Subhiksha New

Subhiksha Retail Chain

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Subhiksha Retail Chain

In 2004, R. Subramanian, Managing Director of Subhiksha, a discount retail chain, addressed a group of management students who wanted to learn from his miracle grocery-pharmaceuticals store that changed the face of discount retailing in South India. Growing from a single outlet in Thiruvanmyur, Chennai, to the largest chain of supermarkets and pharmacies with a turnover of Rs. 235 crore and 164 outlets had not been an easy task—given the controversy about MRP and consumer prejudices against discount stores and not to mention the onslaught of big real estate businesses getting into retail. The branding strategy for this retail store was low-cost and no-frills, i.e., a reliable and trustworthy store that has the lowest prices. The image of the store as communicated through various media was that of one who cared for its customers and ensured the best deals and savings. However, there was more to Subhiksha’s strategy than low prices. It focused on building long-term relationships with its customers by giving them a lifetime of value and savings. The ability to do this stemmed from its relentless focus on value delivery rather than transactional relationships. I. RETAILING IN INDIA Retail was one of the few industries in India that had seen enough action in just the last five years. The others were IT, IT enabled and BPO industries. But the surprising thing was that retailing was even today striving for an industry status. The early players in the retail industry, for example, Raymond's, Indian Coffee House, Akbarally’s and Bata, were limited to a few locations and regarded retailing as an activity than an industry. Today retail was an industry, with players talking of ROI, employee management and IPO’s.

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In India, the retail sector was the second largest employer after agriculture. The retailing sector in India was highly fragmented and predominantly consisted of small, independent, owner-managed shops. The total retail trade in India was Rs. 11 lakh crore or $ 240 billion. Of this, organized retailing accounted for Rs. 14,000 crore, which was poised to grow at 35% per annum in the next five years. Food and grocery retailing accounted for 55% of all retail activity. There had been a boom in retail trade in India owing to a gradual increase in the disposable incomes of the middle class households. More and more players were coming into retail business to introduce new formats like malls, supermarkets, discount stores, department stores and traditional looks of bookstores, chemist shops, and furnishing stores. Retailers were adding new stores on a regular basis. There were over 13 million retail outlets in this country. Indian retailing industry was estimated to be $ 286 billion in 2004 and only about 1.6% share of this market was as organized sector (ICICI property services retail report, 2004). Organized sector was expected to grow to almost Rs. 30,000 crore by 2005 representing 6% of total retail market and top six cities will account for 66% of total organized retailing (KSA Technopak, 2000). Based on GDP growth rate of 6-7% per annum, retail industry expected to be $ 300 billion by the year 2010 (CII-McKinsey Report). In comparison with other Asian economies, India was far behind in the organized retailing sector. In Thailand more than 40% of all consumer goods were sold through organized format. Similar phenomenon was seen in other Asian countries. (Exhibits 1 and 2) Organized retailing got a boost during 2004 with the opening of new format stores, rapid growth of existing players, start of new-generation shopping malls, the government's intention of allowing a certain level of foreign direct investment in retail and the formation of a retailers' association. With consumer sentiment being positive during most of 2004, it led to substantial spending across a

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number of categories such as consumer durables, clothing and lifestyle, automobiles and telecom products. According to Subramanian, 2004 had been a good year not so much in what happened for retail but more of the visibility and profile that it achieved and also in setting the expectations of fast growth. Also, the automobile boom was welcome, because the ability and willingness of people to travel was what made retail boom in many countries. However, on the flip side, practically no progress was achieved in getting industry status for retail. Contrary to some expectations, availability of additional, quality retail space did not improve; the rentals actually hardened. This could act as somewhat of a dampener in the growth of organized retailing. Also, it was expected that the real estate supply would exceed demand in 2004. Therefore, the retailers expected retail spaces at good prices, but this did not happen as only 20 malls became operational in 2004, and costs did not fall a great deal. Also retailing was seen to have a long gestation of two to three years, especially with the high real estate costs and big malls. Hence it was an investment heavy industry. However, 1998 was a year of inception of organized retailing in India with Shopper’s Stop opening its first outlet in Mumbai. But it was 2004 when retail began to scale up and got its fair share of attention. With the economy growing and with some of the metros growing at a decent clip, one could expect more growth

in

the

near

future.

