Risk Management

“Retail arbitrage is dead.”

By Lesley Hensell

That refrain has echoed across Amazon seller conferences, newsletters and Facebook groups for a year. The loudest cries rose during Nike-gate, when Amazon suddenly – and without warning – gated certain sellers, preventing them from selling specific Nike ASINs. We’d like for you to look closer at inventory sourcing.

But Nike-gate was not an obvious crisis to everyone. Some sellers remained ungated. Others lost all of their Nike ASINs. Still others could sell some of their Nike items, but not others.

Unfortunately, from outside of Amazon’s hallowed walls, nobody can be sure exactly what it all means. Even inside of Amazon, there is disagreement about gating, how it should be rolled out, to which sellers, and more.

That leaves average sellers asking some basic inventory sourcing questions that demand answers:

• Should I stop retail arbitrage?
• Should I stop online arbitrage?
• Why can other sellers get away with these strategies, while Amazon is targeting me with ASIN or account suspension?
• Why are some so-called Amazon gurus warning everyone to stop arbitrage completely, while others are still building and selling arbitrage software?

In our view, these questions do not have a single answer. Rather, the choices surrounding arbitrage depend upon the individual seller’s resources and risk profile. Inventory sourcing.

Anatomy of a risk profile

Once upon a time, sellers felt confident and secure with their Amazon accounts. Today, Amazon is viewed as a riskier proposition. While sellers can control a wide range of inventory sourcing factors, some variables remain out of their control:

• Shady Amazon customer complaints
• FBA warehouse issues
• UPS, USPS and other carrier challenges
• Product quality surprises

In addition, RA and OA have their own specific set of risks. Here are scenarios we have seen:

• Amazon refuses to accept RA or OA receipts – but with no rhyme or reason. For example, one seller might have a Walmart.com invoice accepted, while another does not.
• Seller Performance complains because long receipts are photographed/scanned/cut.
• OA suppliers don’t provide invoices in the format Amazon requires.
• RA and OA items garner intellectual property complaints – both valid and fake.
• Branded items purchased via RA or OA are suddenly gated, leaving a seller with excess inventory and no way to offload it or recoup costs.
• RA and OA items may have been shelf pulls or customer returns, and customers rightly believe they were old, damaged or used.

Are you a Bob or a Gary?

Consider two different sellers. Bob has all of his eggs in the Amazon basket. He recently quit his job to sell on Amazon full-time, and he’s focused solely inventory sourcing thru retail and online arbitrage. Bob spends his time scooping up popular items at large retail chains, dollar stores and closeout warehouses. If his account were to be suspended, Bob would find himself with no income to support his family.

Gary has a highly diversified portfolio of income streams. He sells from a brick-and-mortar store. His two Amazon selling accounts feature completely different items: one focuses on hot toys found at retail stores, while the other carries only private label goods. Gary recently launched a Shopify store, and he already sells on eBay and Jet.

Which seller is likely to be more concerned about the risks of retail arbitrage? Or, conversely, which seller needs retail arbitrage more to achieve his financial goals?

There are no right or wrong answers here. What if Gary’s profitability hinges on his RA toys? What if Bob has tried multiple times to break into wholesale and private label, but has not yet been successful?

Understand your company’s risks

Each seller must think through their own risk profile when deciding whether to pursue RA and OA as sourcing strategies. Consider each of the points below, and your risk tolerance for retail and online arbitrage will become clearer:

1. Certain categories present higher risks for RO/OA sellers. Amazon is cracking down on specific categories that are at higher risk of inauthentic items being sold. Beauty and electronics immediately spring to mind.
2. Some brands present higher risks as well. There is a reason that Amazon’s gating push started with Nike. It’s a highly counterfeited brand with relatively expensive items. The more luxurious or expensive the brand, the more likely an Amazon customer will make a counterfeit claim – and RA/OA receipts may not cut it with Seller Performance.
3. Some RA/OA sources are more legit than others. Amazon is more likely to accept receipts and invoices from retailers with solid chains of custody for their merchandise. For example, Walmart and Target tend to have strong direct relationships with manufacturers, and their distributors are expected to provide only authentic goods. In contrast, discounters like TJ Maxx and Marshall’s buy liquidation deals. There is no proof of the chain of custody for these items. (Think Coach bags at a discounter – are you sure they are real? Will Amazon believe they are real?) This even applies to your favorite drug chains. CVS, Walgreen’s and Rite-Aid score those awesome endcap deals from liquidators.
4. RA/OA items can be shelf pulls and customer returns. A well-known shoe store fills its online orders by having its retail outlets ship items to the customer from right off the floor. Often, these shoes are in polybags and taped together – no box and no tags available. How many times were those shoes tried on? Do they have paper in the toes? Other large retailers have similar policies. Even if items ship from the warehouse, some of the stock may be shelf pulls that were used and returned by customers.
5. Is Amazon your only stream of income? If Amazon is the only way you replenish your personal bank account, minimizing risks probably makes sense.

If you’re married to RA/OA, with no plans for divorce …

Some sellers feel the rewards of RA/OA greatly outweigh the risks. The margins can be excellent, and inventory turn can be rapid. It’s also a great way for new sellers to enter the world of Amazon sales. If you’re one of these folks, consider the following suggestions:

1. Choose retailers that eschew liquidation. When inventory sourcing you need to buy brand-new merchandise. Not liquidation lots.
2. Pick sources that Amazon is likely to see as its equal. Amazon gives credit to the big boys. It is unimpressed by dollar stores and their cousins.
3. Inspect, inspect, inspect. Even high-end retailers accept returns and then put them back on the floor. Make sure the coffee maker is coffee-free, the curling iron is hair-free, and the cosmetics are sealed.
4. Choose brands and categories that are less likely to raise eyebrows. Yes, that high-end scarf may have great margins. But without an airtight chain of custody, is it really worth risking your account?
5. Understand Amazon’s condition guidelines. Shelf wear matters. Amazon customers expect items to be brand new and defect-free. Even a bumped package can spell trouble.
6. Build multiple streams of income. Sell on other platforms. Create an approved second Amazon account for your private label offerings. Flip houses. Develop a service business. Do something to ensure you will still have revenue if Amazon takes out your seller account.