- Google has expanded its same Google shopping express service across north California.
- The service is an attempt to regain product search business, something which Amazon has steadily taken away from Google.
- Given its huge cash reserves, Google can continue to experiment with new products and services in order to drive future growth at the company.
Google (NASDAQ:GOOG) is one of the most diversified internet conglomerates, if there was one such thing. The internet behemoth has of late looked to extend its dominance from the online search world to other areas of the online world with the launch of services like Google shopping express and Google computing engine (GCE). Google shopping express (GSE) is Google’s same day/overnight delivery service, which brings the services of popular physical retailers, like Costco, Guitar Center, L’Occitane, Smart & Final, Staples, Target, Toys“R”Us/Babies“R”Us, to your doorstep. So, why a jump into an industry which sent companies like Webvan and Kozmo.com to their deathbeds?
GSE: Google’s answer to eBay and Amazon
Amazon and eBay have slowly but steadily become the destinations for people searching online to buy products. The result has been a loss of the product search business for Google. In a clear attempt to take the fight to the e-retailers and regain some of the lost ground in the product search business, Google had launched the shopping/delivery service last year in the San Francisco bay area. In May 2014, Google expanded the service to the Los Angeles area on the west coast and Manhattan on the eastern coast. Google yesterday announced the launch of its overnight delivery service across northern California. Pretty fast and ambitious, ain’t it? Google stock has significantly out performed Amazon in the year-to-date as investors have questioned the growth focussed strategy at Amazon.
The latest expansion of GSE is a bit different as Google has tied-up with major shipping carriers to fulfill orders in the newly covered area. Google was formerly using its own vans to deliver in the three markets it is currently present in. The move makes sense as the new areas aren't as densely populated as the current markets of GSE.
While Google shopping express is, without any doubt, Google’s answer to Amazon, there is a difference in the way the two companies operate. Amazon fulfills orders from warehouses owned and operated by the E-commerce giant, while Google shopping orders are fulfilled by the local retailers and delivery is undertaken by Google. In one single sentence, Google has leveraged local retailer strength to mount a charge on Amazon. While Amazon is a direct competitor to the local retailers taking business away from them, Google helps them increase their business, while collecting a delivery charge. Google saves on the costs of building and operating warehouses while Amazon has incurred those costs in order to have a greater control on the order fulfillment/delivery part.
Online shopping had till recently lacked one feature of physical retail store shopping: Instant gratification for a purchaser. Same day delivery service is an attempt by the online retail industry to close that gap. No surprise that EBay and Amazon have each launched their own same day delivery services across select cities in the US. The same day delivery service has implications for Google’s search business as well. According to a BGC partners analyst, “It's just another way of to make search more powerful” as it enables Google to better understand online shoppers and their behaviour.
Google will be plagued by another problem on these new grounds. The online shopping and delivery industry has been historically known for notoriously low margins and bleeding promising companies to death. A drag on Google’s significant profit margins isn’t something which will pass the eyes of stockholders. These are waters Google needs to tread carefully.
Coming to the question of where does Google make money, Google will be charging an undisclosed commission to the retailers for every order, apart from charging a $4.99/store delivery fee from the customer, although the service is being offered for free in the first 6 months. Google also plans on leveraging its maps and navigation services to optimize routes and reduce cost/delivery.
Google’s expansion of same day delivery services is a clear statement of its seriousness and intent to protect its turf of product search business. Leveraging on local stores will help it scale faster and at a cheaper price than setting up warehouses would allow. The local stores on their part get to compete against e-retailers who are currently threatening to drive them out of business. The outcome is a win-win situation for the retailer as well as Google.
While there are no official numbers on the business, according to a post on Reuters, the business seems to be getting good traction with tens of thousands of orders being placed each day. For the moment, the business is small and Google, with its huge cash reserves can continue to experiment and challenge other e-retailers. The experiments into new products and services are a necessity for Google in order to drive future growth and valuations. We reiterate our positive long term outlook on the Google stock, which is reflected in our current rating.
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