Smartphone maker Xiaomi switches China playbook with eye toward EV showrooms

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SHANGHAI, Nov 10 (Businesshala) – Chinese smartphone maker Xiaomi Corp (1810.HK) is improving its playbook in its home country by opening thousands of new stores to boost domestic sales growth in a highly competitive market and provide a channel for its plans. Has been doing. To sell electric vehicles.

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Xiaomi opened its 10,000th store on October 30 with a promise to double the number of offline stores, and set a new target of opening 30,000 stores over the next two to three years.

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The brick-and-mortar push is a turnaround for a company that has grown rapidly by becoming a leader in online smartphone sales, and shows how some Chinese businesses are responding to continued soft consumption and slowing economic growth.

But it comes with challenges in the form of higher advertising and inventory costs, analysts said.

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“In the future, the company’s strategy will lean more towards offline based on our sales capabilities. Our initial goal is that our offline sales will achieve the same level as our online sales,” said Shang Jin, general manager of retail for China. Businesshala.

While Hong Kong-listed Xiaomi has successfully expanded overseas, it lags behind larger rivals such as privately owned Oppo and Vivo in its domestic market due to a weak offline presence. About 70% of smartphones in China are bought offline, while Xiaomi gets 30% of its sales offline.

Xiaomi’s new stores offer its suite of Internet-connected home appliances and cameras, which have a higher margin than phones — about 15% thicker than analysts say — and set it apart from its rivals.

Looking ahead, Xiaomi expects its new stores to become showrooms for its electric cars, which company founder Lei Jun has said will be their last major entrepreneurial project. The company aims to mass-produce cars by 2024.

playing catch up

Xiaomi has adopted an online sales model as it helps keep prices down without a network of offline distributors.

This strategy has helped the company grow rapidly since its birth in 2010. According to market research firm Canalys, it overtook Apple Inc. (AAPLO) to become the world’s No. 2 smartphone maker in the second quarter.

However, in its home market, the world’s largest, it has dropped from first in 2015 to fourth in the third quarter in the rankings, behind Vivo, Oppo and Huawei spin-off Honor.

As its domestic market share has struggled to keep pace, so have its stores. Xiaomi opened its first store in China in 2015 but it lags far behind Oppo and Vivo, both owned by BBK Electronics. Shang says those two rivals now have about 200,000 stores in China.

This year, to increase the number of its stores, Xiaomi changed its offline distribution model to attract more franchise partners. Although it owns a few stores, it ultimately aims to be a majority franchisee, especially in rural areas.

Under this new scheme, for some stores Xiaomi classifies a device as “sold” only when a consumer buys it, not when it is sent to middlemen. This reduces inventory risk for the store and shifts the burden of unsold inventory back to the manufacturer.

“Inventory is the biggest risk for smartphone retail businesses compared to store rent and labor costs,” Shang said, adding that the new system means “no stockpiling.”

This helps sweeten the deal for franchisees, who might otherwise balk at Xiaomi’s relatively low margins per phone.

“Xiaomi can’t increase their profit margins without raising their price, which they won’t,” said Nicole Peng, who tracks China’s smartphone market at Canalys. “So now they’re saying to sellers, ‘You’ll make a small margin but I’ll take the risk away from you’.”

The new system is not without its cost. Peng said this would force Xiaomi to invest more in offline advertising, which is more expensive than online advertising.

And since the franchisees didn’t have inventory, they could more easily switch to selling non-Xiaomi products if they were dissatisfied.

In the longer term, Peng said the store’s expansion made sense for Xiaomi’s push into electric cars, which would require dealerships.

“Cars are not standardized and customers demand a lot of customization based on personal preference. Selling offline is very important for that,” she said.

Reporting by Josh Horvitz; Editing by Stephen Coates

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