In conclusion, India Incorporated had some advantages. It had a fast growing Indian middle class with more than ever disposable income. There was a positive economic outlook, and foreign exchange reserves were at an all time high. India was positioned as service provider in IT/ITES sector. These factors could be of help in taking the Indian retail scene forward.

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Competition Bata India Limited was one of the largest retailers, with 1,600 footwear stores across the country, and a retail turnover of Rs. 6 billion in 2001. With almost a monopolistic presence in the organized footwear market until the 1980s, Bata was synonymous with footwear in middle-class India. The stores retail mainly Bata products, with a marketing arrangement with Lotto and Nike as well.

Spencer & Company Limited was another large retail group in the country with supermarkets, music stores, and the beauty and health chain—Health & Glow. Food world was operated by Food World Supermarkets Limited, while Health & Glow

by

the

RPG

Group.

K Raheja’s department store chain, Shoppers Stop, was the second largest retailer in the country and became in retailing operation an Indian success story. It also acquired the Crossword chain of bookstores. Kishore Biyani of Pantaloons launched his new-format shopping mall called Central Trent and opened the first Star India Bazaar. New generation shopping malls, such as InOrbit in Mumbai and Forum in Bangalore, opened their doors. The year also saw a rapid scaling up of operations by players such as Pantaloon, Big Bazaar, Shoppers Stop, Lifestyle, Westside and RPG's Spencer's. Subhiksha Supermarkets Subhiksha was immensely popular in the South, particularly in Chennai, where it sold groceries and pharmaceutical products below the MRP. It expected to earn a total turnover of Rs 1,200 crore in 2008-09 as it planned to expand outside Tamil Nadu and Pondicherry. It planned for 550 stores in the next five years.

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Started in 1997, Subhiksha Trading Services (meaning prosperous in Sanskrit) was a supermarket and pharmacy chain, the brainchild of R. Subramanian, a graduate from IIT and IIM, Ahmedabad. Beginning its journey at Thiruvanmyur, this retail chain now had 49 branches across different parts of Chennai. Subhiksha was supported by an asset management company called Venture Capital Partnership Fund, which belonged to the Vishwapriya Group, specialists in financial services. Subhiksha sold all its products all the time below MRP. It eliminated the margins in the traditional supply chain consisting of the manufacturer-wholesaler/dealerretailer network. Bulk purchases directly from manufacturers or stockists qualified for deep discounts. Quick inventory turns also improved the cash flow and reduced operating costs. Subhiksha made spot payments against delivery to get cash discounts. The supplier helped in inventory control and in return got an improved cash flow. Subhiksha helped consumers make informed buying decisions. Smaller packs of products of established brands were usually less economical. However, promotional offers by leading brands usually priced smaller packs at lower prices to induce buying greater quantities. For example, the oil brand Idhayam was priced at Rs 14 for a 200 ml pack which worked out at Rs 70 per litre while the 500 ml was priced at Rs 36 which worked out at Rs 72 per litre. Here, Subhiksha informed buyers to purchase multiple packs of smaller quantities to save money. On products like tea, which had no tax on small packs and an 8% tax on larger packs, the customers were encouraged to buy multiple units of smaller packs to save money. Subramanian said: Everyone is looking to get a better quality of life, so the consumer is spending less on daily necessities and more on products or services. And the money for the durables and mobile phones will have to come from somewhere—and it is coming from the budgets for everyday products. So it would all come down to how the consumer chooses to prioritize

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her/his spend. Today, the consumer doesn't think twice about spending Rs. 200 on a movie ticket in a multiplex, but will search for rice that is cheaper by Rs. 10/kg. To the consumer, soap or toothpaste is not seen as providing much value or a better quality of life, while a movie or a mobile phone is seen as doing that.

Subhiksha had a centralized purchasing system to eliminate multiplicity of billings, which would occur if the stores were to make independent purchases. It bought directly from distributors who sold at only a small margin above the mill prices and from around 150 manufacturing companies. Subhiksha had three separate godowns for stocking pharmacy products, unbranded groceries and branded FMCGs. It had 10 tempos to supply its stores once a day. As the discount format required holding costs to the minimum, all the stores were connected in an Intranet to facilitate inventory planning. Subhiksha’s retailing format was the outcome of a survey which revealed: •

Customers generally looked for accessibility of the store, availability and quality of groceries, and price of branded groceries.

