August 5, 2022

Rogue sellers and drop-shipping.

43 comments:

tim maguire said...

How is this not simply legitimate arbitrage? How is dum-dums losing money when the product originates from dum-dums no matter who the ultimate vendor is? They still make the original sale and get the profit they agreed to at that sale.

Roger Sweeny said...

I don't see the problem. So dum-dum doesn't make as much money. So what? In fact, it seems like getting amazon to stop the lower-priced sellers is an anti-trust violation, a price-fixing arrangement.

Mike of Snoqualmie said...

So, Dum Dum is only getting the wholesale price for their products instead of the retail price. Boo Hoo! They could try lowering their price on Amazon to recapture those sales.

Jersey Fled said...

Correct me if I'm wrong, but didn't Spangler get paid by Sam's Club for the Dum Dums? And didn't the buyer get their Dum Dums in a voluntary transaction at a price they were willing to pay?

Bloomberg apparently never heard of arbitrage.

Critter said...

How is Dum Dums harmed? The price paid by the consumer is what the consumer would pay at Sam’s Club. And Sam’s Club buys from Dum Dums at a price agreed to by Dum Dums. Isn’t the rogue seller just cutting out a markup included in the price on Amazon? How can Dum Dums expect to charge more on Amazon than at Sam’s Club?

Wince said...

Isn't that economically efficient arbitrage?

rhhardin said...

I don't see the problem. Sell at the same price to everybody and there's no arbitrage opportunity.

It's competition, in the meantime.

gspencer said...

And what exactly is wrong with this drop-shipping? The middleman is simply a broker matching a buyer with a seller who has what the buyer wants. All parties enter the transaction freely; there is no compulsion anywhere along the line.

States have laws prohibiting the so-called "scalping" of tickets. These laws are in the restraint of trade. The so-called "scalper" has a product/service which a willing buyer wants.

MartyH said...

I've sold on Amazon for well over a decade. Drop shippers will occasionally show up in the forum asking what to do when Best Buy is out of the item they sold ten orders for. The community rightly shreds these sellers.

Recently I created a brand. Amazon made me submit a letter on the brand holder's (my) company letter head stating that my company is an authorized reseller of the product.

They have also asked for receipts from a real distributor of product if you wanted to sell in certain categories. Wal Mart receipts would not work.

Because warranties apply to the purchaser of a product, they technically are held by the drop shipper of the product, not the end user. Drop shipped product is not new and should not be sold as such.

This is a problem Amazon could greatly reduce by better screening sellers of product listed as new.

Biff said...

We live in an era where Bloomberg, of all news organizations, doesn't know what arbitrage is.

MartyH said...

"What is wrong?" Technically the warranty is void. Drop shippers are fly by night. Someone who gets sick from those Dum Dums technically has no legal recourse. They bought it off a street corner as far as Dum Dum is concerned.

Strick said...

Arbitrage is a well known, commonly employed principle. Take advantage of your knowledge of an opportunity to buy low and sell higher to someone with less information. An economist would say that it makes the system more efficient, leveraging limited information (that the arbitrage opportunity exists) in a way that will eventually lower prices over all as the arbitrage becomes common knowledge and is squeezed out of existence.

And how is this costing companies anything? If the product is available for a price at Sam's Club, the manufacturer is surely making a profit on selling it to them. Sam's Club sells more product, the seller who advertised the product takes a cut. If the manufacturer is unhappy with their Sam's Club margins, it's not these "rogue" sellers who are to blame, it's the manufacturer's faulty pricing model. They shouldn't have cut Sam's Club such a sweet deal.

BTW, lots of retailers use drop shipping. Buy a product, say metal office furniture, from them and it's shipped to you directly from the manufacturer. It's a common business model.

MartyH said...

You don't get a warranty from a pawn shop.

Carol said...

I worked for a lumber wholesaler who worked the same way. Though first they called the mills to get a feel for prices, then call the lumber yards and make the sale, then back to the mill to close the deal.

Then ship from milk to buyer. I mean the lumber yards could do it themselves but are busy or something.

Something like that. What's the problem?

MartyH said...

This is not traditional drop shipping. This is short selling in real time.

John henry said...

Dittos to what everybody has said about Spangler making their profit and sounding like whiney bitches

This is not a new problem, it is called Grey Marketing and has been going on for 100 years or more. Companies hate it because it disrupts normal sales channels which hate it because it costs sales.

