BSM0054

Rise and Fall of Subhiksha

At current property prices, you cant exist in the modern retail business1 Kishore Biyani, MD, Pantaloons Retail We expanded without the expertise or supply chain. But costs are now getting realistic so dont be in a hurry to write us off...2 Ramaswamy Subramanian, Founder and MD, Subhiksha Trading Services

By the end of 2008, Subhiksha, one of the most popular retail brands of India,3 was on the verge of bankruptcy. Ramaswamy Subramanian (Subramanian), CEO of Subhiksha and the most written-about Indian CEO4 , was looking for means of reviving the retail chain. Subhiksha landed in trouble, after failing to pay its employees, suppliers and landlords for many months in 2008. Adding to its woes, its biggest investors, I-venture (Venture Capital arm of ICICI, Indias largest private bank) and Zash Investment (Azim Premjis investment company Zash Investment Pvt. Ltd., has invested INR 230 crore in Subhiksha to acquire 10% stake from I-Ventures 33% pie) did not extend any help to the ailing discount store chain. The condition of the company was well-manifested by the pillage of around 600 Subhiksha stores in February 2009, as security personnel did not attend duties due to lack of payment.5 The perpetrators could be, Subramanian told, disgruntled vendors, employees or anti-social elements taking advantage of the situation.6 Crumbled by the credit crunch, Subhikshas operations came to a standstill with bare shelves and closed shops. With one of the renowned retail pioneers falling prey to the recession, the great story of the glorious organised Indian retail seems to be fading.
1 2

4 5 6

Yee Amy, Property prices threaten Indian Retailers, http://www.rediff.com/money/2008/jun/19retail.htm, June 18 th 2008 Vora Nikhil, Has Organised retail lost the plot?, http://www.business-standard.com/india/news/has-organised-retail-lostplot/ 348654/, February 11th 2009 Subhiksha is Indias most trusted Retail Brand for 2008, http://www.moneycontrol.com/india/news/OTHER%20NEWS/ subhiksha-is-india%E2%80%99s-most-trusted-retail-brand-for-2008/12/27/339470, May 23 rd 2008 Most Writen-about Indian CEOs, Business Today, April 5th 2009, page27 Around 600 Subhiksha stores vandalized Across the Country, http://www.blonnet.com/blnus/19071820.htm, February 7 th 2009 Subhiksha shops , warehouses looted,http://www.financialexpress.com/news/subhikshas-shops-warehouses-looted/421543/, February 10th 2009

This case study was written by M. Vivek and Saradhi Kumar Gonela under the guidance of Dr. Nagendra V Chowdary, IBSCDC. It is intended to be used as the basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. The case was compiled from published sources. 2009, IBSCDC. No part of this publication may be copied, stored, transmitted, reproduced or distributed in any form or medium whatsoever without the permission of the copyright owner.

BSM0054 Rise and Fall of Subhiksha

Indian Retail Industry: Untapped Potential and Successful Failures

Traditionally, retailing has been a major form of self-employment for Indian youth. As a result, India has one of the highest retail densities in the world at 6% (12 million retail shops for about 209 million households by mid-2000s).7 It is also the second largest employer in the country behind agriculture. It contributes nearly 8% to the employment and 10% to the GDP. However, the Indian retail sector is highly fragmented with more than 96% of it being unorganised. It was the economic liberalisation of 1990s, which altered the course of the Indian retail towards organised retailing. Since then, organised retailing has become one of the fastest growing sectors of the Indian economy with an estimated Compound Annual Growth Rate (CAGR) of 18%.8 Indian retail industry has thus become one of the most attractive destinations9 for the global retailers. The growth of the Indian retail is fuelled by a swift increase in the disposable income and rise of the rich and younger generation. With 60% of the population falling below 30 years of age, the young Indian consumer is transforming the society in terms of both demographic compositions as well as aspirations. The new genre of Indian consumers is searching value for moneyalong with convenience and choice while shopping. This change in the consumer attitude towards retail is one of the cornerstones of the growth of the organised Indian retail (Exhibit I). Though it accounts for less than 5% of the market, it is expected to grow at a CAGR of 40%, from $20 billion in 2007 to $107 billion in 2013.10 On the other hand, the traditional unorganised retail comprising of Kirana stores (Local term for Mom-n-Pop stores) constitutes the major chunk of the Indian retail industry. Due to the very limited market they cater to in their rural neighbourhoods, this format requires small investment in terms of capital, land and labour. Hence, it also remains the choice of many small retailers. As most of the organised retailers are catering to the needs of the urban consumers, 60% of the Indians residing in rural areas are still awaiting their turn to experience shopping in supermarkets. Though some worthy experiments with rural retail like ITCs Choupal Sagar and Godrej Aadhar were found promising, entry into the highly potential rural market (Exhibit II) was impaired by lack of infrastructure. With major business groups of the country investing in organised retail sector, the sector was on a roll till the recession hit the markets hard. Major business groups like Reliance, RPG, Bharti, Tata, Rahejas, Piramals and Birla started their expedition in the organised retail sector with their respective chains providing a variety of products ranging from food, to music, to health, to beauty products. The early trends have shown that food and apparel retailing would become the main growth drivers of Indian retail. Based on the sectors, Indian retail industry basically falls into three categories (Exhibit III). Ready-to-go segment contains categories where a retailer can readily build positions. The shape and adapt segment needs good investments on supply chain and persuasion of customers to change their buying behaviour. Wait and watch are underdeveloped categories, the growth phase of which is not well-determined.
7

