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Back to the Stores: Handset vendors shift from online sales to offline

June 01, 2017
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By Kuhu Singh

Industry trends such as improved mobile network coverage, adoption of 3G/4G services and the increased affordability of handsets are key reasons for the surge in smartphones uptake in India. However, another key factor driving smartphone adoption is the retail, sales and distribution strategies of handset vendors. Over the years, handset players have fine-tuned and redefined their retail strategies to improve their customer reach, while keeping their logistics and marketing costs in check. A significant trend in the handset space was smartphone retailers shifting from “brick-and-mortar” showrooms to the online “click-and-collect” model. Leading this shift was handset manufacturer Motorola, which began the trend of retailing its phones exclusively through Flipkart, its partner e-commerce website. Many other handset players followed suit and made a move towards the no-offlinestore strategy. The trend was a testament to the confluence of the shifting retail behaviour of the average urban consumer and handset vendors’ move to tap the growing opportunities offered by the increased internet penetration in the country.

However, over the past two years, the trend of online retail of smartphones has started reversing, with handset vendors slowly heading back to the offline channel for retail sales.

Exploring new consumer segments

Online stores gave many companies a base to start operations in India. Handset players cut costs by keeping out the logistics requirements of supplying handsets to end-users. They saved substantial capex on rolling out hundreds of exclusive stores across the country. No agreements were signed to bring on board distributors for selling their handsets. This strategy helped several new entrants in the Indian market to increase their consumer reach.

The online strategy worked well typically with technology-savvy, e-commerce-friendly urban users in the metros and Tier I cities. Their semi-urban and rural counterparts are yet to embrace the e-commerce way of life and thus largely remain out of the online sales and marketing ambit. However, these urban markets are now slowly hitting saturation point as most customers in these markets already use smartphones. Clearly, the future opportunities for expanding the customer base in these markets are becoming limited. It has, therefore, become necessary for handset players to tap the less explored markets of Tier II and Tier III cities. As per the Internet and Mobile Association of India (IMAI), there are about 750 million potential internet users in India, a market that is largely confined to Tier II and Tier III cities and rural areas. Since mobile phones have become the primary mode of using internet services in these parts of the country, these markets present a huge opportunity for handset vendors.

In addition, they are now opening offline retail stores, primarily in Tier I and Tier II cities, to cater to the less internet-savvy population in these areas.

GST impact

Earlier, smartphone vendors preferred online sales due to the varying tax regimes prevalent in different states. There were several states that encouraged businesses by levying a lower percentage of value added tax (VAT) and other taxes in comparison to other states. It made good business sense for handset companies to sell their phones from these states online. With the introduction of the goods and service tax (GST) regime, however, the tax differential will cease to exist.

The implementation of GST from July 1, 2017 may become a key reason for handset vendors’ shift from the online “click-and-collect” retail strategy to the offline “brick-and-mortar” strategy. With GST coming into effect, the VAT advantage currently enjoyed by online stores would disappear, putting both offline and online retail markets on a level playing field.

Industry plans and strategies

Smartphone vendors including Huawei, Xiaomi, Motorola, Coolpad, One-Plus, Asus, Oppo and Vivo have started making concerted efforts to increase their offline presence in the country. Motorola and Lenovo have announced plans to invest in setting up exclusive mobile retail stores in the country. While Motorola plans to open 25-100 exclusive outlets over the next three years, Lenovo intends to establish exclusive stores in the top three cities in the country. The China-based Coolpad Group has also widened its retail strategy to move into the offline space in order to reach a much larger audience than it does with only online sales. The company plans to sell about 5 million units a year only through offline stores in 10 states, for which the company would establish 5,000 core shops and 10,000 retail stores by end-2017. Xiaomi has also announced its plans to enter the offline retail business in India, in conjunction with its online sales. According to Xiaomi, its offline model would comprise distributors, who would directly market to retail stores, which would eliminate the need for middlemen, thus reducing costs. To this end, it has partnered with four retail chains –  Poorvika, Sangeetha, Big C and LOT – in the southern states. The company also plans to set up Mi Home stores, akin to its retail stores in China, to improve its offline experience. Moreover, handset vendors such as Asus and ZTE have announced their plans to focus on Tier II cities, small towns and villages to expand their offline presence. In addition, Foxconn-owned InFocus is planning to relaunch its offline business along the lines of the strategies of China-based manufacturers Oppo and Vivo. Huawei and Honor are also following similar strategies to expand their consumer base in India.

Meanwhile, the strategic move of handset vendors into the offline segment has prompted online e-commerce companies to increase their operational presence offline as well. Amazon India and Flipkart, two of the country’s largest online marketplaces, are drawing up plans to expand their operations into the offline retail domain to cater to smartphone vendors and help them increase their sales. During the initial days of demonetisation, Amazon had moved some of its stock to retail stores for clearance, which also served as a pilot project for the company’s offline plans. Amazon has already brought in distributors in various states, including Andhra Pradesh, Delhi, Haryana, Maharashtra, Karnataka, West Bengal, Tamil Nadu, Telangana and Uttar Pradesh. The company is expected to kick-start its offline smartphone sales with Coolpad, Lenovo, Huawei and One-Plus, and is currently in discussions with Samsung and Xiaomi. Interestingly, Motorola, which had an exclusive online sales partnership with Flipkart, is also likely to move to Amazon’s network for offline sales, undertaken by Amazon Wholesale India. Following its rival, Flipkart too has indicated that it may foray into offline stores to push up smartphone sales.

Conclusion

Domestic as well as China-based handset manufactures have had a successful run through online sales leading to the current traction in smartphone uptake. With the urban markets now nearly saturated, it is imperative that handset vendors look towards Tier II and Tier III cities and rural areas to increase their sales and revenues. Nearly all handset companies in India are moving towards offline stores, offering a better service experience as opposed to online sales. Further, the GST regime is expected to provide companies with a fair playing field as the difference in online and offline tax regimes would end.

With government initiatives such as Digital India, aimed at empowering rural and semi-urban consumers, the move to offline stores is likely to boost the efforts made in this segment. Also, as e-commerce websites move to the offline space with their smartphone partners, the synergies of online retail are expected to be replicated offline as well. It would be interesting, however, to see what strategies will provide these companies a competitive edge in terms of pricing, sales experience, post-sales service, and geographical as well as demographic reach.

 
 
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