FAILURE OF SUBHIKSHA

MASTER OF COMMERCE, (M.COM Part - I) SEMESTER I (2013-2014)

Submitted by Japjiv Singh Anand ROLL NO. 1

SMT. M. M. K. COLLEGE OF COMMERCE AND ECONOMICS BANDRA (WEST), MUMBAI 400 050.

FAILURE OF SUBHIKSHA

MASTER OF COMMERCE ( M.COM - I) SEMESTER I A.Y. 2013-2014

Submitted

In Partial Fulfillment Of The Requirement For For The Award Of Degree Of Master Of Commerce

BY Japjiv Singh Anand ROLL NO. 1

SMT. M. M. K. COLLEGE OF COMMERCE AND ECONOMICS BANDRA (WEST), MUMBAI 400 050

SMT. M. M. K. COLLEGE OF COMMERCE AND ECONOMICS BANDRA (WEST), MUMBAI 400 050

CERTIFICATE This is to certify that Japjiv Singh Anand of M.Com (Part-I) Semester I (2013-14) has successfully completed the project on Failure of Subhiksha under the guidance of Mr. Asst. Prof. Vishal R Tomar. Date:Place:-

__________________________

_____________________

(Prof. Dr. MeghaSomani) Co ordinator

(Dr.Ashok Vannjani) Principal

______________________ (Asst. Prof. Vishal R Tomar) Project Guide

__________________ External Guide

DECLARATION

I, Japjiv Singh Anand, the student of M.Com, (PartI) Semester I (2013-14), of Smt. M.M.K. College of Commerce and Economics, hereby declare that I have completed the project on topic name successfully.

The information submitted is true and original to the best of my knowledge.

Thank You,

Yours Faithfully,

______________ Japjiv Singh Anand Date: 24/09/2013

ACKNOWLEDGEMENT
The successful completion of project involved the contribution of time and efforts. This project would never have been completed without the valuable help extended to us by the subject teacher and project guide Prof. Vishal R Tomar. Secondly would like to thank our Principal Dr. A. C. Vanjani for providing us such a prestigious institution. Last but not least I would like to thank our Parents for making us capable in doing this project and giving their continuous support and guidance.

Japjiv Singh Anand

INDEX
Sr. No 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Particulars Page No.

EXECUTIVE SUMMARY
The Indian retail sector is going through a transformation and this emerging market is witnessing a significant change in its growth and investment pattern. Both existing and new players are experimenting with new retail formats. Currently two popular formats -hypermarkets and supermarkets are growing very fast. Apart from the brick mortar formats, brick -click and click-click formats are also increasingly visible on the Indian retail landscape. Consumer dynamics in India is changing and the retailers need to take note of this and formulate their market strategies and tactics to deliver value to the consumer. The research that forms the basis of this dissertation was carried out at Subhiksha super market, an offline retailer based in Bangalore. The core business of Subhiksha is retailing of food products, fresh vegetables and pharmacy products on discount prices. The main objective of this project is to formulate the marketing strategies of Subhiksha super market outlet in Bangalore. The research also involves analyzing the past promotional strategies and reach ability and also to determine the future promotional efforts of the company. The research finds that the Subhiksha retail outlet in Bangalore is formulating good marketing strategies which are useful the company and these marketing strategies are generating good result. But some improvements are required as per the respondents.

GROWTH OF RETAIL OUTLETS IN THE MODERN MARKETING SCENARIO

Organized food retailing is a relatively new phenomenon in India, with small Western-style supermarkets only starting to appear since the 1990s. Most food is still sold through local wet market vendors, roadside pushcart sellers or tiny kirana (grocery) stores. Although less than one per cent of food is estimated to be sold through supermarkets, this share is growing rapidly. Most supermarkets resemble the small independent operations that existed in Australian cities and towns about 20 years ago, typically occupying from 275-750 square meters and carrying about 6000 stock-keeping units. Most of the supermarket development has occurred in the south of the country in the major cities of Bangalore, Chennai and Hyderabad, as well as New Delhi and Mumbai in the north. According to the estimated 500 shopping malls are expected to be built by 2010 from a near-zero base in 2000, in a trend that can benefit Australian producers by providing greater visibility and shelf space. Convenience stores are also taking off in major cities, usually in the form of Shell shops or Food Stops attached to petrol station outlets. The format and product range is surprisingly similar to those in Australia, and they often include chilled and refrigerated sections. Market analysts estimate the organised retail sector has been growing by nearly 30 per cent a year since 2000 with similar growth likely in the short-to-medium term. The sector is expected to undergo further change with prospective new domestic and global foreign entrants, and the takeover or exit of some existing participants. Global players such as Wal-Mart (US) and Carrefour (France) have indicated their plans to enter India once Indian foreign investment regulations permit.

Food retailing in India Traditional local markets and small-scale retailing continue to dominate Indias food retail sector. There are an estimated 12 million retail outlets, of which almost seven million sell food and grocery products. The vast majority of these are small kiosks (17 per cent), general provision stores (14 per cent) and grocery stores (called kirana; 56 per cent of all rural retail outlets) run by a single trader and his family. With more than 71 per cent of the population living in small villages and engaged in agriculture, most of India still does its food shopping at small-scale vendors in the local village, or at larger-scale weekly markets often serving several villages in one area, where small individual vendors trade. In the towns and cities, most consumers do their food shopping at the local neighborhood independent small retailers, kiosks and street hawkers. Servants in high income households usually undertake this task. Most cities and towns also have one (or more) large central fresh produce market where wholesalers and retailers (plus some consumers) procure their supplies for the day from individual traders. The Food Corporation of India (FCI) has an extensive nationwide network of about 478,000 fair price shops and sells subsidized food grains and certain other staples, but since the retargeting of the Public Distribution System (PDS) in 1997 to focus on the poor, these are only available for those below the poverty line set by the government. There are also a few other chains of government-operated provisions stores, such as the Kendriya Bhandar (about 120 stores nationwide) run by the Ministry of Personnel, Grievances and Pensions, and the canteen stores (about 34 plus 3400 canteens) run by the Ministry of Defence, which are exclusively for Defence personnel. Thus the majority of food and beverage retailing in India is categorized as belonging to the unorganized sector. There is no firm data for the total value of Indias annual food and beverage expenditure, however there are various calculations and estimates, such as about US$90 billion by 2000 based on

the Indian governments estimates of average urban and rural household expenditure on food and beverages, and about US$135 billion by 2004 and growing at 4-5 per cent a year, based on industry estimates cited by the USDA. However it is commonly believed that less than one per cent of food and beverage retail sales take place through the organized retail sector, though this share is estimated to be growing rapidly. An early form of supermarket has been around in India for some time: the single-unit, smarter family owned grocery and provisions store, now calling itself a supermarket (while others may call it a super-kirana), of which there are at least five to 20 in each city. Another form is a specific food and grocery section contained in some department stores, such as the Sahkari Bhandar department store chain, which has about 16 stores in Mumbai. But it is only in the past decade or so that a form of supermarket akin to a Western-style supermarket, albeit on a smaller scale, has started to appear in India, mainly in certain cities of southern India plus in New Delhi and Mumbai. One of the pioneer supermarket chains was created in 1995 through a technical agreement (and from 1999 by a 51/49 joint venture) between Indias Calcuttabased RPG Group and the UKs Jardine Matheson Groups Hong Kong-based subsidiary Dairy Farm International. The joint venture converted the loss-making old Spencer department store chain owned by the RPG Group into the Food world supermarket chain, with about 94 stores in several southern cities, including Chennai, Bangalore, Hyderabad and Pune, by 2005. While Dairy Farm aims to continue expanding the Food world chain, the RPG Group decided in 2005 to sell its 51 per cent share in the Food world joint venture, though possibly retaining half the supermarkets rebranded as Spencers. RPG Group plans to focus on developing its other retail businesses including the Spencer hypermarket chain, which had three stores opened by 2005 (in Hyderabad, Visakhapatnam and

