RESEARCH PROJECT

ON

SUBHIKSHA FAILURE

BY:-YOGESH VASKAR
POURNIMA.SHETT
Y
 ACKNOWLEDGMENT

I express my sincere gratitude and thanks to my project guide Ms Farah Hassan for guiding us
throughtout the project with great patience and care.
INDEX

INTRODUCTION

FACT SHEET

OBJECTIVE OF THE STUDY

EXPANSION OR EXPLOSION

FINANCIAL MANAGEMENT

ANALYSIS

CORPORATE STRATEGY

EXTERNAL ANLYSIS

INTERNAL ANALYSIS

CONCLUSION
INTRODUCTION
Subhiksha was dubbed as a retail chain trying to be an India’s Wal-Mart with over 1600 stores
selling groceries, fruits and vegetables, medicines and even mobile phones. It was started and
managed by Mr. R Subramaniam. It opened its first store in Thiruvanmiyur in Chennai in March,
1997 with an investment of about Rs. 5lakhs. The retail chain saw a considerable growth by
offering goods at cheaper rates and thereby increasing its customer base. It was also dubbed as
India's largest retail chain with a vision to deliver consistently better value to Indian consumers,
this vision guided Subhiksha to deliver savings to all consumers on each and every item that they
need in their daily lives, through-out the year, without any compromise on quality of goods
purchased, later with funding from ICICI Ventures, Azim Premji through Zash Investments Pvt.
Ltd. & Debt from 10 Banks and an impressive list of external directors on its Board like S. B.
Mathur, Kannan Srinivasan, ICICI’s Ventures CEO Renuka Ramnath & MD Rajeev Bakshi and
eminent marketing strategist and expert in consumer behavior Rama Bijapurkar, the Subhiksha
juggernaut seemed to be on a roll.

As of January 2009, this multi-location, professionally managed and vibrant organization has
been facing severe financial crises pertaining to liquidity. In February 2009 various media
announced that Subhiksha had collapsed and this change in fortune has led to the shutting down
of a large number of stores across the nation and is facing a bleak future unless it gets the
corporate debt restructuring process started in its favor.

FACT SHEET

Year of Founding: 1997

Business: Discounted Retail
Funding: R. Subramanian, ICICI Ventures, Consortium of banks (debt) table 23
Employees: 14,000 (by end of 2008)
Revenue: Rs. 2,305 Crores (2007-08)

OBJECTIVES OF THE STUDY

1. To examines the reason for failure of Subhiksha.

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 (2C’s)

1. Criticality of cost

2. Convenience of buying

What the company is looking for is to provide products at sustainable low prices right at the
customer’s 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-mart‐style- everyday‐low‐price (5‐10% 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 Venture’s 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, India’s 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 Supervisor’s 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, Birla’s 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
Subhiksha’s 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 2008-09 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.

The expansion:

Mar 1997:- Opening of the first retail store in Chennai, with 5 lacs Initial investment.
Mar1999:‐ 14 stores in Chennai
June 2000:‐ 50 stores in Chennai&I CICI venture joins
June 2002:‐ 120 stores in whole of Tamil Nadu
June 2006:‐ 420 Stores in Gujarat, Delhi, Mumbai, Andhra Pradesh and Karnataka
Feb 2007:‐ 500 stores across country
Dec 2007:‐ 1000 stores across India
Oct 2008:‐ 1600 stores across India

Table 1: Subhiksha Stores in India

Year No of stores
1997 0
1999 19
2000 50
2003 140
2007 670
Mar 2008 1320
 Sep 2008 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 Subhiksha’s 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, Subhiksha’s 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 Rs crores
HSBC 85
ABN AMRO 50
Centurian bank of Punjab 40
YES Bank 50
Standard Chartered Bank 25
HDFC Bank 65
Development Credit Bank 25
Federal Bank 50
Bank Of Baroda 75
ICICI Bank 155
160

ANALYSIS

The case analysis below is approached by using the following concepts in Strategic
Management

1) Corporate Strategy – Growth

2) External Analysis
3) Internal Analysis
4) Corporate Governance Strategy

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:

1) Growth - at what pace?

2) Funding - to support this growth.
3) Tackling a potential future downturn.
4) Differentiated Experience

Subhiksha’s 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 Wal-Mart 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.

EXTERNAL ANALYSIS

THE OFFERING

A services business can’t 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
Subhiksha’s case one wonders by extending the business line’s 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 Subhiksha’s 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 Subhiksha’s 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 (Subhiksha’s typical store size) to break even is Rs
5,000 per sq. ft6, and several people now say that Subhiksha’s 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.
CONCLUSION

Subhiksha expanded too rapidly on a small equity base of Rs 250 crore and grew the business,
primarily through debt, to a level of 1,600 stores and 15,000 employees, and Rs 2,300 crore in
sales by March 2008.Expanding rapidly without sufficient funds in hand was the reason for the
failure of subhiksha.