Strategy - Subhiksha

Posted 9th May 2012 by - Ashutosh Rastogi

Executive Summary

The objective of this report is to assess the strategy failure of Subhiksha, one of the pioneers of
discounted retail format in food and grocery retail Industry.

The company was started by R. Subramanian, an alumnus of IIT Madras and IIM Ahmadabad, in 1996
when Indian market was not much familiar with organized retail. They started with a business model
that was based on cost leadership and was focused on Indian middle class segment.

The business began operations in 1997 from its first store in Chennai through food, grocery and
pharmacy retailing. They later ventured in retailing of mobile phones and grew at a moderate pace till
September 2006. After that, citing the booming Indian economy and increasing interest of Indian
companies in organized retail, they decided to go for a national footprint. The company till then had
presence only in state of Tamil Nadu, India. Buoyed by their success so far in organized retail they
took up an ambitious expansion strategy to grow by over 600 stores in 6 every 6 months. However,
the company went down in early 2009 when they had run out of cash to run their operations. The
company has defaulted on employee salaries, vendor payments and owed a debt of around 740 crores
to multiple investors.

This report analyzes the reasons that led to the downfall of a company that seemed to have a sound
business strategy. After detailed analysis of the facts that can be gathered, the conclusion is that the
company failed due to inefficient operations, decision to fund expansion by working capital and
reliance on high debt financing. Time of expansion plans coincided with global economic downturn
contributing further in aggravating Subhikshas problems. Had they not tried to act too fast on
expansion they still would have been able to control the operations and bring back business on track.

Subhiksha should have strengthened the backend operations and replenishment logistics before going
ahead with their expansion plans. They should have also secured funds to finance the expansion,
restructured their debt by offsetting it with some equity and not used the working capital to fund
expansion.

Introduction

R. Subramanian believed that since discounted organized retail format was nonexistent in India, it
would provide him the first mover advantage if he ventures in this domain.

From his research of three months he found that Grocery was one of the largest categories of
spending for the average customer that they were extremely price sensitive on groceries and that
discount stores were the largest growing format. 4. Research also revealed that Indians prefer to buy
grocery as fresh and would not really prefer to stock that and they would prefer to buy it from close by.

This led to the launch of Subhiksha with following strategic decisions

 Sanskrit word Subhiksha (prosperity) was chosen as the name of the brand because it reflects Indian
ethos and it is a word that can be understood all over India.

Setup of multiple small stores across the city rather than one big store centrally within the city. We
decided to set up 1,000 sq ft shops all across the city and not a 10,000 sq ft big store at one location
in Chennai4 he said.

To differentiate Subhiksha from the existing retail stores, they need to sell the branded products at
discounted prices. It was believed that this would attract the customers as branded products will not
vary in quality even when bought from different store, and this new store will be Subhiksha for
consumers.

Brand mantra for the store was why pay more when you can get it for less at Subhiksha?

The model was to make profit by providing economies from scale. We genuinely believe that by
enhancing our efficiency, we are helping the consumers to save more. We are also happy that we are
introducing a model that is Indian, capable of supporting the middle class of India 1 said
R. Subramanian.

Their retail stores have to be no frills and should operate from low cost properties to keep the cost
structures down. No Air conditioning, No staff to take people around and stocked with products that
are fast moving and already known to consumers. Location of stores would be in off the road
properties.

With an investment of Rs 4-5 Lakhs they opened their first store in Thiruvanmayur at Chennai in the
month of March 1997. Soon enough after their launch they were accused by the enraged retail traders
of undercutting their business by selling at low prices, however court ruling favored Subhiksha.

They had opened 10 stores by the end of 1997 and another 10 by the end of year 1999. End of year
1999 was also the time when they had started to break even because the sales were picking up and
consumers were responding in more numbers.

Subhiksha has grown to almost 50 stores by the end of 2000. This was the time when ICICI ventures
bought 10% stake by investing Rs. 15 Crores in the business. This gave Subhiksha the much wanted
liquidity and credibility in the market to bargain better with suppliers and effectively cater their debt
requirements.
Figure 1: Growth of number of stores

In the year 2004 and beyond lot of foreign direct investment started flowing in to India, with total
investments increasing more than 700% from 2004 to 2006 3. This was also the time when western
organized retail chains like Wall Mart and others as well as Indian corporate houses like reliance and
Aditya Birla Group were planning to setup their own retail stores in India. That is when Subhiksha
decided to scale up their operations and go ahead to have a national footprint, till now they had only
been operating in the state of Tamilnadu.

They decided to grow in parallel in most of the states rather than growing sequentially (i.e. one state
at a time). They raised 160 crores of equity, 220 crores of debt and another bridge loan on 125 crores
to fund their highly ambitious plans of going national. They tried to grow very fast, which is evident
from the fact that they had 160 stores on Sep 2006, 670 stores in Mar 2007, 1320 stores in Mar 2008
and 1650 stores in Sep 2008 In all almost 1500 stores were added in 24 months.

