What’s behind the mark up of popular products like Trader Joe’s online?
You’ve been there: Your store all of a sudden doesn’t have a specific item, or the sales bin is wiped out. Or Black Friday seems finished the Wednesday before it started.
You weren’t late to the sale, there were just more resourceful shoppers ahead of you. And some of them are happy to sell those items to you at a higher price via online marketplaces such as eBay, Walmart or Amazon.
Welcome to the world of retail arbitrage.
Buying from a retailer and then selling elsewhere for a higher price is retail arbitrage, which nichepursuits.com defined as “discovering and profiting from inefficiencies in the market.”
Third-party resellers on Amazon, eBay and other online marketplaces are a growing source of online products you might be looking for.
In some cases, resellers pay full price, but charge you more simply based on scarcity — think seasonal items such as the hot toys for Christmas or anything pumpkin-spiced from Trader Joe’s.
Other times it’s just more convenient — though also more expensive — to buy online. As more brick-and-mortar retailers shutter stores, online sellers theoretically will charge whatever they can get you to pay for the convenience.
All that buying and selling adds up.
In 2017, more than half of items bought on Amazon worldwide were sold by third-party sellers, and more than 140,000 businesses topped $100,000 in such sales.
CNBC recently reported that for the first quarter of 2018, Amazon’s revenue from third-party sellers — including commissions, fulfillment and shipping fees — rose 44 percent to $9.3 billion and accounted for 18 percent of total sales.
Not all of these sellers were retail arbitrage-based. Some are small businesses selling their wares through online marketplaces. But all are vendors using a variety of formulas to get their slices of success.
“We’re used to buying at garage sales and repackaging,” said Aziz Makhani, a certified business adviser and technology consultant for the Small Business Development Center in Pullman. “As far as my personal feeling, that’s not a conflict.”
A PERFECT SETTING FOR ARBITRAGE
Trader Joe’s doesn’t have its own online marketplace, and it doesn’t open stores just anywhere. In Pierce County, the only Trader Joe’s is at 3800 Bridgeport Way W. in University Place. The next closest one is in Federal Way unless you head south to Olympia.
If you don’t live near one of the retailer’s outlets and have a hankering for, say, Trader Joe’s Dark Chocolate Covered Espresso Beans, then you’re not necessarily out of luck.
Amazon’s third-party vendors are happy to meet your need — for a price.
No matter who’s selling, getting those dark chocolate espresso beans delivered to your house might mean a lot in terms of convenience. And with that convenience comes cost.
As nichepursuits.com put it:
“Perhaps some might frown on this practice, but the reality is that if someone really loves Trader Joe's shampoo, which sells for $5 in the store but their closest store is 200 miles away, they might decide to pay $15 for a bottle of it and have it delivered to their doorstep.”
Examples of the prices shoppers face for convenience are easy to find. A sampling of five Trader Joe’s items checked earlier this year found all were more expensive online, sometimes dramatically so.
Prices of the retailer’s products listed on Amazon sometimes were $10 more than what was seen at the University Place store.
And none of the items was in short supply at the store.
This isn’t just a Trader Joe’s phenomenon. Costco and Target brand items also are listed through third-party sellers online.
Compare these local in-store prices from earlier this year with those charged by online sellers using Amazon’s marketplace:
▪ Kirkland Signature premium big roll paper towels, 12-roll: $15.99 at Costco and $30.16 online.
▪ Kirkland Signature milk chocolate roasted almonds, 3 pounds: $11.79 at Costco and $27.38 online.
▪ Kirkland Signature drawstring kitchen trash bags, 13-gallon, 200 count: $14.99 at Costco and $28.70 online.
Target doesn't allow reselling, but some of its in-house brands still show up on sites such as Amazon. For example, an Up & Up Sensitive Baby Wipes refill package, 736 count, costs $12.89 at Target’s online store. On Amazon, there were multiple offers, starting at $42.99.
For brands tied to Amazon itself, it’s another story.
Whole Foods, acquired by Amazon last year, provided an identical price match on every item checked online and at its store at 3515 Bridgeport Way W. in University Place on the same day in March that we checked Trader Joe’s prices.
If you’re shopping online, retail arbitrage makes comparing prices online imperative.
But as a report in Entrepreneur pointed out in 2016, not everybody does that.
In 1997, according to the article, in the dawn of e-commerce, a New York University professor named Yannis Bakos wrote a well-regarded paper predicting that the internet would change pricing forever, with comparison shopping keeping everyone in line and offering the same price.
“And yet,” the article noted, “it turns out, many shoppers don’t do the research.”
TRICKS OF THE TRADE
For every practitioner of retail arbitrage there seems to be a YouTube channel or an ebook describing the seller’s path to riches using a specific buying/selling strategy.
Ryan Grant of Minneapolis, for example, has six full-time and seven part-time employees working for him.
“Last year went very well for the business,” Grant told The News Tribune in a recent interview. “We did $3.7 million in sales on Amazon in 2017.”
What sells best?
“We like anything given as a gift: toys, home goods, home and kitchen, home improvement, some apparel, some books,” Grant said. “We try to avoid things that expire: food, for example.”
His business strategy started in college when he resold textbooks for profit. As a side hustle to his accounting career, he moved on to buying items at clearance from Walmart, Target and Toys R Us.
