Josh Horwitz

SHANGHAI, (Reuters) – Chinese smartphone manufacturer Xiaomi (OTC) Corp has opened thousands of new shops to boost domestic sales in a highly competitive country and to provide a platform for the sale of electric cars.

On Oct. 30, Xiaomi opened its 10,000th location. This fulfilled a promise that it would double the number of offline stores and set a new target to open 30,000 more shops in the coming years.

This is a major shift by a company that has grown rapidly through the pioneering of online smartphone sales.

Analysts said that it does come with its challenges, such as higher inventory and advertising costs.

Based on the sales capability of the company, “The future strategy for the company will be more focused towards offline. We want to achieve an initial goal that offline sales can reach the same volume and sales as online,” Shang Jin (general manager for retail in China at Xiaomi) told Reuters.

Although Xiaomi, a Hong Kong listed company has experienced success in expanding overseas, the company lags behind private-owned Oppo or Vivo in China’s home market due to its poor offline presence. Xiaomi receives 30% of its revenue offline while 70% of smartphones are sold in China.

Xiaomi also offers its new range of internet-connected cameras and appliances in its stores. These products have a higher margin than phones (analysts estimate about 15%) and are unique among its competitors.

Xiaomi is optimistic that its stores in the future will serve as showrooms for electric cars. Lei Jun, founder of Xiaomi, said it would be his last venture capital project. It aims to produce mass-produced cars by 2024.

PLAYING CATCH-UP Xiaomi took the online selling model as a way to keep costs low, without having any offline distributors.

This strategy helped the company to grow quickly since it was founded in 2010. The company surpassed Apple Inc. (NASDAQ) to rise to No. 2 in global smartphone sales during the second quarter. According to Canalys, the 2nd largest smartphone manufacturer is Samsung.

But in its own market, which is the largest in the world it has fallen from first place in 2015 to fourth during the third quarter. It trails Oppo, Vivo and Honor spin-off Honor.

The company has been opening stores in response to a declining domestic market share. Xiaomi was the first to open a store in China, opening its first in 2015. However, it trails Oppo (owned by BBK electronics) and Vivo (owned by BBK). Shang said that the two Chinese rivals have approximately 200,000 outlets in China.

Xiaomi has changed its offline distribution model in order to bring more franchise partners to its stores. Although it does own some stores, Xiaomi eventually wants the majority of its franchise partners to become franchisees. This is especially true in rural areas.

For certain retailers, Xiaomi will now only consider a device sold when a customer purchases it. This is in contrast to when it’s shipped to middlemen. This reduces inventory risk and transfers the manufacturing burden.

Shang stated that inventory, “compared to labor costs and store rent, is the greatest risk for smartphones retail businesses,” adding that there was no stockpiling in the new system.

It helps franchisees to get a better deal, as they may not like Xiaomi’s low margins on phones. Nicole Peng of Canalys who studies China’s smartphone markets, stated that Xiaomi cannot raise their profit margins while increasing the phone’s price. So now, they are telling vendors: “You will make less but I’ll take all the risks.”

It isn’t without costs. Peng stated that it will force Xiaomi to spend more on offline advertising. This is much more costly than online advertising.

Franchisees do not have inventory so they can easily sell non-Xiaomi items if they are unhappy.

Peng believes that in the long-term, the store expansion was sensible for Xiaomi’s push towards electric cars. This would need dealerships.

Customers demand customization and not standardization of cars. She said that offline sales were crucial for this.