•

Customers did not like to travel beyond 5 km for purchasing groceries.

•

Customers did not place any premium on shopping in posh air-conditioner set-ups.

Chennai and its Shoppers Tamil Nadu constituted the south-eastern extremity of the Indian peninsula. Chennai, the capital of the state, had a population of 42,12,618. The district city was one of the metropolises of India and served as the gateway of the culture of South India. The Chennai buyer had been exposed to the most varied and modern retail experiences. Chennai had discount stores, lifestyle stores, Food World-type

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stores, Saravana Bhavan restaurant chains, etc. This raised the buyers’ expectations and contributed to their differentiating ability. The traditional image of the Chennai buyer that they were very conservative and they took time to change was debunked. Across income segments, all customers looked for a value proposition and were willing to try anything that met their requirement. II. SUBHIKSHA’S BRANDS VERSUS THEIR COMPETITORS Private labels and home grown brands in the organized grocery and FMCG retailing segment were beginning to pose a major threat to the brands of established players like HLL, Nestle and Tata Tea. Private labels now had a more level playing field in distribution. The margins of these private brands were believed to be higher because manufacturing of these products was outsourced. Subhiksha had a very clear strategy regarding private labels and competitors. While 35% of the company’s sales came from parent labels of rice, dhal, etc. Subramanian felt that private labels made sense only when the rate of customer acquisition slowed down or when there were no established brands in a category. The company had its own brands, but only in staples and other agri-commodities where there were no national brands. For instance, Subhiksha had withdrawn its atta and basmati rice brands once national brands were launched in this category. "It's not that we are philosophically against private labels. It's just that they don't fit into the scheme of things at present, but may come in at a future date," Subramanian said. Merchandise Mix Subhiksha had a wide range of products in its store—rice, dhal, sugar, oil, butter, toiletries (like Lifebuoy, Tide, Surf, Colgate, etc.), jam, sauce, tea, coffee and cosmetics (like Ponds Dream Flower). (Exhibit 3)

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Buying Procedure The customer chose products from the display on the PC and paid at the cash counter against a composite bill, which did not contain item details. The stocking department processed the order, keyed in the details, and a shop assistant collected the items and delivered it at the delivery counter. The detailed bill was printed only if the data entered by the stocking department matched the composite bill. The bill also showed the market rates and the savings made. Subhiksha’s strategy did not allow the customers the pleasure of feeling the goods before purchasing as in supermarkets. But Subramanian argued that Subhiksha did not sell fashion, it sold food and grocery items which did not require touch and feel by the customer. The closest that the store got to touchand-feel was a store in Tambaram, where there were wall to wall displays of samples of the products sold in the store. III. BRAND ANALYSIS Brand Image and Identity The brand image that Subhiksha aimed at portraying was of a trustworthy, reliable store that cared for the customer and ensured the best deals or lowest prices for them. It aimed at being perceived as a trusted source of household needs, easily accessible and one that offered great prices and savings. Brand Positioning Discount retail chains like Subhiksha needed to position themselves against the neighbourhood stores, which were their major competition. The latter offered personalized service and had small scale operations. However, they were not technology savvy and did not have economies of scale. They were seen as profiteers rather than relationship builders. The unique position of Subhiksha stemmed from the relentless focus on value delivery.

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Brand Strategy By opting for smaller outlets, Subhiksha increased its presence. The aim was that no one should be further than 2 km away from a Subhiksha outlet. The target obviously was the masses. To succeed, the discount chain needed to integrate backwards into the supply chain, cut out middlemen and offer better prices to consumers. Organized discount retailing was still relatively unexploited in India, and Subhiksha was cashing in on this opportunity. Subhiksha worked on the premise that it would do business with the customer for the next 30-40 years. Therefore, the focus was on building a lifetime relationship with the customer than merely a transactional one. In this respect, the company attempted to know the customers—where they lived and what exactly their needs were. Branding through Advertising Subhiksha had initially used only print advertisements and mailers to promote its services. It began advertising on television before the Diwali firecracker sale and also to position itself as a retail store brand which gave a value offering to customers that contributed to better savings and hence an improved lifestyle. The creative of the Subhiksha TVC pointed out: In Tamil Nadu, the reach of Tamil TV channels is phenomenal. And the response is immediate. Stories are told of how a TV commercial today translates into queues of customers the next morning. This turned out to be the case with Subhiksha as well. A promotion for their firecrackers during Diwali resulted in such crowds that they ran out of stocks well before the day. This success made them bring out a commercial on their grocery store as well.

