Subhiksha Case Study

Case Study- Subhiksha: A Saga of Ups and Downs

Subhiksha: A Saga of Ups and Downs

Contents Entering the retail market ten years ago:................................................................2 The expansion of the stores:...................................................................................3 Cut price strategy:..................................................................................... ..............3 The triumphant journey of Subhiksha:..................................................................... 3 Risk in retailing and expansion................................................................................4

Supply chain woes bare Subhiksha shelves.............................................................5 Turndown began at Subhiksha:................................................................................5 References:......................................................................................................... ..7

…………………………………………………………………………………………………….. The views and opinions expressed in this Case Study are those of the author and do not necessarily reflect the views or opinions of any Retail Group India. The facts and figures mentioned in this case may not reflect the actual figures of company. The case is meant solely for the purpose of academic use and study and not for commercial use. For any info plc contact the author on [email protected].

Bindu Rathore

Case Study- Subhiksha: A Saga of Ups and Downs

“We are a golden egg laying duck, we are in trouble. We need their (bankers and lenders) support and upon getting it we will restart operations and repay all debt. It is not easy, but we have to make it happen,” says R Subramanian, Founder, Promoter, and Managing Director of Subhiksha Trading Services, which owns Subhiksha– the India’s largest (in terms of number of stores), food and grocery, small format, neighbourhood, convenience, discount retail chain. Subhiksha (prosperity) which means prosperity in Sanskrit is on the verge of bankruptcy today, as on 2 Feb, 2009. Subramanian wasn't thinking this big when he kicked off Subhiksha-a retail value chain in 1996. In fact, he wasn't even thinking retail when he passed out of IIM Ahmadabad in 1989. After a two-week stint at his first employer Citibank, Subramanian joined his mentor (late) S. Vishwanathan, who then ran Enfield Industries. At Enfield, Subramanian helped professionalize a hitherto family-run set-up and rope in Eicher as a buyer. After working for two years at Eicher, he started his first company called Viswapriya, and made profits up to 25 crores, until the share market collapsed in 1995.

Entering the retail market ten years ago:

Subhiksha in Sanskrit means “the giver of all good things in life”. Subhiksha with a pioneering approach and giving new definitions to the retailing ventured into the Indian retail industry. Since, their predecessors are already existed and doing well in the market, they had to come up with an innovative approach to compete with them. They have made an extensive research on customer behavior and

Bindu Rathore

Case Study- Subhiksha: A Saga of Ups and Downs found that offering the branded goods at a lower price than their competitors could make them stand in the competitive retail industry. He wanted to "pioneer a new trend" because of what he had found out about the retail industry: that the No.1 retailer makes the most money, the No. 2 makes some money, while the third (and the others) has to eventually shut shop. In the year 1997, Subhiksha opened its first store at Thiruvanmiyoor in Chennai with an investment of around Rs 4-5 lakh, with the theme,” why pay more when you can get it for less at Subhiksha” The expansion of the stores: By March 1999, Subhiksha started expanding rapidly. From 14 stores, it was expanded to 50 stores by June 2000. In the next two years, it had 120-130 stores across Tamil Nadu. They decided to look at every part of India which is significantly literate and is a significant consumption market. Telecom companies are their role model. They employed capable regional managers and expanded. In 2004-05, they decided to have 420 stores in places like Gujarat, Delhi, Mumbai, Andhra and Karnataka by 2006. In 2005, Subhiksha started recruiting people in various regions. Subhiksha is currently operating over 1,500 supermarket stores across more than 100 cities selling food, grocery, drugs, and telecom products across INDIA Cut price strategy: Opening a chain of no-frills stores-no air-conditioning, no fancy lighting, and no touchand-feel experience (customers have to ask for products at Subhiksha stores)-was a deliberate strategy. Shops are located not on the main road, but just off it, to take advantage of vastly lower rentals. The catchment area of customers is rarely beyond a two-km radius, since its customers usually come on two-wheelers or on foot. The triumphant journey of Subhiksha: Until little over two years ago, Subhiksha was only a local player with 150 stores (September 2006) operating mainly in Tamilnadu. The retailer began growing rapidly outside the state, soon after infusion of private equity capital by I-venture, the venture capital arm of ICICI. I-Venture took 24 per cent stake in the company’s equity, which until then was primarily held by Subramanian and his associates. Bindu Rathore