The Great Indian Retail Story, http://www.ey.com/Global/assets.nsf/Sweden/The_Great_Indian_Retail_Story/$file/ The%20Great%20Indian%20Retail%20Story.pdf Ibid. Shabath Hana Ben, et al., Emerging Opportunities for Global Retailers, http://www.firae.org/Documents/Global%20Retailing/ Emerging%20Opportunities%20for%20Global%20Retailers_2008.pdf, May 2008 Emerging Opportunities for Global Retailers, op.cit.

8 9

10

BSM0054 Rise and Fall of Subhiksha

Exhibit I Transformation of Indian Retail

Historic 50 During Independence 95150 Mid-1970s-1990s 300600 Since mid-1990s 1,5002,000
Shopping Experience and Pricing Efficiency

Community Get Together

Buying Needs

Convenience

Weekly Markets Village Fairs Agri-based products, vegetables, clothing Village Grounds

Mom-n-Pop stores or Kirana Shops and PDS* Vegetables, edibles apparels, medicinesand low value household products Street Corner Shops in Rural and Semi-Urban Areas Local Brands

Departmental stores Supermarkets Edibles, electronic goods, cosmetics, apparels, medicines toiletries and other household products Business Areas and Primary Locations in Urban Areas Regional and National brands

Hypermarkets Malls

Edibles, electronic goods, cosmetics, apparels, medicines premium and luxury items Upmarket Locations and Prime Locations in Cities International Brands

No brands
* Public Distribution System

Compiled by the author

Exhibit II Indian Retail Market Share Rural vs Urban (in %)

Rural Urban

Source: Indian Retail on the Fast Track, Time for building Capability gaps, http://www.kpmg.cz/czech/images/but/ 2005_CONS_Indian_Retail_2005.pdf, December 2005

BSM0054 Rise and Fall of Subhiksha

Exhibit III Indian Retail Segments

Degree to which consumer is comfortable with modern formats, willing to buy packed, chilled, prepared, or ready-made foods, and willing to pay for added value.

Source: Fernandes Michael, et al., Indias Retailing Comes of Age, , December 2000

Another important and motivating fact about Indian retail is the rise in the number of the Indian middle class, which also happens to be the largest consuming class (Exhibit IV). The increase in the consuming class proportion is surely going to help the growth of the organised retail sector in India.

Exhibit IV Indian Consumer Classification

Class Total Annual Household Income INR $ Less than 90,000 90,000200,000 200,000500,000 500,0001,000,000 Above 1,000,000 Less than 1,969 1,9694,376 4,37610,941 10,94121,882 Above 21,882 Population in 2005 (in million) 597.78 453.87 44.28 11.07 0 Expected population by 2025 (in million) 314.38 514.44 457.28 128.61 28.58

Deprived Aspirers Seekers Strivers Global Indians

Compiled by the author from: Abblet Jonathan, et al, The Bird of Gold: The Rise of Indias consumer Market, http:/ / w w w. m c k i n s e y. c o m / m g i / r e p o r t s / p d f s / l o g i n . a s p x ? R e t u r n U r l = % 2 f m g i % 2 f r e p o r t s % 2 f p d f s % 2findia_consumer_market%2fMGI_india_consumer_executive_summary.pdf, May 2007

BSM0054 Rise and Fall of Subhiksha

In a similar way, the number of seekers, strivers and global Indians is also increasing. Recent studies have also shown that the number of deprived will decrease to half by 2025 compared to that in 2005. The middle class, which constituted only 18% of the total population is expected to grow to 41% by 2025. Thus, India, which was more a nation of deprived and aspirers, is all set to become a nation of seekers and strivers. However, in spite of the abounding opportunities, most of the players have failed to cash in on them as yet. Many players in the Indian retail industry are still in the experimental stage of wooing the consumers and checking out the right formats. Store format is one major concern for Indian retailers. While most of the big players in India have moved to the hypermarket divisions, there are small players too, who created their own brand. The adoption of multiple formats in a developing country like India may be surprising. But considering how the emerging consumer economy changed the conventional views towards retailing, the perplexity of the Indian retailers is rather natural. Whatever the format, successful global retailers have proved that a strong consumer insight is a critical success factor in the retail sector. To get in tune with the tastes and preferences of the Indian consumer is no cakewalk. Whether Indian consumers and retailers can adapt to the internationally successful retail formats is another problem. In order to overcome this, organised retailers in India have tried formats ranging from departmental stores to hypermarkets. Some of the larger players like Pantaloons Retail have gone to multi-format retailing in which they have different store brands for different lines of products and formats. As famous management consultant Harish Bijoor has said, that Indian organised retailers need to be multi-formatted.11 The success of multi-format retailers like Big Bazaar even in the current turbulent times proves it right. Though there are many retail formats, hypermarket, which offers a wide range of products with deep assortment to the consumer, is the choice of many of the major players in India (Exhibit V). While big players with deep pockets are going for large formats, small players with limited capital are opting for small formats targeting one segment of the population and restricting merchandise to meet demands of only that segment. In developing countries, where the middle or low-income strata of consumers form the major segment, majority consumers are less comfortable with the large format retailing shops. The small retail formats like convenience stores and discount stores are getting a strong base from the convenient neighbourhood format. One such retail chain that became popular with small format and had been a success story for quite sometime in the Indian organised retail arena was Subhiksha. The retail chain that catered to the grocery needs of the urban middle class population was a huge success initially. However, the organisation fell apart, ironically, at a time when it was hailed to have cracked the right recipe to succeed in the enigmatic Indian retail market.

