Mobile phone retail has been considered a hot area in Indian specialised retail. Not anymore. Those who are in the business are either selling out at the first instance. Or, they are going back to the drawing board to rejig their business plans.
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Last week, Bangalore-headquartered MobileNXT Teleservices Pvt Ltd sold a 70% stake to the diamonds major Gitanjali Group, which is now converting the stores into a lifestyle products retail chain. Gitanjali Lifestyle, the retail division of the group, will replace mobile phones with a new product line such as diamonds on the store shelves. The stores will be rebranded as Hoop.
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The continuing growth of the telecom sector and also the advent of organised and specialised retail forced many players to believe that the mobile retail could become as booming a business as the telecom service. It seems there was a disconnection between expectations and what is actually happening in the market. The retailers are struggling to keep afloat mainly because of the competition from unorganised players (such as multipurpose shops who sells anything from recharge coupons to air tickets) and also the declining margins (in most cases not more than 5-10%).
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MobileNXT, which had expanded to about 50 stores across the country since it set up shop in 2006, had to bring down its presence to 30 stores last year when the markets were hit by the economic slowdown. Eventually, the company, which got a strategic investment from media group TV18, sold out to Gitanjali Group.
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Gitanjali would retain 21 of the 30 MobileNXT stores, and the remaining nine will be shut down. These stores would be converted into fashion accessory stores, while a small section in each store would also be dedicated to selling to fashion mobiles. This means that the stores would not sell the entire mobile handset range, rather only high end mobile handsets that fall into the fashion mobile category.
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“The mobile phone retail in itself, going by the current the margins, is not a viable business. When you have a larger chain of stores, various costs like products going obsolete, pilferage etc. hit you and you don’t have the margins to sustain the business,” admits Vijay Menon, CEO, MobileNXT.
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Agreeing with Menon is Sanjeev Mahajan, CEO, Hotspot Retails Pvt Ltd, the Spice Group owned mobile retail chain: “We are at the ‘stage of realisation’ that it is an extremely difficult business. The business becomes viable only when people have the ability to get gross margin in excess of 15% or so.”
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Even venture capital funds are unsure of the prospects of the business in the current form. Kanwaljit Singh, Managing Director of Bangalore based Helion Venture Partners, thinks the mobile handset market is large and is proliferating fast (according to research firm Gartner, it’s expected to go from 132 million units in 2008 to 235 million units by 2012). “But,” he says, “my concern is that the margins on sale of handsets in extremely low and not sure how viable this business can be in the context of selling only handsets.”
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Will he fund a mobile retail chain? Unlikely. “We have looked at a few businesses but not yet convinced about a profitably scalable business opportunity,” Singh says. Interestingly, only in November 2008, Chennai based mobile phone retailer UniverCell Telecommunications India Pvt Ltd raised Rs 100 crore from Hyderabad based private equity firm Peepul Capital.
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Even though skepticism rules the business, the companies with strong financial backing are not shutting shop yet, they are reinventing themselves. Some of them will now turn themselves to a retailer of gadgets which would also include mobile phones. Hotspot’s Mahajan says: “Selling only handsets may not be profitable. It is important to sell the entire range of accessories, airtime, MP3 players, and so on”. He adds that if the retailers have a bigger product mix, then the margins will change drastically.”
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Hotspot, with 600 stores, is the second largest mobile retailer after Essar Group’s The MobileStore which has about 1,300 stores across 200 cities in India. Hotspot plans to double its total number of outlets to 1,200 by March next year. Private equity fund Peepul Capital funded Univercell has a dominant presence in south India with around 200 stores. Besides these companies, traditional retailers had also joined the bandwagon such as Pantaloon Retail Ltd’s One Mobile and Subhiksha Mobile.
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As for smaller ones like MobileNXT, selling out to a larger strategic player will remain an option. Early last year, RP Goenka Group sold its entire 50% stake in Cellucom to its joint venture partner, Dubai based Cellucom. In February this year, Cellucom sold the Indian business to HotSpot in a stock deal. Says Menon: “A lot of smaller players will find it difficult to survive and will have to sell out to bigger players who have deeper pockets.” MobileNXT and Cellucom sale are the early signs of shakeout in this space.