Retailers pass on Google Express

October 15, 2014, 2:00 PM UTC
Google Brings Its Same Day Delivery Service To Los Angeles
LOS ANGELES, CA - MAY 5: A Google Shopping Express van is seen at Google headquarters on May 5, 2014, in Los Angeles, California. The same day delivery program, which started in San Francisco, is expanding to West Los Angeles and Manhattan and will offer free unlimited delivery for the first six months for new sign ups. (Photo by Kevork Djansezian/Getty Images)
Photo by Kevork Djansezian — Getty Images

Google is expanding its same-day delivery service, which brings customers everything from clothes to food within a few hours of ordering. But three retailers, American Eagle Outfitters, Office Depot, and grocery store chain Lucky no longer want to hitch a ride.

Google said on Wednesday it would add three new cities and 16 more retailers to its Google Express lineup. In addition to New York, Los Angeles and San Francisco, the service will now cover Chicago, Boston and Washington D.C.

The expansion shows Google’s growing commitment to the nascent service, which challenges Amazon’s dominance in online retailing. But the defection of a handful of retailers from the program also shows the potential hurdles Google faces in succeeding in this new business.

Google’s goal is to be a middle man between consumers and retailers. After a customer places an order, Google sends a courier to pick up the item at a local store and then delivers it during a selected time window. Google has signed up a number of new retail partners for the venture including Whole Foods, Costco, and REI. In all it has 35 retailers on board, which pay Google a commission for each sale.

At first, Google (GOOG) charged customers nothing for the service in an effort to gain traction. But on Wednesday, the company ended the promotion and said that one-year memberships will cost $95, or users can instead opt to pay $5 per order.

Google is chasing after Amazon (AMZN) and its parallel push into same-day delivery, which revolves around building massive warehouses near major cities across the country. To take on Amazon, Google will need to sign up as many retailers as possible.

“Amazon mainly fulfills orders from their own distribution centers, which allows them to have a better control of their inventory,” says Antonio Moreno-Garcia, a professor at Northwestern University’s Kellogg School of Management. “Google partners with the retailers…and uses their inventory, which requires a level of integration that can be difficult to achieve.”

Why Office Depot, American Eagle Outfitters and Lucky pulled out of Google service is unclear. All three either declined to comment or did not respond to messages.

Greg Buzek, president of research firm IHL Group, said that the reason for Office Depot dropping out may be because it already has its own delivery service, making Google’s unnecessary. Meanwhile, he said same-day delivery makes little sense for a clothing retailers like American Eagle.

Customers who need same-day for clothing can’t afford to take risks with getting the wrong size and fit, Buzek said. Those who can afford to do so are a small market. Buzek also pointed out that same-day grocery services have historically struggled. Customers typically prefer to order from home and then pick up their groceries in the store unless they live in a densely packed urban area that makes parking difficult.

“Either the retailers are going to do their own thing, or there are data-sharing issues they are concerned about,” Buzek said. “Perhaps there was concern about sharing customer’s data and potential customer push back.”

Eric Anderson, chair of the marketing department at Northwestern University’s Kellogg School of Management, raised skepticism about same-day delivery in general. Many services have come and gone without gaining much of a following.

“No one has figured out same-day service in the USA and it’s not clear it will be big in the USA,” Anderson said. “We don’t have that kind of population density. Getting goods from that last mile to the customer is costly and challenging.”

Google also declined to comment, but analysts say that the defection hurts Google Express more than the retailers.

“Google offers the convenience of allowing customers to shop with multiple retailers on one platform,” Anderson said. “If you don’t have enough retailers, why would people be interested? They might as well go to Target instead.”

While Target is one of the retailers signed up for Google Express, it is not planning to expand into Google Express’s new cities and is currently experimenting with its own same day delivery service.

“Target has taken a test-and-learn approach with Google Express,” Eddie Baeb, a Target spokesperson, said in an email. “We’ll continue to gauge results and guest feedback as we consider additional expansion opportunities in the future.”

(Correction: A previous version of this story gave an incorrect number of Google Express retail partners. The service has 35 retailers on board, not 25)