11

Interview with Harish Bijoor on Managing Troubled Times, http://www.ibscdc.org/executive-interviews/ Q&A_with_Harish_Bijoor_3.htm, March 2009

6
Sector Food, Grocery, Medicine Food Grocery Hypermarket Books, Multimedia etc. Food , Fruits and Vegetables Hypermarket Food and Grocery Medicines Mall Lifestyle Books, multimedia etc. Jewellery Electronics Sports and Lifestyle Homeware and furniture Electronics Watches Apparel Specialty store Category killer Specialty stores Departmental store Specialty store Specialty store Departmental store Titan growing steadily amid slowdown. Others depending more on private labels to beat the blues Specialty store Discount store Specialty store Supermarket Supermarket Slow growth even in the financial downturn. Integrated the back-end operations to cut costs. Planning to restructure itself into three separate entities Future Market and Consumer Limited, Future Fashion Merchandising Limited and Future Consumer Enterprise Limited Specialty store Supermarket Supermarket Closed down around 70 stores Many Spencers outlets (around 50) closed down Store Format Current Position
Contd...

Exhibit V Major Players in Indian Organised Retail

Retailer

Stores

Aditya Birla Retail

More and Trinetra

RPG retail

Spencers Daily

Spencers

Books & Beyond

Daily & Fresh

Pantaloon Retail

Big Bazaar

Food Bazaar

Fit & Healthy

Central

Brand Factory

Depot

Navras

Electronic Bazaar

Planet Sports

Home Bazaar

Tata Group

Croma

Titan

Rise and Fall of Subhiksha

BSM0054

Westside

7
Jewellery Apparel, Accessories Books, Multimedia, etc. Hypermarket Mall Apparel, Accessories Homeware and Furniture Mall Food and Grocery Apparel, Accessories Jewellery Footwear Books, Multimedia, etc. Vegetables, fruits, food, grocery Food, Grocery, Mobiles Discount store Specialty-discount store Specialty-discount store Closed down 28 easy day Supermarkets. Slowed down the expansion to second half of 2009. Supermarket Deeply wounded. Operations are standstill. Trying for Corporate Debt Restructuring (CDR). Specialty store Specialty store Specialty store Departmental stores Discount store Closed stores. Right sized employees. Trying to induce more cash cutting measures Acquired by India Bulls Departmental Store labels Departmental store Foot falls reduced. Depending largely on private shops and food outlets Specialty store Shoppers Stop set to close down some airport Departmental store Closed down many Crosswords shops. Specialty store

Tanishq

K Raheja Corp.