Mumbai), and a plan for 20 stores across India by 2007 in existing cities plus others such as Chennai, Bangalore, Delhi, Calcutta, Ahmadabad, and Chandigarh. Several other Indian-owned companies have developed chains of supermarkets, hypermarkets or convenience stores, mostly in major cities in the southern states plus in Mumbai and Hyderabad. Another pioneer, the Nilgiri supermarket chain, opened its first supermarket in Bangalore in 1971 and by 2005 had built a network of 30 stores, both company-owned and franchised, in the states of Tamil Nadu, Andhra Pradesh, Maharashtra and Karnataka. The Hyderabad-based Trinethra Group opened its first supermarket in 1986, expanded to 68 stores by 2004, then acquired the 12-store Fabmall chain in Bangalore, in partnership with a new 50 percent equity investor, Bangalore-based GW Capital, to enable further expansion into more states. Fabmall now has a total of 28 stores in Bangalore and Chennai. Other significant chains include the Subhiksha discount supermarket chain, with 72 stores in Tamil Nadu, and Pantaloon Groups 42 Food Bazaar supermarkets and Big Bazaar hypermarkets in major metropolitan centres. The Indian government has taken a cautious approach to allowing foreign direct investment (FDI) in food retailing (and retailing generally), with majority foreign ownership in food retail chains not allowed, and approvals generally given on a case-by-case basis. (In February 2006 the government made a small concession on FDI in retailing, by announcing that up to 51 per cent in retailing of single brand products would be allowed.) Since the joint venture of the RPG Group and Dairy Farm International was approved in 1999, only Germanys Metro Group (with two Metro Cash & Carry wholesale stores opened in Bangalore so far since 2002), and the South African-owned Shop rite Group in partnership with a local investor (with one Shop rite hypermarket opened in Mumbai in late 2004) have been permitted to set up operations. Local foodservice group Radhakrishna has also gained a license for food wholesaling in partnership with Frances Intermarch Group, whereby independent food retailers can sign up for use of the Spar store

brand. Several major multinational corporations, in particular Wal-Mart, have been lobbying the Indian government to allow majority foreign ownership in retailing. Wal-Mart has indicated that it would significantly increase its sourcing from Indian suppliers from its current level of US$1.5 billion a year (so far mainly non-food products, but likely to soon include some food products, such as basmati rice, tea, spices, seafood), if it were allowed to set up retailing operations. Major Indian retail groups, such as the RPG Group and the Pantaloon Group, have expressed their strong opposition to allowing more foreign direct investment into Indian retailing, especially majority foreign ownership. They argue that the sector is still at a very early stage of development and multinationals such as Wal-Mart would swamp local players, especially the kirana-wallahs. However the Indian government appears to be considering some degree of liberalisation, in the interests of improving efficiency in retailing and supply chains and so strengthening the integration of the Indian agrifood market, plus opening possible new avenues for Indian exports via multinational retailers.

Organized retailing in India

Australian presence in India food retail outlet

Nearly all the major retail outlets, such as Food World, Metro and Nilgiris, sell Australian food but none of them imports directly. There are a number of importers and consolidators based in India that import food products from Australia and distribute to various retail outlets. The Australian Food to Southern India partners are making significant progress in identifying potential retail partners for Australian exporters. The supply of grocery items destined for Indian retailers usually initially requires consolidation because of small volumes. Market entry best prospects Jams Pasta Sauces Biscuits Confectionary Bar syrups Honey Juices Wines Breakfast cereals Dietary foods Health supplements Canned seafood Tomato paste Ingredients for food service industry Canned fruit and vegetables Bakery ingredients bread improvers, multi-grain flour, essence, marzipan etc If market access is obtained, dairy butter oil, skimmed milk powder and specialty cheese Pulses mung beans, chickpeas, lentils and field peas Fresh fruits mainly apples and also pears, grapes, citrus and stone fruit

INTRODUCTION TO SUBHIKSHA
Founder Subramanian who did his B.Tech from IIT and PGDBM (MBA) from IIM, Ahmedabad has many first to his credit like starting asset securitization in early 90s, IPO financing in 94 and debentures trading. He has established Subhiksha departmental store at Tiruvanmiyoor, Chennai in March 1997. Entering the retail market ten years ago There was no great logic behind entering the retail market in 1997. They made a study of two areas: software and retail. Between software and retail, they thought they were a bit late for software as Satyam, Infosys, Wipro, TCS, etc had already established by then. They didnt want to be a small and late entrant. In retail, they would be one of the early entrants, so they would have the learning curve much to their advantage. They allocated a Rs 5 crore (Rs 50 million) corpus to it and entered the retail business. There was a lot of thought process behind it. They wanted to attract not the top end customer but the aam aadmi. From their research of three months, they found that consumers prefer buying groceries from closer home. So, they decided to set up 1,000 sq ft shops all across the city and not a 10,000 sq ft big store at one location in Chennai. The next question was why would he come to our store abandoning the existing store? It had to be the price, because ultimately there is no difference between the branded products like say Boost or Surf or such things. So, they decided to sell branded products at a lower price.

On starting Subhiksha They looked at all sorts of names; and finally they chose the Sanskrit word Subhiksha (prosperity) because it reflects the Indian ethos and it is a word that can be understood all over India. What they were trying to do was different from the western model; their model is truly Indian. Their theme was, why pay more when you can get it for less at Subhiksha?
In March, 1997, they opened their first store in Thiruvanmiyoor in Chennai with an investment of around Rs 4-5 lakh (Rs 400,000-500,000). They opened it with the clear idea that it is part of a larger system. They thought the day they opened, there would be a stampede because the prices were low and they would sell goods of Rs 30-40 lakh (Rs 34 million) by the month end. But there was nothing of that sort! They sold goods of only Rs 5-6 lakh (Rs 500,000-600,000) in the first month.

Consumers were very surprised, and they gingerly looked at the products and asked, are they seconds or old stock or defective products? In the first year, they opened ten stores in Chennai. They also started selling medicines at a discount. On the third day of their opening the pharmacy, there were about 100 people outside their store in the morning. They thought all of them were waiting to buy from their store. What they were expecting on day one happened on day three, they thought happily. But they soon found that people who standing outside were not there to buy anything; they were chemists from the neighborhood who had come to do a dharna (protest) saying Subhiksha could not sell medicines at a discount.

Finally they had to go to court, and it was only in 1999 that the Supreme Court gave a ruling that they could sell medicines at a discount. Subhiksha is doing quite well on the pharma front and they enjoyed all the attention they got. Another thing is the medicines that Subhiksha were selling at a discount were bought mainly by the elderly who have no fixed income and they welcomed any discount. Subhiksha people were quite happy to be able to help them in some way. Medicine retailing is more of a service than business for them. Of course, it is good business for Subhiksha too. But their main motto is service. Expansion plans By March 1999, Subhiksha started expanding rapidly. From 14 stores, they expanded to 50 stores by June 2000. In the next two years, they had 120-130 stores across Tamil Nadu. Another big thing was, in 2000, ICICI Venture invested in their company. Today, they have 145 stores all over Tamil Nadu. Subhiksha saw to it that the moment they got into a city, they started as many stores as possible there. Only that made business sense. Then, till 2004, they made sure that they consolidated before they expanded, though there was a lot of pressure on them to expand nationally. They decided to look at every part of India which is significantly literate and is a significant consumption market. Subhiksha wanted to be everywhere. They looked at the telecom companies as their role model because these companies employed capable regional managers and expanded. Subhiksha business is also extremely local. They can't sit in Chennai and run a store in Chandigarh. They decided to have very good quality people to run the region, area, town and the store. In 2004-05, they decided to have 420 stores in places like Gujarat, Delhi, Mumbai, Andhra and Karnataka by 2006-07. In 2005, they started recruiting people in various regions. Subhiksha is already India's largest retail chain store with 500plus stores. They plan to have 1,000-plus stores by the end of this year.

India is a large country and there are still opportunities to avail of. Though now, the thought of opening stores outside India is not tempting because there are enough opportunities in India. They may look at overseas markets too. Probably they open 2,000 or 2,500 or 3,000 stores in India.

BUSINESS MODEL
When the idea of launching Subhiksha in India was conceptualized, organized retail was non-existent in India. An external analysis was done in India through research which showed that for the average consumer grocery was the largest category for spending but it was extremely price sensitive and that the largest growing format was the discount stores model. Also, as compared to consumer shopping in the Western world, Indian consumers preferred shopping for grocery closer to their homes. R. Subramanian the Managing Director of Subhiksha Trading Services decided on the model which was to pioneer the discounted retail format in India a large number of small stores which offers easy accessibility & offers products at a discount. Focus on 2 factors for their business model (2Cs) Criticality of cost Convenience of buying What the company is looking for is to provide products at sustainable low prices right at the customers doorsteps. This model has been the key building block for the success of Subhiksha in making it the oldest discount chain in the country.

STRATEGIES ADOPTED:

Cut Price Strategy. Focused on Lower & Upper middle class Segment Wal-martstyle- everydaylowprice (510% less than MRP) Shops are located not on the main road. The catchment area of customers. Informed customers about promotional offers.

