Is Amazon Retail Arbitrage Worth it? (4 Hidden Dangers Waiting For You in Retail Arbitrage)

February 3, 2023

Amazon FBA retail arbitrage is not worth it in 2022. Issues like low profit margins, apparent oversaturation, lack of control, and tough competition, are uncontrollable. You'll face costly ad spend, issues with the amazon Brand Registry, and gated categories. Amazon itself has also taken a huge hit in 2022

Simply put, there are other online businesses that outperform the Amazon business model in terms of income and potential. 

Local Lead Generation is one of the best options you can go for if you’re searching for a steady source of passive income.

Conversely, Amazon retail arbitrage entails having to monitor inventories, assess competitors, conduct product research, develop brand awareness, and many more. 

4 Hidden Dangers Waiting For You in Retail Arbitrage

Most successful FBA sellers paint retail arbitrage in such a positive light because of two reasons:

  • They have an FBA course and want you to enroll.
  • They've experienced some form of success in FBA and are naturally biased towards it.

While retail arbitrage and FBA has allowed thousands of sellers to generate huge amounts of cash and profit, the darker side of FBA has gone unnoticed amidst all the biased positive reviews given by coaches, students, and biased sellers.

As a result, first-time sellers are often subjected to a number of hidden risks and dangers that not only hinder their progress, but also put them at risk to shut down their business to cut further losses.

Here are a few pitfalls aspiring FBA sellers must watch out for in case they decide to push through with their Amazon business.

1. There are very low profit margins

Apart from the actual costs of starting an Amazon business and the fees that come with it, margins are often low in Amazon FBA retail arbitrage because of several factors, which include cost of production, shipping, sales commissions, and many more. 

While you may find a bit of success when you gain some traction, you still do not have full control over your products because you heavily depend on the business performance of your suppliers, which can prove to be a hindrance when trying to maximize profits and margins.

Low-cost retailers are also entering the Amazon market themselves, which can be bad news for sellers looking to pursue retail arbitrage. 

Keep in mind that as more and more sellers join the Amazon market, products get cheaper and margins become slimmer.

2. Scaling your business is close to impossible

Running an arbitrage business means shopping at retail stores all the time in order to keep your inventory alive. Not only does this take up a huge chunk of your time, it also eliminates the possibility of scaling since you’re practically running on a hamster wheel. 

Sure, you might maintain a good profit margin and earn a lot of money, but that’s all it’s going to be - a way to make money on Amazon. 

You’re also not building a brand of your own since you’re selling a product that’s already been labeled by someone else. 

If you’re dreaming of being able to develop your Amazon store and eventually sell it off years later, retail arbitrage isn’t for you. 

3. Ads can be very costly

The average click-through-rate on Amazon is 0.41%. To better understand this, a click-through-rate, or CTR, is the number of clicks your ad gets relative to the number of impressions it generates. 

For example, if you get 1 click per 100 impressions, your CTR is 1%. Amazon has a 0.41% CTR, which is extremely low, given that they use paid ads.

Sellers also have to pay for each click they get, which is also known as cost-per-click (CPC). 

Ad placement directly correlates with CPC because the cost of each click is determined by how many sellers will bid for the top spot. The more competition there is, the higher the chances are of an ad to have an expensive CPC, which is the case for most arbitrage sellers.

4. Amazon Brand Registry and Gated categories

An Amazon FBA seller will typically be required to register their products on the Amazon Brand Registry to prevent counterfeit products and protect intellectual property.

However, FBA sellers who practice Amazon arbitrage are literally purchasing branded products and selling them off as their own, which can raise some issues with the Amazon Brand Registry. 

Amazon also has Gated categories that often cause problems with retail arbitrage products. A Gated category is a product category that is restricted by Amazon and is usually subject to approval before being sold.

Gated categories are typically restricted because it is licensed and registered by established brands. 

Even after being approved, you still have to pay an expensive fee in order to sell a product in that specific category.

4 Reasons Retail Arbitrage Does Not Work Anymore in 2022

1. Products are over-saturated already

As of February 2022, the number of products in the Amazon marketplace is estimated to be around 350 million, with 96% belonging to third-party sellers. 

Amazon also has over 310 million customers globally, with approximately 200 million being Amazon Prime subscribers. 

While these numbers look very promising for an aspiring Amazon seller, these figures show product oversaturation. Product oversaturation occurs when the supply of a product exceeds the demand for it. 

It would also be very difficult for first-time Amazon sellers to find a unique and profitable product in 2022 because of several reasons:

  • There are millions of products not only on the Amazon market, but also on other online platforms and in real life.
  • You will have to compete with thousands or even millions of sellers who are on the same level as you, or better.
  • Even if you come up with a product that sells, it’ll only be a matter of time before bigger and more established brands take notice and create a better version.

2. The competition is tougher than ever

Retail arbitrage is a buy-and-sell industry where you purchase products from suppliers and retailers that sell them at a cheaper rate. 

However, you not only have to compete with thousands of arbitrage sellers who are doing the same thing you are, there are also third party sellers and big brands from China that are selling at a very low price.

In addition, Established brands and companies are given more priority by Amazon compared to FBA sellers. 

