Indian Smartphones Industry: Online vs Offline Channel

Introduction
Less than one decade ago in India, mobile phones were considered luxury goods.
Today Indias telecommunication industry is the fastest growing market in the world
and the considerable underclass are almost as well connected as the rich. Over the
last decade, the liberation of the mobile industry coupled with the availability of low
cost devices, reduction in tariffs, better network coverage and an affordable service
helped the industry undergo a major transformation. As a society India has readily
embraced the mobile culture which has provided the country with prosperous
economic awards. According to the World Bank, every 10 mobile phones per 100
people in a typical developing country can boost GDP growth by 0.8% points.
With the entry of smartphones, India became one of the leading catalysts in this
tremendous technological change. India is estimated to overtake USA to become
worlds second largest smartphone market with 200+ million users by 2016.

For Indias huge customer base, each firm had been developing its traditional
distribution channel so as to reach the masses. This traditional channel involves
channel partners like distributors, dealers, franchisees etc. and has been an efficient
in catering to its customers. Indian users were used to getting the look & feel of the
product before purchasing and that became an integral part of their buying
behavior.

However, with Motorolas re-entry into the Indian market, they opted for the online
channel for distribution rather than the traditional way of selling. This channel of
selling quickly became a success in Indian market. This channel not only provided
convenience but also competitive pricing for consumers. Online selling also
benefitted the producer as this channel provided him with great value delivering
and cost benefits that will be discussed further in this report.
Despite posing a direct threat to the existing distribution channel, online channel
offers consumers a lot more in terms of product value. It is slowly transforming the
traditional buyers into purchasing online. In this report, we will discuss how online
distribution channel is a more strategical and value driven method than the
traditional smartphone shopping.

Indian Smartphone Industry Competitors

Samsung: With 24% market share, Samsung continues to be the market leader in
the Smartphone segment. Samsung has witnessed shipment growth in Q3 2014 but
the growth is noted to be lower than the industry average. Hence, there is a
contraction in their market share.
Micromax: Yet another strong quarter for Micromax. Micromaxs market share has
increased from 18% in Q2 2014 to 20% in Q3 2014.
Lava: Being one of the fastest growing handset vendors, Lava has witnessed
growth in both their brands i.e. Lava and Xolo. Both the brands are currently
treated as independent line of business in the marketplace.
Karbonn: Consistent growth has been observed in Karbonn smartphone shipments.
More than 85% of their shipment volume is supported by handsets priced less than
$100.
Motorola: Motorolas fresh line up of second generation handsets fared well for the
vendor, helping it cement its position amongst the top 5 vendors.

Apart from the above major competitors, a lot many brands have entered Indian
market to capture the huge potential available. Some of these players, like Xaiomi,
OnePlus have adopted the Motorola strategy to supply its customers via the online
channel. Other players like Sony, HTC etc. are right in the competition following the
traditional channel of distribution.

Indian Smartphone Industry Porters Five Forces Model Analysis

How Online channel differs from Offline channel

E-commerce technology can affect both demand and supply fundamentals of
markets. On the demand side, purchasing online precludes potential customers
from inspecting their smartphones prior to purchase. Further, online sellers tend to
be newer entrants in market and may have less brand or reputation capital to signal
or bond quality. These factors can create information asymmetries between buyers
and sellers, which is not present in Indias traditional offline purchases. Another

factor which is considered by consumers while buying their smartphones online is

the often delay between purchase and physical delivery of their smartphone.
At the same time, however, online channels reduce consumer search costs, making
it easier to (virtually) compare different producers smartphones and prices.

On the supply side, it enables new distribution technologies that can reduce
traditional supply chain costs, improve service, or both. Both the reduction in
consumer search costs and the online distribution technologies combine to change
the geography of smartphone markets, making it all the more price competitive. We
will further discuss each of these factors and their respective impact on Indias
smartphone industry.

Asymmetric Information

Information asymmetries are larger when purchasing online for a few reasons. The
most obvious is that the consumer does not have the opportunity to physically
examine their smartphone at the point of purchase. Indian consumers have been
accustomed to have a look & feel of the product before purchasing. However, in
recent times, Indian smartphone buyers have shown a shift in this style of
purchasing and are willing to buy their smartphones without physically checking it
first. Another factor to consider is that because online channels are relatively new,
online retailers have less brand capital than established traditional retailers, except
a few well established online sellers like Flipkart, Amazon, Snapdeal etc. A related
factor involves some consumers concerns about the security of online transactions.
Because information asymmetries can lead to market inefficiencies, both buyers
and online sellers have incentives to structure transactions. Many examples of such
efforts on the part of online sellers exist. Most of online websites offer free shipping
on purchases and returns, which moves closer to making purchases conditional
upon inspection. However, the delay between ordering and delivery inherent to
online commerce still creates a wedge.

