Google E-commerce Plan May Further Damage Traditional Retailers

Google (NASDAQ: GOOG) will start an e-commerce business to compete with Amazon.com (NASDAQ: AMZN). Amazon is the devil to struggling bricks-and-mortar companies that want more online sales. But Google eventually may be just as difficult an enemy.

Google in in talks with traditional retailers like Gap (NYSE: GPS). The strength of the new service Google would offer is that one-day free shipping would be part of the product the search company brings to bricks-and-mortar outfits. This would compete with the Amazon Prime service that offers frequent shoppers at its site free two-day shipping.

Traditional retailers may find that Google poses dangers to them as a partner. Google earns much of its revenue on retail ads. The new free shipping service will tether these retailers and Google closer together. Most of the same retailers have their own e-commerce sites. They need to be concerned about the extent to which Google’s service may pull away traffic to their own sites. It is not unlike the probably that many airlines have with online travel sites like Expedia (NASDAQ: EXPE). Expedia brings them business but takes a piece of the revenue. At the same time, it cuts visits directly to airline sites where comparison shopping for tickets is not available. Music publishers have had a related problem with Apple’s (NASDAQ: AAPL) iTunes. It enhances song sales, but at a cost to profit margins as Apple takes part of the money from each sale.

Traditional retailers have become desperate. Yesterday, Barnes & Noble (NYSE: BKS) posted worse-than-expected earnings. Traditional sales were off. Its investment in e-commerce systems rose. Barnes & Noble is in a race it probably cannot win. Amazon.com has too much of the online book and e-reader business. Now, Barnes & Noble must ask itself whether an alliance with Google will help sales — and at what cost.

The move to e-commerce has been only a modest success for companies like Barnes & Noble and Gap. They may find that a partnership with Google improves their prospects but takes away their independence.

Douglas A. McIntyre