Key Highlights

• With the best-in-class design, high performance and much lower pricing than other smartphones in the market, Xiaomi’s smartphones were considered groundbreaking smartphones in the budget segment since the launch of its first smartphone in 2011. Xiaomi has grown very fast in the first few years and became China’s top smartphone companies in 2014 and 2015. Yet, there were headwinds for the company thereafter. Its sales for smartphones dropped massively in 2016. The major reason of the slump was attributable to the company’s over-reliance on online sales.
• In 2017, Xiaomi has incorporated New Retail strategies to its “Triathlon business model”, which Xiaomi started to place great emphasis on interconnecting its online and offline channels. Since then, the company has enjoyed an unprecedented turnaround. In May 2018, Xiaomi submitted an IPO application to the Hong Kong Stock Exchange, aiming to raise US$10 billion.
• The success factors of Xiaomi include its powerful ecosystem, “killer products” and strong “Mi Fans” culture.
• Part 1 of this paper discusses Xiaomi’s new business model and its New Retail strategies. Part 2 covers the observations of our site visit to Xiaomi’s New Retail flagship store in MixC World, Shenzhen.

Part I. Xiaomi’s evolving business model and New Retail strategies

Background

Xiaomi Inc., headquartered in Beijing, China, is a privately owned innovative technology and electronics company that designs, develops, and sells smart phones, mobile apps, and other technology products. It was co-founded by eight partners (Lei Jun (CEO), Lin Bin, Li Wanqiang, Zhou Guangping, Huang Jiangji, Hong Feng, Wang Chuan, and Liu De) on June 6, 2010. Since Xiaomi Co., Ltd. was established, it has maintained a surprising growth rate. Xiaomi released its first smartphone in August 2011 and has rapidly gained market share in China to become the country’s largest smartphone company in 2014. Over 61 million of Xiaomi’s smartphones were sold that year. The company was within the top three smartphone companies in China in 2014 and 2015. Xiaomi announced its expansion outside China in the same year, with their first international headquarters in Singapore. Thereafter, the company has expanded into Asia, Africa and parts of Europe.

However, after Xiaomi has enjoyed a rapid rise, it has then gone through a dramatic fall and suffered a massive decline in sales in the second half of 2015. Its sales dropped 30% further in 2016, and in 1Q16, it was kicked out of International Data Corporation (IDC)’s list of the top-five smartphone vendors in the world. As claimed by the company, the sales plunge crisis was due to the fierce market competition, supply-chain problems associated with the company’s rapid growth, and its heavy reliance on e-commerce.

The slump on sales has forced Xiaomi to revamp its business model, revitalize its supply-chain systems and restructure its organizational and management structure, etc. In 2017, it has incorporated New Retail strategies to its “Triathlon business model”, which Xiaomi started to place great emphasis on interconnecting its online and offline channels. Since then, the company has enjoyed an unprecedented turnaround. Xiaomi replaced domestic rival Vivo to occupy the spot of the world’s fifth-largest smartphone maker after its smartphone shipment rocketed 74.5% to 92.4 million units . As claimed by Lei Jun, Xiaomi’s CEO, “Xiaomi is a new brand that was born in the process of China’s economic transformation and upgrading. It is a mobile phone company, mobile Internet company and a New Retail company. And in the strict sense, Xiaomi is a retail company.”

Currently, Xiaomi is the world’s fourth-largest smartphone company, achieving over 100 billion yuan in annual revenue and has nearly 20,000 employees4 . On 3 May, 2018, Xiaomi Group officially submitted an IPO application.

Xioami’s Ecosystem Strategy

Xiaomi started to create a “one-of-a-kind” ecosystem back in 2013 with a five-year plan to invest in 100 hardware startups. They would feed Xiaomi with an ecosystem of products surrounding smartphones, such as power banks and internet-connected devices like air purifiers; and would draw customers to Xiaomi’s stores. Over the years, the ecosystem has expanded rapidly and become increasing complex that other market players find it hard to replicate. In March, 2016, the company strategically upgraded Xiaomi’s ecosystem and launched a new brand, MIJIA, with a Chinese name of “Mi.” By March 2018, Xiaomi has 210 companies within its ecosystem, including ZMIFI, Huami Technology, Zhimi Technology, 1More, etc.

As of March 31, 2018, Xiaomi has established an ecosystem of more than 210 companies through investment and management, of which more than 90 companies are focused on research and development of smart hardware and consumer lifestyle products. These startups have received support from Xiaomi in areas of branding, capital, supply chain, product design and management, as well as access to Xiaomi’s online and offline retail network. A number of them have flourished – such as Huami, Smart Mi, ZMI and NINEBOT. These companies reached unicorn status with billion-dollar valuations by the end of 2015. According to iResearch, as of December 2017, Xiaomi has built the largest consumer IoT platform globally in terms of the number of connected devices (excluding smartphone and laptops).

