Subhiksha Retail Chain 2

Subhiksha Retail Chain

In 2004, R. Subramanian, Managing Director of Subhiksha, a discount retail

chain, addressed a group of management students who wanted to learn from his
miracle grocery-pharmaceuticals store that changed the face of discount retailing
in South India. Growing from a single outlet in Thiruvanmyur, Chennai, to the
largest chain of supermarkets and pharmacies with a turnover of Rs. 235 crore
and 164 outlets had not been an easy task—given the controversy about MRP
and consumer prejudices against discount stores and not to mention the
onslaught of big real estate businesses getting into retail.

The branding strategy for this retail store was low-cost and no-frills, i.e., a reliable
and trustworthy store that has the lowest prices. The image of the store as
communicated through various media was that of one who cared for its
customers and ensured the best deals and savings. However, there was more to
Subhiksha’s strategy than low prices. It focused on building long-term
relationships with its customers by giving them a lifetime of value and savings.
The ability to do this stemmed from its relentless focus on value delivery rather
than transactional relationships.

I. RETAILING IN INDIA

Retail was one of the few industries in India that had seen enough action in just
the last five years. The others were IT, IT enabled and BPO industries. But the
surprising thing was that retailing was even today striving for an industry status.
The early players in the retail industry, for example, Raymond's, Indian Coffee
House, Akbarally’s and Bata, were limited to a few locations and regarded
retailing as an activity than an industry. Today retail was an industry, with players
talking of ROI, employee management and IPO’s.
Subhiksha Retail Chain 3

In India, the retail sector was the second largest employer after agriculture. The
retailing sector in India was highly fragmented and predominantly consisted of
small, independent, owner-managed shops. The total retail trade in India was
Rs. 11 lakh crore or $ 240 billion. Of this, organized retailing accounted for
Rs. 14,000 crore, which was poised to grow at 35% per annum in the next five
years. Food and grocery retailing accounted for 55% of all retail activity.

There had been a boom in retail trade in India owing to a gradual increase in the
disposable incomes of the middle class households. More and more players
were coming into retail business to introduce new formats like malls,
supermarkets, discount stores, department stores and traditional looks of
bookstores, chemist shops, and furnishing stores.

Retailers were adding new stores on a regular basis. There were over 13 million
retail outlets in this country. Indian retailing industry was estimated to be $ 286
billion in 2004 and only about 1.6% share of this market was as organized sector
(ICICI property services retail report, 2004). Organized sector was expected to
grow to almost Rs. 30,000 crore by 2005 representing 6% of total retail market
and top six cities will account for 66% of total organized retailing (KSA
Technopak, 2000). Based on GDP growth rate of 6-7% per annum, retail industry
expected to be $ 300 billion by the year 2010 (CII-McKinsey Report). In
comparison with other Asian economies, India was far behind in the organized
retailing sector. In Thailand more than 40% of all consumer goods were sold
through organized format. Similar phenomenon was seen in other Asian
countries. (Exhibits 1 and 2)

Organized retailing got a boost during 2004 with the opening of new format
stores, rapid growth of existing players, start of new-generation shopping malls,
the government's intention of allowing a certain level of foreign direct investment
in retail and the formation of a retailers' association. With consumer sentiment
being positive during most of 2004, it led to substantial spending across a
Subhiksha Retail Chain 4

number of categories such as consumer durables, clothing and lifestyle,

automobiles and telecom products.

According to Subramanian, 2004 had been a good year not so much in what
happened for retail but more of the visibility and profile that it achieved and also
in setting the expectations of fast growth. Also, the automobile boom was
welcome, because the ability and willingness of people to travel was what made
retail boom in many countries.

However, on the flip side, practically no progress was achieved in getting industry
status for retail. Contrary to some expectations, availability of additional, quality
retail space did not improve; the rentals actually hardened. This could act as
somewhat of a dampener in the growth of organized retailing. Also, it was
expected that the real estate supply would exceed demand in 2004. Therefore,
the retailers expected retail spaces at good prices, but this did not happen as
only 20 malls became operational in 2004, and costs did not fall a great deal.
Also retailing was seen to have a long gestation of two to three years, especially
with the high real estate costs and big malls. Hence it was an investment heavy
industry.

