arbitrage
Retail arbitrage is a fairly simple concept. A retail store (such as Walmart, Target, etc.) sells a product (either online or in-store) for a certain price. You purchase that product and sell it for a higher price yourself and pocket the profit.
Although the concept is simple, there are two main questions that newcomers have…
- How do I determine which products to buy?
- How do I sell the products once I have them in-hand?
And those are fantastic questions. This is the start to your all-inclusive, comprehensive guide on retail arbitrage. There are 6 chapters in total. By the end of reading each one, you’ll be able to walk into any store or browse any e-commerce site, find products to buy, and then sell them quickly without lifting a finger through the power of Amazon.
But first, let’s dive into how this is possible. After all, if department stores were selling items for less than they were worth, wouldn’t everyone be doing this?
How retail marketplaces work + how it benefits you
Let’s invent a fictitious company. Let’s call it… Azzurent. Azzurent is similar to Walmart – lots of branches, lots of general, cheap products, and a steady, healthy flow of customers to each and every branch 24/7/365.
How Azzurent stocks its products
Azzurent stores are, for the most part, consistent in the products they carry. Think about if you were to go to a Walmart in California vs. a Walmart in Boston. There may be different variations of the types of products that they sell – clothing, etc. – but the types of products would be the same.
Consumer behavior fluctuates randomly
Azzurent, with its thousands of branches and steady flows of customers to each, is going to be sending out a lot of inventory and to every single branch daily. In such large quantities, estimating sales volume is never perfect. Let’s say that, on average, a particular branch of Azzurent sells 200 bike helmets per week.
If that branch sells only 150 bikes during one week, the next shipment is still going to be for 200, as that is the proven average. Unless there is some sort of news event swaying public opinion on helmets, the best guess for the next week is the average is still 200, despite the previous bad week.
Then, next week, the branch still sells just 150 helmets. There are now 100 extra helmets in the store (there is only room for 150 on the shelves), and the excess ones need to go somewhere.
The problem is that they can’t. In a store like that, sure, you can make very minor adjustments in each department, but you can’t go putting the extra helmets for sale right next to the air conditioners.
The next logical solution is the storeroom in the back. If just the helmets didn’t sell, there would be room, but there is no guarantee that these lower-sales fluctuations don’t happen for other products as well.
Store rooms aren’t unlimited
If there’s no more room, products have to GO! Out to the clearance rack for some, 2-for-1 discounts for others, etc. Deals will be scattered throughout the store for these overstock items.
Usually, buying “overstock” implies that the products are garbage and that they just don’t sell. The overstock from general stores like Azzurent or Walmart is different, though. All of the products are relevant. Hanes clothing brand, Bounty paper towels, etc… and think of any product in Walmart (such as a new release toy) – no matter what it is, people are buying it en masse.
Amazon competes with Walmart
It’s estimated that there are 30 to 40 million Prime members in America alone. 2-day shipping and similar (and often lower) prices mean that people are using Amazon to buy the same items that sometimes get sent to the clearance section at big brand stores.
This benefits us because we can, in essence, use all of the buying power of Amazon to sell products at the retail price after getting them for below retail.
The next logical thought is if the products are selling somewhere, why don’t the big brands (that have locations all across the US) just send products to other branches or back to a warehouse to be sold online?
Why big brands don’t just send products back
Margins, shipping, and manpower
The profit margin on each product at Walmart (AKA how much they make on each product sold) varies wildly from product to product. Sometimes, they make almost no money if they’re trying to undercut their competitor’s prices. Other products will make up for that profit. To keep these calculated margins steady, the process is to buy, send to stores, sell, repeat.
Warehouses aren’t conveniently located next to each Azzurent or Walmart. For products, it’s a one-way trip to the branch. At each branch, there’s enough manpower to unload trucks, stock shelves, and ring customers up, but there aren’t any excess employees available to send products back or coordinate the process of shipping packages out.
