Amazon's Jeff Bezos has been called "the ultimate disrupter" by Fortune and apparently likes to say, "Your margin is my opportunity." But the man who built the e-commerce juggernaut over the past two decades by being a ruthless competitor and the destroyer of more than a handful of traditional retailers is in the early stages of being disrupted himself. And the scary part for Bezos is not that he's facing not a phalanx of brick-and-mortar retailers, but that they're being commanded by the craftiest of his rivals, Google. The search giant, Re/code says, is preparing to spend $500 million on growing Google Shopping Express to hit Amazon where it hurts: in the business of selling goods and delivering them to customers.
What should terrify Bezos is both how much and how little money that is. He's spent more than $13.9 billion building warehouses in this decade alone, according to Bloomberg in an effort to have as many goods close to as many people as possible. That investment seemed hard to match, especially given Amazon's expertise in everything from selecting the best sites to optimizing layout and design to move goods efficiently.
So Google changed the game. By partnering with retailers like Costco, Whole Foods, and Target -- and using local stores as the source of inventory -- Google immediately gained access to the thousands of products consumers buy most often. And it has employed a hybrid low-tech/high-tech approach to rolling out the service. The retail partners have shoppers in them, working for Google, who pick the items you've ordered with the help of an app, getting them bagged up and ready for delivery. Then a fleet of drivers actually takes them out to customers, again with the help of software to optimize the route.
Humans, cars and trucks with a few apps to make them work efficiently, in other words, can get products to consumers in many cases the day they are ordered. While Amazon has limited same day and next-day delivery, the bulk of purchases from regulars are sold via Amazon Prime, which offers "two-day service" that often arrives on the third day depending on what time you order and whether a weekend falls in between. Google's cheaper solution is often faster.
In the short run, this isn't going to register as a big deal to Amazon, which saw revenues grow a robust 22% last year to $74.45 billion. But in the longer term, this is competition that Amazon likely never fully accounted for. Google, for its part, didn't necessarily want to be in the goods business, but does want its piece of the product search business. Amazon had taken the mantle of becoming the go-to site for people to look for things to buy and Shopping Express ends up being its typically Google-esque solution. The process went like this:
It first started as requiring merchants to pay to be included in the product listings of Google Shopping 2 years ago (not to be confused with Shopping Express, this is the part of the search engine where you can comparison shop). In the next stage, Shopping Express was a reasonable outgrowth. By partnering with the very merchants who might advertise goods for sale, Google took things one step further than just providing product listings by taking the order and also agreeing to fulfill it. Given the company's relatively less successful attempts to enter payments (with Google Wallet) and the Groupon-type deals arena (with Google Offers), its fair to say Shopping Express is an early hit.
Running the risk of confusing anecdote with data, I will tell you that I find it increasingly difficult to head out for my afternoon Starbucks run without spotting a Shopping Express vehicle on the roads near me about 25 miles south of San Francisco. (Shopping Express is currently in the San Francisco, Los Angeles and New York areas, with plans to expand much more broadly in the near future.) But perhaps more shocking is observing Shopping Express in action at Costco the past couple of weekends I've been there. Literally dozens of orders being prepped for shipment in the store while dozens more are loaded onto a rental truck to go out for delivery. It doesn't seem to matter what time I'm in the store; Shopping Express is booming there.
Because the service is new, people are getting delivery for free, which could be skewing the results a bit. The regular charge, though, is just $4.99 for each merchant you order from and Tom Fallows, who heads up Shopping Express for Google, suggests that an Amazon Prime-like unlimited annual fee of <$100 could be coming in the future. (Disclosure: I've used the service about a dozen times and have yet to pay for a delivery.) "We intend this to be an affordable service that as many people as possible can adopt," Fallows told Re/code. “We are trying to democratize the world of same-day delivery."
In the meantime, Amazon recently raised the price of Prime from $79 to $99. While that increase was small, it surely didn't serve to encourage new signups. Amazon has suggested the rate of signups hasn't decreased, but it also has been advertising Prime heavily for the first time ever. The idea more people wouldn't take Prime at a lower price strains the imagination. Around the same time it upped the price on Prime, it began talking about using drone aircraft for deliveries, a fascinating, futuristic plan that has no chance of impacting anything for at least a few years.
More recently, it announced it is building a smartphone, whose most important feature is an app that lets you scan an item and immediately add it to your Amazon cart for purchase -- an app the company more or less already offers on the iPhone.
When Bezos talks drones, he could perhaps argue that the "margin" Fed Ex, UPS and the U.S. Postal Service make on delivery is the one he's after. And the idea of 30-minute delivery of small items is certainly compelling. The logistical and legal challenges, however, make the plan little more than a pipe dream for the moment. When he talks of smartphones, the "margin" he might ultimately be going after is Apple's, but that strategy only works if you gain market share. Just ask Motorola, which promised cheaper, high-quality phones under Google's wing only to ultimately get sold to Lenovo after failing to convince people to buy them.
Amazon and Google both have a tendency to try to get involved in everything and it's therefore reasonable to argue that perhaps both companies have too little focus in a multi-front war. But in this case, that neglects the fact that Google is going right after Amazon's core. It's not like both companies fairly unimportant forays into movie and music streaming, but rather a matter of whether Shopping Express could ultimately seriously damage Amazon's ambitions as a retailer.
Right now, that might seem implausible given the small footprint of Google's effort, the small number of merchants and the much smaller product selection Shopping Express has versus the "everything store." But this is what disruption from the low end looks like: It starts out with a somehow inferior offering that is nevertheless good enough and before you know it, the disruptive force has become the popular one. Whether $500 million will build that national footprint is unclear, but if it costs twice as much or even 5x, Google can afford it. And if it can garner a few percentage points of a few billion dollars wort of retail sales while increasing spending on product advertising, Google will almost certainly profit along the way.
That means trouble for Amazon. And it means it's time to take the threat seriously. Whether Amazon can afford to be spending resources on every battle at this time is a question Bezos might want to seriously reconsider. His army of drones and phones can't help him win this one -- at least not yet.