Shoppers Stop

Crosswords

HyperCITY

Inorbit

Lifestyle International

Lifestyle

HomeCenter

Pyramid Retail

Pyramid Megastore

Trumart

Reliance Retail

Reliance Trends

Reliance Jewellery

Reliance footprints

Reliance Timeout

Reliance fresh

Subhiksha Trading

Subhiksha

Services

Subhiksha mobiles

Subhiksha Pharmacy Medicines

Bharti-Walmart

Bharti-Walmart

Rise and Fall of Subhiksha

Prepared by the author

BSM0054

BSM0054 Rise and Fall of Subhiksha

The Rise and Fall of Subhiksha

Providing Value for Money was the strategy of the once renowned Indian discount retailer Subhiksha (a Sanskrit word meaning prosperity). Launched as a discount store in 1997, Subhiksha was an instant success. Started by an Indian Institute of Technology and Indian Institute of Management alumnus, Subramanian, in Chennai (a South Indian city previously known as Madras), Subhiksha expanded quickly to other geographical areas in India through establishing chain of outlets in major towns in north and south India. Subhiksha targeted middle class Indians, who had grown to become the most important target for all Indian retailers. Initially Subhiksha provided a no-touch way of purchase for its consumers. Customers had to move around the store, note down the item code number on the order form (that they get on their entry to the store) and handle the order form to the counter help. He picks the items and delivers it along with the bill. This method proved effective in the initial stages. But as it grew, to attract more customers, Subhiksha adopted a DIY format in which customers could touch, feel and select the product they want. With its unique hybrid model12 , Subhiksha had all the processes and systems of a modern organised retailer. At the same time, it also maintained a neighbourhood-convenience element, which immediately connected to the middle class. The small format that Subhiksha adopted was also a planned move. When major players were trying to enter hypermarkets and malls, Subhiksha took a stand-alone-store format. Subhiksha stores were never located on the main roads, instead they were found in nearby streets of a residential area. With this choice of location, the company could save money from the real estate costs. Subhiksha never opted for a fancy atmosphere inside the stores. To cut costs, at places, it opted for the first floor. With each store extending over a small area of 15002000 sq. ft., Subhiksha maintained a simple interior with no glamour elements in it, initially. Subhiksha started as a grocery retailer, as groceries accounted for highest share in the expenditure of an average Indian customer. In rural and semi-urban areas, food and groceries form more than 50% of the total consumer income, in urban areas the share is around 30%. However, as the disposable incomes are higher in urban areas, amount spend on groceries in absolute numbers are much higher. It has entered the market as a discount store to get benefitted by offering products at huge discounts compared to the Kirana shops that the consumers otherwise opt for. The FMCG business in India was valued $15 billion or Rs 75,000 crore annually, by PricewaterhouseCoopers. The total revenues of organised retail, consisting of all formats and all the goods, in their entirety are around the same size. About 90% FMCG sales occur through the kirana stores, while the retail chains account for about $1.5 billion or Rs 7,500 crore. Subhiksha saw a grand opportunity in this area and entered into groceries Subhiksha later expanded its merchandise into four categories grocery, fruits and vegetables, medicines and mobiles. The advantage of Subhiksha over its competitors was the prices. Subhiksha sold products for a significantly lower price compared to others. There was a reduction of 9%10% in the Maximum Retail Price (MRP) of every single unit that Subhiksha sold.13 This price advantage helped in attracting the customers and became the base of success. Though customers were initially sceptical about the quality of products, Subhiksha started receiving increased footfalls and sales.
12 13

Varadarajan Nitya, The Discount Warrior, http://www.india-today.com/btoday/20040328/cover3.html, March 24 th 2004 Mitra Moinak, Subhiksha Catering the needs of Masses, not Elite, http://economictimes.indiatimes.com/News/News-By-Industry/ Services/Retailing/Subhiksha-addressing-the-needs-of-masses-not-the-elite/articleshow/2135104.cms?curpg=2, June 20 th 2007

BSM0054 Rise and Fall of Subhiksha

The growth of the chain was phenomenal and soon Subhiksha became a household name among the middle class Indians with its punch lines like Morcha Against Kharcha (Fight against Expenses), Bachat Mera Adhikar, Subhiksha Mera Abhiman (Saving is My Right, Subhiksha is My Pride). The no-frills, no-touch formats, which did not allow customers to do shopping on their own, was later changed to Do-It-Yourself (DIY) format. Through strategically positioning itself as a provider of value for money and through no-frills discount retail, Subhiksha could create a brand image of a dependable, trustworthy neighbourhood store. Subhikshas attempt to bring down the prices without compromising on the quality was received graciously by the customers. Following this, Subhikshas brand image was planted strongly on the value delivery through price advantage. Subhikshas foray into drug retailing proved to be lucrative but was equally tough. But it faced the wrath of the general medical store operators, as Subhikshas trade would affect their sales. Subhiksha fought back and won cases in the court, which allowed it to continue sales of medicines at a lower rate. Drug stores usually have margins of 17%20%, but Subhiksha sold drugs for a mere 7% margin. Even at this rate, the percentage margins in drug retailing were double that of grocery and more than 10 times that of fruits.14 Subhiksha also initiated direct-to-home supplies of medicines. In the case of telecom retailing too, Subhiksha could lure customers with its discount format. Apart from the stand-alone mobile stores, Subhiksha also planned to go for shop-in-shop format in large super and hypermarkets. The number of Subhiksha stores shot up from one store in 1997 to a chain of 50 stores in Chennai by 2000. In the next 2 years, it owned 120130 stores across Tamil Nadu. Once the retail chain saw a fair success, Subhiksha started hiring executives from various companies. As the expansion plans were in the pipeline, it started appointing people from various industries in various locations. A senior president for the entire group was appointed; however, in-charges for different areas were also given the presidential rank. For IT and marketing, there was one head for the entire group. But ironically most of these hired experts were not from the retail industry. Subhiksha pulled in people from banking, financial services, FMCG and pharmaceutical industries. Even as it developed a well-experienced management team, Subramanian, remained the man behind the show. He was the one who planned and executed the low price strategy, which became the most important success factor for Subhiksha. Subhiksha sourced people locally for assisting customers in the store through a separate external agency while managerial hires were selected by the top management. In order to maintain lower prices, Subhiksha concentrated on direct procurement avoiding intermediaries. During the initial periods the chain managed procurement on per-store basis, where in the manager of an individual store would replenish stocks at the end of every working day through cash. Through cash purchases and higher volumes, it succeeded in negotiating higher discounts, which were passed on to customers. But as the chain expanded it had established 14 central purchase centres across the country and goods were sent to all the stores. Supply chain management remained a concern for the Indian retailers and Subhiksha tried utilisation of supply chain software. However, as it expanded, the inventory management and re-ordering did trouble Subhiksha. In 2007, Subhiksha initiated implementing SAP most popular Enterprise Resource Planning (ERP) software in the
14

The Discount Warrior, op.cit.