EXPANSION OR EXPLOSION-Stores tally: zero to 1,000 in 10yrs.

The first outlet in Chennai which opened in 1997 was opened by R Subramanian with a team of youngsters all of them had little or no retail experience, the retail business opened with an USP of low prices and with high neighborhood focus. By March 1999, there were 19 stores and Subhiksha started breaking even. More important fact was that volumes picked up and the consumers were responding to the format. The 50 shop level was reached in year 2000 and by now it was retailing groceries and medicines in a big way; this is when ICICI Ventures decided to pick up 10% stake in Subhiksha for Rs. 15 Crores and this gave the retailer enhanced readability in the market. This fund came in handy, Subhiksha decided to expand beyond Chennai into rest of Tamilnadu. Cash flows were now at reasonable levels and the net worth grew to Rs. 23 Crores. By 2004, Indias retail sector started seeing a high level of activity and Subhiksha decided to expand nationally and scale up at a rapid pace. The management faced a dilemma whether to expand sequentially i.e. one state at a time or parallel many states simultaneously, they selected the latter. On an average 60 to 70 stores were added in a month and the pace of the roll out was unimaginable. In September 2006 the store count was 160 but by March 2007 they were at 670 stores and by March 2008 they were at 1,320 stores and soon by September 2008 they touched 1,650. Scorching pace considering 1500 stores were added in just 24 months. R Subramanian, while speaking as the keynote speaker at an annual retail measurement conference4 organized by AC Nielsen in Mumbai (2004) said if possible, I would like to expand and have more outlets, as an analogy he quoted the Indian Postal Service who have Post Offices present in Urban & Rural India, he said Post Offices number more than 150,000 in India and they could be one of the benchmark for Subhiksha. Among the reasons he cited for slower expansion is the amount of litigations Subhiksha faced his discounting model had enraged the retail trade especially in Chennai and many cases were filed against Subhiksha and R. Subramanian in fact even some Government run institutions like the Tamilnadu Co-operative Milk Producers Federation Ltd had reportedly filed a case since Subhiksha used to sell their Aavin branded products like Ghee and Butter at 10% lower than the MRP (maximum retail prices) printed on the packs creating issues and lower sales in the Aavin outlets and with their other channel partners. One wondered if such expansion was well planned apart from the Corporate Strategy on funding, where they geared for managing other resources as well, they claimed to have a very good Operations team which looked at location and Store expansions and the eventual start up. But, retail is a service operations and is dependent on human resource, here too Subhiksha seems to have found the way out, walk in to some shops8 in Chennai showed that majority of the employees where women, in smaller shops 75% were women. As one store manager said women were preferred, they were sourced from the neighborhood wherever possible if not then from outside of Chennai, they are very hardworking (long hours) loyal (less attrition), honest with lots of integrity (less theft) and they are inexpensive (less pay - Rs. 3000 - per month onwards). Shopping experience showed that the Manager and the Staff Supervisors where the key persons, rest did

menial work and one could not get a standardized experience across the city shops. However, in spite of the shoddy staff and unhealthy stores appeal the friendliness towards the local shopper worked and employee management system seemed to be working. The offering focus was again on price and discount. The bill would show you what the actual price is (MRP) and how much less you paid for it (discounted price), this was a unique experience as till that time the local grocer always sold on MRP never on discount to MRP. The bill also showed separately the free items you would get with some products as a promotion at the store level or from the brand (company which sells this brand). In 2006, Reliance, Birlas and others announced plans to enter the retail market segment and cost pressures started creeping in, however business was growing at a fast and furious pace, Subhiksha between 2006-07 and 2007-08 doubled the number of outlets (670 to 1,320), tripled the revenues (Rs. 833 Crores to Rs. 2,305 Crores) and their profits quadrupled (from Rs. 11 Crores to Rs.39 Crores). It also achieved the unique distinction of being the largest mobile phone retailer with an annual turnover of Rs. 1,000 Crores. Institution and markets started noticing the Subhikshas golden run, at this time around March 2008 ICICI Ventures offloaded 10% of stake to Zash Investments Pvt. Ltd. owned by Wipro Chairman Azim Premji for Rs. 230 Crores. Clearly, Subhiksha had reached a high point in its history it also generated a lot of goodwill in trade due to this high level investment by Azim Premji and the valuation of the company was now pegged at Rs. 2,300 Crores. The company had been contemplating and postponing the initial public offer (IPO) since 2007. The Management went into a huddle again in 2008 and arrived at a decision that they will stick to debt and not dilute the stakes. Raise more debt for growth was the way forward. Meanwhile, the Indian stock market was booming and Subhiksha entered 200809 with a plan of investment of Rs. 1,000 Crores for taking the stores count from 1320 in March 2008 to 2,200 stores. It also decided to add a new vertical business that of consumer durables information technology (CDIT) products retailing.

Product Portfolios:
Supermarket: -Includes quality groceries, packaged foods, cosmetics and toiletries, household items, etc.

Fruits and Vegetables: -Includes fresh fruits and vegetables sourced directly from farms on city outskirts and made available to the consumers at best prices.

Pharmacy: -Subhiksha stores are generally equipped with a pharmacy that stores mostly basic medicines. All medicines are made available to consumers at a 10% discount.

Telecoms: -Subhiksha forayed into the mobile retailer business by 2007 and offers handsets, recharge cards and accessories from all leading cell phone manufacturers at lower prices.

The expansion:

In March 1997 - Opening of the first retail store in Chennai, with Rs 500,000 initial investment.

March 1999 -14 stores in Chennai June 2000 - 50 stores in Chennai, ICICI ventures joins Subhiksha June 2002 - 120 stores in whole of Tamil Nadu 2004 - Change in principle: from consolidation to expansion June 2006 - 420 Stores in other big states in India namely Gujarat, Delhi, Mumbai, Andhra Pradesh and Karnataka. Feb 2007 - 500 stores across country Dec 2007 - crosses 1000 stores across India October 2008 - 1600 stores across India

Table 1: Subhiksha Stores in India

Year 1997 1999 2000 2003 2007 March 2008 September 2008 No. of stores 0 19 50 140 670 1320 1650

FINANCIAL MANAGEMENT
The 2008-09 Business plan looked robust on paper, where was the investment needed being funded from? The, management decided to go for Rs. 400 Crores equity and Rs. 600 Crores debt. In June 2008 it announced a merger plan with Blue Green Construction Ltd a listed company on the Madras Stock Exchange who had some research background on the CDIT business. By this time the stock markets had started weakening and everyone assumed that the weak market will lower the Subhiksha valuation by only 10%. In the meanwhile, a bridge loan of Rs. 125 Crores was coming up for repayment in September 2008 and there was no sign of equity. The banks were a worried lot, they were finding it difficult to lend. At this point of time, things started going terribly wrong, just when some good offers were coming Subhikshas way in September 2008, India woke up to the news announcement of Lehman Brothers collapse and this started a domino effect, all around markets fell off, not only in USA but everywhere. Suddenly, Subhikshas management found that they could not borrow anymore; they just needed Rs. 125 Crores to prevent a collapse. An emergency meeting was called with the stakeholders between September and November 2008, they went on to meet four times in this period but liquidity was tight and investors could do nothing as markets had collapsed.

In the absence of funds but with unwarranted zeal to maintain the expansion plan the management diverted working capital to fund. Consequently, the vendor payments were defaulted, who in turn stopped supplies and the shelves started to run empty. At one point when the Security staff deserted their jobs, over 600 stores were vandalized in November - December 2008.

Bank HSBC ABN AMRO Centurian Bank of Punjab YES Bank Standard Chartered Bank HDFC Bank Development Credit Bank Federal Bank Bank Of Baroda ICICI Bank

Rs crores 85 50 40 50 25 65 25 50 75 155

ANALYSIS
The case analysis below is approached by using the following concepts in Strategic Management Business Strategy Corporate Strategy Growth Operation Strategy External Analysis Internal Analysis Corporate Governance Strategy

Business Strategy
Low cost middle class focused Business strategy of Subhiksha can be explained as follows Who are their target customers? Subhiksha was looking for the price sensitive Indian customers who wish to buy discounted fresh groceries and brand products. Which is predominantly middle class segment, buying often from the market rather than stocking as that allow improved cash flow for home budge. What need to satisfy of target customers? Consumer research by Subhiksha revealed that Indian consumers prefer to buy food fresh and thus want to buy it from a place close by to their home. After all that has also been idea that contributed to success of Kirana stores in India. Also their need is to maximize the utility of their home budget and hence buying the products at discounted prices without compromising on quality.

