Amazon (NASDAQ: AMZN) has been the king of e-commerce for more than two decades because it has been able to set up a simple purchasing solution with an almost unlimited variety of products. And no retailer, physical or online, has been able to keep up with this incredible growing stock.
The purchasing dynamics have changed in recent years with the growth of Shopify (NYSE: SHOP), Square (NYSE: SQ), and even Etsy (NASDAQ: ETSY). But the biggest threat I see for Amazon in the long run is Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) the Google subsidiary is getting its act together in shopping. Here’s why it’s Google that might be creating the biggest challenge for Amazon.
Google takes shopping seriously
Google has long had a shopping tab in its search bar and sometimes displays shopping results in addition to links, but shopping has not been the key to the company’s business. That could change, as Google, as a business, wants to provide answers to user queries, not just blue links that turn people away from its website. That’s why snippets are posted after a lot of research and the company is developing tools to answer questions from people within Google.
Since Google is one of the more likely options for initial purchase requisitions, there’s an incentive to provide customers with exactly what they’re looking for. Thanks to recent partnerships with Shopify and Square, it does this on its website. Sellers on Shopify and Square can use the Google Merchant Center to promote products in Google and even sell on Google’s site with their Shopify or Square back-end. Google is the top of the buying funnel, directing users to the most relevant products, even though it matches highly specialized buyers and sellers.
This is a change from the way Google has long handled purchase searches. Previously, Google was a funnel to Amazon with Amazon ads often lining up almost every search. This helped Amazon become the go-to place for shoppers, especially with Prime shipping, and effectively knocked Google out of the equation when shoppers started using Amazon as their initial search tool.
But the explosion of small stores and niche products combined with Amazon’s continued pressure on third-party sellers has opened up an opportunity for a new sales ecosystem. Buyers who aren’t stuck in the Amazon ecosystem are now looking for diverse and niche products on the internet, and what better place to search than Google?
Google dismantles Amazon integration
The last 20 years at Amazon have been spent integrating the shopping experience in the name of consumer convenience. Amazon started out as owning the website and warehouse, but now it has planes and trucks and payment processing and even computer servers around the world. As it grew, it brought third-party sellers into the equation, allowing them to sell their products on the Amazon platform; it was a victory for sellers who weren’t reaching customers through other means online.
But in recent years, Amazon has started to put pressure on third-party sellers. Of course, there are fees charged for managing products and other services, but Amazon is also finding ways to charge more for advertising to reach customers within the Amazon platform. Most customer searches on Amazon’s website or app will likely be conducted with sponsored ads, for which retailers must pay. Amazon unrelated author Brad Stone called it “pay-to-play” against Amazon’s own brands in an interview with Ben Thompson on Stratechery recently. This addition of ad revenue has made Amazon more profitable, but it must leave third-party sellers in a difficult position with the choice of eating the cost, raising prices to maintain margins, or finding another platform.
Google, Shopify, and Square are trying to attract sellers who want an option other than living within the Amazon ecosystem. And using this network of businesses, retailers and product manufacturers can sell directly to consumers – collecting information such as names, emails, and addresses, and building a long-term relationship that includes marketing of new products to highly qualified customers.
Amazon built an integrated ecosystem where it was the platform, search tool, payment platform, warehouse, shipper, and more for third-party retailers. Google’s strategy to turn Amazon upside down separates this integration. In my opinion, the game-changer in this disruption is the proliferation of streamlined payment options from Apple (NASDAQ: AAPL), Shopify, Square and Pay Pal (NASDAQ: PYPL). Like Amazon, they record your shipping address and credit card information to make payment a snap, but they still allow the retailer to collect valuable customer information. As this stack of services grows and improves, it is a formidable threat to Amazon’s retail business.
Amazon’s biggest advantage
What Amazon still has to offer is Prime and the momentum inherent in the market. Prime and all of its perks have the effect of locking consumers into Amazon’s ecosystem as they prepay for “free” shipping.
The momentum can be just as important, as buyers typically stick with their preferred method of buying for a period of time, even though there are cheaper, faster, or better buying options. Amazon might just take advantage of the growth momentum for the next decade, but I think it’s clear that Google and its partners are going to take market share.
The future of retail
Amazon had a big head start in e-commerce, but online shopping has started to change again as it has become easier and easier to set up an online store, to pay quickly and securely, and to go. to a niche audience of customers. The services that Shopify, Apple, Square, and others have brought to the market have made this transformation from integrated e-commerce to a more disparate model possible.
Key to this Amazon disruption could be Google’s role as a place of discovery for shoppers. Shopify and Square aren’t designed to be discovery tools, so businesses need to find ways to reach qualified customers. Who better to make this match than Google? If the strategy works and Google becomes the first place people go to shop, it could threaten Amazon’s dominance in e-commerce in the long run.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.