BSM0054 Rise and Fall of Subhiksha

world. But the process was not completed until the company ran into troubles. It also had plans to integrate all its stores through wireless communication in order to achieve operational efficiency, to help outlets plan and manage demand and supply of stock on shelves. This would have also helped the company to acquire real-time information needed to ensure harmonisation of the stores and the supply chain. But due to lack of funds, this too got shelved. Due to these failed attempts, managing the in-store inventory remained an issue for Subhiksha and many a times, bare shelves put both the consumer and store management in an awkward situation. Lack of technology, which affected its supply chain and inventory management, haunted Subhiksha, but quick inventory turns improved the cash flows. The huge quantity of purchase helped Subhiksha to cut costs by bargaining discounts. Initially, it resorted to cash purchases to avail maximum discounts. Once it became a major customer, FMCG companies increased credit lines to Subhiksha. To cut costs further, along with bagging discounts on national brands, Subhiksha aggressively promoted private labels for products ranging from atta to shaving cream. And by 2004, around 25% of the company sales came from private labels.15 Once a success in Tamil Nadu, Subhiksha moved to other markets like Karnataka, Andhra Pradesh, Gujarat, Delhi and Mumbai after meticulous planning. By the end of 2006, there were enough Subhiksha stores in those markets. With rapid expansion in both South and North India, Subhiksha was slowly moving out of the image of a Chennai centred South Indian brand evolving into a national brand. Competitions and challenges were no less in these markets. But with the level of discount and the unique format, Subhiksha proved to be a success wherever it went. Soon it expanded to Haryana, Punjab and Uttar Pradesh. In 2007, it entered Kerala and Kolkata with its mobile phone retail chain and made plans to expand during 2008. The extended product lines like mobiles and medicines too helped the retailer to earn popularity. With the growth in the number of stock keeping units, the chain moved to DYI format from no-touch format. With this change Subhiksha was competing with the likes of More, Reliance Fresh and other supermarkets. These supermarkets have had their outlets on the main roads, unlike Subhikshas outlets in the interiors with limited parking space, eventually the chain was neither a discount supermarket nor a proper supermarket. This confused positioning affected the chains sales to a great extant. Many were sceptical about Subhikshas move to north India initially partly due to doubts whether Subhiksha could meet the requirements of a population completely different in culture and perceptions and partly because managing logistics across the vast territory of India is so difficult a job that it wasnt attempted by any retail chain in the country before Subhiksha. Doubts were also raised on Subhikshas financial strength to manage logistics on such grand scale. But soon Subhikshas USP of low prices was welcomed well in all the destinations and the chain could register instant success. Subhiksha had financial troubles right from the beginning. Its first phase of expansion was during 2000 with the first round of funding of INR 15 crore from I-ventures. In 2004, it received the second round of funding, INR 25 crore. By 2006, the number of Subhiksha stores touched 1,000 mark. Analysts observed that, the expansion continued without sufficient capital back up as debt to equity ratio of the company was high (Exhibit VI).
15

Ibid.

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BSM0054 Rise and Fall of Subhiksha

Subhikshas expansion was basically from the fund infused by ICICIs capital arm, I-Ventures. In 2007, the company initiated INR 500 crore phase II expansion to make a foray into Madhya Pradesh, Punjab, Haryana and West Bengal. By 2008, while major players with huge resources were struggling to start new stores, Subhiksha became the largest retail chain with 1,480 stores stretched out in 110 cities across the country.16 Subhiksha also had 125 outlets in Mumbai and 175 in Delhi. From September 2006 to September 2008, the status of stores changed from 150 across Tamil Nadu to 1,650 across the country,17 and this largely contributed to the companys turnover. The turnover rose continuously from INR 330 crore in 20052006 to INR 2,305 crore in 20072008 to a projected INR 4,000 crore in 20082009.18 Apart from opening retail outlets for mobiles, Subhiksha had planned to open stand-alone outlets for consumer durables too. With changes in the format (15,000 sq. ft. on an average and better ambience ) but adhering to the USP of being the cheapest Subramanian was sure that he would be able to make it work. But the company was engulfed in a financial turmoil very shortly.

