Google: Android One Retail Controversy In India

| About: Alphabet, Inc. (GOOG)
This article is now exclusive for PRO subscribers.

Summary

Offline retailers in India have refused to stock Android One inventory.

This move could limit Android One's growth in India.

Retailers in Pakistan, Sri Lanka, Nepal and Bangladesh might follow suit.

Several smartphone manufacturers might back-out of the Android One initiative going forward.

Google (NASDAQ:GOOG) (NASDAQ:GOOGL) launched its ambitious Android One initiative, starting with India in September, with an objective to introduce billions of feature phone users to the Android environment. In my previous Seeking Alpha article, we discussed that success of the Android One program would be critical for Google's ad revenue, software adoption and smartphone market share growth over the next decade.

Pursuant to my above-linked article, we have a clearer picture of how the Android One initiative is faring in India. To put it subtly, Android One is stuck.

Irate retailers

When Google launched the ambitious Android One project in September, it had reserved the initial inventory of its devices strictly for three online retailers - Flipkart, Snapdeal and Amazon.com (NASDAQ:AMZN). Brick-and-mortar smartphone retailers operating in the country weren't exactly pleased by their exclusion during the launch, so they refused to stock Android One inventory later in October.

To put things in perspective, these protesting offline retailers include prominent names like Tata-owned Croma, Big C, Next Retail, Future Group, Reliance Retail, Planet M Retail, Lot Mobiles and Sangeetha Mobiles, which collectively operate over 1,800 brick-and-mortar stores throughout India.

Brand

Model

September Imports

October Imports

Micromax

A1

119,000

132,000

Spice

Dream Uno

43,100

34,791

Karbonn

Sparkle V

67,440

34,390

Total

--

229,540

201,181

(Source: Cybex Exim Solutions)

As a result of this friction, currently only three online retailers - that is Flipkart, Snapdeal and Amazon - are selling Android One devices in India. This reduced distributor adoption, in turn, has gravely limited Android One's growth in the country. The table above highlights the detrimental month-on-month decline in Android One Indian imports.

Another key thing to note here is that Android One devices offer profit margins of just 4%, as opposed to the industry-standard of 10% currently prevalent in the country. This would suggest that the aforementioned offline retailers might not be eager to resolve this matter after all. There doesn't appear to be enough financial motivation for these retailers to budge.

The Catch-22 situation

With the rapid ongoing growth of e-commerce trade activities across the globe, especially in India, one might suggest that this exclusion by brick-and-mortar outlets wouldn't have a substantial impact on Android One device sales. But this case isn't applicable here.

Google launched the Android One initiative to connect billions of feature phone users to the Internet, across emerging markets, at a low price point. But the bulk of these users won't necessarily order their next smartphone online, since only 12% smartphones are currently sold through e-commerce portals in India. This penetration rate would, of course, be much lower amongst low and middle-income individuals - Android One's targeted consumer base.

India-specific Android One sales numbers corroborate these figures. Spice and Karbonn Mobiles reported last week that sales through brick-and-mortar retail outlets represented about 80% of their Android One sales. This number would obviously be much higher if the aforementioned protesting retailers, with over 1,800 outlets, started stocking and selling their Android One devices as well.

This is a Catch-22 situation for Google really. Several smartphone manufacturers - including Intex, Lava, Xolo, Panasonic, HTC, ASUS, Alcatel and Lenovo - have shown their interest to manufacture their own iterations of Android One devices in 2015. But they may back out after closely examining the reduced market, profit and sales potential of Android One devices in India.

Google had earlier announced in September that it would be able to sell 1.5-2 million Android One devices in India by the end of this year. At the current run rate, if the aforementioned brick-and-mortar retail chains don't start selling Android One devices by year end, I believe the web giant will be able to sell only about 900,000 Android One devices through online retailers - just 45% of Google's high-end sales target for India.

Final words

Google intends to expand its Android One project to Bangladesh, Pakistan, Nepal and Sri Lanka by year end. But owing to the minimal profit potential of these devices, brick-and-mortar retailers operating in these emerging countries might refuse to stock and sell these devices as well. Google needs to reward offline retailers with greater profit margins to propel the growth of its Android One initiative.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.