I worked, in the 80s, with Loreal on this problem. They made a lot of high end perfumes in their Rio Grande PR plant. (what? You thought they came frome Paris? Ha, ha, ha. Ditto Chanel #5. Pure Humacao swamp water)

They had a carefully cultivated, high end image, supported by huge ad budgets. They only sold through high end perfume stores, department stores and the like.

Problem was. Macy's, Nordstrom and Fifi's Fine Fragrances would buy a lot more than they could move then sell the excess to low class resellers.

It was a big enough problem that I sold several lasers to etch a microcode on each carton. If it was going to Macy's, the code and position identified it. It was an enormous pita in the warehouse.

Loreal then sent out secret shoppers to the low class stores. Then they would complain to Macy's if they found "their" product.

John LGBTQBNY Henry

John henry said...

I'm reminded of an old column by Chicago columnist Mike Royko.

One August an entrepreneur set up in a storefront to sell school clothes and supplies. No signs, windows papered over "closed" sign.

Customers had to knock and say "Joe sent me or some such"

Inside everthing was done to give the impression that the merch had "fell off the back of a truck, if you know what I mean"

It worked like a charm. Nobody had any qualms about buying what they thought were stolen goods.

So much that the police raided them. Only to find that all the merch had been legally purchased, they had all permits and all taxes were paid.

John LGBTQBNY Henry

John henry said...

If I run a mini-super, c-store or bogada (as the good doctor calls them) I buy my dumdums from Acme Candy wholesale or some such.

I put it on the shelf and sell it for whatever price I want.

And Spangler is happy with that.

Sam's Club, is set up as a wholesaler. It is their specific business model. Lots of small stores get a lot of their merchandise, canned goods, produce, clothing, dumdums and more from Sam's instead Acme. Nobody gets it direct from Spangler. Maybe not even Acme wholesale.

So what difference does it make to Spangler whether I sell it in a virtual or physical store?

I do understand MartyH point about Amazon. If it is going through their system, they need to know it is legit, not stolen, not counterfeit.

John LGBTQBNY Henry

walk don't run said...

When my son was 11 years old, there was one store in our town that sold a new candy called Jolly Ranchers. The store was on my son's way to school and he would get my wife to stop there so he could buy the candy. My wife couldn't figure out what was going on but finally got it out of him. Once he got to school, he would sell the candies at an exorbitant markup (like 200%). Most of the kids couldn't figure out where he got the candies. This worked really well for a few weeks until the candies got wider distribution.

My son now has his own wine importing business. I sometimes tell this story to explain to people where he got his start. As it happens that same year he got a Saturday job working at a lighting store selling light bulbs. When I see his boss he always tells me that my son was by far the best salesman he ever had. Before he started the wine business he worked as a futures broker in Chicago - a pretty dicey business. That was before the broking business went electronic. There was lots of arbitrage nonsense that went on there and the retail accounts were always screwed in favor of the commercial accounts. Sometimes arbitrage is carried out ethically but more often than not someone has their "thumb on the scale". Its potentially subject to a lot of abuse.

John henry said...

Marty,

I used to sell machinery, usually on straight commission but in a couple of cases as a distributor.

I would find a project, get a price from my builder/principal, Mark it up 20%,convince the client to buy it and give me a 50% down payment. I'd order the machine and give the builder part of the down payment.

They would build the machine and ship direct to client. FOB was builder's dock where ownership transferred direct to client. Client would pay me in 30 days and I'd pay the builder what was owing.

I was never the legal owner for liability, tax or other purpose. I was on the hook for payments of course.

So was that "short selling"? Never thought of it that way but it's a new perspective.

John LGBTQBNY Henry

John henry said...

I never thought of DumDums as having a warrantee.

But, like everything in life there is a seinfeld episode that is on point. Kramer tries to return a bad peach, Joe refuses to honor the warranty

https://youtu.be/oOUbrHjlNMQ

John LGBTQBNY Henry

DanTheMan said...

Buy low, sell high.... is that illegal now?

Freeman Hunt said...

Huh? What's the problem?

Lem said...

The cost of shipping via the manufacturer is higher than the cost of shipping via Amazon?

I don’t know.

dwshelf said...

That's why companies make deals with Costco/Walmart to sell unusual packaging at a discounted wholesale price, so that the grey market flow doesn't directly compete with the white market.

