Google (GOOG) Becomes a Grocer

Internet search giant Google (GOOG) surprised the market last week after it announced that it was investing in grocery delivery. The project, Google Shopping Express, is currently being tested on a small group of consumers in San Francisco and the Bay Area. Google has stated that if the initial tests go well, then it plans to roll out the service in other markets across the United States. The tests are emphasizing the benefits of local, same-day delivery services, in an attempt to increase consumer dependence on the Internet. If successful, analysts believe that Google Shopping Express could be disruptive to the business of grocers and superstores that do not offer online options.

As a result, Google Shopping Express could become a new arm of the company’s ad revenue machine, which would encourage participating merchants to buy more online ads to gain more customers from the service. Supermarkets might also decrease their own e-commerce initiatives in favor of providing their goods straight through Google’s service, and save those e-commerce costs for additional ad purchases. And if Google Shopping Express becomes a major part of the Google ecosystem, along with Gmail, Youtube or Docs, then users from those services will be more likely to use the service. Lastly, the widespread adoption of Android on smartphones and tablets will also drive additional sales, with the inevitable mobile application.

Retailers currently signed up with Google Shopping Express include neighborhood, regional and national stores, such as Target (TGT) and Walgreen (WAG). These merchants will sell their items through the central shopping website, which will be delivered by courier services hired by Google. The contracted couriers will drive Google-branded vehicles with Google uniforms, giving the service a more unified appearance.

Google has yet to decide on the final consumer costs for its online grocery service, since same-day delivery is relatively expensive. In 2001, online grocer Webvan collapsed because it failed to pass the costs of same-day delivery service onto customers, who were unwilling to pay a high premium for the convenience. During its six-month test period, customers aren’t required to pay a surcharge for same-day delivery; merchants pick up the tab instead. It is unclear if currently participating merchants will be willing to uphold this agreement if the service goes nationwide. It’s a tough task to expand this kind of service – Wal-Mart (WMT), the nation’s largest superstore, only offers same-day delivery services in five markets.

To add Google Shopping Express to its ecosystem, the company is shutting down iGoogle, a customized portal page, and Google Reader, which automatically collects and organizes RSS links. Although Google Shopping Express is still in its early phases, it is a project worth keeping an eye on, since Google already has defined long-term uses for it, unlike its driverless car and human powered monorail projects.