Episode 724: Cat Scam : Planet Money The internet was supposed to get rid of middlemen--but instead they are taking over the global economy.
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Episode 724: Cat Scam

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Episode 724: Cat Scam

Episode 724: Cat Scam

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STACEY VANEK SMITH, HOST:

Last year on Valentine's Day, Fred Ruckel was sitting on his couch at his house in upstate New York, and his wife Natasha was playing the piano for him.

What were you playing?

FRED RUCKEL: Something she made up.

NATASHA RUCKEL: Yeah. Sometimes I just sit there and let my fingers go and see what tunes and melodies come out. And none of them are great, but Fred loves them.

F RUCKEL: I love them.

VANEK SMITH: Fred wasn't actually paying that much attention to the music. He was paying attention to this new little kitten that they'd gotten.

So who is this?

F RUCKEL: Well, she can introduce herself, but this is Yoda.

VANEK SMITH: Hey, kitty. Will you say something?

F RUCKEL: Yoda?

VANEK SMITH: At some point, I'm going to have to get Yoda to meow.

ROBERT SMITH, HOST:

Got to get the sound of the cat.

VANEK SMITH: It is Radio 101.

SMITH: Did you try to meow?

VANEK SMITH: We'll get to that.

Anyway, Fred's playing with the kitten. And he takes this little toy mouse that Yoda has and he throws it across the room. And it slides across the floor, and they have a rug that's a little bit rumpled up. And the mouse slides across their floor right into one of the little rumples in the rug, and the cat goes bananas.

F RUCKEL: And she immediately attacked it - just ran and started putting her paws underneath and playing with it.

N RUCKEL: And Fred suddenly sat there and said, we're going to make the Ripple Rug. And I looked at Fred - I said, what do you mean? What's the Ripple Rug?

SMITH: The Ripple Rug.

VANEK SMITH: The Ripple Rug. The Ripple Rug is a cat toy. It is basically the size of a doormat. Here, Robert, I'm going to show you the Ripple Rug. This is it. This is the Ripple Rug. I don't know. How do you describe - it's hard to describe.

SMITH: It looks like someone's taken a carpet. They've cut holes into it so it looks like swiss cheese, and then they have wadded up the carpet, thrown it on the floor.

VANEK SMITH: Yeah. That's essentially the Ripple Rug.

SMITH: (Laughter) OK. And cats love this.

VANEK SMITH: This is, apparently, Disneyland for cats. A year later, Natasha and Fred are selling $60,000 worth of Ripple Rugs every month. They've been on "The Today Show." They had set up a shop in the Amazon Marketplace with Amazon Prime. And the Ripple Rug was one of Amazon's best-selling pet toys, 39.99 a pop. And then, one day, Fred gets this call from his brother-in-law.

F RUCKEL: My brother-in-law's like - hey, did you see it's on eBay? - because he's always looking at stuff on eBay. And I was like, what?

VANEK SMITH: Fred goes immediately to his computer, logs onto eBay.

F RUCKEL: I just typed in the Ripple Rug, and there was already four sellers selling the Ripple Rug. And then every single day, there would be five more, six more, 10 more.

VANEK SMITH: How much were they charging?

F RUCKEL: They were going as high as 59.99.

SMITH: That's $20 more than he was selling them for on Amazon.

VANEK SMITH: Basically, people were scalping Ripple Rugs. They were...

SMITH: (Laughter) There's so much demand.

VANEK SMITH: ...Buying them on Amazon and selling them on eBay at a markup. All of these people who Fred and Natasha never met were getting rich off of their invention.

Hello and welcome to PLANET MONEY. I'm Stacey Vanek Smith.

SMITH: And I'm Robert Smith. The internet was supposed to get rid of the middleman. That's what they told us. Consumers were supposed to buy directly from manufacturers - no more going through people like travel agents and having to pay fees. The internet was going to be about getting stuff from the source for a wholesale price.

VANEK SMITH: It did not work out that way. Just ask the makers of the Ripple Rug. The internet has made it so that anyone can be a middleman - or a middleperson.

SMITH: Middleperson doesn't sound as good as middleman.

VANEK SMITH: It's true. Today on the show, how middlemen are taking over the global economy.

(SOUNDBITE OF SONG, "PACIFICA")

DAN O'DONNELL-SMITH AND JON DIX: (Singing unintelligibly).

VANEK SMITH: When Fred Ruckel saw all of these people selling the Ripple Rug on eBay, he went a little nuts. He started spending hours every day checking eBay and trying to get in touch with the people who were selling his cat toys.

Did you ever try to contact any of the middlemen?