Colour coding was used in the TVC. The housewife’s clothes reflected the brand colours, and the brand logo was shown prominently. As regards the branding strategy of the commercial, the brand promised “Subhikshamana vazhvukku,” meaning a prosperous life. The problem the agency faced with the brand image

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was that Subhiksha was viewed as just a discount store. This in turn meant that it was regarded as not really “up there” with the big stores. People could dismiss it as a place where you saved just a few paise. The strategy was to convert these savings into something much more. The route taken was to talk about how small amounts saved today could mean a better life tomorrow. All the ten rupee savings taken together would enable the housewife to indulge her husband with a new watch, her father-in-law with his supari, her son with a computer! This value addition made the discount concept more palatable, transforming it into a quest for a better life. Brand Perception One hundred respondents from Chennai were administered a questionnaire that tested their perception of Subhiksha, their preferences during supermarket shopping, their priorities regarding ambience, savings and so on. The results of the survey could help determine the strategy that Subhiksha could follow to remain the undisputed leader of retailing. The results showed that there was a perception among over 50% of the customers that the quality of the stock at Subhiksha was not up to the mark. Two-thirds of the respondents considered price to be an important choice driver for retail stores. (Exhibits 4a and 4b) Over one-third did not have a favourable opinion of quality of Subhiksha. It was perceived as a down-market store (Exhibit 4c). This was a phenomenon particularly in higher income groups. Other observations were that customers found the lack of product display a disadvantage but they were willing to travel ten minutes to reach a Subhiksha store. People who visited Subhiksha also visit corner stores and Food World. Basic expectations like quality and availability figured high in the list of priorities. Little or no importance was given to peripherals like friendly assistants and

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ambience. They found the communication that the idea of saving hard earned money relevant. IV. WHAT’S IN STORE FOR SUBHIKSHA? Chennai was rightly called the incubator of retail development in the country. In these competition days, pricing below the MRP was an essential tactic. Discount stores were an essential element of organized retailing. They offered price, assortment and quality besides building scale quickly and passing on benefits. Value retailing became the new mantra. Retailers no longer needed to focus on packaging, air conditioning and music. They now needed to offer competitive prices that attracted customers. Michael Fernandes, McKinsey’s associate principal, put it: "Discount retailing has the potential to be a really big category, since Indians are price sensitive customers." Subhiksha was talking to venture capital funds and also looking for private equity participation. “This will be our second round of funding, and we are talking to several VC funds and also our existing investor—ICICI Ventures. We will be looking at Rs. 55 crore of equity being raised, Rs. 55 crore of debt and Rs.30 crore of working capital,” Subramanian said. Subhiksha, which had got almost 150 retail outlets in Tamil Nadu and Pondicherry would open its first store outside the state in Delhi and Bangalore in April 2004. Subramanian said: We are looking at a hub and spoke model wherein retail stores will be set up around the distribution centres. So there will be a distribution centre in each of the four cities. The company also plans to increase the number of its warehouses from the present two in Tamil Nadu to 15 across all the states where the outlets will be opened. Subhiksha is also increasing its focus on milk and bulk packaged water while considering entry into the fruits and vegetables segment.

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The supermarket concept was fast catching on in the country. Each was trying its best to provide that much more of ambience or discounts. Tough times were ahead for the neighbourhood kirana shop. Subhiksha, which gave customers discount up to 17% on MRP, had a good reason to be upbeat. A recent study by ORG indicated that retail branding was going to be increasingly popular in the South in the years to come because of ambience, good stock and efficient billing systems. The supermarkets that were coming up in India needed to compete with each other and offer better and cheaper services. Subhiksha, by the sheer size of its purchases, managed to get good terms from the manufacturers which it then passed on to its customers. Subhiksha's aggressive marketing strategy caught everyone by surprise. It was like a typical Indian grocery shop. The goods were all behind counters, but an exhaustive menu was offered to the buyer to pick from. Even though its outlets had facilities for direct purchase, the shop was pushing its tele-ordering network heavily. The customers got bills with calculations on how much they have saved by going to Subhiksha. With the supermarket revolution in India kicking in, one thing was for sure—Subhiksha, a brand with an unbeatable value offering for the customer, would certainly not be left behind.

