Why Is Samsung Planning To Sell Refurbished Smartphones?

SSNLF: Samsung Electronics logo
SSNLF
Samsung Electronics

Reports suggest that Samsung Electronics (OTC:SSNLF) is planning to launch a program to sell refurbished used versions of its premium smartphones starting next year. As growth in the global smartphone market slows, Samsung is looking at innovative ways to improve its mobile phone revenue and profitability, in our view. According to Deloitte, used smartphones will be a $17 billion market in 2016 and at least 10% of premium smartphones purchased in 2016 will have two or three owners before being retired.  We believe by entering this market Samsung can attract consumers towards its refurbished models and lure them away from phones of  local players such as Micromax in India and Xiaomi in China, which sell smartphones with high end features at low prices. If the company is able to avoid the risk of cannibalizing sales of its own low priced models, this strategy can build momentum for its mobile phone segment, which according to our estimates accounts for more than 30% of its valuation.

Refurbished vs. Low End Models

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Consumers who cannot afford high end smartphones prefer to purchase refurbished models, especially in emerging markets where consumer spending power is low. While this is a huge market and Samsung can generate high margins from this business, it carries the risk of cannibalizing its own low end models. However, if the company is able to execute its strategy in the refurbished phone market appropriately it can have several benefits for the handset manufacturer.  Samsung can launch “buy backs” of its high end models, thus increasing the sales of premium models. Second hand buyers can be converted into consumers for new products based on service and familiarity with the models.  We believe the potential in this market is huge and Samsung’s ability to execute this strategy effectively without impacting sales of its low end models will be critical for its success.

According to our estimates, the mobile phone segment accounts for more than 30% of Samsung’s valuation and we expect Samsung’s mobile phone market share to decline from more than 22% in 2016 to nearly 20% by the end of our forecast period.

We expect competition from local vendors in emerging markets will contribute to this expected decline in Samsung’s market share.  Players such as Xiaomi in China and Micromax in India, as noted, offer smartphones with high end specifications and low price points and over time are likely to have some impact.  With Nokia’s re-entry in the mobile phone market, competition for Samsung will increase. In the high end segment, the company faces competition from Apple and potentially Nokia in future. Tapping into the refurbished market can help Samsung compensate for the falling market share in the mobile phone segment. If this strategy is executed correctly it can also boost sales of the company’s new phones and lead to shorter replacement cycles. We suspect this could result from buyback guarantees and new customers who have used a Samsung refurbished phone earlier.

The refurbished mobile phones market is witnessing tremendous growth as an increasing number of users look for premium phones at lower prices. While Samsung can exploit this trend and improve revenues and profitability, it needs to tread carefully on this path to avoid cannibalization of sales of its own low end devices.

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