Is Inc. Beating Google Inc. In Home Deliveries?

Google’s closure of two Bay Area hubs could be a bad sign for its e-commerce efforts.

Leo Sun
Leo Sun
Aug 26, 2015 at 1:00PM
Technology and Telecom

Google (NASDAQ:GOOG) (NASDAQ:GOOGL) is shutting down two delivery hubs for Google Express, its same-day delivery service, in San Francisco and Mountain View, California. This retreat seems to indicate that the service hasn't gained much ground against Amazon (NASDAQ:AMZN) since its launch in 2013. According to Re/Code, the closures were done to "revamp" the service, which is currently available in seven cities.

Source: Google.

Google Express costs $10 per month or $95 per year for same-day deliveries on orders over $15, and new customers get a free three-month trial. Google doesn't sell any products on its own. Instead, it hires a network of contractors to package and deliver goods from brick-and-mortar partners like Target (NYSE:TGT) and Costco. By comparison, Amazon offers free same-day delivery on select orders over $35 for Prime members, who pay $99 per year.

Is Google falling further behind Amazon, even with a slightly cheaper price tag? Let's take a closer look at the challenges that Google Express faces, and how they could affect the search giant's future.

Why Google doesn't "get" shopping
The more users who go straight to Amazon to look for products to buy, the fewer will do so with Google's search bar. Last year, Google chairman Eric Schmidt admitted that "more than twice" the number of shoppers went straight to Amazon instead of Google. For Google, this means fewer search queries, lower ad revenue, and less user data gathered for targeted ads.

Google noticed that threat years ago, but none of its efforts to challenge Amazon have worked. Its first attempt, Google Shopping, listed merchant-submitted prices for free. By 2012, the service handled around 80 million product searches, compared to 335 million searches on Amazon. However, Google overplayed its hand by charging merchants for listings, which caused growth to stall out.

Earlier this year, Google started putting "buy buttons" on mobile ads. Those buttons link to a retailer's branded checkout page, which is hosted by Google. It also added buy buttons to YouTube videos, which link to retailers' external websites. Those efforts were intended to condition customers to associate Google with shopping, but it's doubtful that they'll convince longtime Amazon customers to change their online habits.

Why Google Express could fail
A big weakness in Google's e-commerce strategy is that it's trying to build an ecosystem without housing an inventory of products like Amazon. Instead, it's simply leveraging its reputation as a search engine to convince retailers to tether themselves to its e-commerce ecosystem. With Google Express, the company's only responsibilities are to maintain the website, process payments, and hire contract workers to pack and deliver products.

This leaves Google vulnerable to its brick-and-mortar partners launching their own same-day delivery services. Target, one of Google Express' key partners, is reportedly planning to test its own same-day delivery service soon. If more retailers follow suit, Google becomes an unnecessary middleman. Workers at Adecco, a Google contractor which packs and ships goods for Google Express in the Bay Area, also recently unionized. This could make it tough for Google to deliver goods without raising prices.

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Google also doesn't have an answer to Amazon Prime, which keeps customers tightly tethered to Amazon's ecosystem. For $99 a year, Amazon customers get discounts, free shipping on select items, streaming video and music, e-books from the lending library, unlimited cloud storage for photos, and other perks. It expands that ecosystem with cheap devices like Kindle tablets and Fire TV set-top boxes. Unless Google can tear Amazon shoppers away from those services, it won't make much of an impression on consumers.

Amazon Prime. Source: Amazon.

To make matters worse, Google lost two key e-commerce leaders over the past year. Tom Fallows, head of Google Express, left last November to join Uber. His boss, commerce head Sameer Samat, left Google for fitness band maker Jawbone in May. Those departures fueled speculation that Google Express would soon become another abandoned Google project.

The key takeaway
Google reportedly earmarked at least $500 million to turn Express into a viable challenger against Amazon. Unfortunately, it will take more than cash to crack Amazon's tightly knit Prime ecosystem, which straddles the markets for both digital and physical goods. It would be premature to declare Google Express a failure, but the closure of two hubs in the tech-heavy Bay Area certainly isn't encouraging.