Protecting Your Business from Retail Arbitrage

In this blog I’ll be weighing in on an article from Bloomberg about a dropshipping scheme that cost a popular family business millions.

This article jumped out at me the second I saw it. It outlines one of the few downsides of dropshipping for vendors and manufacturers, especially if the online marketplaces involved aren’t doing much to police the issue.

Retail Arbitrage

Retail arbitrage has exploded for savvy, or, as some might say, unscrupulous, individuals looking to make an extra buck. It involves buying from one retailer at a low rate and selling it through another retailer, in this case, Amazon, for a higher price and pocketing the difference.

Why Now?

Twenty years ago, finding price discrepancies between various retailers would require days of browsing store after store. The internet makes it possible for these comparisons to be made instantaneously. Even more beneficial to these resellers is the advent of dropshipping. This eliminates the need for them to front the money to purchase the product from one retailer before making it available for sale, basically eliminating any financial risk associated with the gimmick.

But with marketplaces either failing to be proactive or simply ignoring this loophole, the burden of prevention falls on the vendor/manufacturer. Ironically, a viable solution ties into a common conversation I have with clients. The question I am always asked is “What is the best strategy for making my products available across all of my retail partners and should I sell them through my own website or marketplace as well?”

How to Protect Your Business

In most cases, the best strategy and protection against retail arbitrage is exclusivity. The more you can diversify your product offering across each of your retail partners, the better. The more you offer the same product across multiple sites, the more you open yourself up to pricing competition and arbitrage opportunities. The issue is compounded if you then offer the same products on your own site. Retailers and marketplaces will take this as an attempt to compete with them, resulting in a discounting battle. The more you can create product lines that are exclusive to a specific retailer and their target audience, the less need retailers have for pricing competition and the less opportunity for retail arbitrage.

Smaller vendors or manufacturers who have unique products will find it harder to expand their product offerings, so the burden of policing the marketplaces will play a larger role in their efforts to fend off the side-hustlers impacting their business.

Let me know your point of view on this. How would you resolve the issue at your company? What are you doing to protect your business from retail arbitrage?