“I was an accountant working on corporate audits and financial statements, and within about six months thought it wasn’t a job for me,” he said.
“I knew I had experience doing textbooks but … I wanted to find products to sell year-round. I got involved in retail arbitrage and all different categories toys, home goods, groceries … buying in retail and selling on Amazon.
“I thought I'd do it part-time and wanted to earn $1,000 working 10 hours a week. I was able to do that and quit accounting in September 2013 and pursued this full time.”
Target closed its doors to him after it changed its reselling policies.
“I had a cart with 50 to 100 video games and someone stopped me from buying,” he recalled.
The company also stopped granting tax exempt salesto resellers in 2015.
Otherwise, Grant noted, “Most stores are on board.”
“Oftentimes we're buying clearance, which is what they want to get rid of. So in theory, it’s a win-win.”
To be clear, Grant’s the exception with his level of success.
As one reseller noted on an Amazon Seller Central message board in 2015: “Arbitrage is really not a scalable business model and you have to work entirely too hard for your money in my opinion. I think there are a lot of people like me on here that used it as a means to an end, putting together a business when they may have started with less than $1,000.”
WHEN A SALE ISN’T A SALE FOR EVERYONE
Is there anything wrong with people going in and buying out a store for their own resales?
Trader Joe’s, for its part, maintains that people prefer to shop at its stores, and it spent years in court fighting a prominent reseller.
“For us, the store is our brand and our products work the best when they're sold as part of this overall customer experience within the store," according to a statement from the grocer’s recent podcast series.
Spokeswoman Kenya Friend-Daniel told The News Tribune via email: “Part of that experience is the value we are committed to providing our customers, each and every time they shop at our stores — great products of the highest quality, at great prices,” an indirect reference to the higher prices by online arbitrage resellers.
The chain took a stronger line of defense a few years ago against Canadian reseller Pirate Joe’s. The store, operated by Mike Hallatt in Vancouver, B.C., was filled with Trader Joe’s items bought in bulk at Seattle-area stores and sold in Vancouver at much higher prices.
The store was shuttered last summer after five years of operation and four years of litigation involving the U.S. grocer. Trader Joe’s sued in 2013, alleging trademark infringement, unfair competition, false designation of origin and false advertising.
“They definitely didn’t want me to be a business,” Hallatt told The New York Times last year when the two sides settled the lawsuit and he closed Pirate Joe’s.
Inflated reselling of products can backfire not only with litigation, such as the Trader Joe’s case, but also by not being seen online in the first place.
One way vendors can basically become invisible on Amazon is by hiking the price on items still available in stores, said James Thomson, president of PROSPER Show, an educational organization focused on developing training and materials for online sellers.
“If a product is still available in stores and sold at a price that is 10 or 12 percent above list price, then Amazon suppresses the ‘buy box,’” said Thomson, an advisory member of Buy Box Experts, which helps teach strategies for selling on Amazon.
This means, “you can sell it but won't be on main page,” Thomson said. “People will only find it through ‘other sellers’ tab.”
Meaning, probably not at all.
NO SIGN OF STOPPING
As for the bigger picture concerning retail arbitrage, Makhani, the business adviser from Pullman, says it’s just business.
“People in remote locations and/or for convenience are willing to pay higher prices at Amazon,” he pointed out. “I believe this is capitalism at work and don’t see a perspective other than perhaps moral.
“Sometimes these merchants are single sellers of the products on Amazon. As much as I personally find it distasteful to overcharge or gouge customers, it is the price one pays for the benefit they pursue.”
Others, including Thomson, defend it as pure market economics.
“Walmart may sell 50 percent off and a brand may say, ‘No, you'll create retail arbitrage sellers,” he said. “The brand is horrified but Walmart has cleared inventory.”
Do brands really lose out, though, if people are still buying? Does it matter whether it is average customers or third-party sellers making the purchase? What about people making use of in-store sales or two-for-one offers for retail arbitrage?
“I believe brands earn the same because they have built enough margin in their products,” Makhani said. “BOGO (buy one, get one free) brands coordinate with Walmart to make this a win-win. Walmart decides when to offer the products as single or BOGO when it chooses to do so.”
Yet, it’s a world where people tend to pick an online marketplace and buy exclusively from it. For one thing, people want to make the most of their Amazon Prime memberships, now costing $119 a year.
Arbitrage sellers and other marketplace vendors will continue to battle it out for customers, and that can mean vendors putting more of their valuable items on their own online stores.
And the road can be tricky for Amazon sellers, particularly if their products are deemed in violation of its selling policies and code of conduct, which can be difficult to parse. Even Amazon’s online sellers discussion forum includes endless debates among sellers on what’s allowed and what’s not.
General recommendations from sellers on the forum: Stay away from reselling top brand names, food, anything with a warranty.
Amazon also offers a list of restricted products.
From brands’ perspectives, the fight to keep control of their products continues.
“A brand's distribution problems are not Amazon's to solve,” Thomson noted. “Brands figure out they have five hero products. They can be distributed on Amazon and if they (customers) want a specialty item, they can come to our store.”
Makhani says it’s just another facet of capitalism.
“Unless government steps in to make a rule against this practice” he said, “there is no issue.”