However, 1998 was a year of inception of organized retailing in India with

Shopper’s Stop opening its first outlet in Mumbai. But it was 2004 when retail
began to scale up and got its fair share of attention. With the economy growing
and with some of the metros growing at a decent clip, one could expect more
growth in the near future.

In conclusion, India Incorporated had some advantages. It had a fast growing

Indian middle class with more than ever disposable income. There was a positive
economic outlook, and foreign exchange reserves were at an all time high. India
was positioned as service provider in IT/ITES sector. These factors could be of
help in taking the Indian retail scene forward.
Subhiksha Retail Chain 5

Competition

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

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

K Raheja’s department store chain, Shoppers Stop, was the second largest
retailer in the country and became in retailing operation an Indian success story.
It also acquired the Crossword chain of bookstores.

Kishore Biyani of Pantaloons launched his new-format shopping mall called

Central Trent and opened the first Star India Bazaar.

New generation shopping malls, such as InOrbit in Mumbai and Forum in

Bangalore, opened their doors.

The year also saw a rapid scaling up of operations by players such as Pantaloon,
Big Bazaar, Shoppers Stop, Lifestyle, Westside and RPG's Spencer's.

Subhiksha Supermarkets

Subhiksha was immensely popular in the South, particularly in Chennai, where it

sold groceries and pharmaceutical products below the MRP. It expected to earn
a total turnover of Rs 1,200 crore in 2008-09 as it planned to expand outside
Tamil Nadu and Pondicherry. It planned for 550 stores in the next five years.
Subhiksha Retail Chain 6

Started in 1997, Subhiksha Trading Services (meaning prosperous in Sanskrit)

was a supermarket and pharmacy chain, the brainchild of R. Subramanian, a
graduate from IIT and IIM, Ahmedabad. Beginning its journey at Thiruvanmyur,
this retail chain now had 49 branches across different parts of Chennai.
Subhiksha was supported by an asset management company called Venture
Capital Partnership Fund, which belonged to the Vishwapriya Group, specialists
in financial services.

Subhiksha sold all its products all the time below MRP. It eliminated the margins
in the traditional supply chain consisting of the manufacturer-wholesaler/dealer-
retailer network. Bulk purchases directly from manufacturers or stockists qualified
for deep discounts. Quick inventory turns also improved the cash flow and
reduced operating costs. Subhiksha made spot payments against delivery to get
cash discounts. The supplier helped in inventory control and in return got an
improved cash flow.

Subhiksha helped consumers make informed buying decisions. Smaller packs of

products of established brands were usually less economical. However,
promotional offers by leading brands usually priced smaller packs at lower prices
to induce buying greater quantities. For example, the oil brand Idhayam was
priced at Rs 14 for a 200 ml pack which worked out at Rs 70 per litre while the
500 ml was priced at Rs 36 which worked out at Rs 72 per litre. Here, Subhiksha
informed buyers to purchase multiple packs of smaller quantities to save money.
On products like tea, which had no tax on small packs and an 8% tax on larger
packs, the customers were encouraged to buy multiple units of smaller packs to
save money.

Subramanian said:

Everyone is looking to get a better quality of life, so the consumer is spending less on
daily necessities and more on products or services. And the money for the durables and
mobile phones will have to come from somewhere—and it is coming from the budgets for
everyday products. So it would all come down to how the consumer chooses to prioritize
Subhiksha Retail Chain 7

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

Subhiksha had a centralized purchasing system to eliminate multiplicity of

billings, which would occur if the stores were to make independent purchases. It
bought directly from distributors who sold at only a small margin above the mill
prices and from around 150 manufacturing companies.

Subhiksha had three separate godowns for stocking pharmacy products,

unbranded groceries and branded FMCGs. It had 10 tempos to supply its stores
once a day. As the discount format required holding costs to the minimum, all the
stores were connected in an Intranet to facilitate inventory planning.

Subhiksha’s retailing format was the outcome of a survey which revealed:

• Customers generally looked for accessibility of the store, availability and

quality of groceries, and price of branded groceries.

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

• Customers did not place any premium on shopping in posh air-conditioner

set-ups.