How to satisfy that need? Subhiksha decided to sell the branded and fast moving consumers goods at discounted prices through no-frills store. They decided to operate on low margins and believed that profitability could be achieved through operational efficiency and economies of scale.

CORPORATE STRATEGY
Everything seemed to be in place when R. Subramanian envisioned a discount store model in every nook and corner firstly at the state level then at the National level, the research supported his model and he had the first mover advantage at least in the discount format model. But if the only USP is discounts will it be a sustainable competitive edge. The Corporate Strategy of growth too was well executed and the business was generating cash and it was even turning out to be a profitable business, four things though that seemed to be lacking in the overall strategy formulation, were planning for: Growth - at what pace? Funding - to support this growth. Tackling a potential future downturn. Differentiated Experience

Subhikshas early success was due to its no frills model it had read the external environment very well and identified deep discount business model which appealed to the middle and lower income strata families which went for the convenience of the location and the price as after all it was mostly the groceries that they bought. It also seemed to have operated on a very low back end and corporate overhead costs. So long, as Subhiksha focused on its core competency and operated with in a small geography the model worked. It was not geared to handle a fast pace of expansion primarily due to increase in costs and availability of funding. The increase in stores and personnel were affecting the financial controls. A classic case of not doing Consolidation before Expansion sealed its fate. The management failed to capitalize on the good will it had generated in the market for funding expansion, since the strategy was for growth they should have seized the opportunity of going in for equity through initial public offer (IPO) and should have raised money from the market. They error of choice to stick to debt over equity was to prove costly in the end. Again, in the boom period of 2007 and 2008 by not raking in money through private placement or/and equity offer it lost out creating a fund buffer which would have allowed it to handle the downturn. Just by the having a discounted model all the time the business would not have sustained Subhiksha would have become a re-seller, it was also a matter of time when some competitor would have replicated the model in other part of the country the management should have after the initial run of success, like WalMart had done should have planned investments in strengthening the backend like the supply chain, distribution and replenishment logistics, building employee capabilities and of course doing some innovation to improve customer experience.

OPERATIONAL STRATEGIES OF SUBHIKSHA

Subhiksha has not positioned itself against established players like Nilgiris or Food World in retail marketing, who have set up air-conditioned outlets. Rather, it aims to make its aggressive pricing strategy its brand equity against the neighborhood grocery shops. Mr K. Balasubramanian, Manager, Subhiksha Trading Services (P) Ltd, Chennai, told Business Line , ``The company is emulating the worldwide trend of garnering the benefit of organized retailing by efficiencies and economy of scale, which in turn brings down the cost to the consumer.'' Apart from the entire range of branded grocery and cosmetic products, Subhiksha retails medicines at lower prices. In fact, this aggressive pricing of medicines drew strong protests from organized pharma traders. The company was forced to approach the Supreme Court to ensure that its rights were protected and is able to procure and sell medicines at discounted rates to ``Subhikshites''. Explaining how his company was able to sell at a substantial discount to the MRP in spite of its overheads and investment in technology, Mr Balasubramanian said this was possible because of cost-cutting and elimination of waste wherever possible. Besides, it was able to offer sizeable discounts due to its bulk-buying strategy. Subhiksha believed that low margins and high turnover was better than high margins and low turnover. Even top retailers such as Wal-Mart, Metro, Tesco and Carrefour believed that low unit margins (therefore, low unit prices to customers) and high turnover are the ways to succeed in a very competitive environment and Subhiksha was the relevant model in Indian context. Subhiksha efficiently operated on thin inventories and information technology. However, Subhiksha does not offer its customers the freedom to browse and shop like Nilgiris, Food World or Vitan retail chains. Because for buying cosmetics or

grocery, customers look for a quick purchase rather than the shopping pleasure. Therefore, Subhiksha does not view this as a handicap. Subhiksha positioned itself as a destination store for the ``value-conscious'' customer. ``It is a functional and transaction-oriented shop that has no room for unnecessary frills and ambiences,'' On the limited choice for buyers in any particular product range, the company stocked two-three most popular brands in each category as was common with international discounters. This anyway constituted about 95 per cent of sales even in stores stocking larger number of brands. The idea was to stock fast moving brands and not those that had limited appeal. This also helped the company manage an inventory logistics and supply chain as also in offering lower prices. The chain was ``sensitive to customers' needs'', constantly adding or removing products based on customer feedback. Inventory Subhiksha has a centralized purchasing system. This eliminates multiplicity of billings, which would occur if the stores were to make independent purchases. It buys directly from distributors who sell at only a small margin above the mill prices and from 150 odd manufacturing companies. Subhiksha has 3 separate god owns for stocking Pharmacy products, unbranded groceries and branded FMCGs. It has a fleet of 10 tempos, which supplies its stores once a day. As the discount format requires holding costs to be at a minimum all the stores are connected in an intranet to facilitate inventory planning. Subhiksha makes spot payments against delivery, which enables it to get cash discounts. The supplier helps in inventory control and in return gets an improved cash flow.

Customer Education Subhiksha helps the consumer make informed buying decisions. Smaller packs of products in established brands are usually less economical. However, promotional offers by leading brands usually price smaller packs at lower prices to induce buying. For example the gingerly oil brand Idhayam was priced at Rs 14 for a 200 ml pack which works out at Rs 70 per litre while the 500ml was priced at Rs 36 which works out at Rs 72 per litre. Here, Subhiksha would inform buyers to purchase multiple packs of smaller quantities to save money. On products like tea, which have a nil tax on small packs and an 8 % tax on larger packs, the customers are encouraged to buy multiple units of smaller packs, which help them save money. Thus, Subhiksha strategy of having low real estate costs, quick inventory turns and informed customer buying has helped its meteoric growth. Price Control Subhiksha takes extreme care while pricing the products through all its stores. It has employed software, which evaluates the price by minimizing profits. Every store is computerized and utilizes the software to determine the pricing. This helps in ensuring that the products are rationally priced. The success of Subhiksha indicates that the discount war will hot up in the coming months but it will be the customer who will emerge as the final winner. Subhiksha launches national campaign Discount retail chain Subhiksha has launched its first-ever national TV campaign following its recent expansion across the country. Launched in Hindi, the campaign depicts various shoppers looking for lower prices and opting to shop at Subhiksha, declaring that saving hard-earned money is "bachat mera adhikaar hai" (savings are my right).

The company is spending Rs15 crore on this campaign in the first 12 months. Other media it is using include print, outdoor and radio. The ad agency in charge of the campaign is Orchard, Bangalore. Subhiksha Food Card ICICI Bank and Subhiksha have launched a pre-paid food card to be used as an alternative to the cash and meal vouchers. "We are delighted to offer a solution that helps cut down the hassle of carrying cash," said Ms Shanta Vallury, Dy general manager, ICICI corporate payment solutions group. The pre-paid card, which is re-loaded on a monthly basis, will be accepted at all Subhiksha outlets throughout India and select restaurants. The card is first being launched in Delhi and would soon be available in Mumbai, Hyderabad, Bangalore and Ahmadabad.

KALEIDOSCOPE OF STRATEGIC MARKETING

Marketing has been defined as the management function responsible for identifying, anticipating and satisfying customer requirements profitably. Marketing is, therefore, both a philosophy and a set of techniques which address such matters as research, product design and development, pricing, packaging, sales and sales promotion, advertising, public relations, distribution and after-sales service. These activities define the broad scope of marketing and their balanced integration within a marketing plan is known as the marketing mix. A modification of a definition of marketing by Doyle (2000) suggests that marketing is the management process that seeks to maximize returns to shareholders by creating a competitive advantage in providing, communicating and delivering value to customers thereby developing a long-term relationship with them. This definition clearly defines the objectives of marketing and how its performance should be evaluated. The specific contribution of marketing in the organization lies in the formulation of strategies to choose the right customer, build relationships of trust with them and create a competitive advantage (Doyle 2000, p. 235). A marketing strategy consists of an internally integrated but externally focused set of choices about how the organization addresses its customers in the context of a competitive environment. A strategy has five elements: it deals with where the organization plans to be active; how it will get there; how it will succeed in the marketplace; what the speed and sequence of moves will be; and how the organization will obtain profits (Hambrick and Fredrickson 2001, p. 50). The organization must identify the problem that its customers use its products and services to solve. It is also necessary to identify the benefits customers seek from using a product or service available in the market. A market consists of all the