Delay between purchase and consumption

Online purchases of smartphones typically involve delivery lags that can range from
hours to days and occasionally longer. Furthermore, since these delayedconsumption smartphones are the kind of product most likely to be available in both
online and brick-and-mortar stores, the role of this lag can be particularly salient
when considering the interaction between a markets online and offline channels.
The traditional view of a delay between choice and delivery to end consumer is as a
waiting cost. This reduces the expected utility for customers while purchasing their
smartphones online.

Reduced consumer search costs

It is generally accepted that search costs online are lower than in offline markets.
The rise of consumer information sites, from price aggregation and comparison sites
(like pricedekho.com, mysmartprice.com etc.) to product review and discussion
forums (like gsmarena.com), has led to large decreases in consumers costs of
gathering information. This has important implications for market outcomes like
pricing of smartphones, market shares of competitors and profitability. Online
search isnt completely free. Nevertheless, while positive, these costs are less for
most consumers than the value of the time it would take them to travel to any one
offline retail store.

Lower distribution costs

India is traditionally known for the offline retailing. However, the new players
disrupted the market by entering into exclusive arrangements with the leading
online players like Flipkart and Amazon. Time to market and scale are the two
advantages of online when it comes to smartphones. Getting to scale is very
important in India and yes, in the long run, offline is the only way of getting the
scale but offline distribution takes time to build. On the other hand, with online
channel, a new entrant can hope to reach the consumers in top cities pretty fast.
Both Motorola and Xiaomi used the online channel to quickly reach out to
consumers ready to try their products. Both the players had an established brand
name so it helped but still creating physical channel would have taken many years
to reach the scale they have managed in a short time. Gionee is building its own
physical channel but is doing so one territory at a time instead of a nationwide
coverage which is a very slow and painstaking approach. Weak brand equity is one
reason why Gionee is relying on the offline distribution.
Online channel now contributes to over 10% of smartphone sales in India (up
from ~4% a year back) and continues to rise. Most of the experts predict that it

would reach close to 25% of smartphone sales by middle of next year. In 2014, the
smartphone sales is over 75 million devices or $11.2 billion by value which means
that online channel would contribute to over $1 billion sales only from smartphones
and this would go up to close to $4 billion in 2015 (25% of $16 billion market value
for smartphones in 2015). This is phenomenal and big businesses can be built on
the strength of online space alone.
The numbers of retail outlets in the country are a little over 400K and smartphones
are sold in a quarter of those outlets. This means to have any meaningful coverage,
a smartphone brand needs to reach out to at least 20-25K outlets. The cost to serve
to 20K+ outlets is very high as the distribution structure needs to include
distributors and sub-distributors leading to total channel margins and back-end
schemes close to 20% apart from the inventory carrying cost. Contrary to the
physical distribution, the margin to an online player is sub 10% and the inventory
carrying cost is also low. There are fewer chances of stock-outs as well. There are a
number of steps involved in establishing a physical distribution network, e.g.
identifying a strong national distributor and regional distributors. Flipkart has 22
million registered users which are growing at over 100% annually. Hence, if a brand
wants to attain scale and speed, online is a good cost effective option. This also cuts
out the overheads such as rent, salary of store staff and IT infrastructure. Online can
also be a medium to quickly test waters without a full-fledged roll-out. The rich data
available with online players can significantly reduce the spending on market
research. Motorola or Xiaomi can take the demographics of their buyers for further
analytics and targeted advertising. Even the user reviews are a good barometer for
net promoter score.

Geography of Markets

E-commerce allows buyers to browse across potential online sellers more easily
than it is possible across offline outlets. This fading of markets geographic
boundaries is tied to the reduction in search costs in online channels. Further, ecommerce technologies can reduce the costs of distributing smartphones across
wide geographies. The practice of drop-shipping i.e not having to ship to retailers is
an example, that can make it easier for supply chains of smartphone manufacturers
to service greater geographic markets.