Chennai and its Shoppers

Tamil Nadu constituted the south-eastern extremity of the Indian peninsula.

Chennai, the capital of the state, had a population of 42,12,618. The district city
was one of the metropolises of India and served as the gateway of the culture of
South India.

The Chennai buyer had been exposed to the most varied and modern retail
experiences. Chennai had discount stores, lifestyle stores, Food World-type
Subhiksha Retail Chain 8

stores, Saravana Bhavan restaurant chains, etc. This raised the buyers’
expectations and contributed to their differentiating ability. The traditional image
of the Chennai buyer that they were very conservative and they took time to
change was debunked. Across income segments, all customers looked for a
value proposition and were willing to try anything that met their requirement.

II. SUBHIKSHA’S BRANDS VERSUS THEIR COMPETITORS

Private labels and home grown brands in the organized grocery and FMCG
retailing segment were beginning to pose a major threat to the brands of
established players like HLL, Nestle and Tata Tea. Private labels now had a
more level playing field in distribution. The margins of these private brands were
believed to be higher because manufacturing of these products was outsourced.

Subhiksha had a very clear strategy regarding private labels and competitors.
While 35% of the company’s sales came from parent labels of rice, dhal, etc.
Subramanian felt that private labels made sense only when the rate of customer
acquisition slowed down or when there were no established brands in a category.

The company had its own brands, but only in staples and other agri-commodities
where there were no national brands. For instance, Subhiksha had withdrawn its
atta and basmati rice brands once national brands were launched in this
category. "It's not that we are philosophically against private labels. It's just that
they don't fit into the scheme of things at present, but may come in at a future
date," Subramanian said.

Merchandise Mix

Subhiksha had a wide range of products in its store—rice, dhal, sugar, oil, butter,
toiletries (like Lifebuoy, Tide, Surf, Colgate, etc.), jam, sauce, tea, coffee and
cosmetics (like Ponds Dream Flower). (Exhibit 3)
Subhiksha Retail Chain 9

Buying Procedure

The customer chose products from the display on the PC and paid at the cash
counter against a composite bill, which did not contain item details. The stocking
department processed the order, keyed in the details, and a shop assistant
collected the items and delivered it at the delivery counter. The detailed bill was
printed only if the data entered by the stocking department matched the
composite bill. The bill also showed the market rates and the savings made.

Subhiksha’s strategy did not allow the customers the pleasure of feeling the
goods before purchasing as in supermarkets. But Subramanian argued that
Subhiksha did not sell fashion, it sold food and grocery items which did not
require touch and feel by the customer. The closest that the store got to touch-
and-feel was a store in Tambaram, where there were wall to wall displays of
samples of the products sold in the store.

III. BRAND ANALYSIS

Brand Image and Identity

The brand image that Subhiksha aimed at portraying was of a trustworthy,

reliable store that cared for the customer and ensured the best deals or lowest
prices for them. It aimed at being perceived as a trusted source of household
needs, easily accessible and one that offered great prices and savings.

Brand Positioning

Discount retail chains like Subhiksha needed to position themselves against the
neighbourhood stores, which were their major competition. The latter offered
personalized service and had small scale operations. However, they were not
technology savvy and did not have economies of scale. They were seen as
profiteers rather than relationship builders. The unique position of Subhiksha
stemmed from the relentless focus on value delivery.
Subhiksha Retail Chain 10

Brand Strategy

By opting for smaller outlets, Subhiksha increased its presence. The aim was
that no one should be further than 2 km away from a Subhiksha outlet. The target
obviously was the masses. To succeed, the discount chain needed to integrate
backwards into the supply chain, cut out middlemen and offer better prices to
consumers. Organized discount retailing was still relatively unexploited in India,
and Subhiksha was cashing in on this opportunity.

Subhiksha worked on the premise that it would do business with the customer for
the next 30-40 years. Therefore, the focus was on building a lifetime relationship
with the customer than merely a transactional one. In this respect, the company
attempted to know the customers—where they lived and what exactly their needs
were.

