International sales increased an even faster 30%. The company also reported a record profit of $857 million during the second quarter and accelerated expansions ...
A rumored alliance with chains makes sense, but poses major challenges.
Retail stores have an Amazon problem. And Google has an Amazon problem. Maybe they can help each other. That’s the logic behind rumors circulating online that Google will take orders for retail chains that the chains will then fulfill from their stores, perhaps even the same day.
There is plenty of motivation on both sides to construct an anti-Amazon strategy. Amazon.com Inc.’s online revenue has been growing at roughly 30-40% a year for several years, well ahead of e-commerce sales growth of15-16%, and far beyond store growth of 4-5%. Stores know they are losing sales to Amazon, and fear they will lose even more now that most consumer enter stores with access to Amazon.com and other online retail sites in their pockets, in the form of a smartphone.
Google faces its own challenge from Amazon. A Forrester Research report last year said that 30% of consumers surveyed in 2011 said they began their last shopping-related search at Amazon.com, versus only 13% at Google.com. In 2009, in answer to the same question, 18% said Amazon and 24% said Google. Google can’t be happy with that trend.
So how can store-based retailers and Google jointly address their Amazon problem? The idea being circulated is that when a consumer searches for a product—for example, a toaster oven—Google will show results from stores near her, including the price they’re charging and whether they have a particular toaster oven in stock. If she sees a toaster she likes at a nearby Target, she can click to buy it from Google, which will then handle payment. Target would deliver the toaster oven to her door, maybe even the same day.
It’s a pretty slick idea, and if Google could sign up several major retail chains it could offer a lot of product for fast delivery, which could be appealing to many consumers.
But implementing such an idea would mean big operational issues for the retail chains—and pose a big strategic question for them.
Let’s start with the operational issues. Stores aren’t set up to deliver items to individual consumers, which means the retail chains would have to set aside space in at least some stores and train employees to pick and pack orders.
Then there’s the cost of the delivery. Local courier services would be a likely option, and there’s buzz among couriers about how they’re acting as the conduit for same-day delivery from retail stores to online shoppers, according to Josh Dinneen, vice president of supply chain at Lasership Inc., an East Coast courier company. He says his company has tested the concept with several retailers and will be rolling out same-day delivery this spring with three retailers, which he declines to name.
But for the cost to be reasonable, Dineen says, the courier would have to pick up a larger number of orders from a relatively few pickup points to deliver in a relatively small area. In that kind of setting the courier’s fee might be “mid-single digits,” Dineen says. My guess is a delivery fee of $5-$8 is about the best a retailer could expect to pay. A recent Boston Consulting Group survey showed only affluent, young city dwellers have much interest in same-day delivery, and then only 28% of them. And they’re willing to pay on average only $8.20. So the cost of delivery will be a pain point for retailers and Google.
Next problem: the store inventory must be accurate. Otherwise, the courier would show up at the store and the item wouldn’t be there. Eric Best, CEO of online marketing company Mercent, tells me that’s just what happened when a Mercent employee in the San Francisco area? participated in an eBay Now test of a same-day delivery service. The courier who delivered the product said he had to travel to two stores because the first store didn’t have the item, though its inventory said otherwise. Improving inventory accuracy for thousands of stores would be expensive, and raising the safety stock level at those stores would be really expensive.
Then there’s price. Many retail chains vary their prices by location, and the online price is not always the same as the one in the store. Which price will Google show, and will the consumer be unhappy if she finds that the price she paid was higher than what her neighbor paid when she went to the same chain’s store in a nearby suburb?
Those are just some of the operational issues, and while they’re pretty significant, there’s also the big strategic issue. If this works—and it could if some big chains and Google invest heavily in the idea—then many more consumers will start their online shopping trips at Google. That would make the chains highly dependent on Google and give Google the power to raise the rates it charges for handling transactions. Would the chains have an alternative, after having invested so much in convincing consumers to start their shopping at Google?
I suspect Wal-Mart and Best Buy think Google already has too much power, and takes too much of their marketing budgets. Between their reluctance to become more dependent on Google and the sizable operational investments required, I suspect the retail chains will think long and hard before they go all in on this idea.
On the other hand, if they don’t, they’re left with their Amazon problem. The devil? Or the deep blue sea? Let’s see which option the retail chains select.
P.S. We asked Google if there was anything to these online reports. Here’s what a Google spokeswoman said: "We are always working to build a delightful shopping experience for users, in close partnership with retailers, and to empower businesses of all sizes to compete effectively. We will continue to work toward providing technology, tools and traffic to help power the retail ecosystem but have nothing to announce at this time."