The Wall Street Journal reported that Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) is expanding its same-day delivery service to include fresh groceries in a move that allows GOOG to further penetrate into consumers' daily lives and tap into the underpenetrated grocery delivery/e-commerce space. Given the long-term stagnation of GOOG's core business in search and advertising, non-search business such as GOOG's Other Bets will become increasingly important to the company's future growth. In the case with food delivery, it will be an essential in driving GOOG's mobile ecosystem in OS, payment and advertising.
I remain bullish on GOOG and like the company's execution in expanding beyond its core business. Although the Other Bets will continue to operate at a loss, I am positive that 1) Android remains the dominant mobile OS globally, 2) Nest is a competitive IoT home automation ecosystem, 3) robotics/AI have plenty of attractive implications from civilian to military, 4) drones and fibre are positioned to disrupt our legacy telecommunication/cable industry, and 5) VR/Google Glass is already well positioned to fuel the next growth in our modern computing trend. In short, GOOG will be more than just search but an essential part of our daily lives in the decades ahead.
GOOG's same-day delivery service covers fresh groceries including produce, meat, eggs and other perishable goods. The trial will start in LA and San Francisco and will be part of GOOG Express, which partners with retailers across US cities to deliver goods to the consumers. In the near term, this business will operate at a loss given the already low profit margins of roughly ~2%, and faces multiple challengers including Amazon (NASDAQ:AMZN), Instacart (Private:ICART), Fresh Direct and Safeway (NYSE:SWY).
In my view, the biggest challenge to food delivery in North America is the high labor cost. Unlike China where O2O has taken off in recent years thanks to the abundance of low-cost labor used by logistics providers, the labor cost in North America is relatively high and this will continue to depress margins. Although GOOG has increased the minimum order size and membership fee to address this issue, competition is unlikely to allow this sort of pricing power to be sustainable.
Rather than building its logistics fleet organically, GOOG could develop a crowd-sourced/Uber (Private:UBER)-style delivery platform where typical shoppers are doubled up as delivery personnel. For example, a Costco (NASDAQ:COST) shopper/GOOG Express contractor could pick up extra items for a consumer and get paid a delivery fee if the consumer is located within a reasonable proximity. This could significantly reduce certain overhead expenses for GOOG and allow this service to scale up faster than the conventional food delivery companies.
Simply put, in an absence of cheaper labor cost, it is difficult to scale food delivery. However, GOOG does differentiate from the rivals given its Other Bet on driverless cars, which I believe can greatly reduce the logistic cost and complications involving human delivery services. Unfortunately, a realistic expectation of such a scenario is at least a decade out.
Conclusion: I remain bullish on GOOG and continue to like the company's long-term growth outlook with the Other Bets.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.