Xiaomi’s ecosystem is centered on Xiaomi’s core products – smartphones including peripheral products such as chargers, earphones and power banks; smart hardware including robots, rice cookers, televisions and air purifiers; and lifestyle products including backpacks, suitcases, toothbrushes, pillows and other daily necessities. Xiaomi’s gigantic ecosystem offers a wide range of new and interesting products that customers anticipate. This helps attract customers to visit Xiaomi’s physical store – Mi Home from time to time to see what they offer. This also makes Xiaomi nothing like a smartphone company, but a lifestyle and retail company that offers a large array of lifestyle products to customers.

Xiaomi’s ecosystem adopts an “investment + incubation” strategy. Xiaomi would provide resource support to companies it has invested in, especially in their early stages of entering the market; these include branding, supply chain, channels & platforms, investment and financing, quality assurance, product definition, and industrial design. Xiaomi will continue to invest in and incubate companies with good potential for development, primarily in the fields of IoT and mobile Internet services.

Xiaomi to Go Offline; Omni-Channel is the Key

Having experienced the sales plunge since 2015, Xiaomi realized the drawbacks of being a pure-play e-commerce player. Thereafter, Xiaomi has started to push forward its brick-and-mortar strategies. In September 2015, Xiaomi opened its first physical store Mi Home in Beijing, which marked Xiaomi’s official debut in the offline retail market. As of May 2018, there are more than 400 Mi Home stores, covering more than 50 cities in China; the number of Mi Home stores is expected to reach 1,000 by 2019 and achieve total revenue of 70 billion yuan in five years.
Currently, omni-channel is Xiomi’s critical driver of growth. 

Evolving Business Model

Xiaomi named its unique business model as “The triathlon model”. Originally, the triathlon model was comprised of three modules namely, “Hardware”, “Software” and “Internet Services”. In 2017, Xiaomi upgraded its business model to incorporate the “Software” section to the “Internet Services” section, and added the “New Retail” section. The triathlon model now entails three components – the “Hardware”, “Internet Services” and “New Retail”.

• Hardware – innovative, high quality and well-designed hardware focused on exceptional user experience. These include mobile phones, TVs, routers, AI speakers, etc.;
• Internet Services – provide Internet services and give users a complete mobile Internet experience. These include MIUI, Mi Live, Mi Cloud, Mi Finance, Mi Music, Mi Video, Mi Game Center, etc.
• New Retail – the integration of online and offline channels. Major online channels include Xiaomi’s direct online retail store Mi Store (available in mobile app and Mi.com), Xiaomi’s self-operated boutique-style e-commerce marketplace “Xiaomi Youpin”, and its flagship store on Tmall. Key offline channels include Mi Home, and local authorized stores in China “Xiaomi Xiaodian”. New Retail is a core component of Xiaomi’s growth strategy, allowing the company to operate efficiently while simultaneously extending the customer reach and enhancing customer experience.

Essence of Xiaomi’s New Retail Strategies

To put its New Retail strategies into action, in September 2017, Xiaomi launched its first New Retail flagship store, Mi Home, in Shenzhen to demonstrate Xiaomi’s New Retail strategies. The essence of Xiaomi’s New Retail strategies is to provide users with omni-channel shopping experience and through highly efficient store operations, with optimal rent-to-revenue ratio. The strategies highlight eight tactics under four areas:

• Increase traffic flow – Locate Mi Home stores near fast fashion brands; offer products with higher repurchase rates
• Drive up conversion rates – offer a number of “killer products” for each product category; leverage big data analytics
• Increase sales – increase the purchase rate for inter-related products; provide better shopping experience
• Encourage repeat purchase – strengthen brand awareness; enhance seamless integration of all channels

Through its New Retail strategies, Xiaomi aims to achieve greater efficiency and provide the same products at the same accessible price points to consumers.

Xiaomi’s Success Factors

Killer products

Xiaomi has strived to offer “killer products” that are of high quality, high performance, well-designed and honestly priced. The company has advocated a unique principle of “satisfying 80% needs of 80% of the market” – to offer products that target the mass market (cover 80% of users in the market) and provide products that can satisfy most (80%) of their daily needs. Xiaomi aims to: 1) offer mass products that are of high quality – in order to meet the needs of the post-80s and post-90s generations who want a higher quality of life; 2) offer high-end products to the mass market – allow high-tech, trendy, and well-designed products at price points that are accessible to the widest and largest user base.

