What is Google Inc. Thinking?
From self-driving cars to connected glasses, Google is widely considered the world's most innovative company. Following in the footsteps of its online advertising rival Facebook, Google has taken steps to help bring the Internet to underserved markets around the world, including acquiring drone maker Titan Aerospace for a reported $60 million. And Google is reportedly ready to spend $1 billion for satellites to further its efforts to provide Internet access to the world. Philanthropic, and outside-the-box thinking, now that sounds like Google.
However, there was nothing innovative about Google's plans to take on Amazon.com when it introduced Shopping Express last year in select areas of San Francisco, New York, and Los Angeles. Shopping Express gives consumers the ability to shop multiple brick-and-mortar retailers and have their purchases delivered the same day, or the next day depending on the time of order, much like Amazon.com's Prime service. But why? Setting innovation aside for a moment, what possible business case is there to justify Shopping Express, let alone expanding the service, as Google intends to do?
When Google started its online shopping service, it delivered customer's orders via a fleet of personalized vans. Unlike Amazon.com, that ships its products to customers from a bevy of warehouses strategically located across the globe, Google aligned itself with major retailers. After submitting an order to a local retailer like Walgreens or Target -- two of the several Google Shopping Express partners -- customers sit back and wait for a knock on the door.
Shopping Express, like Amazon.com's front door delivery service, is a potentially great deal for customers, depending on just how much of the same-day or overnight costs associated with delivery are passed on. Now that Google has decided to expand the service to include all of Northern California, there are additional logistic concerns to take into account, meaning all those Googlized vans won't cut it.
When the shopping service was confined to specific areas, Google's fleet of delivery vans was more than sufficient. However, with the expansion of its service, Google is now in negotiation with multiple couriers to deliver to rural areas. And plans are to use this same business approach as Shopping Express spreads like wildfire, if Google has its way, across the U.S.
There's are reasons Amazon.com trades at a price-to-earnings ratio that is downright frightening -- it's trailing P/E is north of 480 today -- and that's primarily due to the impact building out its infrastructure has on its bottom line, combined with razor-thin margins common in retail. At the end of Q1 2014, Amazon.com's profit margin stood at 0.55%. Needless to say, margins that small leave little to no wiggle room.
Yes, the approach Google has decided on for its retailing business avoids the expenses associated with building and stocking warehouses around the country, and that's a good thing. However, just how much are partners like Target, which historically run lean and mean in the competitive retail industry, willing to concede to gain additional business from Google via its Shopping Express division? There is simply too little upside to warrant Shopping Express at all, let alone expanding the service.
Final Foolish thoughts
Not every venture Google undertakes needs to be on the forefront of innovation for it to make good business sense. And exploring new avenues of growth outside of search and advertising to diversify revenues streams is perfectly reasonable. Maybe someone in Google's Mountain View, California headquarters has visions of self-driving cars delivering Target goodies to customers across the country. If so, it's time to wake up, because all it takes is one look at Amazon.com, and those minuscule margins, to realize Shopping Express isn't the answer.
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The article What is Google Inc. Thinking? originally appeared on Fool.com.Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Facebook, Google (A shares), and Google (C shares). The Motley Fool owns shares of Amazon.com, Facebook, Google (A shares), and Google (C shares). 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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