potential customers who share a particular need or want who might be willing and able to engage in exchange to satisfy that need or want. A marketing orientation helps to define the organizations business. Marketing is concerned with problem solving and customer benefits. The organization must be able to answer the following questions: What is the problem customers are trying to solve? What benefits do customers seek? How well does the organizations product solve this problem and provide these benefits? A statement that the organization is in the movie business is not very useful. An organization is not in the movie business because that says nothing about customer needs. Some movie organizations assumed they were in the movie business when the entertainment business left them behind! Marketing is a philosophy that encourages the organization to ensure that the needs and wants of customers in selected target markets are reflected in all its actions and activities while recognizing constraints imposed by society. This marketing concept first received formal recognition in 1952 by one of its leading exponents, the General Electric Organization the marketing concept: . . . Introduces the marketing man at the beginning rather than at the end of the production cycle and integrates marketing into each phase of business. . . . marketing establishes . . . for the engineer, the design and manufacturing man,

what the customer wants in a given product, what price he is willing to pay and where and when it will be wanted. Marketing will have authority in product planning, production scheduling and inventory control, as well as in sales distribution or servicing of the product (General Electric Organization, New York, 1952, Annual Report, p. 21). Three aspects of this statement are interesting: the customer orientation; the profit orientation; and the emphasis on integrated organization effort. These three aspects are fundamental to the adoption of the marketing concept. Marketing means, therefore, being oriented to the needs of customers rather than emphasizing what is convenient to produce. Effective marketing requires that the organization analyses the needs that its products are supposed to satisfy. Customers do not buy coffee; they buy a warm stimulating drink or a unique coffee experience if it is Starbucks. Likewise, customers do not buy sisal; they buy a material to make baling rope to tie things together or fiber to serve as backing for a floor covering. The organization should realize that many alternative products may satisfy the needs identified; there usually are many substitutes for coffee include tea, cocoa, alcohol or soft drinks and for sisal include polypropylene fiber or polythene sheeting. The real lesson of a marketing philosophy is that better performing organizations recognize the basic and enduring nature of the customer needs they are attempting to satisfy. It is the technology of want satisfaction which is transitory (Anderson

1982, p. 23). The products and services used to satisfy customer needs and wants change constantly. The adoption of a marketing philosophy confers specific authority and responsibility within the organization in regard to the provision, communication and delivery of customer value. Marketing is concerned with all parts of the organization; it is more than a set of tools, it is an orientation which pervades the thinking of the organization as a whole.

EXTERNAL ANALYSIS THE OFFERING

A services business cant last long if the offering itself is flawed. Managers have to focus on the experiences a customer wants to have. E.g. the customer attributed convenience, price and friendly neighborhood interaction as a Subhiksha offering and compared this closer proximity, lower prices favorably against any competition. The management must be very clear on which attribute the business wants to be in like in Wal Mart where ambience and sales help was least valued by its customers and low prices and wide selection were more valued. In Subhikshas case one wonders by extending the business lines to include mobile and other consumer durables information technology products (CDIT) products retailing that too in the smaller size of the stores they operate in would it have continued to keep its offering valued by customer intact in the future. Add fresh vegetables and medicines to the grocery verticals and one wonders, where is the focus? THE CUSTOMER MANAGEMENT SYSTEM As seen above in the Strategy part the focus was not on improving customer experience over a period of time instead keep them involved only on the price advantage which can be easily dislodged when a new more focused competitor or a local entrant comes into play. INTERNAL ANALYSIS FUNDING MECHANISM With a tangible product offering Subhikshas mechanism for superior performance was relatively simple the price tags. The products were offered at a discount and lapped up by customers. All agree that Subhikshas low-cost model was sound. Troubles started due to the rapid expansion with debt capital to open 800 stores in a year. Although the same store sales were as high. The industry average for stores of 2,000 sq. ft (Subhikshas typical store size) to break even is Rs 5,000 per sq. ft6, and several people now say that Subhikshas new stores never achieved break-even levels. It is put natural that very few stores would have been profitable in terms of cash flows.

EMPLOYEE MANAGEMENT SYSTEM Employee self sacrifice is rarely a self sustainable resource, and the system at Subhiksha could have been designed to allow an average employee to thrive. They did see the simple reality that employees who are above average in both attitude and aptitude are expensive to employ a simple diagnostic tool could have given the directions like what will make the employees reasonably able to achieve excellence and then what makes the employee reasonably motivated to achieve excellence. In the long run Subhiksha would have faced the economic reality of flawed service from employees. The fast paced growth and increase in stores at Subhiksha led to rapid increase in personnel and they should have put an Employee Management System in place. Was the employee geared to handle the diversity of business the Management growth strategy envisaged? There is no direct reference in the case but the employee factor has a direct impact on the business efficiency quotient in retail. CORPORATE GOVERNANCE ISSUE Business decisions of reckless expansions across disconnected geographies required a reckless increase in debt these decisions seems to have got the nod from the Board. The ambitious growth strategy grew on the promoters and other investors and the focus seems to have shifted from delivering value to customers to creating valuation for self. Cash flow mismanagement which ultimately led to the downfall showed lack of implementation of management control systems. Market seems to be getting now on now off signal for the Initial Public Offering (IPO) for the equity, transparency was lacking. Also, absence of audits and non availability of the financial statements, a lot of things could be guess work or estimation. For a business which was generating approx. Rs. 200 Crores in revenue per month (2007-2008 Revenue Rs. 2,300 Crores) why did it not service even Rs. 125 Crores bridge loan? It appears that there was severe cash mismanagement. Subhiksha made the hugely erroneous decision of funding expansion by diverting the working capital, which then leads to the boomerang effect of vendors not supplying goods stores running dry.

AN OVERVIEW OF MARKETING STRATEGIES IN RETAIL OUTLETS

Marketing strategies outline exactly how marketing objectives will be achieved. For example, if the marketing objective is to increase market share, the marketing strategy states exactly how the market share increase will occur. A marketing strategy is a way to give marketing orientation to a business by deciding to position a product or service in terms of buyer needs and wants. Inexperienced business people often make decisions based on what they like or want, leaving the customer out of the picture. A marketing orientation brings the customer into the center of the picture. The marketing objectives for profits, cash flow and market share can be achieved by increasing the number of users, increasing the rate of purchase, retaining existing customers or acquiring new customers.

Location
Competition, to most Indians, is good thing. It leads to better products and services at lower cost. It can inspire a retail manager to do a better job. However, numerous and/or aggressive competitors in a limited geographical area are costly to the retailer. Too many similar stores serving too few customers cause the sales volume of each store to suffer. For some type stores, however, the best strategy can be to locate as close as possible to the competition. Competing stores located in the same area may in crease customer traffic. Some cities, for example, have an area with many antique shops. Customers are drawn to the area because of this convenience, and each stores traffic helps the other stores. Retailers should not afraid of competition, but their mission statement should guide the finding of market where there is an unfilled demand for the type of store create shopping areas where customers can find everything they need in a single area.

The location strategy can be examined by mapping retailers according to the amount of traffic at location (pedestrian and/ or vehicular) and the retailers drawing power. The pedestrian or vehicular traffic is usually fixed at the location unless the retailer has the ability to draw customer to the area just because that is where the store is located. Drawing power represents the natural ability of the store to encourage customers to travel farther to shop there. Merchandise Planning the merchandising mix is one of the most important aspects of store operations. The merchandise mix represents the full range of products the retailer offers to potential customers. The merchandise a retailer carries defines the store for the customer. Marketing the store as brand is another effective means of competitive differentiation based on merchandise rather than price appeal. This approach is heavily employed in United Kingdom and to a growing extent in the United States and other countries. One manner in which retailers examine their merchandising strategy is by using an assortment/variety graph. Variety refers to the number of different types or classes of products that a retailer carries. Retailer such as Target carries a large variety of merchandise, but a relatively small assortment. The assortment refers to the depth of a product line, or how many different styles and brands a retailer carries in each product line. Stores often have to make the choice to carry either a large assortment or a large variety. Attempting to carry both would increase inventory costs to the point of being competitive. Price One way to examine the relative strategic positioning of a store is to plot your own retailer against competitors on a margin/turnover graph. To a large extent, these two variables will define not only the success or failure of the retailer but also how that retailer is perceived by the public. As per the graph, it is difficult, if not impossible, to maintain both high margins and high turnover. As retailers increase their process in an attempt to improve margins,

