Aaron Kaplan, Eunice Cho, Jordan Sugar, Poornima Nookala, Shoaib Bharmal, Vishal Vibhandik, and Felipe Caro
In 2013, Google launched Google Express, its rendition of an online shopping and delivery service. Within Google Express, customers can order products from a range of national retail stores including Costco, Target, PetSmart, and Whole Foods. It currently serves the Bay Area, Los Angeles, Boston, New York, Chicago, and Washington D.C., and it is testing fresh produce delivery in the Bay Area and Los Angeles. One of the primary aims of Google Express is to understand customer purchasing patterns within the grocery market. The US online grocery market had revenues of $13B in 2015, and forecasts indicate the market will grow to more than $42B in 2016[1]. There is intense competition in this industry: Google Express has 4% of the market, trailing far behind AmazonFresh (31%), Kroger (13%) and Instacart (10%). In New York, where competitors include Fresh Direct, Google Express only has 1% of the market. Amazon offers a similar expedited delivery service to customers through Amazon Prime Now, but it has different pricing and execution strategies compared to Google Express. Amazon Prime Now costs $299 per year, includes free two-hour delivery ($7.99 per order for a one hour delivery), utilizes inventory from both its warehouses and local stores and restaurants, and marks up some prices in comparison to the in-store prices. Google Express costs $95 per year, offers free delivery if order minimums are met ($2.99 for delivery in a two-hour window), utilizes local store inventories to avoid warehousing costs, leverages courier services to deliver the products, and charges the same price available in-store.
To create a streamlined and efficient supply chain while obtaining customer data on purchase decisions, Google had to create a win-win-win for its partner stores, the end customers, and itself. Customers receive products from trusted, reliable sources at the same prices they are accustomed to without leaving their homes; retailers leverage the robust and reputable brand of Google to battle online retailers and expand beyond brick and mortar locations; and Google gets the benefit of collecting consumer data and building a more comprehensive ecosystem.
Within the Google Express model, orders are submitted to Google Express, who then forwards them to the retailers. Retailers pay a commission in return for bringing in business. Google’s primary supply chain strategy circles around responsiveness, with the goal of responding quickly to demand. While differentiation already exists due to various product offerings by multiple retailers, the pricing strategy depends on efficiency. Since retail inventory is being leveraged and couriers are delivering the products, Google Express must maintain a clear and transparent supply chain from the customer orders all the way to the retail locations. The lack of inventory places greater emphasis on retailers to provide Google with accurate and timely data to prevent stock-outs. As Google obtains data, the purchasing patterns of customers will help in anticipating what items to stock and which to pursue further.
To obtain a further glimpse into the usage of Google Express and understand financial implications, we carried out a survey for Google Express subscribers. In this survey, we asked general questions about location, number of orders, value of orders and overall preference of the service. In summary, 44% of our survey respondents were using Google Express of which 55% were from NYC and 22% from LA. The maximum number of orders per week was 10 and the average number of orders was 2.3. The maximum order value was $288, the minimum was $23, and the average was $73. In addition, 32% of the orders did not meet the minimum requirement for free delivery, adding an extra $3 delivery cost. The graph below shows that there isn't a high degree a brand loyalty since most Google Express users also use other services, which is an indication that online shoppers are extremely price sensitive.
As we were researching Google Express, one of our biggest questions was if this service is profitable. We hypothesized that it would not be, and we created a model using a mix of Google Express customer survey data and assumptions about the market. We assumed the average Google express subscriber would make about 120 orders annually, 32% of which would not meet the minimum order limit and incur a $3 delivery charge. We determined that delivery cost per order would be $5. We came to this figure with the assumption that it would take 20 minutes to complete the order (picking up the order from retailer and delivering to the customer’s door) with the average trip distance of 10 miles and assuming a $12 hourly wage. We assumed that Google express captures 1% margin of the goods sold, as retailers typically capture only 2-3% margin and would be unlikely to give up much. With these assumptions, our model shows that Google Express is not profitable. However, if the last mile delivery time was reduced to 7.5 minutes, Google express could be profitable at $8 per customer.
In evaluating the viability of Google Express, it is pertinent to understand Google and the general landscape of the industry. Google, as reflected through their financials, is first and foremost a search company. The primary revenue stream is and continues to be advertising, built around search. However, Amazon is a dominant force and fierce competitor. With customers turning to Amazon for product searches, Google is missing out on data about purchasing patterns. Google is known to invest in a variety of industries, as further indicated by its rebranding attempt to Alphabet, many of which are discontinued or scrapped if they underperform. Google Express is different. Although the model may not be profitable, Alphabet needs to capture customer purchasing pattern data to further enhance the value it offers advertisers, and Google Express is one sure way to do this. Investing in Google Express is the company’s way of investing in its’ core business: search.
[1] https://www.morganstanley.com/ideas/online-groceries-could-be-next-big-ecommerce-driver
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