F RUCKEL: I have reached out to many of them. I've sent cease and desist orders to every single one of them.

SMITH: Whoa. He wanted them to stop.

VANEK SMITH: Yes. The letters did not work, and then Fred started tracking down their phone numbers and personally calling them.

F RUCKEL: I am Fred from SnugglyCat, the makers of the Ripple Rug, and I'm calling you about you selling our product illegally. And, you know - I'm not selling it illegally - and they hang up.

SMITH: Well, I mean, the eBay guys were probably right. There's nothing illegal about buying something and reselling it. There's even a name for it. We've used it before - arbitrage. Arbitrage means you buy something cheap in one place; you sell it expensive in another place.

VANEK SMITH: Yes. But this is a twist on arbitrage called drop shipping, and it's kind of genius because there is basically no risk involved at all. These people never bought a Ripple Rug. It's not like they bought a Ripple Rug, stored it in their closet and then sold it. They never actually touch the Ripple Rug. They just wait until a customer buys the Ripple Rug from them, and then they buy it from the Amazon store and ship it directly from Amazon to the customer.

SMITH: And the customers have no idea where the Ripple Rug comes from. All they know is they pay $60 instead of $40 and the Ripple Rug showed up. They thought it came from whoever made it.

VANEK SMITH: Exactly. And the drop-shipper can just pocket the difference.

SMITH: OK. It is easy to resent people who have found a way to make some easy money. But I'm going to argue that this is good for Fred. This is good for Fred and Natasha and for the Ripple Rug because this fleet of middlemen - whoever they are - they're advertising the product. And yeah, they're adding money to it on eBay. They're making a profit, but they act as this sort of fleet of salespeople out there pushing the Ripple Rug, getting it into people's hands. Yes, they don't actually do any of the work, but they're making more sales happen.

VANEK SMITH: But Fred says there are a couple of problems with this. The first is that he is trying to build a brand here. It's not just about selling one Ripple Rug. It's about building the SnugglyCat brand. So part of...

SMITH: (Laughter) So he doesn't want it to be a luxury cat toy product.

VANEK SMITH: Price is a big part of branding. And so he wants to control his brand. He wants to control the price of his product. He doesn't want people selling it for all kinds of different prices.

SMITH: OK. OK.

VANEK SMITH: But the real problem was that he says he was losing money because what was happening is people were ordering this product on eBay, and the box showing up at their doorstep was from Amazon. So people would get confused. They would look up the product on Amazon, and they would realize that they had paid $20 more for their Ripple Rug...

SMITH: Yes.

VANEK SMITH: ...Than they needed to pay. And so they would think, well, I'm just going to return it to eBay and order it from Amazon.

F RUCKEL: Let's say you feel cheated. Say I want to return it because it's 39.99 on, you know, Amazon for real. I paid 59.99. They're both free shipping and free returns. I'll return this one, order from there.

SMITH: But you're not returning the product to the middleman - to the people on eBay. You're really returning the product back to Fred and Natasha.

VANEK SMITH: And that comes with a whole boatload of fees apparently. So Amazon charges fees all along the way. They have a fee for the purchase, a fee for shipping, a fee for the return, a fee for restocking. And then when the customer reorders it from Amazon, there's another purchase fee and another shipping fee.

Plus, Fred says, a lot of times, the rugs would come back used, so he had to destroy them. He couldn't resell them. And just two months after Fred noticed all of these drop-shippers on eBay, he said he had over 200 returns.

F RUCKEL: Which was over 10,000 in losses in just a couple of months.

VANEK SMITH: You lost $10,000 in two months?

F RUCKEL: In two months.

SMITH: Meanwhile, the eBay people, the people who were charging $60 for this, pocketing the extra $20 difference - they get to keep the money.

SMITH: Yeah, they're not paying any of the fees.

SMITH: They're geniuses.

PARRISH WITHERSPOON: You want me to go first. You can go first, babe.

NIKKI WITHERSPOON: OK. I'm first. All right, so hello. My name is Nikki Witherspoon.

P WITHERSPOON: Hello. My name is Parrish Witherspoon.

VANEK SMITH: Nikki and Parrish are drop-shippers. I talked to them on Skype. And they say they never sold the Ripple Rug, but they do sell tons of cat toys and household products and kitchen supplies and all kinds of things on their eBay store.

SMITH: And, once again, they don't make any of those things. They don't have possession of any of those things. They just mark up the price and send them on to the customer.

VANEK SMITH: That is what they do. And they actually got started in this business when they were both living in Baghdad in Iraq. They were working for private contractors, and they were spending all of their time buying stuff online. They bought everything online.