Big brands run like well-oiled machines (most of the time, at least), but they don’t go past the basics. Yes, Walmart, Target, and Costco are absolutely trying to break into the online space, but in late 2014, Walmart was only doing 3% of its sales online…
Big brands move physical products – they don’t dwell on non-sellers
Walmart is in the business of moving inventory quickly. The sales of a single store per day are absolutely absurd – some of the busier branches easily hit seven figures in revenue per day. Just FYI, Walmart has over 10,000 stores internationally. Imagine that…
With this absolutely massive amount of inventory being moved, there is no need (or want) for an individual store to dwell on a tiny bit of product that happened to not sell in that particular store for one reason or another.
Let’s say that residents of Stores, Connecticut (a small town with a Walmart) just didn’t vibe with the new Elena doll from Frozen… does that mean that the doll didn’t sell everywhere?
No, it doesn’t – Walmart doesn’t source products that don’t sell on the mass scale overall. You better believe that the doll was sold out in most other locations.
Here’s the point: Just because a product is discounted somewhere online or at a particular big brand store doesn’t mean that it’s a bad product overall – it just means that one particular branch of a big brand store didn’t sell that much of one particular item during one particular time frame.
Whew! That’s a lot to take in at once. Let’s recap:
The business model of a big brand store revolves around finding products that people buy, sending them to individual branches, and selling the items. If the sales volume for a branch is incorrectly estimated and there is no room for the excess, it gets discounted.
We buy the discounted products, then flip them around on Amazon (where people are paying full price) for a quick profit.
Big brands sometimes do have the cheapest price
As we said before, with Amazon, you have an almost unlimited number of buyers, and later on in the guide, we’ll show you how to make sure that your product sells no matter what.
Aside from the dynamics of retail inventory storage, you have to consider this: not everyone is a price shopper. Many people (especially those with Prime subscriptions) will see a price on Amazon, assume that it’s the lowest, and hit the buy button.
Big brands are always trying to compete with Amazon on price – if you’re a savvy shopper, you can see where the big brands are beating Amazon, and take advantage of that by selling to people who aren’t doing their homework. Get it?
So all in all, there are two ways that you source products – finding lower prices from the giants, and capitalizing on specific products not selling at specific big brand stores.
Here’s the next question you should be asking: how on earth am I supposed to move a random assortment of products? It’s not like there are heaps of profitable products for you to choose from…
The power of Amazon’s FBA service
FBA stands for Fulfilled By Amazon. In layman’s terms, this means that you ship an item to Amazon, Amazon then puts that item on the particular product’s listing, and if someone buys the item, you get the money. But you don’t do any of the shipping – you only have to ship it once to Amazon.
Before Amazon, you’d either have to sell the product in-person through Craigslist or flea markets, or, you could take your chances with a random online market like eBay. What makes Amazon so powerful is that when people need a product, they go there. There are almost always buyers on Amazon for your products that you obtain through retail arbitrage, and in later chapters, we’ll cover how to make sure that your product will fly off the shelves right after you ship it to Amazon FBA.
The specifics of Amazon FBA will be explained later in this guide, as well how to source profitable products.
What happens when you buy something profitable
- You find a product in-store and buy it or you find a product online and buy it. The item is now in your hands.
- You find the Amazon listing (where the product is selling for a higher price), and Amazon gives you a custom mailing label to slap on the box that the item is in.
- Your product arrives at Amazon’s warehouse, and your item is for sale under the official brand sales page on Amazon. This is important – you are an independent seller, but you get to harness the power of the official brand page’s advertising and traffic.
- Once your item sells, Amazon ships it for you, and you receive the funds in your bank account. If any customer support is required, Amazon takes care of it.
The name of the game is spending as little time as possible sourcing and shipping products – with this guide and Amazon FBA, you can spend just a few hours per week and supplement your income nicely. Some people (after getting it down to a science) have even quit their main jobs to do this – it’s sort of like being a merchant in the middle ages. You’re not creating anything yourself, but you’re giving the people what they need, and you’re rewarded financially for doing so.
If any of this page has sparked your interest, please continue onto chapter 2. Everything is completely free – we will tell you how to do everything from sourcing products, to selling products… all the way to growing exponentially and outsourcing all of the legwork.
Next up is the difference between thrifting and retail arbitrage, including why we think RA is exponentially more profitable.