Xiaomi Adapting offline expansion in India

In a bid to expand its reach into the Indian retail market, Xiaomi has taken to selling
its smartphones through offline channels in India territory, in tandem with its online
retail strategy. Xiaomi announced that it will begin selling its next line of phones,
the Redmi Note 4G, through retail outlets belonging to India's largest telecom
operator Bharti Airtel. The telecom operator revealed that it would sell Xiaomi's 4G
handsets in six cities through 133 stores.
Consequently, when Xiaomi first came to India in mid-2014, it adopted an onlineonly sales strategy that both enthralled and outraged Indians. Its Mi3 launch was so
popular that 90,000 units were scarfed up in mere seconds over the course of a
number of flash sales. Around 20,000 Redmi 1S phones vanished in under 4.2
seconds in another instance. And yet, the company garnered the wrong kind of
attention when the hundreds and thousands of Indians who were unable to get their
hands on these phones vented their spleen on social media.
But why go offline in the first place, especially if the online strategy is working so
well?
In India, no matter how much you flog your phones online, being able to look at
Xiaomi's line-up and touch and feel them is something that buyers ultimately crave.
And while Xiaomi has proven to be wildly successful with the urban set, with 68
percent of the country yet to buy a smartphone and most of them in rural India, a
hybrid strategy that includes an on-ground sales channel may ultimately trump a
purely online one is going to be perhaps most crucial in terms of future growth. This
is especially so for a company that is just one of 280 brands in the largest, most
exciting, and furiously competitive smartphone market in the world. Google
apparently has had a similar epiphany, as its Android One range of phones made by
local manufacturers like Micromax and Karbonn have shifted from an online-only
strategy and are now available in stores.

Conclusion
The emergence of online channels in India can bring substantial changes to the
smartphone markets economic fundamentals and, through these changes, affect
outcomes at both the market level and for individual firms. The potential for such
shifts has implications in turn for firms competitive strategies. Incumbent offline
retailers and new pure-play online entrants alike must account for the many ways a
markets offline and online channels interact when making pricing, investment,
entry, and other critical decisions.
I would like to suggest that for smartphone market in India which is a big potential
for all firms, it can be catered with Online-offline retail (Xiaomis strategy), an
opportunity to collaborate and serve customers better. Online versus offline, or ecommerce versus brick and mortar, is the big retail battle, according to the media,
analysts and even entrepreneurs in retail. But at this moment in India's retail sector,
this need not be a battle it is an opportunity to collaborate and serve customers
better. An opportunity for online retail majors riding on high valuations to invest into
or partner with offline retail majors will be sensible investments for the big boys of
e-commerce.
There are basically two big reasons why a Flipkart should seriously consider
partnering or investing in retail outlets, as follows:
First is the evolving shopper habits and experience. Increasingly, customers are not
making rigid distinctions between online and offline shopping. In a shopping
mission, consumers figure out what they want and are driven by three primary
considerations: convenience, price and assortment (the variety of range and

offering). Convenience includes ability to get instant delivery (as in physical stores)
as opposed to waiting periods of 2-3 days, typical for e-commerce.
But, as is already seen in the West, consumers are opting for omni-channel
shopping, not an either/or choice between online and offline. While planning their
purchase for smartphones, customers would do plenty of online and offline research
before settling on the brand, model and price.
Online retailers are offering huge discounts on smartphones by funding these priceoffs themselves. This is not sustainable. E-commerce majors claim they are building
customer loyalty to their websites. But the blunt truth is that shopper loyalty is not
high anywhere in the world, and least so in India. Here, customers will go anywhere
and to any channel for a great deal. There is also the point that online and offline
modern trade accounts for less than 5 per cent of total retail. This creates natural
incentives for supplier companies to protect the interest of traditional retail.
The omni-presence of traditional retail means that omni-channel shopping in India
will take off best if online and offline channels pool their resources together. Since
organized brick-and mortar retail and online totals account for just a fraction of
India's shopping, a partnership between them will be best positioned to incentivize
omni-channel buying habits by offering great convenience and variety to shoppers.
The second reason why e-commerce majors should be looking to invest in offline
smartphone channels or partner with them is the poor quality of India's supply chain
infrastructure.
E-commerce players can mitigate this by doing delivery from large retail/distribution
stores based within city limits. Using the inventory in these stores as a means of
fulfilling online orders is cost and time efficient. Customers also have the option of
placing orders online and taking physical delivery if they are in a hurry or if the
store is conveniently located for them. Tesco and many other retailers in Britain
have a very successful omni channel model: Tesco's physical stores act as
fulfillment centers for online purchases.
Our Flipkarts and Amazons should look at this opportunity carefully. Combining
online and offline shopping and, therefore, improving supply-chain efficiencies is an
idea worth exploring by India's newest breed of entrepreneurs. Done right, this
partnership will improve customer choice, price and convenience, and be a win-win
for both online and offline retailers.