Manufacturers are also cutting the middle man to operate on slimmer margins and sell cheaper products compared to regular FBA sellers. 

You also have to deal with product hijackers. Product hijackers not only leave negative reviews on a product listing, they also create products that are extremely similar to another product or a better version of an existing one. 

Hijackers normally appear in your Buy Box, which can drive away potential clients and prevent you from selling your products.

You will also have to compete against Amazon itself, which has over 400 brands that offer approximately 240,000 products, with Amazon Basics being one of their biggest brands. 

3. You have no control

The whole idea of retail arbitrage is heavily reliant on other retail stores and suppliers, which means you have absolutely no control over your prices, supply chain, inventory, and many more. 

Think about it this way - what if your go-to-store or retailer stops carrying the product you’re purchasing from them? What if their prices skyrocket? What if they randomly decide to stop retailing to third party sellers and just sell the product themselves? 

Another uncontrollable issue Amazon sellers usually have to deal with is damaged products coming from Amazon warehouses. There have been incidents of items being damaged because of disasters, both caused by nature and human error.

For example, an Amazon warehouse collapsed after it was hit by a tornado back in December 2021.

Sellers have also reported incidents where their accounts have been suspended or temporarily banned for no apparent reason. Amazon has full control over your business, and there may be little that can be done on your part.

Once you create an Amazon account or a seller account, you’re basically playing by Amazon rules, not yours.

These issues are extremely detrimental to any retail arbitrage business and can quickly diminish returns, or worse, cause your business to fully shut down.

4. It’s a slow year for Amazon

Now that the pandemic is coming to a close, aspiring retail arbitrage sellers must keep in mind that people are slowly returning to actual, real-life retail stores instead of buying from online marketplaces. 

Amazon CEO Andy Jassy has stated that the company is on pace to surpass its worst year in 2008, especially in the retail sector, because a large percentage of its customer base is now turning to physical stores.

In addition, Amazon’s stock has taken a huge nosedive, plummeting by about 41% this year. 

The company has also announced that their plan to layoff over 10,000 employees has officially started, which could take a huge hit on the company’s overall performance and value.

While 2022 is officially about to end, the future isn’t looking too bright for Amazon, which could be bad news for aspiring Amazon sellers who are planning to jump on board in the next few years.

What is Amazon Retail Arbitrage?

Amazon retail arbitrage, or just retail arbitrage, is the process of looking for low-cost, discounted products from a retail store or a thrift store and selling it at a higher price on Amazon. 

For example, if you find a napkin that’s worth $2, and sell it on Amazon for $10, you basically take home around $8 dollars in profit minus Amazon fees. That’s how retail arbitrage works.

Retail Arbitrage vs Online Arbitrage

A retail arbitrage seller purchases products from retail stores and resells them on Amazon at a higher price.

There are others who practice Amazon online arbitrage, which involves buying a low-cost product from online platforms such as Alibaba and selling it on Amazon.

However, these words are often used interchangeably and don’t cause as much confusion. The definitions of these two concepts are simply technicalities that don’t really matter when used as business jargon.

Other Amazon FBA Business Models

  • Amazon wholesale / Wholesaling: Wholesaling is buying products in bulk, usually from manufacturers in China, because they often come at a cheaper price. Here's a comparison of Amazon retail arbitrage vs wholesale.
  • Private Labeling: Private Labeling is the process of purchasing unbranded products and labeling them with your own brand. A product that is privately labeled is called a private label product. 
  • Amazon to eBay arbitrage: Amazon to eBay arbitrage is a method used by arbitrage sellers where in they will list a product on eBay and purchase that product on Amazon once an order is placed. However, eBay arbitrage has now been banned after multiple reports from users 

Conclusion: Is Retail Arbitrage on Amazon Worth It? Why is Local Lead Gen Better?

Retail Arbitrage sellers found some success back when it first started. Sellers came up with a unique and profitable product without having to deal with intense competition from other sellers. 

However, as time went by, thousands of other sellers entered the Amazon marketplace with the same formula and strategy upon launching their Amazon business.

Because of the influx of online entrepreneurs joining in on the Amazon hype, a variety of problems kicked in such as product oversaturation, costly fees, never-ending paid ads, and many more. These ultimately led to the retail arbitrage business model becoming unprofitable.

Local lead generation not only eliminates these uncontrollable issues, it also provides a more stable and sustainable source of passive income. 

Local lead generation shines because every city is its own market, and each city offers 50-100 potential niches that you can get into. It is also proven to still give you significant income even after up to 5 years.

Unlike Amazon retail arbitrage, local lead generation only requires you to pick a niche you want to focus on, create a website that caters to that specific niche, and allow local companies under your chosen niche to use your site and promote their services there.

It doesn’t depend on customer reviews and feedback to gain traction, since it relies on SEO tactics to generate organic traffic. 

Local lead generation also doesn’t need as much maintenance as Amazon retail arbitrage. All you have to do is keep your site ranked under Google’s algorithm and watch the leads turn into sales. 

To learn more about the differences between Local Lead Generation and Amazon FBA Retail Arbitrage, read our breakdown of Local Lead Generation vs Amazon FBA.

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