Samsung Considers Going Offline In India To Boost Margins

Indian e-commerce industry is on the growth trajectory, with several retailers getting a massive influx of revenues. Amazon (NASDAQ:AMZN) CEO Jeff Bezos is in the country to chart further growth for Amazon’s Indian outfit, and there have been significant investments over the course of the year in other major e-commerce stores like Flipkart.

However, it looks like there will be a major change in the mobile segment as it was revealed earlier this month that Samsung (KRX:005935) is mulling a move to an offline-only business model. Such a model does not make much sense considering that e-commerce stores offer better deals and discounts to users, but it is believed that several brick and mortar retailers across the country have largely contributed to Samsung’s decision to go offline.

The bid to go offline

There have been significant rumblings in the offline distribution channels over the course of the year as brick and mortar stores have seen their customer base dwindle due to the rise of the e-commerce stores. Several retailers have been vehement in stating that they would refuse to carry Samsung products unless the manufacturer decides to offer them exclusively online. The main reason why retailers are so worried about e-commerce sites is that there isn’t any method to control the prices. For instance, the Galaxy S5 price online in India is $575 (Rs. 35,400) whereas in an offline store it is in the vicinity of $633 (Rs. 39,000).

This led to the creation of a union of sorts called the All India Mobile Retailers Association, which is the coalition of brick and mortar stores from across the country. The stores have banded together to ensure that the price hygiene – the price of a handset across cities and states – stays fixed. Samsung’s incentive in going offline is that it can retain a healthy margin, which an executive has said has dwindled to single digits due to low pricing from e-commerce stores. Samsung met with AIMRA members in New Delhi last month to discuss the move to go offline, and while the South Korean manufacturer hasn’t offered a statement confirming the decision, it is looking likely that its upcoming products like the Galaxy Note 4 will be available only through brick and mortar stores.

The move does not mean that Samsung will cease to sell all products online, as the manufacturer has stated that it will look to offer exclusive deals to e-commerce stores in selling select devices. For instance, the Galaxy K Zoom is available exclusively via Amazon in the country. However, it is unlikely that devices in the Galaxy Note line will be available online in the future. Another contributor must also have been effective pricing: Samsung wants more control on setting the prices on its devices, which it does not have online. By going offline, Samsung can assert more control in terms of pricing its handsets and setting limits on the amount of discounts retailers can offer. We may see this sooner rather than later as the Galaxy Note 4 price in India is claimed to be in the vicinity of around $894 (Rs. 55,000), which is very similar to what the price of the iPhone 6 Plus is rumored to be in the country.

Oddly enough, Samsung isn’t the only one who would be following an offline-only model in the country. Chinese vendor Gionee also sells its handsets exclusively through offline channels in the country, and was quick to quote that it was able to sell 5 million handsets this year. Gionee is making significant inroads into the Indian market by advertising aggressively and maintaining a strong presence at brick and mortar stores.

Samsung doesn’t need to worry about market presence, as its wares are constantly featured in advertisements and billboards. With a total of 48 devices available to consumers across all price segment in the country, the manufacturer offers an abundance of choice. What customers don’t get with Samsung is great value for money, which sums up why the manufacturer is thinking of shifting to an offline-only strategy in the first place.

Turbulent times for Samsung

Although Samsung was the largest handset vendor in the country in 2013, it lost its position to Micromax this year. A combination of lackluster device launches combined with high pricing has led to the South Korean vendor’s shift in fortunes. With the introduction of Motorola’s Moto G, Moto X and the Nexus 5, and the more recent entry of devices like the Xiaomi Mi 3 has meant that Indian consumers are spoilt for choice when it comes to handsets that offer a great set of features at an affordable price. Samsung not only lost out in the mid-tier segment this year, but also in the high-end category as the Galaxy S4 and Galaxy S5 failed to meet the vendor’s sales targets.

Xiaomi has been highly successful in generating a lot of attention for its handsets thanks to its unique flash sale model, which has seen over 40,000 devices being sold in under five seconds. Xiaomi’s devices were also in great demand as the manufacturer was offering hardware that was available for a third of what Samsung was charging.

More recently, Google (NASDAQ:GOOGL) made its move into the entry-level segment with the announcement of Android One, which will serve to further consolidate the market share of local vendors in the country. Samsung is noticeably absent from the list of Android One vendors, and while the manufacturer is set to launch its own offering that targets this segment, it is unlikely it will match what the Android One handsets offer, both in terms of hardware as well as software features.

With the handset vendor losing ground in India as well as other global markets in light of stiffer competition, it remains to be seen whether a move to offline-only sales is a smart choice in the long run. For now, however, it is looking likely that consumers in India have to head to a brick and mortar store if they want to get their hands on a Galaxy Note 4.