Case Study- Subhiksha: A Saga of Ups and Downs Riding on the back of rapid expansion, Subhiksha’s turnover grew from Rs 330 crore in 2005-06 to Rs 833 crore in 2006-07, and then to Rs 2,305 crore in 2007-08 (year ending March 31, 2008). Likewise, having grown from 150 stores in September, 2006 in Tamilnadu to 1,600-odd stores across the country in September, 2008, Subhiksha has been the envy of its competitors. By the end of this year, it was looking at grossing a turnover of Rs 4,300 crore from 2,300 stores. Interestingly, all the growth was, however, fuelled from a small net worth base of Rs 250 crore having equity component of Rs 180 crore (face value of Rs 32 crore). Risk in retailing and expansion We are not mad risk takers. We are not producing movies. We do a lot of research before starting business in an area, and we have back-up plans in place. We work with very good people, and if something goes wrong, we try to take corrective steps. The big advantage we have is, we are not creating products. So there are no worries about whether it would succeed or not. Consumers are smart and they are all priceconscious and they want to finish the work as fast as they can. They don't go to a provision store for fun. However, as it happens with many growth stories, the retailer could not keep pace with its growth and got into liquidity trap as in the hope increasing its valuations, it kept postponing infusion of equity funds. Need for an IT Solution The need was first felt when the company began to face problems managing its frontend and supply chain operations using its existing local Enterprise Resource Solution (ERP). "We were facing a lot of difficulty in accessing data across different regions using this local solution," concurs Ankur Saigal, vice president (Tech Initiative), Subhiksha Trading Services. "Besides business expansion brings its own complexities and we needed a robust platform to streamline our operations and control." Furthermore, the company needed a solution to manage the payroll system. Although it didn't have any HR issues at the ground level, sending the payroll to employees on time was getting difficult. The system worked manually, with a central team taking care of Bindu Rathore

Case Study- Subhiksha: A Saga of Ups and Downs running 2-3 payroll systems in a month depending on the availability of the bandwidth and the entire process. Keen to avoid further problems, the company decided to invest in a more effective ERP solution and zeroed in on the SAP All-In-One solution in July 2007.

Supply chain woes bare Subhiksha shelves Inventory management is austere, too. All goods are bought on cash to extract the maximum discount from suppliers; SKUs (stock keeping units, or the number of items on display) are restricted to the fastest moving ones of about 1,500. Most of the SKUs are bought directly from the manufacturer, cutting the intermediary out. A supply chain software, developed in-house, keeps track of what's selling and what isn't. Management is divided into two simple sections: operations, which is centralized and looks after everything from ordering to accounting, and stores, which is responsible for all storelevel activity. There's one manager for every three stores, and he reports to a chief manager responsible for business development, who in turn reports to a vice president. The VPs are responsible for sales targets. Mr R. Subramanian, Managing Director, admits to a “communication failure” in informing customers why store shelves are empty. “There is a lot of pain around SAP (being implemented by TCS). We didn’t think it would take so long. All our 1,650 stores are being converted and we cannot run a legacy system alongside SAP. An intermediate system in place means we will lose control.” He says that the stock outs in the stores could lead to some business losses but says the chain will bounce back soon. Turndown began at Subhiksha: The management has committed some eventual mistakes which have led the company towards the downward position. The first and big mistake committed by the management of Subhiksha is expanding the number of stores rapidly without sufficient funds in hand. They thought of raising equity during last September but the things had gone too far before they woke up. The global markets were stated collapsing and there were no possible chances of raising funds. . “We got into trouble during the second half of last year, when we were unable to tie up funds for our ongoing operations. That slowly started choking and has lead to paralysis of operations completely now,” said Subramanian. Bindu Rathore