In his interview with Madhavan4 Subramanian said that Business was growing like mad. Despite the
cost pressures in 2006 after Reliance, the Birlas and others announced plans to enter retail, between
2006-07 and 2007-08 we doubled our stores (from 670 to 1,320), tripled our revenues (from Rs 833
crore to Rs 2,305 crore) and almost quadrupled our profits (from Rs 11 crore to Rs 39 crore).

In March 2008, Azim Premji, chairman of Wipro, bought in 10% stake in Subhiksha through his
investment arm Zash Investments which was offloaded by ICICI ventures for Rs. 230 crores.

However, Indian economy had started growing at a fast pace during these years 3. And also the Indian
organized retail was now crowded with big names likes Reliance Fresh, Big Bazaar, Food Bazaar,
Spencers Retail, Food World and More store. The growth of economy had started to put pressure on
rental costs of the Subhiksha stores and increased competition had put pressure on the people costs.

Due to rising input costs, both property and people costs, and companys expansion strategy sucked
lot of liquidity out of the operations and left company cash strapped. This led to the non-payment of
staff salaries for over 4 months, defaulting on rent on properties and payments to the vendors. Industry,
during then was also abuzz with news about the company going bankrupt which also impacted their
plans to raise cash for operations when their operations were at halt with no money to proceed. This
was denied by Subramanian, then director of Subhiksha, however he agreed that he need to sell stake
to raise cash to service his debts and operating costs.

Subramanian was convinced that the business was viable and only issue was that they have no cash
to run operations which can only be solved by infusion of at least Rs. 300 crores7. In his opinion cash
problem could be addressed through debt restructuring exercise, by offsetting some of his debt
through equity route. Their lender ICICI bank took up the retailers case for debt restructuring exercise
to RBI. All their lenders, including both private and foreign banks, had sought for the review of
accounting books of Subhiksha to raise money and put company back on track.

Figure 2: Distribution of debt across lenders

Overall Subhiksha had an overall debt of around 750 crores.

Methodology

The data used in this paper are collected from the articles published by different newspapers
(economic times, the Hindu), magazines (Business Today, Business World) and other business
articles (Rediff Business news) cited in the notes and references below.
This paper also includes the excerpts of published interviews conducted by different people with Mr.
R. Subramanian. Information has also been gathered from the free videos available online.
Some of the interpretations come from personal experience of the author while shopping at Subhiksha
stores in Noida.

Analysis

R. Subramanian entered the retail business after a careful choice between his options of Information
technology and organized retail. Non existence of organized retail and the idea of gaining first mover
advantage made Subramanian venture into the domain with Subhiksha.

Business Strategy
 Low cost middle class focused Business strategy of Subhiksha can be explained as follows
Who are their target customers? Subhiksha was looking for the price sensitive Indian customers who
wish to buy discounted fresh groceries and brand products. Which is predominantly middle class
segment, buying often from the market rather than stocking as that allow improved cash flow for home
budge.
What need to satisfy of target customers? Consumer research by Subhiksha revealed that Indian
consumers prefer to buy food fresh and thus want to buy it from a place close by to their home. After
all that has also been idea that contributed to success of Kirana stores in India. Also their need is to
maximize the utility of their home budget and hence buying the products at discounted prices without
compromising on quality.
How to satisfy that need? Subhiksha decided to sell the branded and fast moving consumers goods
at discounted prices through no-frills store. They decided to operate on low margins and believed that
profitability could be achieved through operational efficiency and economies of scale.

Operations Strategy

To achieve these business goals, Subhiksha knew that they have to reduce their input costs. Property
rental costs and people costs are the two costs that contribute to most of the expenses for a trading
business after cost of the goods sold. They focused on different areas of their operations to bring down
costs and provide value to customers. Subhikshas Operational strategy can be explained as follows
They decided to operate from smaller stores all across the city rather than big stores located in the
centre of the city. Idea behind this was to locate the stores in such a way that average distance from
the house of potential consumers would be less, so that they can visit the store more often.
They decided to operate from properties that are located off the street. The reason to reduce the rental
costs for the properties, as generally off street properties can be rented on good bargain than on street
stores. They believed that customers could still be attracted with discounted products with same quality
& brand promise.
They decided to stock only fast moving consumer goods so that presence of item on the store shelf
can be minimized and hence reduce the operation cycle. Shorter the operation cycle, more and more
profit the company can generate.
They decided to keep their stores no frills. No air conditioning, no staff to take people around, stocking
products people are already aware of and no spends on decoration lighting in the store were the few
ways to bring the store costs down. All this was believed essential for low cost strategy.
They designed store formats in such a way that consumers enter from one end, walk through the store
and exit from other end. Exit end has the billing counter and also a security guard.
 Figure 3: Subhiksha Retail store format
They used information technology to efficiently run operations. Each store would update the central
database about the stocking requests by end of day. And all these requests would be catered by
various central warehouses efficiently before store opening next day.
Subhiksha used to buy all the products on cash. Paying upfront is also a good way to get wholesalers
price down, says R Subramanian, founder and CEO of Subhiksha Supermarket and Pharmacies 2.
Their expansion strategy resulted in opening of around 500 stores in 6 months during their later years,
and thereby allowing them to go for bulk purchase contracts with vendors to source centrally for all the
stores. This started giving them benefits of economies of scale.
For financing its operations Subhiksha brought in investors like ICICI ventures and Azim Premjis Zash
Investments. This brought in both liquidity and credibility to their business and allowed them to enjoy
a greater bargaining power with suppliers.
They had setup customer loyalty programme, Subhiksha tracked their customers through loyalty cards
and these card holders got attractive discounts on special products. This program allowed them to
gather consumer data and provide more focused benefits. This also allowed them to provide services
like home delivery.

