Corona Virus plays bad weather, who'll play better - Online Or Offline?
2020 has not started the way all of us had presumed. Against an expected increase of 5-8% over last year shipments of 152 million approx.(as per IDC), most research agencies are now talking about a decline ranging from 3-7% over last year with a major hit in H1 with a possible gain in H2 due to the pent-up demand. However, nothing is constant today and a lot will depend on how the situation pans out in the next couple of months. As of now, the situation is too fluid.
What started as a supply chain issue from China side has now become a demand issue on the Indian side.
The reason for the reduced demand is obviously the lockdown with the offline market closed and online not selling the item as it is not considered as an “essential” product. While we can all debate whether it should be considered as one, we have to go by the government classifications. You may like to read my opinion on it in an article by Jagmeet published on NDTV Gadgets.
Whatever has happened, is happening or may happen in the future, will have an impact on how the industry behaves in the future. For the time being, I am limiting my views to the current calendar year.
Here is what I see:
Brands
The brand which will stand out is the one which goes beyond just hardware specifications as that may no more be enough for a customer to change with the hardware specifications already beyond what are required. The Folding Phone availability at aggressive prices may be one of the reasons for a customer to change to a new device. Its high time brands find other reasons as well.
I would expect the high-end or premium segment to be affected the least in these times.
#Xiaomi should be steady/gain in volumes as they have a stranglehold in the online which would be a key channel in 2020.
Overall I do not expect major changes in the rankings except #Samsung giving #Vivo a tough fight to try and get back to No. 2 position. Vivo needs to be careful here and strengthen their online presence. Same applies for #Oppo and #Realme.
Spends/Profitability
It would take a hit for all brands and one could expect cuts in brand spends in H1. H2 may see higher spends as hopefully things will get streamlined by then and the festival season will start.
I would rate Samsung as the best company to tide through 2020 for various reasons:
· They were the only profitable mobile phone company last year out of the top 5.
· The health of a company in a country and the investments it will make is also determined by their global health. It is here that they stand strong. They have reported a good Q1 on account of their B2B portfolio of memory, storage and silicon chips for the cloud which will offset their B2C business losses. We must keep in mind that Samsung’s semiconductor business is more profitable than its consumer electronics business.
They could afford to continue with their spends.
Xiaomi could be in a spot of bother in profits as they operate on very thin margins. For them it is basically an equation of high revenues/volumes at low margins to arrive at a reasonable bottom line. If revenues fall drastically the losses could only mount. They do have some hope of reducing them from their portfolio of other products and they have quite a few of them.
#Vivo may be a gainer in terms of saving Rs. 440 Cr – A huge amount to be spent on #IndianPremierLeague which could be invested in H2 on aggressive marketing during the festival season. It is to be noted here that Vivo has successfully entered the online space and will gain when the demand shifts online. They are supposedly No. 1 in offline where they may face an impact in line with the industry.
Realme and Oppo, already in heavy losses, may see their losses mounting. The losses will need to be minimized through a cut in operating expenses.
The other profitable company in India would be #Apple as they may be the only company to grow in India over last year and they do work on high margins.
2020 will possibly see a more cautious approach by all brands on their supply chain for various reasons linked to how the #CoronaVirus issue progresses, fear of its possible resurgence, the Indian rupee depreciating further and the clear impact of the increase in GST. As of now with the lockdown the real impact is unknown.
This could lead to delays in fulfilling orders or stock out situations for fast-moving models and channel carrying slow or non-moving stocks.
New Launches
· The only way brands would look at making customers buy smartphones is through new launches which were scheduled first for MWC and then later. One will see a slew of product launches. Personally, I don’t think smartphones will be on the top of the ‘to buy” list once things start getting back to normal and the resultant effect may not be as expected at least in H1. Rising unemployment, salary cuts will add to a cut in spends.
· The other thing would be for brands to clear out the existing stocks in the channel as on one side the GST has pushed the prices up, and on the other, the demand will be weak in H1. The need to launch new devices to be in line with the competition would push brands to offer discounts on the stocks with them and the channel once it is business as usual. This "virus subsidy" has already started in China and will follow in India.
Channel Impact
· Online should be a gainer as more and more customers are already getting used to online ordering for essential items and may prefer contactless delivery post the pandemic as well.
· I won't be surprised if the market share of the offline/online segment which was 60:40 in 2019 switches to 40:60 in 2020. This will make brands give online more priority.
· I would also expect a big hit on the small offline retail stores in India due to high/fixed cost of operations, low business coupled with low margins. Backend supports which contribute a lot to a retailer’s margin will see cuts. One could see a lot of the retailers exiting the business if things don’t improve drastically. Retail stores including chain stores are already asking for 3 months' rent waiver from landlords, unilateral backend support without any linkage to targets etc. from brands.
· With the uncertainty, unsecured credits from brands to distributors and from distributors to retailers may be impacted. So be prepared for a credit squeeze. One thing which normally happens in such situations is territory realignment by brands with the addition of new distributors.
Employment
· Will we see a reduction in the workforce? Yes! The first obviously will be the people in offline at the retail level - The ISDs. One can already see ISDs being removed from stores.
· Salary cuts for the others could follow next, and if the issue lingers on over a longer period, layoffs.
Rise in sales of refurbished devices
With people wanting to spend less, the refurbished device market will see growth with offerings of good brands and high-end models at attractive prices. After all, when one is tight on money, aspirational refurbished devices fit in well.
My opinion above is based on simple logic, but there is another perspective which cannot be ruled out especially in India. Post this experience, customers may prefer to buy local, stick with brands they love and trust and value the human touch. The most common phrase all of us write about is “customer experience”. It may not be just about the customer experience with/on the device but with the brand and/or the channel. Offline can do a lot here. The next-door retail for essential products which was allowed to operate has stood up to the challenge to support and hopefully the customers will recognise their importance now.
Consumers will replace. So while the market will slow down during the worst period of the crisis, it will rebound; volumes may be lost in the short term but will achieve normalcy hopefully sooner than later.
The world has seen the worst of disasters and at times it looked as if life would never come back to normal. It has and so will the business. Just hang on there. Stay home, stay safe. 😊