Exhibit VI Subhikshas Debt and Equity (INR crores)

Debt 32 Equity 750

Source: Varadarajan Nitya, How can we last without eating, http://www.business-today.com/ index.php?option=com_content&task=view&id=10232&issueid=53, February 19th 2009

It appeared that Subhiksha fully concentrated on increasing the number of stores and the turnover, and overlooked the consequences of low equity. But the strategy that called for intensified expansion turned out to be a disaster, once the recession struck by the end of 2008. With mounting debt and low equity, Subhiksha continued its operations until there was nothing in its coffers. Once it ran dry of all cash, it failed to pay suppliers and rented retail space operations were stopped across the

16

Subhiksha takes over Blue Green Constructions, http://www.business-standard.com/india/storypage.php?tp=on&autono=41040, June 28th 2008 Varadarajan Nitya, How can we last without eating, index.php?option=com_content&task=view&id=10232&issueid=53, February 19 th 2009 Ibid. http://www.business-today.com/

17

18

11

BSM0054 Rise and Fall of Subhiksha

country. Its financial woes were manifested by its failure to pay around 15,000 employees for over 6 months.19 As the discounter fell into trouble, it tried seeking help from major investors like Wipros Azim Premji and ICICIs I-venture. The retail chain was affected badly by the credit crunch too. No banks were ready to extend the credit lines due to the financial downturn. When all the attempts for gaining liquidity failed, the company had no way but to stop its operations. We were doing really well till we realised that we didnt have any more cash, said Subramanian. When we realised we needed more money the crisis got even worse and nobody was ready to help us out ... we are looking for options now. 20 To add to the woes, the top executives of Subhiksha quit the sinking ship. As it was unable to pay even the security agencies, there was no protection for the stores and warehouses. Around 600 of Subhiksha stores across the country were ransacked. The company seems unable to protect its properties as due to non-payment to security agencies and staff. The properties have become vulnerable target for the looters21 , explained Subramanian. Lack of funds, which led to non-payment to employees and PF arrears also proved to be humungous problems. The Employees Provident Fund Organisation (EPFO) sent notice to I-venture asking it to pay the due PF of Subhikshas employees. I-Venture refused to do it stating that it had no control over Subhikshas operations.22 It also blamed Subhiksha for keeping the investors in dark.23 But Subramanian insisted that I-Venture had every right to control the company according to the Articles of the company and it did so. In our case, the Articles provide that ICICI Venture can appoint the majority on the Board, and in fact had appointed the majority on the board. Hence, not only control of board, but also has extensive right on the operations, including right to appoint statutory auditor. And every right was exercised,24 he said. There were attempts for Corporate Debt Restructuring (CDR) too, which were in vain. Subhikshas problems (Exhibit VII) do not have a simple solution.Apart from the money matters, the revival of the company demands focus in other areas too. Subhikshas downfall was complete when Subramanian accepted that the company is in deep financial trouble and will require a minimum of INR 300 crore to restart its operations. But he was optimistic and was hoping that one or the other investor will help the ailing company. He told that the company would not shut down the stores and quit the field. In his words, The market is so bad that its not a sane time to exit. So, slogging with the bus is the only way forward. 25

19

Rumman Ahmed, Subhiksha: Not aware of Any Bank Accounts Siezed, http://online.wsj.com/article/SB123727776825053141.html, March 17th 2009 Fontanella-Khan James and Sood Varun, Ambitious retail plans Falter in India, http://www.ft.com/cms/s/0/b7eb80f0-f912-11ddab7f-000077b07658.html, February 12th 2009 Around 600 Subhiksha stores vandalized Across the Country, http://www.blonnet.com/blnus/19071820.htm, February 7 th 2009 We Dont control Subhikshas operations, http://economictimes.indiatimes.com/News/News-By-Industry/Services/Retailing/Wedont-control-Subhikshas-operations-ICICI-Venture/rssarticleshow/4180343.cms , February 24 th 2009 Subhiksha Kept us in Dark, http://www.business-standard.com/india/news/subhiksha-kept-us-indark/09/18/349964/ February 24 th 2009 ICICI Venture Exercised Every Right , http://www.blonnet.com/2009/02/24/stories/2009022450990500.htm, February 24 th 2009 How can we last without eating, op.cit.

20

21 22

23

24 25

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BSM0054 Rise and Fall of Subhiksha

Exhibit VII What Is Plaguing Subhiksha?

Poor supply side logistics - Empty shelves and out-of-stock labels Inconsistent plans - One day the company reiterates its plans to sell perishables, next day, it calls it off Poor brand recall - Poor in-store experience and lack of supplies Increase in realty costs - Resulted in increase in expansion costs Growth-only focus- Quantity, not quality, is important Fund crunch - No funds for expansion plans Poor web interface - Website is not yet ready
Source: Behl Tejeesh N. S., Stocking Up or Selling Out http://businesstoday.intoday.in/ index.php?option=com_content&task=view&id=8785, November 27th 2008

