Why Is Google Focusing On Google Express?

Alphabet‘s (NASDAQ:GOOG)  subsidiary Google announced recently that it is expanding the services of its delivery platform “Google Express” to fresh groceries including meat, eggs and other perishable products. ^[1] While this is Google’s first foray in delivering fresh produce, it is entering a high cost competitive market with players such as Amazon Fresh and Instacart already operating in this space. Google Express, which operates in some U.S. cities, was launched by the company in 2013 to delivery non-perishable items in partnership with retail stores such as Costco and Whole Foods, in what appeared to be an attempt to drive product search traffic away from Amazon to its own search platform.  While fresh produce delivery might not be a profitable segment for Google, given the high costs involved in logistics, we believe this segment is crucial for Google to maintain is product search traffic and generate revenues from product advertising.

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Google Express To Drive Product Advertising Revenues

A study of online shopping habits of 2,000 consumers conducted in the U.S. by BloomReach Inc., revealed that 44% of  shoppers begin their product searches on Amazon while 34% start their search on a search engine. This is being partially attributed to the shift of searches from desktop to mobiles and Amazon’s superlative search and discovery mobile platform. ^[2]  As users shift from desktops to mobile phones for e-commerce, the use of search engines is declining and consumers prefer apps where they can search a product and complete the transaction. Google is looking at ways to divert product search traffic from Amazon towards its own search engine and the delivery service “Google Express” appears to be aimed at achieving this goal. Google’s blog post stated “ Everyone wants milk delivered with their cookies – that’s why we are excited to start adding fresh groceries to Google Express”, indicating that the company’s pilot launch of fresh grocery delivery was based on consumer feedback on delivering the “entire grocery list”. ^[3]

According to our estimates, search advertising (PC and Mobile combined) accounts for more than 70% of Google’s valuation and we expect Google to maintain its mobile search market share at around 86% over our forecast period.

However with users now shifting to mobile phones with apps available for popular e-commerce and other sites, the number of searches on search engines is declining and users are going directly to the relevant app based on their requirements. Amazon Prime users which are now estimated to be around 54 million in the U.S. ^[4]  They are more likely to search for a product on Amazon’s app, rather than using Google search.  Providing delivery services similar to Amazon Prime, by basing its services on a membership model, is one of the ways in which Google appears to be taking on Amazon. However, whether it will be able to compete with Amazon’s strong logistics network and growing Prime memberships, remains to be seen. While we believe Google’s investment in “Google Express” should show results in the long term, the company’s ability to directly threaten Amazon and drive product searches to its platform is not yet proven.

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More Trefis Research

1. Google Launches Fresh-Grocery Deliveries, Wall Street Journal, February 2016 [↩]
2. Troubling trend for e-tailers: Amazon captures more product searches, Internet Retailer, October 2015 [↩]
3. Fresh grocery delivery to your doorstep, Google Commerce Blog, February 2016 [↩]
4. Amazon Prime now reaches nearly half of U.S. households, CNN Money, January 26, 2016 [↩]