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Google Is About to Step Into Physical Retail

By Evan Niu, CFA - Oct 18, 2017 at 8:20AM

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Baby steps.

Alphabet (GOOG -0.27%) (GOOGL -0.21%) subsidiary Google has dabbled in physical retail before, but not like this.

In 2015, the search giant opened its first store-within-a-store locations, mostly inside of big-box retailers. Last year, Google opened its first Google Shop, a pop-up shop in New York City that was primarily intended as a way for consumers to experience the first-generation Pixel and the other hardware products that were unveiled alongside the handset, but they couldn't actually purchase products there; customers still had to buy online.

Different colors of Pixel 2 and Pixel 2 sitting vertically on a table

Pixel 2 and Pixel 2 XL. Image source: Google.

Now, Google wants to actually start selling through these Google Shops, according to The Verge.

There's a first time for everything

Presumably, the reason why Google Shops didn't sell products last year was because Google simply has no direct experience with physical retail, which involves implementing point-of-sale (POS) systems, inventory management, handling customer service issues like returns and refunds, and more.

It's a lot easier to just showcase a small number of products on hand and direct people to the online Google Store, even if that's not the ideal experience for a customer that's ready to buy something on the spot. In fact, that point of friction risks losing the sale once the customer leaves the store.

It seems that Google is now up to the challenge of stepping more directly into physical retail.

With great hardware comes great retail distribution needs

Last year was a turning point for Google in terms of its hardware ambitions, unveiling its first "Made by Google" products, including a smart-home device. The company continued that trend in a big way this month when it showed off a plethora of new hardware products like the Pixel 2 and 2 XL phones, a new Pixelbook with stylus, Pixel Buds, and an expanded portfolio of smart-home products.

With the growing hardware portfolio, the justification for controlling more of the retail experience grows commensurately as well. This is less important for smartphones, since carrier retail stores still dominate smartphone distribution in the U.S., but we're not just talking about smartphones anymore. It's less than ideal to forever be relegated to stores-within-stores, even if the reality is that those outlets will still end up representing the bulk of Google's retail distribution.

Is it worth the effort?

But therein lies the rub. There's a theoretical benefit to entering retail to sell a growing portfolio of hardware, but that benefit will be directly related to the scale. If we're just talking about a couple of temporary pop-up shops in a few cities like New York City and Los Angeles (as mentioned in the report), then the overall impact will be negligible.

At the same time, it's not realistic that Google will open a large network of permanent stores to directly sell what's still a fairly modest product portfolio. Google Shops selling directly to consumers may end up being more trouble than it's worth.

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