Xiaomi’s upcoming IPO is more proof tech will boost physical retail, not kill it

Try before you buy.
Try before you buy.
Image: Reuters/Edgard Garrido
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Companies that have thrived by selling goods in cyberspace might grow even more if they move out into the real world.

On Dec. 4 Bloomberg reported that Xiaomi is aiming to IPO next year in Hong Kong at a valuation of at least $50 billion. That marks yet another sign of a turnaround for the Beijing-based smartphone maker, which throughout much of 2015 and 2016 struggled to maintain the rocket growth it experienced earlier. And its revival has come in part from a tactic it once shunned—brick-and-mortar sales.

Xiaomi rose to prominence in China starting in 2012 by selling almost all of its phones online. At the time, the tactic was pioneering—by keeping its devices out of stores, it could avoid costs like rent and sales commissions and maintain low prices. The strategy’s success appeared to be yet another sign of doom for physical retail—if consumers would buy their smartphones online without trying them out in person first, why bother buying anything in a store?

Yet in 2015 Xiaomi fell short of its smartphone sales goals, and throughout the following year its market share continued to decline in China. Two rivals arrived to take its place—Oppo and Vivo. Both grew steadily throughout 2015 and 2016 by investing heavily in brick-and-mortar stores across China’s second- and third-tier cities, which happened to be where many of Xiaomi’s cost-conscious customers lived.

In response, Xiaomi doubled down on offline retail, even as it continued selling primarily online. Its physical presence in China was once limited mostly to a few dozen “experience centers” that primarily helped customers repair devices and try products in person. But in late 2016 the company began converting those spaces into proper retail outlets, and adding others. It now has over 220 “Mi Home” stores across China (link in Chinese) where it sells its smartphones along with other products.

The decision paid off: Xiaomi’s market share grew five percentage points annually during the quarter ending in September 2017, according to IDC.

Xiaomi is replicating the retail expansion in India, where its market share is currently even stronger than in China. The company opened its first Mi Home store in Bengalaru last May, and reportedly generated 500 million yuan ($73.5 million) on its opening day. Xiaomi plans to open 200 more stores in India through 2019. Thanks to additional partnerships with third-party retail stores, the company said in August that 20% of its total sales in India come from brick-and-mortar shops.

Xiaomi’s investment in retail might seem counterintuitive, especially given its early success as an online-only brand. But it follows a trend in which other tech companies increasingly embrace brick-and-mortar retail.

Amazon’s purchase of Whole Foods in the US, for example, lets it enter the potentially lucrative grocery sector and collect valuable data about customers. Alibaba’s forays into supermarkets in China achieve similar goals. Both companies are also experimenting with various ways to integrate the stores into delivery and fulfillment online.

In the gadget industry, Apple has long built its brand on the Apple Store, which led Microsoft and Samsung to launch similar outlets. Razer, the Singapore-based smartphone brand that sells high-end devices to gamers, has also begun opening concept stores similar to Xiaomi’s Mi Home and the Apple Store.

Even as these hardware and software makers have become some of the world’s most valuable companies, online retail still accounts for as little as 8% of total retail in the US, and about 15% in China. Rather than try to lure more customers online, it’s perhaps easier for tech companies to follow them into the shopfront.