Smartphone maker Xiaomi switches China playbook with eye toward EV showrooms

Chinese smartphone maker Xiaomi Corp is revamping its playbook in its home country by opening thousands of new stores to spur domestic sales growth ina highly competitive market, and provide a channel for its plans to sell electric vehicles.

Xiaomi opened its 10,000th store on October 30, capping apromise to double its offline store count, and set a fresh target to open 30,000 shops over the next two to three years.

The brick-and-mortar push is a shift for a company that grew rapidly by pioneering online smartphone sales, and shows howsome Chinese businesses are responding to persistently softconsumption and slowing economic growth.

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

"In the future, the company's strategy will tilt moretowards offline based on our sales capabilities. Our initialgoal is that our offline sales will achieve the same volume asour online sales," Shang Jin, Xiaomi's general manager of retailfor China, told Reuters.

While Hong Kong-listed Xiaomi has successfully expandedoverseas, it lags behind larger rivals such as privately-owned Oppo and Vivo in its home market because of its weak offlinepresence. About 70 per cent of all smartphones in China are purchasedoffline, while Xiaomi gets 30 per cent of its sales offline.

Xiaomi's new stores also offer its suite ofinternet-connected home appliances and cameras which have fattermargins than phones - analysts say about 15 per cent fatter - and set itapart from its rivals.

Looking ahead, Xiaomi hopes its new stores will becomeshowrooms for its electric cars ,which company founder Lei Jun has said will be his last majorentrepreneurial project. The company aims to mass produce carsby 2024.

Playing catch-up

Xiaomi has pursued an online sales model because it helpskeep prices low without networks of offline distributors.

This strategy has helped the company grow rapidly from itsbirth in 2010. It overtook Apple Inc in the secondquarter to become the world's No. 2 smartphone maker, accordingto market research firm Canalys.

However in its home market, the world's biggest, it hasslipped in the rankings from first in 2015 to fourth in thethird quarter, lagging behind Vivo, Oppo, and Huawei spin-offHonor.

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

This year, to increase its store count, Xiaomi altered itsoffline distribution model to lure in more franchise partners.While it owns some of its stores, it eventually aims for amajority to be franchisees, particularly in rural areas.

Under this new plan, for certain stores Xiaomi onlyclassifies a device as "sold" when a consumer purchases itrather than when it is shipped to middlemen. This lowersinventory risk for the stores and shifts the burden of unsoldinventory back to the manufacturer.

"Compared to store rent and labor cost, inventory is thebiggest risk for smartphone retail businesses," Shang said,adding that the new system meant "no stockpiling".

This helps sweeten the deal for franchisees, who otherwisemay balk at Xiaomi's relatively lower margins per phone.

"Xiaomi can't increase their profit margins withoutincreasing their price, which they won't do," said Nicole Peng,who tracks China's smartphone market at Canalys. "So now they'resaying to vendors, 'You'll make a smaller margin but I'll takethe risk away from you'."

The new system is not without its costs. Peng said it wouldforce Xiaomi to invest more in offline advertising, which ismore expensive than online advertising.

And since franchisees did not own inventory, they could moreeasily switch to selling non-Xiaomi products if they wereunsatisfied.

In the longer term, Peng said the store expansion made sensefor Xiaomi's push into electric cars, which would requiredealerships.

"Cars are not standardised and customers demand a lot ofcustomisation based on personal preference. Offline sales arevery important for that," she said.