N WITHERSPOON: You know, groceries and household-type stuff and furniture. We've bought a car online. We've bought a house online. We bought our dog online.

VANEK SMITH: (Laughter) You bought your dog online?

N WITHERSPOON: Yes (unintelligible).

P WITHERSPOON: Yeah, we sure did - and had him shipped.

N WITHERSPOON: Had him shipped from Oklahoma to Iraq - we sure did. That was interesting.

VANEK SMITH: So Nikki and Parrish are very familiar with buying things online. And they decided to give drop shipping a try. They sign up with a company called DS Domination.

SMITH: DS for drop ship.

VANEK SMITH: Exactly. And they get software that helps them find these best-selling products on Amazon, copy the images from Amazon, set up a little store on eBay and figure out how much to charge for these products that they're drop shipping. They start out selling mostly toys and novelty items. And almost right away, Nikki says, she realizes this is going to be a big business.

N WITHERSPOON: I'll never forget it. It was like a Angry Birds Star Wars set that we had got. And it took off in less than 48 hours. I mean, you just kind of sit back, and you're, like, I just paid 30 cents for this item. And it sold for, like, nine bucks about 30 times today. You know, it was just an amazing feeling.

SMITH: And an amazing profit. I mean, just in that one day, they made, you know - what? - 260 bucks...

VANEK SMITH: Yeah.

SMITH: ...For doing almost nothing.

VANEK SMITH: Yeah. And after just a few months of this, they were making enough money that they were both able to quit their jobs in Iraq and move back to the U.S., to Houston. And now, they say, they make more than a million dollars a year in sales. They've ex...

SMITH: No, no, no, no, no.

VANEK SMITH: No, they've ex...

SMITH: Selling, like, dumb little toys?

VANEK SMITH: Well, they've expanded into a whole bunch of other things. They're wholesaling now and doing private-label stuff. But Nikki told me they will never stop doing the drop shipping business.

N WITHERSPOON: It's just too easy. Of course, we've got some tools in there that kind of automate everything, really just a matter of pressing a button and your store is kind of ran for you. So, you know, that's profit that - you know, if it's that easy to do, why would we not keep it, (laughter), you know?

VANEK SMITH: Did you ever feel like we're not actually doing anything? We're just charging to post it. You know what I mean? Like, you're not adding anything to the product or anything like that. Did you feel weird about that?

N WITHERSPOON: No really, honestly. You know, when you're actually doing - it does require some work. You're having to do the tracking, you know. Like, say for instance Amazon if Amazon is out of a particular item, you have to go to an actual retail location, grab that item, put it in a box, make sure your customer gets it. You're doing all the customer service. You're making sure that that customer is happy, that there's no issues with it. And, you know, it...

P WITHERSPOON: You're doing quality control. I mean, yeah, you're doing the whole thing.

SMITH: I mean, when you put it that way, they sound like a retail store. They sound like a retail store that wants customers to return. And even though they don't make the products or even really even ship the products or touch the products, they're the public face of the product.

VANEK SMITH: Yeah. In a lot of ways, retailers are just middlemen. But to Fred and Natasha, the cat rug makers, these guys on the internet were just scalpers. They were making the product a lot more expensive for customers. They were not adding anything to it. Jason Feifer is the editor-in-chief of Entrepreneur magazine. He wrote about the Ruckels and drop shipping.

JASON FEIFER: If there's a bad guy in this story, really, it's us.

VANEK SMITH: What? No.

FEIFER: It's us. Have you ever bought anything on eBay?

VANEK SMITH: Yes.

FEIFER: Did you ever think where it came from?

VANEK SMITH: The...

FEIFER: No.

VANEK SMITH: ...Seller.

FEIFER: The seller, right?

VANEK SMITH: Yeah.

FEIFER: You don't know who - you don't know where it came from. That mentality creates this opportunity for people.

SMITH: So it's our fault because we aren't shopping around - because we're not searching for the original Ripple Rug rug at the original $40?

VANEK SMITH: Exactly. We don't want to look around on the internet, so the middlemen are saving us a couple of keystrokes.

SMITH: A few seconds here and there.

VANEK SMITH: Yeah. And we are willing to pay for that - $5, $10, $20. We are paying for that.

FEIFER: All I have to do is go to another website and see the price is different. And I don't. It's crazy. Like, why am I not doing that? I mean, as long as we are all willing to be taken advantage of by different marketplaces, even though we have all the information in front of us...

VANEK SMITH: It would literally take 5 seconds.

FEIFER: It takes no time at all, and we don't do it. So if we're not going to do it, why can't people take advantage of us? We're the problem.

