Xiaomi takes up Direct-to-Retail approach, to cut middlemen costs

After making a mark with online sales, smart phone manufacturer Xiaomi is exploring Direct-to-Retail (DTR) with a novel approach that cuts out middle men and lowers costs.

“We broke our own records by selling phones only online. Xiaomi sold over a million units in the September 2015 quarter, and repeated the feat in the two subsequent quarters,” said Manu Kumar Jain, India Head of Xiaomi Technology India.

Within five months of its debut in July 2014, Xiaomi had become the fifth largest smart phone company, purely on the strength of its online presence.

Xiaomi debuted in India with sale of its Mi3. It was the only time when Flipkart’s site crashed during a phone flash sale, when over 2 lakh people vied for 10,000 units, he said.

Online market share Currently, it is the second largest in terms of online market share of smartphones, and first in wearables, as per research firm IDC. It sells eight models of phones ranging from ₹5,999 to ₹24,999, and tablet PC and wearable.

“A brand that nobody had heard of, without any marketing and advertising, could sell such a high quantity by selling only online. People do lot of research before buying a product,” he said.

Xiaomi also started selling its products on Amazon, Snapdeal, Tata Cliq, Paytm and its portal Mi.com/in.

Only recently, the company started a pilot direct-to-retail through distributor Redington, he told BusinessLine . Jain said through DTR, Xiaomi wanted to eliminate certain middlemen between distributors and shopkeepers. Offline sales are too expensive as there are 4-5 middlemen between brand and retailer.

Each of these middlemen will try to push inventory to others and increase working capital cost in the entire supply chain. “It was a push system. We decided to pilot a pull system, wherein retailers directly placed orders on a daily or weekly basis with Redington,” he said.

Predictability Instead of getting ten phones of a single category, retailers can order multiple products depending upon the buying pattern. This reduces working capital for retailers, while Xiaomi can provide the inventory based on need.

Margins will be better, as each middleman charges 2-5 per cent, depending up on value addition. “If we cut two layers, it means margin will improve by 10 per cent. It also becomes more predictable on the exact quantity the retailer needs. If we push the product, we don’t know whether it will sell. But in pull system, predictability is high,” he said.

Xiaomi has started manufacturing phones in India at Foxconn’s factory in Sri City in Andhra Pradesh.

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