Branding through Advertising

Subhiksha had initially used only print advertisements and mailers to promote its
services. It began advertising on television before the Diwali firecracker sale and
also to position itself as a retail store brand which gave a value offering to
customers that contributed to better savings and hence an improved lifestyle.
The creative of the Subhiksha TVC pointed out:

In Tamil Nadu, the reach of Tamil TV channels is phenomenal. And the response is
immediate. Stories are told of how a TV commercial today translates into queues of
customers the next morning. This turned out to be the case with Subhiksha as well. A
promotion for their firecrackers during Diwali resulted in such crowds that they ran out of
stocks well before the day. This success made them bring out a commercial on their
grocery store as well.

Colour coding was used in the TVC. The housewife’s clothes reflected the brand
colours, and the brand logo was shown prominently. As regards the branding
strategy of the commercial, the brand promised “Subhikshamana vazhvukku,”
meaning a prosperous life. The problem the agency faced with the brand image
Subhiksha Retail Chain 11

was that Subhiksha was viewed as just a discount store. This in turn meant that it
was regarded as not really “up there” with the big stores. People could dismiss it
as a place where you saved just a few paise. The strategy was to convert these
savings into something much more. The route taken was to talk about how small
amounts saved today could mean a better life tomorrow. All the ten rupee
savings taken together would enable the housewife to indulge her husband with
a new watch, her father-in-law with his supari, her son with a computer! This
value addition made the discount concept more palatable, transforming it into a
quest for a better life.

Brand Perception

One hundred respondents from Chennai were administered a questionnaire that

tested their perception of Subhiksha, their preferences during supermarket
shopping, their priorities regarding ambience, savings and so on. The results of
the survey could help determine the strategy that Subhiksha could follow to
remain the undisputed leader of retailing.

The results showed that there was a perception among over 50% of the
customers that the quality of the stock at Subhiksha was not up to the mark.
Two-thirds of the respondents considered price to be an important choice driver
for retail stores. (Exhibits 4a and 4b)

Over one-third did not have a favourable opinion of quality of Subhiksha. It was
perceived as a down-market store (Exhibit 4c). This was a phenomenon
particularly in higher income groups.

Other observations were that customers found the lack of product display a
disadvantage but they were willing to travel ten minutes to reach a Subhiksha
store. People who visited Subhiksha also visit corner stores and Food World.
Basic expectations like quality and availability figured high in the list of priorities.
Little or no importance was given to peripherals like friendly assistants and
Subhiksha Retail Chain 12

ambience. They found the communication that the idea of saving hard earned
money relevant.

IV. WHAT’S IN STORE FOR SUBHIKSHA?

Chennai was rightly called the incubator of retail development in the country. In
these competition days, pricing below the MRP was an essential tactic. Discount
stores were an essential element of organized retailing. They offered price,
assortment and quality besides building scale quickly and passing on benefits.
Value retailing became the new mantra.

Retailers no longer needed to focus on packaging, air conditioning and music.

They now needed to offer competitive prices that attracted customers. Michael
Fernandes, McKinsey’s associate principal, put it: "Discount retailing has the
potential to be a really big category, since Indians are price sensitive customers."

Subhiksha was talking to venture capital funds and also looking for private equity
participation. “This will be our second round of funding, and we are talking to
several VC funds and also our existing investor—ICICI Ventures. We will be
looking at Rs. 55 crore of equity being raised, Rs. 55 crore of debt and Rs.30
crore of working capital,” Subramanian said.

Subhiksha, which had got almost 150 retail outlets in Tamil Nadu and
Pondicherry would open its first store outside the state in Delhi and Bangalore in
April 2004. Subramanian said:

We are looking at a hub and spoke model wherein retail stores will be set up around the
distribution centres. So there will be a distribution centre in each of the four cities. The
company also plans to increase the number of its warehouses from the present two in
Tamil Nadu to 15 across all the states where the outlets will be opened. Subhiksha is
also increasing its focus on milk and bulk packaged water while considering entry into the
fruits and vegetables segment.
Subhiksha Retail Chain 13

The supermarket concept was fast catching on in the country. Each was trying its
best to provide that much more of ambience or discounts. Tough times were
ahead for the neighbourhood kirana shop.

