Phone brands clash with retailers amid fall in consumer demand

A fall in consumer demand for smartphones and rising inventories has led to a clash between smartphone makers and offline retail firms. According to people aware of developments, smartphone firms want to drop prices of devices on offline stores as they prepare for a new portfolio of devices coming in post February, but retailers are at odds with the decision since it hurts their margins.

The fall in consumer demand for phones, which is driven by the ongoing economic crisis and lack of innovation by brands, has led inventories to rise. According to November data from market researcher International Data Corporation (IDC), smartphone shipments fell 10% year-on-year in the festive quarter, which is typically the strongest quarter for phone makers. Analysts said that while December quarter numbers are being analyzed right now, they expected a 30% YoY drop in Q3.

Furthermore, smartphone firms usually launch new devices in the February-March period, which means they have to clear current inventories to make way for new ones. A Delhi-based electronics retailer, who requested anonymity since they feared backlash from brands, said that margins have declined by over 50% over the past year.

“Until early 2022, the offline smartphone market was surviving on strong retailer margins that two brands in particular — Oppo and Vivo — so far offered. Their margins were of the order of 10-15%, depending on the category of the device being sold. Over the past six-odd months, this margin has declined to a near-flat rate of 5% irrespective of which category of phone we are selling,” the retailer told Mint.

Further, the retailer said that brands are also urging offline stores to offer cashbacks and discounts similar to how online e-commerce platforms, and large multi-brand retail chains such as Croma and Vijay Sales, offer. These cashback discounts are typically to the tune of ₹500-2,000 per device, depending on the price category of a smartphone.

“However, brands have significantly delayed the discount subsidy payout schedule, and now take over two months to pay a retailer back the discounts. On top of that, the discounts further deduct an 18% input credit of goods and service taxes (GST) before paying us the subsidies, leaving us with lesser cash in hand,” the retailer said.

To be sure, while deduction of GST input credit (which can be claimed by a business while filing their annual tax returns) is not money lost, such a deduction from discounts that are paid upfront by retailers reduces the amount of cash that a business would have in-hand — a parameter that is crucial in order to run their everyday operations.

It’s not just Oppo and Vivo that have reduced the margins either. Nitin Bangia, general secretary of industry body All India Mobile Retailers’ Association (Aimra), told Mint that small and mid-sized offline smartphone retailers have seen Xiaomi halve their margins in the past six months.

“For instance, take the Redmi 11 Prime 5G that was launched on September 6, which is Xiaomi’s most affordable 5G phone right now. In the offline market, the smartphone is sold at ₹13,000, the same price as it is online (₹12,999) right now. While Xiaomi previously offered a flat margin of 5% on their phones, such a device is today offered to offline retailers at a margin of 3%. The same also applies for the Redmi 10A Sport — a popular budget smartphone that costs ₹11,000 offline, but ₹10,499 online,” Bangia said.

In an emailed statement, a Xiaomi spokesperson denied the company slashing margins for offline retailers. “We have recently increased margins for a majority of our models for all our offline partners. For every new launch, we ensure the same-day availability of our devices across channels. Our recently launched Redmi Note 12 5G series was made available offline and online on the same day and has received a great response, especially in the offline retail space,” the spokesperson said.

A top multi-brand smartphone retailer based in Mumbai added that Samsung has dropped the margins of its sub-₹20,000 Galaxy M and Galaxy F series smartphones to between 3-4%, depending on retailers. “This strategy is largely to ensure that these phones are mostly sold online, since they cannot officially sell them through online retailers only. At a margin of 3%, it is nearly impossible for an offline retailer to offer users discounts and deals, absorb the 2% merchant rate levied on credit card transactions, and still earn a profit,” the retailer said.

Retailers in Delhi also concurred, stating that the Galaxy M50, for instance, presently sells in the offline market at a retailer margin of 2.5% — down from 4.5% over the past six months. The Mumbai-based retailer said that Samsung pays a flat margin of 6% for all of their devices apart from the Galaxy M and F series phones.

“Previously, margins on Samsung devices could extend to above 10%, depending on sales targets that would get incrementally higher as a retailer sold more phones. Over the past one year, to decrease payouts amid falling demand, Samsung has removed sales targets and set a flat margin” they said.

Questions emailed to Samsung, Oppo and Vivo went unanswered at press time.

Retailers may have to give in eventually though.

“Users are not buying new phones, and the 5G rollout has not managed to rejuvenate the smartphone industry as of now. As a result, retailers will look to take on different measures in a bid to clear out existing inventories — which stand at all-time highs of over 10 weeks right now,” said Prachir Singh, senior research analyst at market research firm Counterpoint India, told Mint on January 6.