Will Uber’s Corner Store Threaten Amazon and Google in Same-Day Deliveries?

Uber just launched an experimental grocery delivery service. What does this mean for Amazon and Google?

Aug 23, 2014 at 9:10AM

Uber, the controversial online cab and limo service, just launched Corner Store, an experimental grocery delivery service in Washington, D.C. The experiment is limited to two zones of the city, and is available on weekdays from 9 AM to 9 PM.

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Source: Uber.

The service enhances Uber's original business model -- which allows anyone to become a paid driver -- by turning its drivers into "personal shoppers." Customers can use Uber's app to order drugstore items like diapers, gum, and shaving cream, and drivers will make an instant delivery. There's no minimum purchase, delivery fee, or tip -- the driver is compensated by Uber, meaning that the company is likely running this experiment at a loss.

This isn't the first time Uber has experimented with becoming a delivery service. It launched a bike courier service in April, paying couriers between $20 to $30 per hour for on-demand deliveries. But whereas the bike courier service targeted services like Postmates and WunWun, Uber's Corner Store is aiming higher at two tech giants -- Amazon (NASDAQ:AMZN) and Google (NASDAQ:GOOG) (NASDAQ:GOOGL) -- which have been squaring off over the home delivery market.

The business of quick home deliveries
To understand why Uber launched Corner Store, we should take a look at what Google and Amazon are offering.

Google Shopping Express offers same-day delivery in four areas of California and Manhattan, and offers products from brick-and-mortar retailers like Target, Costco, and Whole Foods Market. Google charges $4.99 per delivery, but it is currently offering a free six-month trial, which will eventually be replaced with a flat subscription rate.

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Source: Wikimedia Commons.

AmazonFresh is available in northern and southern California and Seattle. Amazon charges its Prime ($99 per year) members $5.99 for same-day delivery from participating retailers. Non-Prime customers pay $9.98 per delivery. Amazon also offers Prime Fresh, a $299 package which includes Prime benefits (free two-day delivery on select items, the Kindle e-book lending library, and unlimited video streaming) with free same-day and early morning delivery for orders over $35.

Google is operating Shopping Express at a loss to gain ground in product searches against Amazon, which could translate into higher ad revenue across its ecosystem. AmazonFresh -- like the Kindle, Fire TV, Dash, and Fire Phone -- is designed to lock customers up within its e-commerce ecosystem.

Why Uber is getting involved
That's why Uber is getting involved -- it is experimenting with home deliveries as a loss leader to stimulate a higher usage of its app and driver services.

This is how Uber makes money -- customers pay Uber, which takes a 20% cut of the fare, and the rest goes to the drivers. A leaked receipt from last December showed that passengers paid Uber drivers $1.1 billion in 2013, which would translate into annual revenue of $220 million. An estimate based on those figures, published at Gawker, pegged the number of monthly active users at around 860,000.

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Uber's iOS app. Source: iTunes.

While it's unclear how profitable the company is, CEO Travis Kalanick has stated that Uber is profitable in all of its earliest markets. That's not surprising considering that Uber doesn't actually own any cars -- it merely provides a search, connection, and payment service.

In addition to keeping smartphone users dependent on the Uber app, same-day delivery could give Uber drivers more to do between giving passengers rides. That would increase Uber's appeal as a source of stable income, attracting more drivers to its fleet. These delivery runs could also satisfy Uber limo drivers, who have claimed that cheaper services like UberTaxi (partnerships with local taxi commissions) and UberX (non-luxury cars) have cannibalized their earnings.

To graduate from this experimental phase, Uber will eventually have to add minimum orders and delivery fees. But considering how quickly Uber's original service grew, we could see Uber's delivery drivers multiply quickly to outnumber Google and Amazon's fleet of contract drivers.

Where it could all go wrong
While the prospect of waging guerilla warfare against Google and Amazon in the home deliveries business is ambitious, the plan could backfire as well.

Uber is already being targeted by taxi commissions across the world. If it decides to spread its delivery service to other cities as well, it could also irritate delivery services like FedEx and UPS. Uber also needs to be careful about annoying Google, which invested $258 million in the service last August to bump its market valuation up to $18 billion.

But hurt feelings and industry enemies are the least of Uber's problems. There's the question of accountability -- what if the goods are damaged or stolen? Uber has already faced alarming accountability issues in the past -- there have been several cases of sexual assault, one kidnapping, and a hit-and-run where an Uber driver struck and killed a 6-year-old girl.

Uber responded to these problems by tightening up its background checks and training, while introducing a widely $1 "Safe Ride" fee for UberX customers to offset those costs.

A Foolish final thought
In conclusion, Uber could face some very tough questions if it spreads Corner Store to other cities.

While it may be easy to tap Corner Store to have a few drugstore goods delivered, the convenience might not justify revealing your home address to a stranger. However, Uber Corner Store is still a wild card competitor that could eventually redefine same-day delivery.

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Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Google (A shares), and Google (C shares). The Motley Fool owns shares of Amazon.com, Google (A shares), and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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