customers start seeking competitors from which to purchase goods. In this instance, competition will quickly drive such a retailer out of business. Likewise, it is also impossible to maintain low margins and low turnover. In this instance, the retailers will not make enough money to survive. This leaves the retailer a choice of either a low margin-high turnover or a high margin-low turnover strategy. Discount stores depend partly on lower prices (and thus lower margins) to achieve the high rates of turnover that they need to be profitable. Where as specialty stores depend on higher prices to make up lower turnover. While turnover and margins are good way to examine a relative pricing strategy, this classification is insufficient by itself. Some Retailers found that high margins were insufficient to make up for lower turnover. Others have run into the opposite problem-that of having a high turnover during sales at less than needed margins. During the mid-1980s Sears found it was having problems selling merchandise at full price. Most merchandise was being sold at the reduced margins as customers learned to expect periodic sales. Instead of paying full price, customers waited for the sale and bought merchandise at discount. This led to a customer image that was consistent with Sears strategy. Service Each store owner-manager must determine the level of service that is appropriate for the store. This includes both the quality of services provided by the sales people and the quantity of associated services provided by the stores, such as gift wrapping and mailing. It should be recognized that high levels of service increase cost, and unless increase in sales follow, it may be necessary to raise prices. Retailer must examine the character of the business to identify the features that can be best exploited to create a compelling point of differential from competition. In every type of retail business there are features and variables that, while shared by competitors, can be manipulated in a manner to establish a special character for a retailer over the competition. For example, all retailers provide service of some sort, but service can take many forms. If service is to be employed as a

positive differentiator, the key is to understand what particular aspect of service is most appropriate for the type of merchandise being sold and is most important to the shoppers being targeted. While basic services are necessary for a retailer, many firms, such as Walmart and other discounters, have tried to minimize their cost. Other retailers have built a strategic advantage around the idea of providing better quality service than their competitors. Communications Each retailer should have an overall strategy to reach potential consumers. One manner in which this strategy can be examined is in the context of the objectives of the promotional mix. There are four strategic dimensions that can be examined in the communication policy: Reach represents the number of people who will see a promotion or advertisement at least once, where as frequency is the average number of times that customer sees the advertisements. Most retailers use newspapers to communicate with the potential consumers. However, with the advent of inexpensive cable television, more retailers are depending on higher levels of frequency with less reach, to target a specific consumer group. The content of advertisement can be described as either image-or information-oriented. Many larger retailers use national television ads to promote the image of their stores. However most, retail ads tend to be oriented toward providing the consumer with store, product, and price information. Each newspaper carries a great deal of this type of ads. These ads tend to inform the consumer of the products being carried by the store and the price of the products. Achieving strategic positioning Retailers depend up on the operations management, purchasing/logistics, market research, financing, and technology to achieve their strategic positioning. These variable acts as the tactics to achieve a given strategy. Their functions must be performed on a daily basis, often without the customers direct involvement, to ensure success.

Operations The manager must pay the attention to the day to day requirements of running a retail outlet. Included in operations are staffing maintenance, and general management of the store. While each store should have a grand plan or strategy to compete, the daily operations will determine the success or ability to achieve a given strategy. The managers must ensure that the staff provides services consistent with the retail strategy and that the store appearance is maintained to provide an appealing atmosphere. Purchasing/Logistics Retailers are using purchasing and logistics as a competitive advantage. Integrated into the distribution system is the retail buyer. This person is responsible not only to maintain stock level in the store but also to ensure that the goods are those that the consumer wants. Stores are defined by the products that they choose to stock. Logistics planning is also becoming more a competitive weapon. For example, firms such as Wal-Mart use cross-docking, and The limited has reduced turnaround times because of its efficient distribution system. These and other firms have learned to substantially reduce costs or increase service to the customer by better controlling the distribution channels of their goods. While these options have traditionally been reserved for only the largest retailers, new technologies in distribution are allowing even the retailers who maintain more traditional distribution channels may find themselves left behind. Market Research In order to satisfy a customer and have store, as discussed later in the chapter, the retailer must be touch with consumer expectations, desires, needs, wants, and behavior. This is often accomplished through a formal market research program. Store managers should always keep in mind that their tastes and preferences do not represent those of the consumers. Too much inventory has been bought with the attitude of I like it instead of the consumer wants this. market research is also necessary to continually adjust to changing consumer trends.

Financing The financial performance of a retailer is often viewed as an end retail result, instead of a planning function. However, store managers need to realize that financial planning is an imperative for success. This is often a weak area for store managers. For example, many small retailers are financed with short-term debt that causes problems as it comes due. Often, little attention is paid to the return on debt and equity. By planning for the future, retailers ensure that they have the capital to be successful. Technology The use of technology has become so pervasive in retailing that it is often considered a strategic decision. In smaller stores technology is used as a support function for other functional areas of business. In retail chains and franchises, technology is often the centerpiece of the system. It allows corporate and store managers to interact on an efficient basis. Technology not only provides store managers with information but also reduces inventory losses and reduces costs.

The crash:
December 2007 keeping in view of the uncertain stock market condition, Subhiksha shelves much needed IPO. April 2008 Subhiksha plans private wholesale markets. Aimed to expand to 2300 outlets across India by September 2009. June 2008 Subhiksha searches for alternate routes to generate cash so as to fund expansion. September 2008 breakouts of news on Subhiksha not long delays in vendor payments and employee salaries. October 2008 newspapers state problems in cash flow. Vendors cutting supplies causes stores to go dry. Employees shouting for obtaining salaries. Subhiksha defaults on rent for the stores. January 2009 CEO admits Subhiksha needs Rs. 3 billion just to stay afloat. Subhiksha tries negotiations with property owners on dues and rentals.

The Positioning:
Subhiksha made an extensive research on customer behavior and found that offering branded goods at a

lower price than their competitors could make them stand in the competitive retail industry.

Low Prices: Subhiksha made extensive research on customer behavior and found that offering branded goods at a price lower than their competitors could make them stand on firm ground.

Trust: Subhikshas name inspires trust and its consumers rely on it through all times to deliver larger savings as compared to any other retail chain or stand alone mom and pop stores.

Savings: It focuses on the concept of constant low pricing so that regular customers see the same low prices all year round(below MRP) and are able to buy with the assurance that they stand to save on any commodity on any given day.

Competitive Analysis:
Subhiksha earlier was a regional player which was situated mostly in the southern India but later on with the growth in the company, it started spreading at a national level to many cities all over India.

Competitors at the National level for Subhiksha.

S.No 1 2 3 4

Brand Name
Spencers Reliance Fresh Food Baazar More

Outlet type
Supermarkets Supermarket Supermarkets Supermarkets

Level of operation
National National National National

Ownership RPGroup Reliance Group Future Group Aditya Birla

Competitors at the Regional level for Subhiksha. Dfi Group

1 2 3 4 5 6

Food world Nilgiris Trinethra Fabmall Spar Adanis

Supermarkets Supermarkets Supermarkets Supermarkets Supermarkets Supermarkets

South India South India South India Tamil Nadu Mumbai Western India Nilgiris Franchisee Pvt Ltd Fab mall India Ltd

The Trinetra Group

Spar India Ltd Adani Group

Competitive Analysis:
Key Elements Subhiksha Neighborhood stores Pantaloo ns Food Bazaar No 15 km in radius Grocery Perishabl es RPG Spencer Super stores No NA Reliance Fresh Stores Yes Trinetra /More

Connivance Store Location Product Range

yes 2 km in radius Grocery, Perishables , Pharma Mobiles 5 10% low than MRP Discount store No touch n feel offered

yes 1 km in radius

Yes

Grocery Perishables

Grocery Perishables Apparels

Grocery Perishable s

Grocery Perishables

Prices

MRP

Less then MRP Discount /value store Touch n feel offered Low price and best quality Ok Strong financial support, huge assortme nt

MRP

MRP

MRP

Positioning

Pop n mom Store No touch n feel offered

Quality store Touch n feel offered

Quality

Convenient

Store Format

Touch n feel offered Fresh Quality at reasonabl e prices Poor Strong financial support, fresh stock added

Touch n feel offered

Brand Image

Low Pricing

Trust & Relationship

Quality

Convenient store

Quality Strengths

Poor Everyday low prices 365 days

Poor Customer relationship & credit provided

Good Strong financial support, huge assortment

Ok Local presence

SWOT analysis of Subhiksha: Strengths

-Combination of Discount and Carpet Bombing model -Strong experienced Top management -High Customer base -High Brand Value

Weakness
-Lack of expertise in Indian Retail environment -Low grade lower management team -Strategy of debt-led Rapid expansion on a small equity base -Long time taken in IT Implementation -No funds for operating expenses

Opportunities
-World's most lucrative retail market -Heavy Investment industry from FIIs (foreign institutional investors) and Venture Funds -Huge no. of customers

Threats
-Economic uncertainty and Recession -Strong Competitors at National and Regional Level -Price war and shrinking margins -Risk in Retailing and rapid expansion

Galloping on the back of rapid expansion, Subhikshas turnover grew from Rs. 3.3billion in 2005-06 to Rs. 8.33 billion in 2006-07, and then by 2007-08 to Rs. 23 billion. Likewise, having grown from 150 stores in September 2006 to 1600 plus stores in September 2008, Subhiksha managed to become the envy of its competitors. By the end of 2008, they hoped of grossing Rs. 43 billion from 2300 stores, in turnover. Intriguingly, all growth was fuelled from a small net worth base of Rs 2.5 billion having equity component of Rs. 1.8 billion.