This stuff has been going on on ebay for twenty years. Order on ebay, get it from Amazon Prime.

Levi Starks said...

They make it sound as of the drop shipper is making money for doing nothing, essentially doing no work.
Not true,
The work the drop shipper is doing is in fact finding the lowest price for the customer.

Buckwheathikes said...

Ponzi schemer Kenneth Griffin would say that these so-called "rogue sellers" are merely providing Dum Dum "liquidity."

And that's all you need to say to get the crooks at the SEC to look the other way.

Joe Smith said...

Seems like capitalism to me.

I think of a dumdum as an expanding bullet, so don't want that anywhere near my mouth.

Tootsie Pops® are the preferred candy when I wish to lose a filling.

Joe Smith said...

'How is this not simply legitimate arbitrage? How is dum-dums losing money when the product originates from dum-dums no matter who the ultimate vendor is? They still make the original sale and get the profit they agreed to at that sale.'

This also happens in the world of gray market watches.

Nowadays watches are hot and impossible to get, but just a few years ago you could get an actual Rolex at a discount.

The authorized dealer (AD) would end up with too much inventory, and instead of waiting for a full-price buyer, would sell to a middle man at a discount off of MSRP, but for more than his wholesale price.

The middle man would mark it up a bit (still less than MSRP) and it would be purchased by a customer at a discount.

Rolex made their margin when they sold it to the AD. The AD covered his cost when he marked it up from his wholesale price. The middle man made his money on his markup. And the customer bought a Rolex at a discount...

Aggie said...

"authorized seller". Oh-ho. So now the real 'problem' becomes apparent, the manufacturer as the gatekeeper for his product cannot maintain his authority in an open marketplace where he is both wholesaler and retailer. Open markets are the consumer's friend, but not always the manufacturer's. This video is a ploy to make you care, and to feel guilty that you got a good deal (while also taking a risk).

Joe Smith said...

'How is Dum Dums harmed?'

I can't tell you if the example is candy.

But in the world of luxury goods, the manufacturer has to worry about potential counterfeit goods, and about eroding MSRP and brand perception.

For instance, you will never see Ping golf clubs offered at a discount unless authorized by Ping. If it happens, the dealer is dropped.

Cheaper prices cheapen their brand image and can cause concerns about counterfeit goods.

Wine producers (on the high end) also keep an eye on this. If the MSRP on your wine is $200/bottle and you sell it to BevMo for $100, you don't want to see it discounted to $120.

Yes, you made your margin on the original wholesale price, but you are selling a luxury good and your brand image must be maintained...

Joe Smith said...

'They make it sound as of the drop shipper is making money for doing nothing, essentially doing no work.'

Money for nothin' and your chicks for free...

gilbar said...
This comment has been removed by the author.
gilbar said...

Now do "house flipping" !!!

gilbar said...

I remember this one time, back in the '70's, that there was this one beer company that wouldn't ship their beer east of the Mississippi, for some marketing reason.
Me and my buddy Jerry (and his bassethound), got a semi load of beer in Texarkana, and we had to deliver it to Atlanta George in 24 hours, to smooth out the prices.
The problem was, the speed limit was 55 back then.
Jerry drove the truck, and i "blocked" by driving a souped up Trans-Am through the speed traps before him to distract the police. and Every was a going fine...
Until this gal ran away from her own wedding. The worst part was; the groom was a sheriff's son.

Leland said...

I agree with MartyH on the real problem. Not every seller acting in this manner is properly sourcing the product. I've purchased products advertised as new and received the proper product by the manufacturer (not counterfeit), but it was refurbished. The market rectified my problem, but not without a cost to me and the market in dealing with the issue.

However, Bloomberg used DumDum's as the example, and I don't want to imagine a refurbished DumDum. What they describe is just an efficient market, assuming the middle supplier is competent in providing legitimate merchandise.

I never thought of DumDums as having a warrantee.

Do you not check "good by" dates?

etbass said...

Years ago, I discovered that Sam's carried the complete line of Serta mattresses at well below the retail price of Serta in regular mattress stores. So I set up a web site advertising Serta mattresses, using the descriptions and photos published by Serta on its web site. I set the price between Sam's price and the going store retail prices and it worked fine. When a customer on my web site ordered a mattress, I entered an order on Sams with shipping direct from Sams to my customer. It worked fine and I was making a profit that covered my web site fees.

