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Struggling Chinese Unicorn Xiaomi Plans to Open Hundreds of Stores

15 June, 2016 -上海 小米之家上海大悦城店西藏北路198号上海大悦城3层302-01Shanghai - Story: Xiaomi -Photo: Xiaomi store, located in a Shanghai mall. The design of the store is really similar to Apple. -Photographer: Julie Glassberg for Fortune.15 June, 2016 -上海 小米之家上海大悦城店西藏北路198号上海大悦城3层302-01Shanghai - Story: Xiaomi -Photo: Xiaomi store, located in a Shanghai mall. The design of the store is really similar to Apple. -Photographer: Julie Glassberg for Fortune.
A customer peruses the gear at a Xiaomi store in a Shanghai mall. Xiaomi’s smartphone models won early accolades for offering sleek designs at about half the price of comparable iPhones. Photograph by Julie Glassberg for Fortune Magazine

Xiaomi, the Chinese smartphone startup valued at $45 billion, is struggling. Revenues flatlined last year, smartphone sales in the first quarter this year nose-dived 26% says IDC, and its ecosystem companies that make everything from mood lights to drones will have a difficult time expanding outside their home country. Fortune recounted some of the details in a long story published Friday.

Xiaomi is already turning its attention to the slowdown in smartphones, its biggest business and the one responsible for 90% of revenues.

But its solution, notably, departs from what made Xiaomi special in the first place

To boost sales, the company plans to eventually run 200 to 300 retail stores, a company spokeswoman earlier told Fortune, with the goal of opening 50 to 60 stores by the end of this year.

The plan is to especially target smaller Chinese cities, where shoppers still prefer brick and mortar stores, says Xiaomi investor and venture capitalist Richard Ji. In these smaller cities, he says, shoppers turn to retail shops before Xiaomi’s website.

Already, Xiaomi has partnered with the Chinese Best Buy equivalent Suning to distribute its smartphones. “For lower tier cities and the rural areas, online sales are not a prudent format for local consumers,”says Ji, who run All-Stars Investment in Hong Kong.

Xiaomi’s executives have always said they sell high-spec, low-cost smartphones near the price they cost to produce in order to lure users into Xiaomi’s ecosystem. Almost zero spending on advertising and retail distribution were the reasons Xiaomi could underprice competitors’ phones. One of those key advantages will disappear as the company turns to traditional stores in dozens of cities.

The company currently operates 25 “Mi Home” outlets, which showcase the ecosystem tableau of rice cookers, mood lights, power strips, and bluetooth speakers, in addition to phones. CEO Lei Jun has said he wants to transform the outlets into full-fledged retail stores, but hasn’t given a timeline for doing so.

 

The news is a radical departure for the company. During its ascent in the rankings of the world’s highest valued startups, Xiaomi was praised for its asset-light approach. Retail stores were a thing of the past for the online-only seller. Back then, its customers were mostly male, young, and less affluent. As Xiaomi tries to broaden its appeal to older customers and families who would buy a Xiaomi air purifier or Xiaomi rice cooker, online sales are more limited.

“Our new Mi Home stores are meant to complement the online buying experience that Xiaomi has created,” says a spokeswoman.

They are also changing what Xiaomi stands for.

No longer should the company be known as a smartphone upstart. It is already resembling a more traditional competitor.