Express Lane: Google's Challenge To Amazon Kicks Into A Higher Gear

Competing with Amazon in e-commerce keeps getting harder. The company’s most recent earnings announcement showed why. Amazon will add six more distribution centers to the 59 it already has, pushing product closer to more customers than ever. And by the end of 2014, it will have 15 dedicated “sortation” centers — facilities whose purpose is to expedite and reduce the cost of delivering packages to you. The investment in this combination of bricks and mortar along with logistics expertise gives the company cost and efficiency advantages over anyone who tries to battle it. A frontal assault leaves most would-be Amazon conquerors trying to beat the company at its own game, usually without much success. Google, instead, is using an end-around and the danger for Amazon is that it just might work.

Amazon’s Firefly can easily identify items for purchase. But can it see the threat facing the company?

Express delivery

While Amazon is spending fortunes to expedite packages to you — negotiating for Sunday deliveries with the U.S. Postal Services, offering same-day service in more cities, and even experimenting with drones – Google’s Shopping Express has been built on the cheap. Using an army of contract workers, the company lets people order from more than a dozen brick-and-mortar merchants and then delivers the purchases usually the same day. With Whole Foods, Target and Costco as partners, Google is able to offer thousands of products while warehousing none of them.

And while Amazon is doubtless far more efficient at picking items for large numbers of orders, Google’s inefficiency is irrelevant to the search giant. So long as Shopping Express can run at breakeven, Google can justify investing to expand it beyond its current markets of New York, Los Angeles and San Francisco. Rumors are that it will do just that over the coming months, reaching most of the nation’s largest metro areas.

Fresh and frozen

But perhaps more importantly, Google is getting ready to fix Shopping Express’ biggest weakness: To date, you have been unable to order perishable goods, like produce or meat, even from grocery partners. A survey recently sent to customers suggests that’s soon going to change. Google apparently won’t be able to do this for free, though. Shopping Express has been costless for most users during a promotional period, but the company has teased the fact that the “actual price” for deliveries is $4.99.

The survey suggests that if one pays $89 annually (or $8/month), those $4.99 fees will be waived — sort of the way Amazon Prime delivers unlimited packages in 2 days for a $99 annual fee. But even with the $89 payment, you’ll still be charged $7.99 for fresh or refrigerated goods — unless you spend $150 on an order, which would make delivery free. (It’s worth noting that Google may be testing a number of different pricing scenarios, and I’m only sharing one of them.)

Amazon has its own similar offering, called AmazonFresh. That’s currently available only in Seattle and much of California. But it costs a whopping $299 (or $200 on top of the $99 you pay for Prime) in California. In Seattle, Amazon is testing a program under which those who spend enough can get subsequent deliveries free. Otherwise it’s $8-10 per order unless you buy more than $125 worth of stuff.

What’s most important about these numbers is how similar they are, rather than the specifics of what’s different. Amazon has made its mark historically as the low-cost provider, but recently with its new Fire Phone and these delivery options, the price is nothing special.

Familiar places

More troubling for Amazon is that Google can keep adding merchandise to Shopping Express by signing up new merchants. It recently added Barnes and Noble as its 19th retail partner. While there might be an upper limit, there’s little doubt most traditional retailers will eventually sign on. Their biggest threat is that consumers eventually stop buying from them and instead buy from Amazon. Google gives them a way to leverage the assets of the physical store, whether or not the customer actually stops in.

For shoppers, the familiarity is a virtue as well. The products you buy at Walgreen or Whole Foods are ones you probably know and trust. Sometimes, with the bewildering selection on Amazon, you can’t be precisely sure what you’re getting. Nor does Amazon do much to curate its store beyond recommending a dozen products similar to the last ones you looked at. For all its success, the company isn’t a great merchandiser and doesn’t have a great web site.

Technical fix

As e-commerce moves to mobile, the ability to repurchase trusted products becomes more paramount. While Google’s partners have a leg up, Amazon is trying to gain its own advantages. The Fire Phone has a technology calledFirefly, which lets you scan many real world objects and immediately purchase them. It’s great for when you’re in a store and want to check out an item but buy it online later. Sadly, it’s only on the Fire Phone, which nearly no one will use.

But Firefly isn’t the company’s only weapon. The Dash is a small handheld scanner and voice recorder that allows you to tell AmazonFresh you’re out of milk or scan a bar code to put that cereal on your list. It’s a clever gizmo, but presumes you’ll be willing to move away from a traditional list — whether kept on paper or on an app – just because you can.

Prime time

Speaking of things done because they can be, Amazon recently raised the price of Prime from $79 to $99. The company claimed it’s has no impact, but it has been forced to spend on advertising Prime for the first time seemingly ever. That cost reduces the supposed additional gain from the price increase. And while Cnet reports on a Consumers Intelligence Research Partners (CIRP) study saying 95 percent of customers will “definitely” or “probably” renew, that same study suggests it means Amazon could easily lose more than 1 million of them to the increase.

CIRP had previously estimate Prime customers spend $1,340 per year, which would generate more than $350 in gross margin based on Amazon’s latest figures. If even 500,000 cancel, the company loses out on $175 million, not including what it’s spent on marketing the service. Worse still, there is some deterrent effect to garnering new signups at $99 versus the old price. Six months ago I asked why Amazon was screwing with Prime – which I’ve used for years — and the answer is no clearer. (Amazon dodged a question about Prime during its earnings call, saying “subscribers are growing very nicely year over year.)

The company’s lack of data on actual Prime subscriber counts means it’s impossible to know how much the price rise changed the slope of the growth curve, but it surely got flatter than it would have been had things stayed the same.

That Google is looking at $89 for the Shopping Express base price — $10 less than Prime is no coincidence. While Amazon offers streaming video as a throw in, Shopping Express counters with that same-day delivery benefit. Video junkies likely are paying for Netflix anyway given its at 36.2 million U.S. customers. The instant gratification crowd is likely to at least consider Google over Amazon if they’re only choosing one.

Low-cost provider

But Google’s bigger strength is that it can hit Amazon from both sides. On the resources front, it has far deeper pockets, with $60 billion in cash to Amazon’s $12.5 billion. Google is wildly profitable, while Amazon tends to run right on the cusp of profit and loss. In the past year, Google’s cash on the balance sheet swelled by $10.5 billion, 50 times Amazon’s gain of $200 million.

Yet on the cost side, Google also wins in that it can enter markets for a fraction of Amazon’s cost. While Amazon’s labor productivity is likely significantly higher, Shopping Express ultimately costs much less to get started. A fleet of delivery vans and some fulfillment personnel, and its launched. Further, Google is fulfilling from locations that are often closer to the customer; for fresh food, that’s especially important.

But it also means Google can launch the delivery of perishables almost anywhere Shopping Express goes. Amazon has been slow to expand Fresh due to far-away distribution facilities and the challenges of getting things right. That light footprint may allow Google other innovations Amazon will find difficult to match.

execution and a strong focus on the customer. Lately, though, as Amazon has entered into fiercer competition with more and more rivals — including Microsoft and Apple — it’s become reasonable to question whether Bezos hasn’t missed the threat to the biggest part of his business.