Couch analytics #259. Why is Xiaomi trying to become number one in Russia
It's great to live in a world where no one wonders why companies are trying to become number one in the market and why this is important to them. It seems that this is akin to the Olympic Games, where the first place brings prizes, honors and has no downside. A fairy tale without encumbrances and unpleasant trifles. On the example of Xiaomi in Russia, we can consider in detail why companies strive to take first place, what tools they use for this and what they want to get at the end of the journey.
Any business is the people who work in it, and their personal goals, in theory, should coincide with the goals of the company, form a single whole. Look around, look for the perfect people, I'm sure you won't find them. Whether we like it or not, but personal goals are present in each of us, in some they are pronounced brightly, in others they are not so noticeable. But they are present. I have heard many times that the role of a person is greatly underestimated in the processes that take place in specific companies, I can even partially agree with this statement. A good example is BBK Corporation, in Russia it is represented by such brands as OPPO, Vivo and realme. The products are not very different, a similar set of tools and budgets, but only realme has succeeded, and it is directly related to the team that breaks the soles and overtakes its relatives in the parent company. An excellent illustration of the fact that the skills of specific people, building a team give a good result. It's even funnier that the Samsung school is having an effect, which is slightly modified for realme conditions and adapted to specific introductory ones.
In Xiaomi, initially and at the global level, the bet was made on the old proven method - the cost of goods. The task is to sell everything that is the same as that of competitors, but at a lower cost. That is, in theory, choosing Xiaomi, you will get more for every thousand rubles spent than other companies. The freshness of this approach ten years ago was not in doubt, but today competitors are not far behind and offer prices even lower, so it is impossible to bet on cost alone. Xiaomi in the Russian market began to rely on the fact that the goods are selling like hot cakes, the company is growing aggressively and, therefore, you need to become part of this growth. This approach sounds like the right one and ensures correct positioning in every sense, especially if your partners do not want to go into details, but only want to calculate profits. It is important to make a reservation here that, according to some stupid tradition, it is considered in absentia that only people who can count money do business. Paradoxically, about a third of those who are engaged in business do not know how to do it at all. Not only do they not know how to count money (costs, profits, return on investment), but they don't even want to do it. A good illustration are the Yandex.Taxi drivers acting as individual entrepreneurs (it doesn’t even matter whether they rent a car from someone or bought it with their own). They are outraged that the aggregator takes about 30% of the order as a commission. Almost no one thinks that the cost of a transaction for Yandex is the same regardless of the duration of the trip, while for them it varies greatly.All these costs are on their shoulders. But the most important thing is that Yandex takes its commission clean, that is, the payment of taxes falls on the shoulders of the very businessmen who agreed to harsh working conditions. In the end, the aggregator de facto takes almost half the cost of the trip, and from the remaining money you need to deduct the depreciation of the car (as an option, rent), interior cleaning and washing, fuel, insurance, and so on. The output is pennies, which can turn into more or less significant money only in one case - if the driver works non-stop.
The drivers themselves became an excellent advertisement for Yandex.Taxi, a lot of cars appeared on the streets of cities, and people began to think that there was money there. Why count? After all, this has already been done for you, in the end, Vasya, Petya, Kolya are clearly not fools and they do not work for a great life. Do as your neighbor is one of the rules of business that appeared evolutionarily and sometimes allows you to ride the wave. But more often it leads to sad consequences.
Something similar Xiaomi did in Russia with branded retail. A large gray market, good demand for goods and a noticeable margin - all these were prerequisites for independent partners to open branded retail under the Xiaomi brand. And this is a great tool to become number one in Russia. Why be number one? There are many answers here, each depending on who you ask:
- The first place in the market makes it possible to loudly talk about this event in PR (Xiaomi has already done this many times - we were the first this week, this hour and so on. But for some reason at the end this first place disappeared all the time ). The minimum cost to promote this idea, you don’t even need to do anything here.
- Many buyers want to buy a product not only for its real characteristics, they want to be sure that many other people have chosen the same product (funny, funny, but it is exactly that, which is why Apple tries to tell how popular the iPhone is year after year that people allegedly stand in lines - become part of the success story).
- First position is reinforced by supply, as a result, your partners are partly dependent on your product, you become interconnected, it is not so easy to hold the first position, but your value for the market in the long term grows.
- In theory, increasing sales means being able to increase sales of expensive, high-margin devices to improve your own economy.
- Management responsible for a specific market, upon reaching the first place, can receive medals and other forms of encouragement on their chest, their weight within the company grows.
The disadvantage of the first place is that it looks like juggling ten balls while standing on a large and slippery ball, which also rolls in an incomprehensible direction, constantly bumping into obstacles. For some reason, people always try to see the positive aspects of the situation, forgetting about the shortcomings.