Case Study- Subhiksha: A Saga of Ups and Downs Consequently, in the following month (October, 2008) the company ran out of enough funds to run the organization .Thereafter, Subhiksha has been continuously besieged by a set of problems from all sides. 1. Subhiksha Trading Services has come under fire from television channels for not

clearing advertising dues that run around Rs 8 crore. 2. Subhiksha is believed to owe Rs 35 crore against goods, Rs 18 crore against wages, and Rs 20 crore against lease rents. The company, according to the report, is also carrying a debt of Rs 700 crore at an average interest cost of 12 per cent per annum. 3. Expansion of Stores without adequate system control and IT Support. That’s why there was a huge Audit and abnormal losses in the system. And when they have started implement ion of SAP the time has gone for survival of Subhiksha. 4. Maharashtra FDA, the state government’s regulatory authority for food and drugs, had asked Subhiksha to suspend operations of its warehouses at Bhiwandi (Mumbai) for 20 days as well as had cancelled licences of three of its vendors, charging that they had failed to maintenance health and hygiene norms as prescribed by the regulator. 5. Many wholesale suppliers in Azadpur subzi mandi, or vegetables market, have

stopped supplying fruits and vegetables to Subhiksha’s outlets in the National Capital Region (NCR) surrounding the national capital. This comes in the wake of the company holding up payments for two to six months against normal credit period of one month.

6. Lack of strong Hr policy and Staff--- Due to this Shubiksha was not able to retain

the talent which he initially bring into Junior, Middle and high level management. Whatever was remaining with it is all family bound with no commitment policy. 7. They were paying huge rentals for these stores, which was a huge drain on the

company's finances.. There are huge frauds while entering in to rental agreements by their own management people. There was no proper check and control on this cost though this is a very crucial part to defeat competitors and to

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Case Study- Subhiksha: A Saga of Ups and Downs gain profitability in future. This, coupled with less than-expected footfalls, drove the operational costs to unsustainable levels

8. The wrong assumption that telecom segment is a sound, and profit making

segment. The CEO never looked in to system losses arise from telecom. Subhiksha stores always sell handsets at below DP while its benchmarking is to match DP. No control on inventory of mobile accessories and there stock value and were unable to circulate the working capital.

9. Meanwhile, the company has closed around 90 grocery stores across the country

over the last one month or so. The company has also significantly reduced the inventory levels in its mobile retail arm - Subhiksha Mobile stores. Thus sinking into unrepaired conditions Subhiksha has to compete with its high profile competitors like RPG, Reliance retail and Future group etc. Reliance Retail has set up 700-odd stores in the past two years, almost at the rate of one store per day, Future Group has begun opening a new no-frills discount retail chain called KB’s Fair Price Stores, a format that is similar in concept to Subhiksha stores. Reliance’s food and grocery format Reliance Fresh on the other hand is high-end in terms of display, ambiance and size. The raise of the company thus gradually started sinking down step by step and now stands on the verge of collapse. The management frankly admits that their over confidence and aggressiveness are the main reasons for their loss. They should have gone for an IPO when the things were well and good to prevent such downfall. If they had responded in right time they wouldn’t have been put through such bad phases. Subramanian is confident of reviving the business of his company. “The market is tough and banks are cautious about lending, but, if we are to get back on track, I cannot predict a timeframe, but we will,” believes Subramanian References: 1. http://www.indiaretailbiz.com/blog/category/indian-retalers/subhiksha-

subramanians/ 2. http://www.livemint.com/subhiksha.htm 3. http://www.financialexpress.com/news/subhiksha-charts-rs-1-000-croreinvestment/373019/ Bindu Rathore

Case Study- Subhiksha: A Saga of Ups and Downs 4. http://www.rediff.com/money/2007/feb/05bspec.htm

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