What They Did Right

Subhiksha pioneered the concept of no-frills, deep discount stores in India. When all his counter parts began embracing shoppertainment by providing enviable ambience to the customers, Mr. R Subramanian dared to think different. He concluded through his market research that food and grocery purchase is not a shopping experience that a prospective customer will look forward. Rather, it is a routine purchase where customers would look for proximity, lower costs and quality than a posh ambience. Subhiksha launched non-AC stores when that was a stigma in organized retailing in the country. They were the groundbreakers in the Indian Organized Retail, who decided to tap the bottom of the pyramid by offering products at prices lower than the market price. They reached at lower prices than the competitors by pruning luxuries like air conditioning from the store. These benefits were rendered to the customers in the form of better savings The savings on each purchases were printed on the bill, thus making the customers aware of the benefits of shopping at Subhiksha Mr. R Subramanian also decided to limit his stores sizes to around 1500 sq.ft. as the catchment area for no food and grocery store in India exceeded 5 kilometres. He clearly understood that what India needs is not one stop shopping destinations, but small sized stores nearer to the customers.

Subhiksha integrated their supply chain by sourcing their products directly from the manufacturers, thus eliminating the commission to intermediaries. They also used to pay for the sourcing in cash in order to avail cash discounts. Subhiksha also challenged the touch and feel factor when everyone else was shouting for experiential marketing. Mr. R Subramanian says touch and feel is an abuse word in food and grocery retailing. Resultantly, none of the Subhiksha outlets provided the luxury of touch and feel to its customers. While the customers placed their order through display terminals, delivery was wholly over the counter.

Reasons for failure of Subhiksha:

The management had committed certain mistakes which has led the company towards a downward position. The biggest mistake by the management was expanding the number of stores rapidly without having sufficient funds in hand: They thought of raising equity during September 2008 but things had gone too far. Global markets were reported collapsing and no possible chances of raising funds remained. By October 2008, the company ran out of enough funds to run the organization. Since then, Subhiksha has been continuously troubled by a set of problems from all sides. Poor financial management: Subhiksha Trading Services has come under fire from television channels for not clearing advertising dues that run around Rs 80 Million. Subhiksha is believed to owe Rs 350 million against goods, Rs 180 million against wages, and Rs 200 million against lease rents. According to the reports, Subhiksha is also carrying a debt of Rs 70 Billion at an average interest cost of 12 per cent per annum. Uncontrolled increase in no. of stores and personnel were bleeding their treasury. Subhiksha worked on very slim & zero margins. Thus cash flows were high where as inflows in terms of margins were non-existent. Expansion of Stores without adequate system control and IT Support: On auditing, huge gaps were revealed financially as proper documentation was not performed. They started implementation of SAP, but it was too late by then. Government Intervention: Maharashtra Food and Drug Authority had asked Subhiksha to suspend operations of its warehouses at Mumbai for 20 days as well as had cancelled licenses of three of its vendors, stating that they had failed to maintain health and hygiene norms as prescribed by regulations. Supplier Bargaining Power: Many wholesale suppliers in Azadpur vegetables market have stopped supplying fruits and vegetables to Subhikshas outlets in the national capital region (New Delhi). This was due to the company holding up payments for two to six months against the normal credit period of one month. Lack of strong HR policy and Staff : Subhiksha was not able to retain the talent which was initially brought into Junior, Middle and High level management. It was like a family bound with no commitment. Locals were recruited as the personnel for operations of each store. There were tendency towards dishonest practices in face of turnover pressure. Quality of store service was poor. Adherence to rules of retail was minimal. Huge Rental and Lease Bills: They were paying huge rentals for some stores, which was a huge drain on the company's finances. Frauds were committed while entering into rental agreements by their own management people. There were no

procedures to check and control on this cost. Rents play a crucial part in defeating competitors and gaining profitability in future. This, coupled with almost expected other issues, drove the operational costs to unsustainable levels. Wrong assumption that telecom segment would be a safe and profit bearing segment. The CEO never looked in to system losses that arose from telecom. Subhiksha stores always sell handsets below DP while its benchmarking is to match DP. There was no control on inventory of mobile accessories and stock value and finally ended up unable to circulate the working capital. Poor inventory management: Shelves at Subhiksha stores were usually empty. Stock-outs in the store led to loss of business for the retail giant. Lack of communication (delay in implementation of SAP) between the storage facilities of Subhiksha and their outlets proved to be costly. Customer dissatisfaction was the overall result. Strong Competition: Thus sinking, Subhiksha had to compete with its high profile competitors like RPG, Reliance retail, Future group etc. Reliance Retail has set up 700 odd stores by 2008 almost at the rate of one store per day. Future Group has begun opening a new no-frills discount retail chain called KBs Fair Price Stores, a format similar in concept to Subhiksha stores. Reliance Fresh on the other hand is high-end in terms of display, ambience and size. Over confidence and Aggressiveness: The once titan company thus began collapsing slowly. The management admits that their over-confidence and aggressiveness are the main reasons for their loss. They now regret not going for an IPO when the things were well and good to prevent such a downfall. In a rush to build turnovers and meet targets, lower level managers resorted to reselling products to retailers and emptying their inventories. In effect, target pressures impacted the unique selling proposition since consumers chose to buy from other stores since the Subhiksha was sold out. Poor supply chain management: Downstream supply chain of Subhiksha was not integrated. Subhiksha acted as a re-seller at times by buying products from other vendors and selling them at almost zero margins. Subhiksha tried to increase scale on bulk quantity purchases from vendors and a very liberal credit term handed to them. Subhiksha delayed most of their payments to vendors and this resulted in vendors moving back from further business with them.

Subhiksha financed most of their operations and expansion plans through secured or unsecured debt from banks. They were considering raising capital through equity route however stock market started falling globally after collapse of Lehmann Brothers and they are left with no option to go through this route. A certain amount of debt is good when a company is making above average returns, however a company losing money in operations and expansions will bleed with high debt financing. This is what happened in case of Subhiksha. Subhiksha did the worst mistake of financing their expansion plans through working capital. A company cannot sustain operations without working capital. As the company grows it often requires larger working capital, however Subhiksha did exact opposite. Their working capital was financing their expansion, hence was getting reduced as the operations grew which left the company with no money. The desire for expansion was so overpowering Subhikshas management that they ignored the need to strengthen supply chain, distribution and replenishment logistics.

They got caught up in issues that come with scale. This led to the empty shelf in stores and dissatisfied consumers. There were also indications from ICICI ventures in their one of the filings to the court regarding the lapses in corporate governance on the part of founder of Subhiksha and Managing director R. Subramanian Economic environment in 2008-2009 also contributed to the downfall of Subhiksha. Due to financial companies going bankrupt and steep downward slides in stock market, investors grew very cautious in taking investing decisions and ran to safety avenues. This closed the Subhikshas options to raise further debt or equity to fund its operations. Agitated unpaid employees, unpaid vendors and cash losing investors lost their trust in the organizations capabilities which led no support from them.
Unmindful Expansion Across states from South to West and North and East Rapid store expansion Rapid increase of personnel From groceries and medicines Mobiles and Electronics Consumer durables and IT. Huge investments and cash flows. Growth ... without Consolidation 2004 marked a departure in Subhiksha philosophy from Consolidation & Growth to uncontrolled growth! Very few stores would have been profitable in terms of cash flows with Retail management. The focus was towards multiplying turnovers! Expansions happened without an eye to principles in Retail and Customer Management Staff service was shoddy and stores lacked a healthy appeal to Consumers A Subhiksha store often looked like a Government uniform Pricing Store! Profit and Loss? Balance Sheets? Cash Flows! Uncontrolled increase in store and personnel were bleeding the Treasury Turnover being the mantra, Subhiksha worked on slim and zero margins, Often invoking the wrath of other players in the market Thus Cash outflows were high where as inflows in terms of margins were non existent Mastering the Supply Chain A Wal Mart builds scale through integrated Supply chain, not by being a re-seller! Downstream supply chain was not integrated. Bulk buying is not a source of advantage. In effect, Subhiksha was being a reseller buying products from vendors and selling them at zero margins. Managing Vendors! Subhiksha tried to build scale on bulk Quantity purchases from vendors and a liberal credit term extended to them Your vendors only have a limited leash...expecting huge credit cycles to make up for your RoIs is hardly good vendor management

