Case Study:Subhiksha Retail

(2009)

Group 1
Manish Singhal
Mridul Gautaum
Sakshi Sharma
Chowkhun
Background of Case Study
In the year 1997, Subhiksha opened its first store at
Thiruvanmiyoor in Chennai with an investment of around
Rs 4-5 lakh, with the theme, why pay more when you
can get it for less at Subhiksha
By March 1999, Subhiksha started expanding rapidly.
From 14 stores, it was expanded to 50 stores by June
2000.
In the next two years, it had 120-130 stores across Tamil
Nadu.
In 2004-05, they decided to have 420 stores in places
like Gujarat, Delhi, Mumbai, Andhra and Karnataka by
2006.
In2005, Subhiksha started recruiting people in various
regions. Subhiksha is currently operating over 1,500
supermarket stores across more than 100cities selling
food, grocery, drugs, and telecom products across INDIA
Background of Case Study
Cut price strategy:
Opening a chain of no-frills stores-no air-conditioning, no
fancy lighting, and no touch-and-feel experience was a
deliberate strategy.
Shops are located not on the main road, but just off it, to
take advantage of vastly lower rentals.
Until little over two years ago, Subhiksha was only a
local player with 150 stores(September 2006) operating
mainly in Tamilnadu.
The retailer began growing rapidly outside the state,
soon after infusion of private equity capital by I-venture,
the venture capital arm of ICICI. I-Venture took 24 per
cent stake in the companys equity, which until then was
primarily held by Subramanian and his associates.
Background of Case Study
Riding on the back of rapid expansion, Subhikshas
turnover grew from Rs 330 crore in2005-06 to Rs 833
crore in 2006-07, and then to Rs 2,305 crore in 2007-08
(year ending March 31, 2008).
Likewise, having grown from 150 stores in September,
2006 in Tamilnadu to 1,600-odd stores across the
country in September, 2008, Subhiksha hasbeen the
envy of its competitors.
By the end of 2008, it was looking at grossing a turnover
of Rs 4,300 crores from 2,300 stores. Interestingly, all
the growth was, however, fuelled from a small net worth
base of Rs 250 crore having equity component of Rs 180
crore (face value of Rs 32 crore).
Background of Case Study
"Besides business expansion brings its own complexities
and they needed a robust platform to streamline our
operations and control.
"Furthermore, the company needed a solution to
manage the payroll system. Although it didn't have any
HR issues at the ground level, sending the payroll to
employees on time was getting difficult. The system
worked manually, with a central team taking care of
running 2-3 payroll systems in a month depending on
the availability of the bandwidth and the entire process.
Keen to avoid further problems, the company decided to
invest in a more effective ERP solution and zeroed in on
the SAP All-In-One solution in July 2007.
Background of Case Study
Inventory management is austere, too.
All goods are bought on cash to extract the maximum
discount from suppliers; SKUs (stock keeping units, or
the number of items on display) are restricted to the
fastest moving ones of about 1,500.
A supply chain software, developed in-house, keeps
track of what's selling and what isn't.
Management is divided into two simple sections:
operations, which is centralized and looks after
everything from ordering to accounting, and stores,
which is responsible for all store-level activity.
There's one manager for every three stores, and he
reports to a chief manager responsible for business
development, who in turn reports to a vice president.
The VPs are responsible for sales targets.
Delay in implementation of SAP causing the empty
Downturn of Subhiksha
In the month (October, 2008) the company ran out of enough
funds to run the organization .Thereafter, Subhiksha has been
continuously besieged by a set of problems from all sides:
1. Subhiksha Trading Services has come under fire from television
channels for not clearing advertising dues that run around Rs 8
crore.
2. Subhiksha is believed to owe Rs 35 crore against goods, Rs 18
crore against wages, and Rs 20 crore against lease rents. The
company, according to the report, is also carrying a debt of Rs
700 crore at an average interest cost of 12 per cent per
annum.
3. Expansion of Stores without adequate system control and IT
Support. Thats why there was a huge Audit and abnormal
losses in the system. And when they have started implement
ion of SAP the time has gone for survival of Subhiksha.
4.Maharashtra FDA, the state governments regulatory authority
for food and drugs, had asked Subhiksha to suspend operations
of its warehouses at Bhiwandi (Mumbai) for 20 days as well as
Downturn of Subhiksha
5.Many wholesale suppliers in Azadpur subzi mandi, or
vegetables market, have stopped supplying fruits and
vegetables to Subhikshas outlets in the National Capital
Region (NCR) surrounding the national capital. This comes in
the wake of the company holding up payments for two to six
months against normal credit period of one month.
6. Lack of strong Hr policy and Staff--- Due to this Shubiksha was
not able to retain the talent which he initially bring into Junior,
Middle and high level management. Whatever was remaining
with it is all family bound with no commitment policy.
7. They were paying huge rentals for these stores, which was a
huge drain on the company's finances. There are huge frauds
while entering in to rental agreements by their own
management people. There was no proper check and control
on this cost though this is a very crucial part to defeat
competitors and to gain profitability in future. This, coupled
with less than-expected footfalls, drove the operational costs to
unsustainable levels
Additional Information
Charts
Stores Revenue
1800 5000

1600 4500

1400 4000

1200 3500

1000 3000
Stores Revenue
2500
800

2000
600

1500
400
1000
200
500
0
0
2005 2006 2007 2008 39845
 Case Analysis
Revenue growth rate in the year 2008
is 87% Facts
Rate of expansion in terms of
opening of store 06-08 is 1433%
Debt of Rs 700 crore (High)
Equity Rs180 crore
High debt/equity ratio
Assumptions
Profit margin on product
around 12%
Operational profit of retail
business is around 10%
Investment in opening of
one store is Rs 10-12
lakhs, net capital used
approx Rs 300 crore
Chart
Chart Title
350

300 300
investment made in
250 H stores
U Porfit 4%
200 G Profit 2%
172
E
150 Profit 1%
G
Proft 0.5%
100 90 A
86
P
50 43
30 33.32 21.5
13.2 16.66
8.33
0 6.6
3.3
1.65 4.17
99-06 2007 2008
Analysis of Chart
Rapid Expansion caused:
Usage of debt quickly with in a span of an
year (investment)
Lowering of overall profit margin.
Increase in operational cost
Not enough working capital
Cash flow Imbalance
Case Analysis
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
Case Analysis
External Analysis
The Offering A services business cant last long if the
offering itself is flawed.
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.

Internal Analysis
Funding Mechanism
Employee Management System
Case Analysis
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,
but 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.
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
Case Analysis
The key piece is that the balance sheet didn't keep pace
with the growth. The business is a low-margin business.
Subhiksha was focusing on making sure that they drive
the economies of scale, they build scale and they sort of
get to a size that puts them as the largest retailer in
both supermarkets and mobiles, which they did.
Subhiksha was pretty thinly capitalised. They used to be
very light on assets, so they didn't need that much
capital.
Unfortunately, they built it with Rs 250 crore of equity
and Rs 700 crore of debt. But as the debt market started
weakening in the first part of this fiscal, banks refused to
lend further till subhikhisa beefed up his equity.
They were on the verge of searching for equity and then
the Lehman and the financial tsunami happened. Equity
went for a toss, and so did debt and liquidity completely
Case Analysis
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.
Absence of audits and non availability of the financial
statements, a lot of things could be guess work or
estimation.
THANK YOU