Subhiksha, which gave customers discount up to 17% on MRP, had a good

reason to be upbeat. A recent study by ORG indicated that retail branding was
going to be increasingly popular in the South in the years to come because of
ambience, good stock and efficient billing systems.

The supermarkets that were coming up in India needed to compete with each
other and offer better and cheaper services. Subhiksha, by the sheer size of its
purchases, managed to get good terms from the manufacturers which it then
passed on to its customers.

Subhiksha's aggressive marketing strategy caught everyone by surprise. It was

like a typical Indian grocery shop. The goods were all behind counters, but an
exhaustive menu was offered to the buyer to pick from.

Even though its outlets had facilities for direct purchase, the shop was pushing its
tele-ordering network heavily. The customers got bills with calculations on how
much they have saved by going to Subhiksha. With the supermarket revolution in
India kicking in, one thing was for sure—Subhiksha, a brand with an unbeatable
value offering for the customer, would certainly not be left behind.
 Subhiksha Retail Chain 14

EXHIBIT1: From CII–Mckinsey Report on Retailing in India

Year 2004 Year 2010

Description US$ (in Bn) Description US$ (in Bn)
Total Retail Market 286 Total Retail Market 453
Organized Retail 3.31 Organized Retail 11.5

Aggregate Retail (USD) - CAGR -8%

380.23

269.86
$ Billion

180.6
127.06
76.85

1992 1997 2002 2007 2012

Subhiksha Retail Chain 15

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

Asia

Country Total % of organized

market sector

Taiwan $40 Bn 81

Malaysia $20 Bn 45

Thailand $32 Bn 40

Indonesia $75 Bn 30

China $325 Bn 15

India $180 Bn 2

EXHIBIT 3 - Comparative Price Chart

Product Subhiksha MRP

Rs Rs
5 kg Ponni rice (I quality) 102 119.50

5 kg Ponni rice (II) 90 100

Toor Daal 1 kg 36.95 42.50

Urad Daal 1 kg 27.85 32.25

Sugar 1 kg 15.15 17

Moong daal 1 kg 32.50 37.50

Subhiksha Retail Chain 16

Surf Excel Blue 1.5 kg 91.65 135.00

Tide 1 kg 43 46

Aavin butter 500 g 61 65

Amul table butter 100 g 12.50 13

Ponds Dreamflower 100 g 25.50 28

Lifebuoy Gold 100 g 11.75 12.50

Whisper Maxi 10s 54.95 60

Colgate Dental Cream 200 g 58.95 65

Kissan Mixed Fruit Jam 200g 24.50 26

Kissan Tomato Sauce 200 g 23.50 25

Horlicks 500 g 91.30 99

Three Roses Dust Tea 500 g 90 100

Goldwinner 1 litre 55 64

Idhayam Gingelly Oil 1 kg 97.50 101

Green Label Coffee 500 g 65.95 69

Subhiksha Retail Chain 17

Britannia Marie Godl 400 g 20.95 24

Britannia Orange Cream 100 g 9.95 11

Five Star Chocolate 120 g 36.10 38

Dairy Milk 43 g 15.20 16

Top Ramen Noodles 400 g 32.95 36

This is merely a representative sample. Several other brands in each category are
available. There is a column at the end of the bill saying: `Your savings' which gives the
total difference between Subhiksha prices and the MRP on purchases that day.
Subhiksha Retail Chain 18

EXHIBIT 4a: Importance Given to Low Prices

Importance - Low Prices

40
35
30
25
Percent

20
15
10
5
0
Not at all Least Important Very Most
important Important Important Important

EXHIBIT 4b: Perception of Stock Quality at Subhiksha

Perception of Stock Quality

35

30

25
Percent

20

15

10

0
Very Poor Poor Satisfactory Good Very Good
Subhiksha Retail Chain 19

EXHIBIT 4c: Mhi and Perception of Quality of Stock

MHI vs Perception of Quality

100%

80%
Percentage

60%

40%

20%

0%
<10000 10k - 20k 20k-30k >30k
Monthly Househols Income

Very Poor Poor Satisfactory Good Very Good

Subhiksha Retail Chain 20

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

WEBLIOGRAPHY
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www.chennaibest.com
www.chennai.tn.nic.in
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www.retailyatra.com
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