SMITH: I feel like this gets to something deep because although economics treats us like economically rational beings, always hunting for the best price, the truth is we are all deeply lazy inside.

VANEK SMITH: (Laughter) And there is always someone who will help us be a little bit lazier - for a profit.

SMITH: And I guess in some ways with all that, you know, one-click shopping, the internet has made us lazier, and it's simultaneously created all these opportunities for people to jump in and make things even easier but to take a little slice of the profit here and there.

VANEK SMITH: Exactly. Like, save us a couple of keystrokes and charge us a little more. Michael Munger is an economist at Duke. He has been studying the middleman for years.

MICHAEL MUNGER: All you have to do is have a computer with a connection to the internet and the ability to write code, and you can be a middleman. It's the most competitive industry the world has ever known.

VANEK SMITH: Being a middleman?

MUNGER: Being a middleman - that's what people all over the world want to do. I want to write an app that will sell and I'll make a lot of money. But the app itself can't make any good or service. All it can do is bring together a buyer and a seller who otherwise wouldn't have met. That's the essence of being a middleman.

VANEK SMITH: I mean, if you think about it, a lot of the hottest companies in the world right now are essentially just middlemen.

SMITH: Yeah. And we don't even think of them as middlemen, right? Oh, I'm going to get an Uber - that's what I say - I'm going to an Uber, so a car is going to show up. But essentially, Uber - all Uber is is a middleman between me and a driver. They don't own any cars. They don't employ any drivers. They just take a slice of profit for connecting the two of us.

VANEK SMITH: The same with Airbnb, the same with Kayak, the same with eBay and Amazon, Alibaba - all just middlemen.

So the future of the economy is really becoming more and more about middlemen getting people much, much, much more efficiently to goods and services?

MUNGER: You're not going far enough. It's about almost nothing else.

VANEK SMITH: Is more middlemen good?

MUNGER: Well, that's like asking, is gravity good?

VANEK SMITH: You're comparing middlemen to gravity?

MUNGER: No, I'm comparing the economic logic of selling reductions and transactions cost.

VANEK SMITH: Oh.

MUNGER: It is irresistible and inevitable.

VANEK SMITH: So inevitable that even middlemen are worried about middlemen.

SMITH: No.

VANEK SMITH: Yes. Nikki and Parrish Witherspoon, the Amazon to eBay drop-shippers, would not even give me the name of their store on eBay because they were worried that someone would go to their store, copy all the items they were selling, set up their own store and sell them for a little bit less.

P WITHERSPOON: People that are lazy will go in and instead of doing the research like we did, they'll just go and take what you have and just start selling it. So...

N WITHERSPOON: They're not going to have to do the work that you did to go research the items, you know.

VANEK SMITH: But that's like the drop shipping way, I thought. Like, the whole - isn't that the whole thing?

N WITHERSPOON: Absolutely is...

P WITHERSPOON: No (laughter). It is not...

N WITHERSPOON: It - no - it absolutely is to go find products...

P WITHERSPOON: Yeah...

N WITHERSPOON: It's not for you to copy other people.

P WITHERSPOON: Right. Right. That's where I was going with that.

SMITH: But their whole business is copying other people.

VANEK SMITH: (Laughter) Yes, but they said they know things. They've gotten really good at their business over the years. And they don't want somebody stealing their ideas.

SMITH: I'm sorry. Middlemen are like gravity. They're just inevitable. If there's any little bit of profit left on the table somewhere, someone is going to grab it.

VANEK SMITH: There is one man who has decided to fight gravity.

SMITH: To fight the middlemen.

VANEK SMITH: Fred Ruckel, our Ripple Rug maker, he was spending hours a day trying to shut down the drop-shippers.

F RUCKEL: First thing in the morning, check for arbitrageurs. Last thing at night, check for arbitrageurs, send out any cease and desists before or after. It was taking up an inordinate amount of time, and it was super stressful.

VANEK SMITH: So a couple of months ago, Fred did something drastic. He pulled the Ripple Rug off of the Amazon Prime marketplace. No more free Prime shipping, no more Amazon store - that is where the arbitrageurs hunt for their products.

F RUCKEL: We pulled out of the whole Prime shipping thing in May. And at that point, we were over 60,000 a month in sales. And in a blink, 60,000 went down to 25,000.

VANEK SMITH: Oh, my gosh. That's a big price you paid.

F RUCKEL: I would say it was a huge price.

VANEK SMITH: So is it worth it?

F RUCKEL: Well, we had put together...

N RUCKEL: Yes (laughter).

VANEK SMITH: Really? That's a - I mean, that's so much money. That's like...

