Last week, rumors surfaced that Google (NASDAQ: GOOG ) may open retail stores in major metropolitan areas. Google has denied a retail store plan since December, but the company may not be able to push off a physical retail presence any longer. Google's competitors are in the midst of a new wave of tech retail -- and Google may be wise to follow suit.
Follow the leader
When it comes to tech companies diving into the retail space, we're really talking about a game of "Follow the Leader" -- that leader obviously being Apple (NASDAQ: AAPL ) . In Q1 2013, about 120 million people visited Apple stores and the company made $6.4 billion in revenue from them, with $1.6 billion in operating income. With almost 400 stores in its retail arsenal, Apple is light-years ahead its tech counterparts. Apple also entered the retail world more than a decade ago, so it's had a bit of a head start.
Of course, Google is a different company than Apple, but the two are in a constant battle for mobile dominance. Apple currently has a greater-than-50% smartphone market share in the U.S., while Google's Android has about 42%. Apple's success in the retail space should show Google that entering the physical world does have its benefits.
The experience is the product
Apple has known for a long time that if it can control the experience of its products, it has a better chance at selling them. Most recently, CEO Tim Cook commented at the Goldman Sachs Technology and Internet Conference:
One thing that's not well understood, I don't think we would have been nearly as successful with iPad if it weren't for our stores. The tablet was ingrained in their mind as this heavy thing the Hertz guy held. But our store is the place to go and discover and try it out and see what it can do. I don't think the launch would have been nearly as successful without stores that welcome people in, at 10 million a week, and show this. It gives Apple an incredible competitive advantage.
What works for one company doesn't always work for another, but it doesn't mean Google shouldn't try. Microsoft (NASDAQ: MSFT ) is starting the see the value in selling products in its own stores and has about 51 locations, while it works its way to a goal of 75 by 2014. To compete against Apple, Microsoft and Google need to do much more than tell people about their great products -- they need to show them. Microsoft will have a harder time doing this because the Surface tablet and Windows Phones don't dominate any markets right now. Google may have a better chance because its Android OS is already one the dominant mobile platforms.
Google can afford to try this
Investors may argue that Google hasn't been in the retail space at all (outside of a few Chome Zone stores), and they're doing just fine in the tech space -- and they'd be right. But with Apple pushing further into retail and Microsoft building new stores each year, Google would be unwise to let these competitors own the tech retail space. That's not to say that Google needs retail stores to survive, but if Microsoft becomes even remotely successful with its stores and Apple continues to expand its retail endeavors, Google could lose out on building brand awareness with its stores and winning new costumers from retail locations.
Even if Google launches physical stores and they flop, investors shouldn't expect the company's revenue to hurt that badly. More than 80% of Google's net revenue comes from its Internet search side of the business, and a few stores wouldn't change that. Retail locations should be viewed as a way for the company to market its Nexus line, Chromebooks, and future products, and to connect with current and potential mobile customers.
Like other companies in the digital world, Google is fighting to win more mobile customers, and a few retail locations may help. Google already has an enviable lead with its Android operating system, but consumers' preferences can change quickly. That's why it's more important than ever to understand each piece of Google's sprawling empire. In The Motley Fool's new premium research report on Google, we break down the risks and potential rewards for Google investors. Simply click here now to unlock your copy of this invaluable resource, and you'll receive a bonus year's worth of key updates and expert guidance as news continues to develop.