Lessons learnt
Subhiksha story highlights the perils of growth at any cost and challenges of scaling a business something which todays startups will face tomorrow. Never overlook the fundamentals of running a business while easy money is flowing in. Healthy management of cash-flow is key in deciding the fate of an enterprise. Every retail giant faces some common problems while their empire is in the process of ever-expansion. High level of growth means a store is opened every other day at least. Often it can be seen that wrong locations might be selected. Expensive leases may be agreed upon and poorly trained staff might be employed. These can prove to be a massive headache for the organization. Monetary greed should never be the motivation behind a project/business. Striving to reach the pinnacle/the number one position is an admirable trait, but it should not be with an at any cost attitude. Implementation of proper HR policies is required for retaining and motivating existing employees. Training costs and inadequately working employees may prove costly in terms of money and might even tarnish the reputation of the enterprise. Inexperienced lower management will affect the smooth functioning of any business. Any business would require the proper documentation of all processes and performance. Therefore all businesses should be backed by a sound and welldefined IT structure. Finance should be managed with utmost care. Operational expenses must be considered before indulging into costly advertisements and expansion projects. Strategy of debt-led rapid expansion is not advised Foraying into new ventures requires thorough research and analysis of that particular venture and its possible outcomes. Overconfidence and over-aggressiveness will result in the downfall of a business. Strategic planning plays a pivotal role in the sustenance of any establishment. Never go in to expansion without safeguarding the principles in retail and customer management. Multiplying turnovers should not be the only goal in mind.

Possible solutions
MONETARY CONTROL - Instead of huge advertisements, Subhiksha should have concentrated on quality control, improvement of their outlet conditions and their infrastructure. They targeted customers in the immediate vicinity of their outlets; therefore the advertisements did not exactly serve the purpose they were supposed to. Early implementation of IT would have helped in the organized running of the business. Introducing effective measures for tracking employee activities and having stringent rules and regulations within the corporation would have helped them. PULLING THE BREAKS - Subhiksha should have slowed down their expansion process and concentrated more on the smooth working of the retail empire. Huge investments and cash flows were involved and Subhiksha did not have the right expertise to cope with it. WHERE NEXT - Should have done more research on the places they opted for opening their outlets. Most of the outlets turned out to be quite costly and Subhiksha ended up in huge debt due to rent payment issues with landlords. Only few stores would have been profitable in terms of cash flows. CONSOLIDATE Subhiksha was doing very well until the global recession crisis. But recession was never the fault for their collapse. They should have consolidated their business before dwelling on expansion. GOVERNMENT HELP The business model of Subhiksha is infact quite effective and they do have a large number of loyal customers. The government could help by providing financial assistance for Subhikshas running which inturn is going to benefit the common man of India. IMPROVING RETAIL AND CUSTOMER MANAGEMENT Subhiksha should introduce healthy shop appeal to customers. This would help them compete against their rivals in the retail market. FRANCHISING OF OUTLETS Most of the 1600 odd stores could be given out on franchisee basis. This would help them in raising some funds. Subhiksha had a very good opportunity to raise money from Indian stock market by offering an IPO in 2007 and early 2008 . This would have allowed them to capitalize on the goodwill created by investment of AzimPremji in their business. However, they kept postponing the plans as the founder and director Mr. R. Subramanian was not willing to dilute the company stake. They kept financing through secured and unsecured loans which they could not service when they were cash strapped. Subhiksha should have secured sufficient funds through both equity and debt financing

moderately balancing their risk before going after expansion plans. Investors interest in the company and growing Indian economy had allowed them to have both. Subhiksha went for an aggressive expansion strategy in later 2006. However, they ignored the strengthening of their supply chain, replenishment logistics and distribution when they started expansion. That should have been planned along with their expansion strategy. These operations designed to run with small number of stores were not able to fund the suddenly increasing number of stores doubling tripling within months. The stores started having empty shelves; operations lost the track of the goods movement and left customers dissatisfied. Working capital required to run operations should have not been used to fund Subhikshas expansion plans. Expansion should have been delayed or slowed down the moment company started facing issues with funds. A proper monitoring system/process should have been in place that would have alerted them about draining working capital.

Conclusion
Subhiksha operated for around 10 years; first 7.5 years growing moderately and last 2.5 years expanding at very aggressive pace. Even though starting in nascent Indian organized retail sector they could not enjoy the benefits for long. Failure of the company can mostly be attributed to their own mistakes and to some extent the coinciding of their expansion plans with global economic downturn. Subhiksha, unlike many other enterprises, did not mitigate their risk by maintaining appropriate debt and equity exposure for financing and could not service its mounting debts. They lost the trust of their employees who were not paid for over 4 months and had their provident fund payments also pending. They lost their vendors by defaulting on their payments. They lost the trust of investors and credibility in the market. Though the company did not declare bankruptcy, its surrounded by the lawsuits filed, in different courts of India, with closed operations since 2009. Having lost all the trust, business support system and left with a trashed brand, R. Subramanian can do nothing to revive it.

Bibliography
Notes Lily Fang & Roger Leeds, Case Studies: ICICI Ventures and Subhiksha: page 1http://www.insead.edu/facultyresearch/faculty/personal/lfang/cv/documents/Subhiks ha.pdf NoeimieBisserbe, The Strategist, Business World magazines, http://www.businessworld.in/index.php/Telecom/The-Strategist.html C.P. Chandrasekhar &JayatiGhosh, The Hindu Business Line news paper, May 01, 2007http://www.thehindubusinessline.com/2007/05/01/stories/2007050100040900.ht m N. Madhavan, Business Today magazines, http://businesstoday.intoday.in/bt/story/4268/1/pushing-the-acceleratorinstead-of-brakes.html, 13 June 2009 Kapil Bajaj, Riding on Retail, Business Today magazines, http://businesstoday.intoday.in/bt/story/riding-onretail.html/1/491.html 10 September 2007 Mail Today Bureau, Subhiksha faces nationwide attacks, http://businesstoday.intoday.in/content_mail.php?option=com_content&name =print&id=10086 RasulBailay, Dead end for Subhikshas debt restructuring plan http://www.livemint.com/2009/09/02212305/Dead-end-for-Subhiksha8217s.html

References Lily Fang & Roger Leeds, Case Studies: ICICI Ventures and Subhiksha: page 1http://www.insead.edu/facultyresearch/faculty/personal/lfang/cv/documents/Subhiksha.pdf NoeimieBisserbe, The Strategist, Business World magazines, http://www.businessworld.in/index.php/Telecom/The-Strategist.html Success story of Subhiksha, India's largest retail chain, Rediff Articles, 05 February, 2007 http://www.rediff.com/cms/print.jsp?docpath=//money/2007/feb/05bspec.htm N. Madhavan, Business Today magazines, 13 June 2009, http://businesstoday.intoday.in/bt/story/4268/1/pushing-the-accelerator-instead-ofbrakes.html TanviVarma, Purveyor of retail prosperity, 03 February 2009, http://businesstoday.intoday.in/bt/story/7943/1/purveyor-of-retail-prosperity.html Chandra Ranganathan, ET Bureau, Banks may give Subhiksha a helping hand, 31 March 2009http://economictimes.indiatimes.com/news/news-by-industry/services/retailing/banksmay-give-subhiksha-a-helping-hand/articleshow/4340903.cms Chandra Ranganathan, ET Bureau, ICICI Venture hints at corp governance lapses by Subhiksha MD, 13 March 09 http://economictimes.indiatimes.com/news/news-by-industry/services/retailing/icici-venturehints-at-corp-governance-lapses-by-subhiksha-md/articleshow/4257902.cms Mail Today Bureau, Subhiksha faces nationwide attacks, http://businesstoday.intoday.in/content_mail.php?option=com_content&name=print &id=10086 RasulBailay, Dead end for Subhikshas debt restructuring plan http://www.livemint.com/2009/09/02212305/Dead-end-for-Subhiksha8217s.html Subhiksha's Story Underlines Retail Challenge, Business Monitor International, 09 Feb 2009 http://store.businessmonitor.com/article/233418