After a while I got a letter from Serta fussing at me for using their copyrighted web photos and descriptions. but when I pointed out that I was increasing Serta's business (to Sam's), the lawyer backed off.

The only hitch was my web site was unknown and got poor organic ranking making me buy Google ads at a price that ate up my profit. So after selling a few, I decided it wouldn't work.

My son in law was enchanted by the idea and began using drop shipping in his online sales site and eventually built it into a big business and is now a multi-millionaire.

Free enterprise. Nothing illegal.

Gospace said...

walk don't run said...
When my son was 11 years old, there was one store in our town that sold a new candy called Jolly Ranchers.


I never gave my sons allowances in HS. I gave them bake goods from the bakery thrift shop, the one where they sell at a steep discount because they're not fresh off the line.

They were never short of money. The mark-up they got was tryly amazing. In school other kids paid more then the price at the corner convenience store.

Rabel said...

The budget cuts at Bloomberg must be brutal.

Gabriel said...

Spengler paid someone to write the article and fed it to Bloomberg. That's about 90% of news these days.That's why a business-focused media company has temporary amnesia regarding arbitrage.

All intended to benefit the big people at expense of the little. Selling fear has always been a tool of big business. How can you trust the fly-by-night mom-and-pop shops? The big companies have quality control teams, guarantees, economies of scale, etc... no one ever got fired for buying from IBM.

Joe Smith said...

'You don't get a warranty from a pawn shop.'

We were walking around midtown Manhattan many years ago (when it was rough) and a friend bought a quartz watch for $10 from a street vendor for his wife.

She liked the look of it and put it on right away.

Then she turned to her husband and said, 'Did you ask about the warranty'?

: )

MartyH said...

John Henry-

What you describe is not short selling. It is a normal and probably necessary business practice.

You presumably had a contract with both the manufacturer and your customer. One company I am involved with makes custom steel products. We will laser cut the name of their park into a piece of steel and weld a frame around it so that they can hang it in their park. Unless they have terms, they prepay 50% up front and the balance when they pick it up a few weeks later.

Retail Arbitrage is short selling in real time for two reasons:

1) The seller does not own the goods, just as a short seller does not own the stock.
2) The purchase of the item is like a margin call-the seller has to produce the item quickly. He may not be able to find the product at all, or it may be more expensive than the sell price. You can imagine a short squeeze scenario where a product is completely out of stock and a single order ping pongs back and forth among three retail arbitragers "buying" from each other to fill that single order.

MartyH said...

Retail arbitrage drop shipping (RADS) is different than the other examples given because the seller has made a promise he may not be able to keep.

As an example, a customer of mine was desperate for 2-3 feet of hot dip galvanized structural steel channel. He needed it early the next day to pass an inspection so he could collect a milestone payment. A RADS would have sold it to him at a certain price and then went looking for the part. I told him I would try to find it and spent an hour on the phone before locating a 20 foot long piece. I rolled a truck (four hours round trip) and had it on his jobsite first thing the next morning. My customer was able to knock that item off his punch list.

The RADS was risking not finding the part, not having the truck to pick it up and deliver it, and having to buy the full length when he gave a price for three feet. Most importantly, he was risking pissing off the customer in a big way.

That is perhaps Amazon's biggest concern: the order defect rate for RADS is probably ten times that of a seller who controls his own inventory. Simply put, too many RADS will hurt Amazon's reputation with their customers.

As to the other examples cited:

In traditional retail arbitrage, the seller has the goods. A rural retailer may go to Costco and buy cases of soda to resell in his store.

Carol's company had an existing relationship with mills and checked price and availability. They knew they could deliver.

Third party drop shipping is also common. Amazon holds most of my inventory, and sometimes I will use them to fulfill orders that I sell on my site rather ship from my warehouse. But, again, it is my inventory and I do not risk being out of stock.

To reiterate Ed's point, RADS is not illegal. One can set up their own site to perform this service. This means paying for and building a website. You have to create and maintain product listings. The plugin tools to support this business model are probably not as common as for Amazon. You risk lawyer letters like Ed got. You will get no traffic without advertising, and people may be leery of purchasing from you.

RADS are trying to leverage Amazon's listings, visibility, and credibility while risking Amazon's standing with its customers. Good luck with that business model.