Can Google Succeed in Retail?

Of all the Internet companies that could potentially open up brick-and-mortar retail stores, search giant Google (NASDAQ: GOOGL  ) is probably among the last to come to mind. 9to5Google is reporting that this is exactly what's in the works and that Big G is shooting to open up a handful of Google Stores in major metropolitan areas by year's end.

The step out of cyberspace would be geared toward selling Google hardware and giving prospective buyers a chance to try out devices before taking the plunge. Recently, Google has begun to improve its direct-sales execution after fumbling its first foray in 2010 with the Nexus One. Nexus devices can now be purchased directly from the company through its Google Play storefront.

Everyone's doing it
Rivals Apple (NASDAQ: AAPL  ) and Microsoft (NASDAQ: MSFT  ) both operate their own retail storefronts.

Apple Stores have become a pillar of retail success over the past decade, as they allow the Mac maker to exert control over the entire purchase experience. Apple CEO Tim Cook even said recently that he didn't think the iPad would have been as successful without retail stores, since allowing customers to experience the device first goes a long way in convincing them that they want one.

In Microsoft's broader push to be more like Apple, the software giant has not only launched its own first-party Surface tablet, but also erected a network of Microsoft stores that bear an uncanny resemblance to Apple Stores, too. Microsoft also used its stores as the first retail outlet to launch the Surface RT models in October.

However, there's a big difference in how Google approaches hardware sales that has implications on any potential retail strategy.

What will it cost?
Google's hardware strategy is much like Amazon.com's in that both companies sell devices at cost in order to feed users back into their respective core businesses of search advertising and e-commerce. This lack of margin means that the company has no hopes of profiting directly from a retail initiative and will need to eat the costs of operating stores.

For example, Apple spent $865 million building up retail stores last fiscal year, and expects to spend another $850 million in fiscal 2013 to open between 30 and 35 new stores. However, Apple's global retail network is quite mature at this point, after the company first opened retail stores in 2001, and Google's retail operating expenses wouldn't be anywhere near this much. Still, all of those costs would have to be absorbed and other parts of the business will have to foot the bill.

Get out the way
On the other hand, cutting out middlemen would definitely further Google's goals. Even some carrier and hardware partners get in the way by trying to mark up Nexus devices.

T-Mobile is Google's only official domestic carrier partner with the Nexus 4, and attempts to sell it at an unsubsidized retail price of $550. LG has jacked up the price of Google's flagship smartphone to third-party retailers also. A Spanish retailer suspended sales after LG was suggesting a retail price of 599 euros -- up to twice what Google Play was charging. An Austrian reseller has it listed for 549 euros, a 200 euro markup compared to Google Play.

Getting rid of margin-demanding third parties will allow Google to sell Nexus and Chrome devices closer to cost.

Seeing is believing
The notion of opening retail stores reportedly began as management was trying to figure out how to launch and commercialize Google Glass. The Explorer Edition of the device went on pre-order for developers at Google I/O last year for a whopping $1,500, and they should eventually retail to consumers at a price point between $500 to $1,500.

Google Glass is the type of revolutionary product that needs to be seen and experienced to fully appreciate. A Google Store is the most promising place where the company can convey this value proposition.

Google Stores face some challenges that investors must accept, but they might just pay off by helping accomplish some of Big G's long-term goals.

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