and the very

The only way to come out of the trouble is to find liquidity, which seems impossible for Subhiksha for the time being. Subramanian was prepared to make Subhiksha a public company, in order to face the forthcoming misery. In fact, he had tried to do it twice but failed. The last option left for him, say the observers, was to bring in more investors. Expansion might attract more investors, but the waves of financial distress were spreading fast, denying any respite for the chain. As a final attempt to go public, Subhiksha acquired a feeble, but listed, construction and investment company, Chennai-based Blue Green Constructions and Investments, a Non-Banking Financing Company (NBFC). Subhikshas plan was to merge it with Subhiksha Trading Services, rename it as Subhiksha Limited and then get listed in BSE and NSE. But as Azim Premji, another major investor with 10% stakes, opposed the reverse merger, And thus, Subhikshas verdict was made. Some of the analysts think that Subhikshas failure was the result of recession, some blame capital structure while some others believe it is the result of over expansion. However, operational deficiencies are also not ruled out. The chains supply chain management lacked required expertise and technology was too weak to support sophisticated retail operations. While modern retailers depend largely on IT, Subhiksha operated on IT infrastructure that it possessed from the beginning. Even when it expanded, Subhiksha did not or could not upgrade its technological powers. The MD agrees with the fact that the supply side logistics was not good, since there was no up gradation of technology. But he justifies it by saying, Since the business was running on venture capital (ICICI Venture had bought a 33 per cent stake in March 2005 and sold off 10 per cent this year to Premjis Invest for Rs 230 Crore), it was important for us to cut costs and so we didnt invest too much in technology.26
26

Behl Tejeesh N. S.,, Stocking up or Selling Out, index.php?option=com_content&task=view&id=8785&issueid=53, November27 th 2008

http://www.business-today.com/

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BSM0054 Rise and Fall of Subhiksha

Subhiksha was a hot property even when it was in trouble. Without naming the interested companies, Subramanian revealed that some retail biggies are eyeing Subhiksha. News that one of its major competitors, Reliance Retail, was interested to take over Subhiksha also spread. But Subramanian disposed them off stating that they are baseless rumours. They are in no position to take us over,27 he said. President of Marketing, Mohit Khattar too said that Subhiksha is takeover proof.28 Food and grocery is the largest and the most under penetrated sector in organised retail.29 And it is quite natural for big retailers to try for an acquisition at any opportunity. The crux of the problems, Subramanian says, is that the company expanded too rapidly on a small equity base of INR 250 crore and grew the business, primarily through debt, to a level of 1,600 stores. 30 The enormous increase in the number of stores seems something more than it could take. The operations were highly scattered because of the expansion to various states (Exhibit VIII). Moreover, the low equity also spells trouble. Because of the over ambitious plans, the company landed in a debt of INR 7 billion ($143 million, 111million, 100 million).31 In March 2009, the company had dues of INR 85 crore, with an interest expenditure of INR 9 crore per month; quite a huge amount in the troubled times. However, the story of Subhiksha typifies the struggles of the Indian organised retail sector, which is caught in the whirlpool of bad decisions, confused formats, immature expansion, unjustifiable investments, excessive optimism and above all recession. Recent developments are also not very promising for Subhiksha. The Chennai High Court had appointed a Provisional Liquidator (PL). This special form of Court-appointed Liquidator is usually used in instances where there is some aspect of urgency or concern for the protection of company assets. There may be no necessity for the company to be wound up and it is possible, albeit uncommon, for the company to be returned to the directors care. The appointment is usually made on the application of a creditor, shareholder or director.32 Subhiksha was expected to complete the debt restructuring by the month end of April 2009. But with the company under liquidation, nobody wants to take the trouble. Bankers had already explained that they would not be interested in assisting the company, if the PL takes charge. Based on the same reason, companys merger with Blue Green Constructions and Investments also seems unviable. At this turn of events, Subramanian was more than displeased. He said, In a merger, the fate of both the companies gets intertwined. So, if one company is under a PL, the other company gets impacted when the merger happens. Why should Blue Green, why should anyone, want to take over a company under liquidation and buy the problems of that company?33 Subhikshas plea against the liquidator had been dismissed by the High Court. Still it is trying hard to convince the court that the appointment of the PL will harm its interests.
27

Das Krishna Narayan, Vested Interests Hurting Subhiksha: R Subramanian, http://economictimes.indiatimes.com/News/News_By_Industry/ Services/Retailing/Vested_interests_hurting_Subhiksha_R_Subramanian/rssarticleshow/3459981.cms, September 9 th 2008 Ibid. Kaul Pummy, Big Fish Eat Small Fish, inner.aspx?articleid=1338&subcatgid=220&editionid=1&catgid=20, January 5 th 2007 http://business.outlookindia.com/

28 29

30

Subhiksha Looks for Cash Infusion to Get Going again, http://www.thehindubusinessline.com/2009/01/31/stories/ 2009013151080500.htm, January31st 2009 Ambitious retail plans falter in India, op.cit. Provisional Liquidation, http://www.jonespartners.net.au/OurServices/Insolvency/CorporateInsolvency/ProvisionalLiquidation/tabid/ 95/Default.aspx Narasimhan T. E., Liquidator move to hit revival: Subhiksha, http://www.business-standard.com/india/news/liquidator-move-tohit-revival-subhiksha/355369/, April 17th 2009

31 32

33

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BSM0054 Rise and Fall of Subhiksha

Exhibit VIII Subhikshas Scattered Presence

Compiled by the author

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BSM0054 Rise and Fall of Subhiksha

Is Indian Retail at Crossroads?

With many well-known players struggling for survival during the tough times, Indian retail sector is caught in uncertainty. Not only the financial crisis but some earlier decisions too had helped the problems worsen. In India, operations varying from merchandise management to supply chain management are bothering factors to the retailers (Exhibit IX) that are typical to India.

