Aware of Amazon.com taking away a significant portion of its product searches, Google has decided to invest heavily in its same-day delivery service, Shopping Express. The search engine giant recently set aside $500 million to fuel this initiative in the United States.
So far, Google has partnered with top retail stores like Costco, Wal-Mart, and Whole Foods. Its relatively new shopping site displays these stores, through which users can examine a variety of products available near their location. The success of this new service could potentially increase revenue considerably. Since the company faces a threat to a part of its core business, it is willing to incur high expenses and challenge Amazon.
Revenue growth from product listing ads
Google bases part of its core business on the ads shown on its search engine, which consistently generate a substantial amount of revenue. In that sense, the company focuses strongly on building its clients' brands, making sure that it provides relevant ads that lead to sales or conversions. For that matter, it is concerned about the number of people who search for products on Amazon.com instead of Google, which leaves out its product listing ads.
If Google takes a portion of these Internet users from Amazon, it could increase revenue significantly, as ads could potentially get more views and conversions. Shopping Express is Google's way to accomplish this. In its most recent quarter, the company had revenue of $15.4 billion, up 19% year over year. Likewise, network revenue grew 4% year over year, totaling $3.4 billion.
Concern with costs
Investors might worry about Google spending its financial gains on a low-profit-margin venture that requires high capital expenditure. Yet, as Amazon takes a significant share of Google's core business, it seems like a sound initiative. Google gaining more control of product searches could positively affect the amount of traffic it drives on its search engine, attracting more agencies and publishers who wish to promote their brands.
However, the way Shopping Express works logistically seems somewhat complicated, plus some retail stores apparently dislike the amount of control that Google has within its proposed partnership plan. Still, Google's current partners show that they are willing to explore a new way to reach customers, challenging Amazon's aim to practically replace traditional stores with its online retail site.
Shopping Express poses a direct threat to Amazon's same-day delivery service, called Amazon Fresh, which is offered through a $299 yearly membership of Prime Fresh. Amazon shows consistent growth of its online retail business, and in its latest quarter, the company's electronics and general merchandise revenue increased by 27% to $13.02 billion.
Although the company constantly reports net losses, it has managed to increase its stock price through steady and significant revenue growth, as evidenced by its 2013 annual revenue figure of $74.45 billion, up 22% from 2012. Also, a possible explanation for Amazon's lack of profit could be strong investments in the worldwide expansion of its services, which could yield notable benefits in the future.
Final foolish takeaway
Shopping Express seems like a sound initiative by Google to attract users searching for products to its own search engine. The company need to do this because a great number of Internet users look for products only on Amazon.com. Moreover, Google's success in this new service could garner a significant increase in revenue. Although the initiative could imply high expenses and a low profit margin, it seems justified by its potential to improve Google's core business in the U.S.
In regard to Amazon, it also operates a same-day delivery service, using its own trucks and stores. The company shows consistent growth in its business, but remains unprofitable. Still, as it aims to increase its market share in the overall retail store market, it poses a threat to Google's new partners and product listing ads.
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The article Why Is Google Investing Half a Billion Dollars in Shopping Express? originally appeared on Fool.com.John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Alvaro Campos has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Costco Wholesale, Google (A shares), Google (C shares), and Whole Foods Market. The Motley Fool owns shares of Amazon.com, Costco Wholesale, Google (A shares), Google (C shares), and Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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