Mi Fans

Xiaomi’s success is also largely built upon its strong fans culture. The company has cultivated close interactions and direct relationships with its fans. Xiaomi’s relatively inexpensive products with good design or intelligent functions have continued to win and accumulate massive global community of “Mi Fans”, passionate users who are intensely loyal to Xiaomi brand. There are “Mi Fans Clubs” in different parts of the world and there are active interactions within Xiaomi’s platform for fans to provide feedback and ideas on product development, product testing, advertising and marketing. Xiaomi has regularly launched a number of promotional campaigns such as “Mi Fans Festival”, “Mi Pop” events, games, and contests to boost sales and engage with their fans.

Many Mi Fans are passionate and keen to exchange product ideas, cocreate new features of the smartphones and operating systems through Xiaomi’s online forum, Xiaomi BBS and MIUI forum. In turn, Xiaomi’s engineers have constantly improved the MIUI platform by incorporating direct feedback from Mi Fans. As of March 2018, Xiaomi has a large and highly engaged global user base with approximately 190 million monthly active MIUI users; over 1.4 million users have more than five connected Xiaomi products (excluding smartphones and laptops); and Xiaomi’s users had collectively generated over 250 million posts on MIUI forum since it was launched in August 2010.

Comments from Fung Business Intellignece

Against the backdrop of the consumption upgrading trend in China, Fung Business Intelligence believes that Xiaomi’s successful formula of high quality and low pricing strategy will render ample room for the company to seize more market shares ahead. Xiaomi’s relatively inexpensive yet high quality and well-designed products will continue to win and accumulate massive number of loyal Mi Fans (de facto customers). The “fans community” will co-design the products with the company or even sell and promote their products to boost sales.

The company’s vast ecosystem, together with its new business model and New Retail strategies are set to transform and reshape the traditional consumer electronics and home products sectors. Xiaomi’s wide range of high-functional products such as smartphones, smart watches, Internet TV boxes, and smart TVs are well-liked by customers. Its “smart living” product lines, particularly travel suitcases, travel pillows, table lamps, etc. are also gaining increasing attention from consumers.

Going forward, we expect Xiaomi’s New Retail strategies will continue to flourish, with stronger physical presence and higher penetration across China and in the rest of the world. Xiaomi will truly transform from a Chinese smartphone brand into an international lifestyle and retail brand. Xiaomi’s upcoming IPO, which is expected to be the world’s largest IPO since 2014, is expected to bolster its position as one of the leading retail brands in China, and even in the world.

Part II. Site Visit and Observations from Fung Business Intelligence

Fung Business Intelligence conducted a site visit at Xiaomi’s New Retail flagship store in MixC World, Shenzhen on 23 May, 2018. Designed by New York-based famous designer Tim Kobe, the same designer of Apple flagship at 5th Avenue of New York City, this Xiaomi flagship is a standalone duplex store located along the shopping avenue “High Street” of MixC World. The store has a floor area of around 650 sqm.

We visited the store on a weekday afternoon; foot traffic was considered quite high at the time we visited. As observed, there were local customers and tourists, students, office workers and different types of people choosing and trying the products.

The shop is bright with high ceilings and glass facades across two storeys. The interior design is hip and simple with Xiaomi’s corporate colors – white and orange as the store colors. Xiaomi’s flagship store sells more than 400 SKUs and allows customers to try and experience the products. All products sold in the shop are available in Xiaomi’s e-commerce platform Xiaomi Youpin and each of them is attached with a QR code. After scanning the code through Xiaomi’s app, customers can place order online by Wechat Pay or Alipay and enjoy speedy delivery to home. Customers can also buy the products and take away with them when they leave the shop.

Xiaomi has incorporated various “black technologies” in its flagship store, including a large interactive shopping wall which comprises five LED screens sizing 80” each. The screens can track user’s hand motion and movement. Customers can point to the products that are shown on the screen to browse the product information and place order.

On the ground level, the major “killer products” of Xiaomi are displayed, including smartphones, smart watches, smart music boxes, headphones, portable power banks, etc. The second level mainly displays products of “smart living”, including travel suitcases, travel pillows, bicycles, table lamps, coffee machine, etc.
In terms of customer service, Xiaomi’s flagship store houses large amount of staff to assist customers. They are mostly young people with a smart and energetic appearance. They attentively answered enquiries from customers and offered advice to them.

Overall, the shopping ambiance is robust and vibrant as the shop displays a large array of Xiaomi’s products and allows customers to try and touch them freely. Some customers were trying the electronic scooter on the pedestrian pavement outside the store, which gave them an experience of using the products.