Historically, Xiaomi has created interesting products in terms of price / quality ratio, they sold themselves and without much effort. Around the brand, a community of fans arose (the best smartphones), which sincerely promoted the brand to the masses. With the growth of market share, Xiaomi worsened the price / quality ratio in order to earn more money, raise their own margins. There are no miracles in the world, and it is impossible to sell a significant amount of devices without the economy that underpins these sales. But the accumulated inertia of perception made it possible to do this.
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But what we are interested in here is not even the price / quality ratio, but how popular the Mi11 line is among other products from Xiaomi. The answer will be unexpected - these models are sold extremely poorly, they are not included in the list of bestsellers in the Russian market and are needed by a rather small number of people. In general, both for Xiaomi and for other Chinese manufacturers, the segment above 50 thousand rubles is a scorched earth, there is no one there except Samsung and Apple. Companies can take their own in the segment up to 20 thousand rubles.
Let's look at the first half of 2021, when Xiaomi was ranked first in Russia in terms of shipments (sell-in, retail sales were noticeably smaller, and the company did not take first place). Let's take data from GS Group as an example.
In the first half of the year, the share of Xiaomi in unit terms was 32.5% (5.3 million smartphones), a year-on-year growth of 133%. The second place belongs to Samsung with a share of 29.3% (4.8 million smartphones), 7% year-on-year growth.
The victory of Xiaomi is beyond doubt, it seems that it is based on demand and there are no pitfalls behind it. And now the most curious thing, year on year, the average price of a smartphone from Samsung increased by 12%, while for Xiaomi it fell by 23%. Given the rise in prices for electronics, we can say that the fall in the average price from Xiaomi is even more significant, that is, there is a purchase of market share in Russia in order to become number one at any cost. In the context of a shortage of goods, this is a conscious rejection of margins and profits, when the goal dictates a price reduction to a minimum, but they still remain high compared to other Chinese manufacturers (the growth of the same realme proves that the prices for their products are even lower, and such prices Xiaomi can no longer install due to the size).
Now let's look at the difference between the companies in terms of market share in terms of money, Samsung has 36%, while Xiaomi has 23%. The lack of noticeable sales of flagships and expensive models from Xiaomi paints just such a picture of the world. The main task that Xiaomi needs to solve is to achieve sales growth in the upper segment in order to get off the needle of available models, to get a large margin that can be sent to marketing.
Against the background of a shortage of goods in 2019-2020, Xiaomi branded retail in Russia was actively developing, partners opened stores, as they believed that this would provide them with access to the goods. The reasoning was simple and clear: the manufacturer will not abandon its own stores with empty shelves. It was branded retail that became a tool that made it possible to increase retail sales, to negotiate with operators on the growth of purchases.
But the key for Xiaomi was the growth of market share in unit terms. And therefore, the aspirations of mono-brand retail and the desire of partners to earn money turned a blind eye. And this is understandable, since people who have opened such stores can no longer go anywhere without losses, they cannot exit the business and not record losses, which means that they can figuratively twist their arms. The emphasis was on sales to federal networks, for example, the same MTS. Let's take a look at the plate prepared by one of the Xiaomi partners, the prices in branded retail and the prices for the same models in MTS.
Pull-push situation, in which Xiaomi will convince partners, owners of mono-brand stores that these are exclusively MTS actions, they are outraged, they are fighting and further down the list. But in fact, this is a conscious plan to maximize the market share in unit terms. Given the general shortage of supply in the smartphone market, such actions look strange, since Xiaomi could sacrifice a market share of 5-7%, but increase its share in monetary terms by the same 5-7%, earn much more and invest this money, for example, in mono-brand stores. But this is not happening, since now there is a struggle exclusively for market share, other indicators fade into the background or even third plan. Considering that this is a strange approach within the framework of a deficit, there is no need to talk about any winning strategy.
The gift for Xiaomi was the disappearance of Huawei/Honor, year-on-year sales growth is directly related to the disappearance of their smartphones. But the same Honor returns to the market, it will again be present and promote its products. Plus, the sharply increased sales led to growth problems, not the entire line from Xiaomi sells well, Baby & Child Care goods in Port-Harcourt, as we saw above, many models freeze. The suboptimal price/quality ratio now creates new heroes, other brands become interesting for buyers. This does not mean at all that Xiaomi will fall sharply, but that the company will be under a lot of pressure in 2022 is beyond doubt. There is only one way out - to reorient from the desire to occupy the largest market share to making money, and let partners do it too. As a result, we will see many changes, but the main thing is the growth of the market share in terms of money and the fall of the market share in unit terms. I think that these changes will become noticeable at the end of the first - the beginning of the second quarter of 2022.
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