F RUCKEL: Integrity is important to us.

N RUCKEL: And the stress factor...

F RUCKEL: And the stress...

N RUCKEL: ...Was completely removed.

F RUCKEL: So we removed all the stress.

VANEK SMITH: Fred and Natasha started doing all of their own shipping, and they converted their garage into a little packing facility. They've gotten really good with those envelopes.

(SOUNDBITE OF PACKAGES BEING FILLED)

VANEK SMITH: And the night before I saw them, they had both been up until midnight because a video had gone up online with a couple of cat celebrities - minor cat celebrities named Cole and Marmalade playing on a Ripple Rug, and orders had been pouring in.

N RUCKEL: And so we spent two hours each packing last night. And then this morning, we spent another two hours each packing.

F RUCKEL: So that's 8 hours for one person right there.

N RUCKEL: Yep. So...

VANEK SMITH: This doesn't make you wish slightly that you were still using Amazon to do all the shipping?

F RUCKEL: People would be arbitraging our product.

SMITH: I don't know, Stacey. It seems like everybody's losing out of this decision. Fred and Natasha are losing money. They're not selling as much. The the drop-shippers, the arbitrageurs, they're not making as much money reselling these things. And their product, which seems like a great product, is harder to get. Cats everywhere are suffering...

VANEK SMITH: (Laughter).

SMITH: ...Because Fred and Natasha won't just suck it up and deal with the middleman.

VANEK SMITH: All of that is true, but there is an emotional component to business. And Fred and Natasha invented this thing, this Ripple Rug. And they felt a lot of ownership for it. And to them, it felt like people were coming in and taking, like, a bite out of this thing they invented. They were essentially sort of stealing their product in some way.

And for Fred and Natasha, they just wanted control back. They didn't want to be up at night and up in the morning trying to pull their product back from all of these different forces. They just wanted total control of it. And the loss of money, they told me, was worth it to them.

Now Fred and Natasha are mostly selling Ripple Rugs directly from their website. And they told me sales are starting to come back after the initial big drop-off. And they were very pleased to say in the last four months, they have only had two returns.

(SOUNDBITE OF DAN O'DONNELL-SMITH AND JON DIX SONG "PACIFICA")

VANEK SMITH: Kitty, kitty - will you meow? Kitty, kitty, kitty. Kitty, kitty, kitty. (Meowing).

We reached out to both Amazon and eBay. Amazon did not get back to us. EBay did respond saying that drop shipping is not against its rules.

SMITH: As always, we like to hear what you think of the show. Email us - planetmoney@npr.org, or tweet at us. We are @planetmoney. Our episode today was produced by the great Nick Fountain.

VANEK SMITH: A huge thanks to Jason Feifer. You should really check out his article about drop shipping at Entrepreneur magazine. And he also has a new podcast called the "Pessimists Archive." Apparently, it is a history of unfounded fears. Jason is fearless.

SMITH: (Laughter) That's a great idea...

VANEK SMITH: You heard it here first.

SMITH: And speaking of entrepreneurs, NPR is launching a new podcast - a new podcast about the way people start companies, featuring one of our favorite people at NPR.

GUY RAZ, BYLINE: Hey, it's Guy Raz here from the TED Radio Hour. And I'm really excited to tell you about another podcast I'm hosting. It's called How I Built This. And it's a show about the most amazing innovators and entrepreneurs and the stories behind the companies and movements they built. You can find it at npr.org/podcasts, on iTunes or on the NPR One app.

VANEK SMITH: I'm Stacey Vanek Smith.

SMITH: And I'm Robert Smith. Thanks for listening.

(SOUNDBITE OF DAN O'DONNELL-SMITH AND JON DIX SONG "PACIFICA")

VANEK SMITH: When Fred Ruckel, the Ripple Rug - when Fred Ruckel, the Ripple - blah (ph) - when Fred Ruckel, the guy - when Fred Ruckel - that's really hard to say. When Fred Ruckel, the Ripple Rug maker, saw (laughter).

SMITH: (Singing) Fred Ruckel, the Ripple Rug maker.

VANEK SMITH: (Laughter) No.

SMITH: It sounds like - (singing in the style of "John Jacob Jingleheimer Schmidt") Fred Ruckel, the Ripple Rug - that's my name too...

VANEK SMITH: (Singing "John Jacob Jingleheimer Schmidt") His name is my name too.

SMITH AND VANEK SMITH: (Singing, "John Jacob Jingleheimer Schmidt") Whenever I go out, the people always shout, there goes Fred Ruckel the Ripple Rug maker - da, da, da, da, da, da, da (laughter).

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