Google chairman Eric Schmidt recently said "Many people think our main competitor is Bing or Yahoo. But really our biggest search competitor is Amazon." In particular, Google lags Amazon in product search, where it lacks the customer purchasing data that retailers such as Amazon can collect. This explains why Google has been investing a reported $500m to drive its Express shopping service this year and has been busy signing up major retailers such as Office Depot, Target, Toys R Us, Raleys, Costco and Whole Foods, as well as smaller players in the Los Angeles and San Francisco area. It recently introduced a $4.99 same day delivery charge, along with a minimum order value of only $15 and a $90/year subscription for free delivery (compared to Amazon Prime's $99 sub fee). So far Google Express only offers non-perishable items, but there are reports it is looking to offer fresh food as well in partnership with supermarkets, with a mooted $7.99 delivery charge, waived for orders above $150 in value.
Joining forces with Google Express could be a relatively low-cost way for brick and mortar grocers to test the market for fresh food delivery, as Google's cut of the revenues - estimated to be in the mid-single digit percentage range - is still less than what it is likely to cost food retailers to pick, pack and deliver the goods themselves. In other words, there may be an opportunity to piggy-back on the subsidy that Google is paying to achieve its strategic objective of creating a same day delivery service and hence product search portal to rival that of Amazon. The downsides of such a model being a) little or no control over the quality and continuity of the service offered; b) limited scalability (as long as the products are picked in-store); and ceding control of customer data to a (not just any) third party.
The danger for the grocery industry as a whole is that this strategic battle between two highly cash-rich companies known for taking a long-term view on profitability could significantly drive down the cost and hence accelerate customer take-up of home delivery. This implies a double-whammy on brick and mortar profits due to the higher subsidy required to compete in this new channel, combined with greater cannibalisation of store sales and profits. (Remember that for the grocery market as a whole, the shift online only adds costs, not sales.)
It is possible that Amazon, whose profitability is starting to come under greater scrutiny by investors, may blink before Google and decide to put a limit on the delivery subsidy it is prepared to pay to drive its Fresh business. However, given the strategic importance of same day delivery of perishable and non-perishable goods, not just in the battle for highly lucrative advertising income but also in the determination of CEO Jeff Bezos to sell more stuff to more people at a lower cost, this limit is likely to be a lot lower than that implied by the current $6-$12 average service fee charged by those offering grocery home delivery in the US today.
The good news is that next generation robotics technology could allow traditional food retailers to leapfrog Amazon Fresh and Google Express in terms of order fulfillment efficiency, while at the same time making much more effective use of their key assets - people and stores.