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Samsung offers cheaper phones to chase volumes

The giant is stirring, and those who have dominated the stage over the last two years had better take note. Samsung, which had practically been absent in the value-for-money segment in the Indian smartphone market, has just announced its latest entry – the Galaxy A7, priced at Rs 30,499.

What is most remarkable about the launch is not the price – but the specifications available at the price.

Except for a quad HD or 2K display, the A7 comes with nearly all the high end features you could think of, and traditionally, such a product from Samsung would cost around Rs 42,000 at launch.

Yet, the A7 is being launched at just Rs 30,499. So, what gives?

ONLINE MODEL

First – Samsung has realized that it cannot ignore e-commerce and online retail. Online retail has allowed new brands, such as Moto, to sell their phones much cheaper than traditional players like Samsung and Nokia.

While Samsung and Nokia must share at least 15-20% of the price of a phone with their distributors and retailers, for companies such as Lenovo, Huawei, Xiaomi and Motorola, total distribution cost can be as little as Rs 500-750 per unit. That works out to total distibution costs of just 2-3%, versus 15-20% through the traditional channels.

A saving of Rs 5,000-10,000 in terms of distributor and retailer margins on a high-end phone can be passed on to the consumer, allowing new-age brands to sell their wares cheaper than traditional players.

For big players like Samsung, LG and Nokia, such a strategy is fraught with risks. If they bypass their traditional distributors and partners, even for one or two phones, their partners get angry, and may give poor recommendations about their phones to buyers.

To ensure that their brick-and-mortar partners continue to remain in business, big brands tried to prevent online retailers from selling their models at low prices.

But as weeks and months passed by, the big brands have realized that they need to leverage the online model and take their phones to the end customers at a cheaper rate than they are used to.

Micromax, in fact, created an entirely new brand called Yu in the expectation that doing so is likely to limit the downside of going ‘fully digital’ as far as distribution of certain models are concerned.

samsung-india

Samsung seems to be going on a different tangent with its ‘estore’. The Samsung estore is likely to play a much larger role in the company’s retailing strategy in coming months.

A case in point is the A7 launch. The phone is being sold on eBay for Rs 35,500, but has been listed on the Samsung eStore at just Rs 30,499. What that does is that even if the sticker price is higher than that, retailers will find it difficult to sell the phone at a premium.

MARGIN PLAY

The second reason for the relatively lower price of the A7 is Samsung’s realization that it is losing the numbers game in India.

While Samsung has disputed a report by Canalys that put Micromax ahead of the Korean company, the indisputable fact is that Samsung has seen its share of the Indian smartphone market decline for the last few years.

And it has done practically nothing to address the main reason — high margins charged by big brands like itself. While Indian and Chinese players work on razor thin margins of Rs 500-5,000 per unit for themselves, big brands are used to having 25%-40% gross margins on their handsets.

Not surprisingly, flagship phones from bigger brands would debut in the Rs 50,000-65,000 range, while Indian and Chinese players are selling phones with similar specifications at half that price.

Of course, bigger brands have certain advantages that the others cannot match – primarily service networks, but also brand value and to some extent, better build quality.

But today, no one uses their phone for more than two years. In the old days, people would use their Nokia phones for 3-5 years, but today, technology change is so fast that most people find it difficult to use the same phone for more than two years. As a result, people are more willing to experiment with newer brands such as Xiaomi, HTC and Huawei.

Factors such as the availability of service centers have, therefore, become less important, though they continue to be a factor in purchase decisions.

Still, Samsung, and going forward, LG, Sony and Nokia, have no option but to squeeze their margins a little to play in a fast-changing market.

Of course, a single model launch is not enough to judge a company’s strategy, but we believe Samsung will continue with its value-for-money strategy going forward. It is likely to launch the an entry-level range called ‘J Series’, while ‘E Series’ phones will offer mid-range devices. Of course, it will continue with its Grand and S series phones, which will complement the J, E, and A series phones.
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