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 Others raised their eyebrows when orders of one or two items, such
as toothpaste or a can of soda, sometimes arrived in a bag big
enough to hold a week's worth of groceries.
It was a rookie mistake, one that underscores how Google is wading
into unfamiliar territory — a business, now contested by seasoned
hands Amazon.com Inc and eBay Inc. that claimed many victims during
the first dotcom boom.
For Google, which dominates the wildly profitable Web search
advertising business, dispatching drivers and delivering packages
seems like an expensive diversion with an uncertain payoff. One of
the biggest disasters of last decade's dotcom crash, Webvan, bled
hundreds of millions of dollars on just such a business until it
failed.
Online shopping is an area that Google, which has ambitions to
dominate every aspect of the Web, has traditionally had a limited
presence in. Traffic lost to Amazon and eBay, which are using
same-day service to lock in consumers for the main business, means
customers lost for Google's other services.
As e-commerce grows, Google wants at least to get its hands on data
about online shoppers, so it can expand and improve its main
business, search advertising. Its successful foray into mobile phone
software was driven partly by a similar philosophy to guard its
search franchise. Now its Android system ensures Google search is on
most smartphones globally.
After more than a year of testing, and hiccups such as on packaging,
Google is preparing to expand its delivery service.
Unfazed by the ghosts of defunct home-delivery operations Webvan or
Kozmo.com, Google is ramping up its Shopping Express with radio ads
touting the service in the San Francisco Bay Area. It recently took
its blue-and-white Priuses and vans to Los Angeles in a limited
trial and is considering moving into New York, according to a person
familiar with the matter.
"Same-day delivery doesn't have to be a luxury. It's a convenience
that everyone should be able to enjoy, and that means across lots of
stores, across lots of cities and across lots of products," said Tom
Fallows, director of product management for Google Shopping Express.
Fallows wouldn't say when Google delivery cars might come to New
York, but he confirmed that the company plans to enter more cities.
"We are eagerly starting to move forward on some of our next steps
for expansion," he said. He declined to discuss the economics for
Google.
Google is also experimenting with ways to deliver perishable
groceries such as milk and eggs — items that require special
temperature-controlled storage and delivery gear, and which are
already available through Amazon's rival Fresh service — though
Fallows said it's too early to say whether that might ultimately
become part of the service.
Google has "tens of thousands" of users of the service in the San
Francisco Bay Area placing thousands of orders a day, according to
the person with knowledge of its delivery business.
"This is a play that will take many years before it turns in any way
profitable. But it's something worth doing if they can establish the
marketplace and the other hooks into the business," the person said.
THE LAST MILE
Google Shopping Express lets consumers buy products online from more
than a dozen stores in the San Francisco Bay Area, including
Staples, Costco, Blue Bottle Coffee and Toys R Us, and have the
goods at their doorsteps that same day.
Couriers or contract drivers pick the orders up from retail stores
throughout the day. Google collects an undisclosed commission from
the retail stores for each sale.
For now, consumers pay nothing for the convenience, thanks to a free
six-month membership trial offered by Google. Google will likely
extend the free trial until it has perfected the service and is
ready to charge a subscription fee, said Fallows.
With nearly $60 billion in cash, Google can afford to experiment
with same-day delivery, similar to the way it is building out
high-speed fiber networks in some cities.
Importantly, the ability to deliver purchases into buyers' hands on
the same day closes the "last mile" between an online business and a
customers' home. That removes a key advantage of traditional
retailers today: instant gratification.
As Amazon spends billions on fulfillment centers and eBay contracts
couriers around the country, the danger is Google may be left out of
one of the hottest new areas of online growth.
The eBay Now service, available in the San Francisco Bay Area, New
York, Chicago and Dallas, charges $5 per order and delivers goods
within one to two hours. Amazon charges a $299 annual fee for Prime
Fresh, which lets consumers order anything from fresh salmon to
digital cameras, with free same-day delivery for orders more than
$35. It's available in Los Angeles, San Francisco and Seattle.
Amazon's separate Local Express service lets Prime members in 10
U.S. cities pay $3.99 per item for same day delivery.
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Google's Shopping Express is being tested as a standalone delivery
service, but many people expect the eventual goal is to integrate
home deliveries as a feature in the search engine. A consumer doing
research about camping tents on Google, for example, might see an ad
that lets them order one and have it delivered to their doorstep the
same day.
"It's just another way of to make search more powerful," says BGC
Partners analyst Colin Gillis. And it gives Google more insight
about users, such as valuable information about which visitors its
website "convert" into buyers after clicking one of its search ads.
MAGIC WAND?
Amazon, eBay and Google have been mum on progress. But there's
evidence to suggest that consumers may be taking to it.
Family-owned Palo Alto Toy & Sport, which Google identified to
Reuters as a participant in Google Shopping Express, has increased
sales by 15 percent, said manager Miguel Natario. The increase in
sales has more than paid for an additional employee hired to pick
the 30 to 40 additional daily orders from store shelves and prepare
them for the Google driver pickup.
Among the most popular items? Helium-filled Mylar balloons, a party
essential that sells for about $4 to $5 each. "I get inflated
balloon orders every single day," said Natario.
The real test will come when Google asks users of Shopping Express
to open their wallets and pay for home deliveries.
Google may need to put in place some restrictions if it hopes to
make same-day delivery a viable business.
Paying drivers to crisscross town delivering packs of gum or tubes
of toothpaste is not a sustainable business, said Kenneth "Skip"
Trevathan, former chief operating officer of Kozmo.com, an online
delivery service that expanded to several cities in the 1990s before
going out of business.
"Unless they've got a magic wand of some kind that we didn't have, I
just don't see how they can make money off that," Trevathan said. He
predicts Google may have to impose a minimum order or tack on an
additional fee for smaller orders.
Unlike many Internet businesses in which being first to grab market
share is key to success, growing too big too fast can be fatal in
the delivery game, said David Vernon, a Sanford Bernstein analyst. A
small order that forces the delivery person to drive to the other
side of town can do more harm than good.
"Last mile" economics are among the most complex metrics in the
industry. Too much time between deliveries or poorly planned packing
can inflate costs, especially for same-day orders.
A difference in the time between deliveries of just a few minutes
can double shipping cost, according to an October analysis of
Amazon's delivery service by Marc Wulfraat, a consultant who
specializes in logistics networks.
"Getting a bunch of revenue that doesn't drive density in your
routes is actually worse, because you're adding costs faster than
you're adding revenue," said Vernon.
For Google, the key is to get that lag down. That's where mapping
technology and a wide network come in handy.
"If you think about the fact that there are more than a billion
people using Google maps to help them drive around town, we have a
ton of information for optimal routes and traffic patterns," Fallow
said.
Equipped with Android smartphones, Google couriers receive
"step-by-step" driving directions. Deliveries per hour have
increased by more than a factor of six since Shopping Express began,
thanks to ongoing improvements in the software, and Fallow expects
more improvements.
Orders for a single tube of toothpaste aren't ideal, but they are
offset by the "broader basket" of customer orders and the annual
spending of each customer. Google's delivery service is not so
different from a traditional retail business, he said.
"Stores sometimes sell particular items as a 'loss leader' in order
to over time earn the broader business of that shopper," he said.
(Additional reporting by Deepa Seetharaman;
editing by Edwin Chan
and Douglas Royalty)
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