Rare Good News for Retail

Yesterday it was leaked that Google plans to release a same-day competitor to Amazon Prime.  Even better, they’re going to undercut it on subscription price – $69 buys you all the same delivery you can eat.  The main operational difference is that Google won’t be provisioning the goods, they will be the payments and logistics platforms and local/chain merchants will be actually supplying the goods.  This is pretty neat – that way Google doesn’t have to invest an insane amount of money to do troublesome things like “hold inventory”.  Plus, once Google combines “Google Shopping Express” with the Google Car, it will be amazing – if I were Google, I’d be perfectly willing to burn cash on this for a few years to establish a market presence in order to prepare for the amazingness that will be Google Car delivery.

The aggressive undercutting of Amazon Prime smells like a price war, which is great.  Normally it’s only great for consumers, but in this case it doesn’t seem like any of the main parties involved will suffer too badly.  Google has $48B in cash-equivalents just, you know, sitting around.  Amazon doesn’t, but has never really been in striking range of solid profitability and investors don’t seem to care.

As for merchants, this will give all of them the ability to have a meaningful ecommerce channel where that just wasn’t possible before.  Some goods will take margin hits, but this allows them to have a dual-tier pricing structure.   They’ve always been competing with Amazon on price, though many of them don’t see it as such.  With Google Shopping Express they can sell retail-price goods in the store and Amazon-competitive goods online.  And by outsourcing the logistics to Google, retailers might actually be able to beat Amazon on price.

Pricing power comes down to volume.  In a pure price competition environment, businesses that spend more on their goods have more power to move prices.  There’s a ton more that goes into “Cost of Revenue” (distribution, etc.), but in retail goods are the biggest part by a long-shot.  Amazon’s cost of revenue in 2012 was $46B.  Wal-mart’s was $352B. Target’s was $51B. Walgreen’s was $51B.  Of course, it hasn’t been a pure price-competition environment since none of these retailers have been able to put together an ecommerce operation that rivals Amazon.  But if somebody else does it, it’s far from clear that Amazon will win the resulting price war – Amazon’s pricing power pales next to Wal-Mart, and there are a number of other retailers that have the scale to give Amazon a very serious fight.


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