During the first dot-com boom, marketplaces such as EBay (EBAY) turned millions on to the pleasures of selling junk to strangers. In recent years, there’s been a twist on the resale game: Instead of selling used stuff, a growing number of individuals in the U.S. are buying new consumer goods at steep discounts and reselling them to buyers overseas, where demand for American brands far outstrips supply.
This new breed of bargain hunters arms itself with coupons and trawls online retailers large and small. Then it snaps up brand-name goods, from women’s jeans to snowboards, and ships them to importers that specialize in Western luxuries. “Say Kate Spade has a one-day, 75 percent-off sale,” says Scot Wingo, chief executive officer of e-commerce software provider ChannelAdvisor, which has about 2,000 customers using its technology to run their online retail sites. “They will go in with 20 credit cards and 20 IDs, plus membership in cash-back programs, and get the item for 78 percent off, plus they have coupon codes for free shipping for all of it.”
Based on numbers released by sites such as Amazon Marketplace (AMZN) and EBay, Wingo estimates that there about 3 million U.S. resellers, mostly people working out of their homes to supplement incomes. Liz Crawford, a retail consultant in Westport, Conn., and author of The Shopper Economy, describes the phenomenon as “a consumer arbitrage market that is really new and fueled by technology and growing income disparity.” For underemployed people with time on their hands, “there’s an opportunity for [them] to buy low and sell high,” she says, because of sophisticated pricing that results in prices that change throughout the day.
Unsurprisingly, these coupon-clipping arbitrageurs are frowned on by premium brands. Kate Spade last year convinced the Web host of one reseller, which was based in Montana and catering to Japanese shoppers, to shut the site down because of unauthorized use of its name, according to the reseller. The designer brand didn’t respond to requests for comment. “It certainly raises red flags when online sellers offer prices that appear to be below wholesale. If a price looks too good to be true, it’s often the case that the merchandise has been stolen,” says Jason Brewer, vice president of communications and advocacy at the Retail Industry Leaders Association, a trade group in Arlington, Va.
In fact, most online resellers are not fencing stolen goods but taking advantage of websites such as CouponCactus, a Ringwood, N.J., home-based business launched in 2007 by Scott Fitterman. The site offers coupons, affiliate marketing, and cash-back deals from 4,000 merchants to its 100,000 members, bringing in about $5 million in annual revenue, Fitterman says. About 18 months ago, he noticed an increase in foreign members who operate online retail stores, primarily in China and Japan. He’s not sure what sparked their interest, but says savvy operators who spend the time to aggregate cash-back offers with coupons and sales can buy certain items cheaper than wholesale.
Frank Muscarello, CEO of Chicago-based MarkitX, an IT hardware exchange that handles around $1 million in monthly transactions, has seen overseas sales rise since he started the company in April 2012. “These developing markets are gathering a lot of steam. They want to be Westernized, but retailers don’t have the distribution in these places. When American entrepreneurs can figure out how to master the distribution, the retailers are certainly not happy about it, but if [the small businesses are] providing value to the customer base, a lot of them don’t care who they p— off,” Muscarello says.
Like many interstate online sales, these types of transactions generally take place outside the tax and regulatory structure that governs traditional retail sales, including the collection of state and local sales tax. Crackdown efforts are underway, including legislation reintroduced on Feb. 14 by Senator Richard Durbin (D-Ill.), which would allow states to make Web-based retailers collect sales taxes. The legislation has bipartisan support and is backed by groups such as the National Retail Federation and online merchants that include Amazon. The IRS is also tightening up the reporting of e-commerce income on federal income tax returns.
While most resellers are part-timers, two Russian immigrant brothers have turned the model into a 120-employee business that charges a 9 percent markup on the goods it sells. Founded in Skokie, Ill., in 2007, Russian shopping site Bay.ru expects $50 million in 2013 revenue, according to CEO Aaron Block. The company has a warehouse and a 24-hour call center staffed mostly by Russian immigrants, who must master the complexities of customs, shipping, currency conversions, and cultural issues.
Block acknowledges push-back from certain retailers, but “nobody’s forced to sell anything to us,” he says. His six-person procurement team deals with more than 100,000 merchants, from top brands to EBay sellers, the majority of whom “want nothing to do with Russia because they don’t want to deal with fraud and customs. They want to sell more to us,” he says. “We’re like a travel agent for these goods. Some people just can’t or won’t do it on their own, and they prefer having one throat to choke if something goes wrong.”