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EXHIBIT1: From CII–Mckinsey Report on Retailing in India

Year 2010

Year 2004 Description

US$ (in Bn)

Description

US$ (in Bn)

Total Retail Market

286

Total Retail Market

453

Organized Retail

3.31

Organized Retail

11.5

Aggregate Retail (USD) - CAGR -8% 380.23

$ Billion

269.86 180.6 127.06 76.85

1992

1997

2002

2007

2012

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EXHIBIT 2 – Indian Retailing Comes of Age, Mckinsey Quarterly, 2000 Number 4 Asia Total market

% of organized sector

Taiwan

$40 Bn

81

Malaysia

$20 Bn

45

Thailand

$32 Bn

40

Indonesia

$75 Bn

30

China

$325 Bn

15

India

$180 Bn

2

Country

EXHIBIT 3 - Comparative Price Chart

Product

Subhiksha

MRP

Rs

Rs

5 kg Ponni rice (I quality)

102

119.50

5 kg Ponni rice (II)

90

100

Toor Daal 1 kg

36.95

42.50

Urad Daal 1 kg

27.85

32.25

Sugar 1 kg

15.15

17

Moong daal 1 kg

32.50

37.50

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Surf Excel Blue 1.5 kg

91.65

135.00

Tide 1 kg

43

46

Aavin butter 500 g

61

65

Amul table butter 100 g

12.50

13

Ponds Dreamflower 100 g

25.50

28

Lifebuoy Gold 100 g

11.75

12.50

Whisper Maxi 10s

54.95

60

Colgate Dental Cream 200 g

58.95

65

Kissan Mixed Fruit Jam 200g

24.50

26

Kissan Tomato Sauce 200 g

23.50

Horlicks 500 g

91.30

Three Roses Dust Tea 500 g

90

100

Goldwinner 1 litre

55

64

Idhayam Gingelly Oil 1 kg

97.50

101

Green Label Coffee 500 g

65.95

69

25

99

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Britannia Marie Godl 400 g

20.95

24

Britannia Orange Cream 100 g

9.95

11

Five Star Chocolate 120 g

36.10

38

Dairy Milk 43 g

15.20

16

Top Ramen Noodles 400 g

32.95

36

This is merely a representative sample. Several other brands in each category are available. There is a column at the end of the bill saying: `Your savings' which gives the total difference between Subhiksha prices and the MRP on purchases that day.

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EXHIBIT 4a: Importance Given to Low Prices

Importance - Low Prices 40 35

Percent

30 25 20 15 10 5 0 Not at all important

Least Important

Important

Very Important

Most Important

EXHIBIT 4b: Perception of Stock Quality at Subhiksha

Perception of Stock Quality 35 30

Percent

25 20 15 10 5 0 Very Poor

Poor

Satisfactory

Good

Very Good

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EXHIBIT 4c: Mhi and Perception of Quality of Stock

MHI vs Perception of Quality 100%

Percentage

80% 60% 40% 20% 0%

<10000

10k - 20k

20k-30k

>30k

Monthly Househols Income Very Poor

Poor

Satisfactory

Good

Very Good

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BIBLIOGRAPHY Bhasker, Vijay. “Someplace else,” Economic Times, 20 August 2000. Chandran, Rina. “Good monsoon doesn’t mean more FMCG sales,” Business Line Chennai, 20 November 2003. Dey, Mrinal Kanti. “Subhiksha plans Rs.150 crore expansion strategy,” The Asian Age, 20 November 2003. Doctor, Vikram. “Competing on price is the new name of the game,” Economic Times, 7 February 2001. Jain, Ajay. “Food retailing value addition to up growth,” Financial Express, 17 June 2003. Nair, Malini. “The great Indian super bazaar,” The Telegraph, Calcutta edition, 3 April 1998. Thakur, Ritu. “Held to ransom by L&F,” The Pioneer, 21 February 2002. Vijayraghavan, Kala. “Private labels give FMCG giants a run for their brands,” Economic Times, 2 February 2002.

WEBLIOGRAPHY www.agencyfaqs.com www.blonnet.com www.business-standard.com www.chennaibest.com www.chennai.tn.nic.in www.iimcal.ac.in www.retailyatra.com www.themanagementor.com _____________