24 Feb Retail Arbitrage in 2022: What you Need to Know
The e-commerce space can be challenging. Depending on your funding, there can be limitations in initial growth. Many business models need considerable initial investment for stock and overheads.
With inflation reaching a fever pitch in the US, there’s been a lot of talk about retail arbitrage or re-selling. Retail arbitrage is a strategy where sellers buy products (sometimes from local retailers) and then sell it later online at a profit. It can be a tempting strategy but it’s not without risk.
Often the conversation around retail arbitrage presents it as a ‘get rich quick’ scheme. The truth is more nuanced. While it can be a good strategy, it depends on your market, the goods you sell, and many other factors.
Regardless, here is what you need to know about retail arbitrage in 2022.
What is Retail Arbitrage?
Retail arbitrage, or reselling, takes advantage of the variation of prices in the market. Typically, you purchase an item at a lower or discounted price and sell it online for a profit. You can use the majority of online marketplaces for this, though Amazon is particularly popular. With the rise in inflation and the fact that retail prices are also rising, some are saying retail arbitrage is a good strategy.
The primary difference between retail arbitrage and more traditional business models is that you purchase goods in bulk in advance with the aim of reselling those at a higher rate later in the year.
Sometimes, sellers actually purchase from physical stores and then sell online. This has been particularly appealing over the last few years. Big box retailers like Target or Walmart can afford to offer lower prices, or put items on sale.
In fact, these retailers can sometimes sell certain products at a loss. Their profit margins from existing items can cover the slight profit loss from sales, discounts, and clearance items. However, those same items might still be listed at full price on online marketplaces.
Retail arbitrage involves taking the time to research available stock and current prices. This can be time-consuming but gives you a clear idea of the profit potential for an item. The risk here is that demand shifts, products sometimes lose value. You can never guarantee that retail products will increase in value or stay on-trend.
The savviest sellers will do their research to determine which items are best to sell while stocking up on packaging or other materials they know they’ll need.
Other Retail Models
Retail arbitrage is just one potential e-commerce business model or interim strategy. The more common alternatives are wholesale or manufacturer purchases, dropshipping, and even private label.
The wholesale model involves the purchase of inventory from manufacturers or suppliers. Typically, prices will be lower at wholesale as purchases are made in bulk, leaving a bigger margin for profit. However, a larger inventory must be bought and stored in order to make a good return and requires a larger capital commitment.
Dropshipping removes the middle man. Sales are made through your store, but orders are fulfilled by your sourcing company. They send the items directly to your customer. This removes the need for storage of large amounts of inventory.
Finally, private label is the more labor-intensive option. You own and create your own items. You might manufacture them from source materials, or purchase basic items and rebrand them. Private label selling requires sellers to take the time to create a brand and a demand for their products.
Benefits of Retail Arbitrage
The primary benefit of retail arbitrage is that you can get higher margins on products. The argument goes that with inflation rising, prices will go up in 6 months so buy now, sit on the products and sell later at a higher price.
It’s also possible to buy products from big box stores that are selling on razor-thin margins or even a loss and then sell them at a higher rate later on. In short, the advantage of retail arbitrage is higher margins and more revenue.
Limitations of Retail Arbitrage
The biggest limitation of retail arbitrage is your appetite for risk. There is no guarantee that prices will go up in the short or long term. You could be left with a lot of stock you overpaid for and all of your money tied up in said stock.
Prices could even go down, as retail items go out of season or are no longer a trend. This change in popularity could result in a sizeable loss for your business.
Furthermore, this business model isn’t scalable. Retail arbitrage isn’t the ideal business model for those that are looking to scale up their business.
Essentially, retail arbitrage is a little bit like gambling and it requires someone with skill at analyzing the market to buy at the right time and sell at the right time. It can work, but it can also fail catastrophically.
A Smart Retail Arbitrage Strategy
Instead of trying to figure out what products you can buy at a low cost and sell at a higher price later, focus on evergreen products or goods. These are goods that you will always need, or will always be applicable to your business.
Packaging is one example of an evergreen product. As interest rates inflate, consider where you can save now, for the future. Look at buying your boxes and other packaging materials now, rather than in the future when they have inevitably increased in price.
You will always need packaging for your orders, so you won’t be stuck with immovable inventory. It also helps that packaging doesn’t have an expiration date.
Depending on your product line, you might have other materials that you will always need. Materials like plastics, yarn, or fabrics don’t have an expiration date. If you manufacture your own products, these products can then sell for a higher price at a later date. Utilize evergreen retail arbitrage to increase your profit margins for the future.
At Yardline, we are experts in all kinds of e-commerce businesses. We offer capital advances to help your business grow and can help you learn where to best invest for success.