Exhibit IX Major Challenges to Indian Organised Retail

Supply Chain Management Technology Controllable Store Format Shoplifting Limited Consumer Insight

Merchandise Management

Regional Differences Labour Laws Uncontrollable Competition Taxation

Global Financial Crisis

Lack of Space and Utilities Limited FDI Real Estate Costs

Moderate
Compiled by the author

Severe

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BSM0054 Rise and Fall of Subhiksha

Recession, which reduced the footfalls and thereby sales, had put enough players in trouble. Irrespective of the fact that Indian retail was on its path to glory, the recent turbulence in the business environment globally had its effects in India too. Even some big players are affected badly. The recession made the consumers tight-fisted, and unveiled a difficult phase for the retailers. As the salaries slumped and pink slips became the best way of cost cutting, simultaneously demand for every other product decreased. The resulting uncertainty of job losses also reduced the demand, as consumers preferred saving over spending. The retail sales grew only 11% in December 2008 compared to 34% in December 2007.34 A slothful economy and the liquidity crunch had caught many of the retailers off guard. Most of the retailers have shed their expansion plans already. Cutting costs had become the major concern for everyone. As consumers have become extremely careful about spending their hard-earned money, retailers are trying to attract them with large discounts and offers. Indian retailers need to understand the customers well and adapt according to their need. The formats of shops, which have been a trouble right from the scratch, should be closed. It is widely suggested that Indian retailers need to be multiple-formatted.35 It is observed that the only one retailer who doesnt seem to be much affected by the recession and going on strong with the expansion plans is the multi-format retailer, Future Groups Pantaloons Retail. Kishore Biyani, CEO of Future Group, has already told that they are considering small format retailing and value-based retailing as serious options. The growth of the discount retailers like Wal-Mart has proved that the future is going to be of the value providers and the Indian retailers are advised to move to that model. The popularity of small format retail stores in the troubled times may also make the players shift to the small format retail. The no-frills convenience of a kirana and the efficiency of an organised retailer is said to be the future model. Stores like Spencers daily, Trumart and Spinach are cases in point, as they stand for both convenience and efficiency. Future Group is planning to bring in a new small-format, no-frills, deep-discount retail chain like Subhiksha.36 So when Subramanian says that there is nothing wrong with his discount store model, no one can contradict it. According to him, This is the model that everyone else is copying from Wal-Mart to Pantaloon. We mucked up on not raising enough equity.37

34

Slowdown Bites Retail Sector, Sales Fall to 11% , http://timesofindia.indiatimes.com/Business/Slowdown-bites-retail-sector-salesfall-to-11/articleshow/4340377.cms, March 29th 2009 Dr. Chowdary Nagendra V., Executive interviews: Interview with Harish Bijoor on Managing Troubled Times, http://www.ibscdc.org/ executive-interviews/Q&A_with_Harish_Bijoor.htm, March 2009 VijayaRaghavan Kala and Vyas Shuchi, Biyanis Next Call is Small Bazaar, http://economictimes.indiatimes.com/ Biyanis_next_call_is_Small_Bazaar/articleshow/2179743.cms, July 6 th 2007 Chakravorthy Gautam, Operations are at- Near Standstill, http://www.business-standard.com/india/news/operationsat-near-standstill/ 347576/, January 31st 2009

35

36

37

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BSM0054 Rise and Fall of Subhiksha

The expected investment flow and organised retail penetration might remain dreams considering the scale of the global recession. Organised retail penetration, which was expected to touch 16% by 2012 from the current 5%, is likely to reach only around 10.4%.38 RPG has shut down 4050 stores of its retail chain, Spencers. K. Raheja group has shuttered its specialty bookstore, and Crosswords has closed its three stores. Reliance Industries too, which had made its entry a flamboyant affair, seems to be experiencing the heat. Bharti-Wal-Mart has slowed down under the current circumstances. Vishal Megamart also has landed up in troubles. At this pace, Indias retail sector is expected to continue to slow down for another 1218 months, and the recovery will depend on the governments efforts to stimulate the economy.39 Amidst the economic crisis, organised retail players in India are trying to strengthen their supply chain and cut costs through innovative methods. The economic growth, increased credit facilities, changing demographics and urbanisation are the growth drivers of the organised retail sector in India. The expected high growth rate in the future years, has been severely hit by the global recession, which has devastated industries across the world. Survival will be a privilege for those who concentrate on value propositions and better customer management. Value for money had become the latest mantra of customers during troubled times.

38

Mukherjee Writankar, Slowdown to affect organised retail in India, http://economictimes.indiatimes.com/News/News-By-Industry/ Services/Retailing/Slowdown-to-affect-organised-retail-in-India/articleshow/4340918.cms, March 31 st 2009 Singh Rajesh Kumar and Udayabhanu Prem, India retail sec slowdown to last 12-18 months-KPMG, http://in.reuters.com/article/ domesticNews/idINDEL43266020090331, March 31 st 2009

39

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