What went wrong with Subhiksha?

Subhiksha did lot of right things, however they also failed on certain aspects which led to the failure of
the company and forced them to close down operations.
Subhiksha financed most of their operations and expansion plans through secured or unsecured debt
from banks. They were considering raising capital through equity route however stock market started
falling globally after collapse of Lehmann Brothers and they are left with no option to go through this
route. A certain amount of debt is good when a company is making above average returns, however
a company losing money in operations and expansions will bleed with high debt financing. This is what
happened in case of Subhiksha.
Subhiksha did the worst mistake of financing their expansion plans through working capital. A
company cannot sustain operations without working capital. As the company grows it often requires
larger working capital, however Subhiksha did exact opposite. Their working capital was financing
 their expansion, hence was getting reduced as the operations grew which left the company with no
money.
The desire for expansion was so overpowering Subhikshas management that they ignored the need
to strengthen supply chain, distribution and replenishment logistics. They got caught up in issues that
come with scale. This led to the empty shelf in stores and dissatisfied consumers.
There were also indications from ICICI ventures in their one of the filings to the court regarding the
lapses in corporate governance on the part of founder of Subhiksha and Managing director R.
Subramanian
Economic environment in 2008-2009 also contributed to the downfall of Subhiksha. Due to financial
companies going bankrupt and steep downward slides in stock market, investors grew very cautious
in taking investing decisions and ran to safety avenues. This closed the Subhikshas options to raise
further debt or equity to fund its operations.
Agitated unpaid employees, unpaid vendors and cash losing investors lost their trust in the
organizations capabilities which led no support from them.

What they should have done differently?

Subhiksha had a very good opportunity to raise money from Indian stock market by offering an IPO in
2007 and early 2008 4. This would have allowed them to capitalize on the goodwill created by
investment of Azim Premji in their business. However, they kept postponing the plans as the founder
and director Mr. R. Subramanian was not willing to dilute the company stake. They kept financing
through secured and unsecured loans which they could not service when they were cash strapped.
Subhiksha should have secured sufficient funds through both equity and debt financing moderately
balancing their risk before going after expansion plans. Investors interest in the company and growing
Indian economy had allowed them to have both.
Subhiksha went for an aggressive expansion strategy in later 2006. However, they ignored the
strengthening of their supply chain, replenishment logistics and distribution when they started
expansion. That should have been planned along with their expansion strategy. These operations
designed to run with small number of stores were not able to fund the suddenly increasing number of
stores doubling tripling within months. The stores started having empty shelves; operations lost the
track of the goods movement and left customers dissatisfied.
Working capital required to run operations should have not been used to fund Subhikshas expansion
plans. Expansion should have been delayed or slowed down the moment company started facing
issues with funds. A proper monitoring system/process should have been in place that would have
alerted them about draining working capital.

Conclusion

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

Notes

1 Lily
Fang & Roger Leeds, Case Studies: ICICI Ventures and Subhiksha: page
1http://www.insead.edu/facultyresearch/faculty/personal/lfang/cv/documents/Subhiksha.pdf
2 Noeimie Bisserbe, The Strategist, Business World magazines,http://www.businessworld.in/index.php/Telecom/The-
Strategist.html
3C.P. Chandrasekhar & Jayati Ghosh, The Hindu Business Line news paper, May 01,
2007http://www.thehindubusinessline.com/2007/05/01/stories/2007050100040900.htm
4 N. Madhavan, Business Today magazines,http://businesstoday.intoday.in/bt/story/4268/1/pushing-the-accelerator-
instead-of-brakes.html, 13 June 2009
5
Kapil Bajaj, Riding on Retail, Business Today magazines,http://businesstoday.intoday.in/bt/story/riding-on-
retail.html/1/491.html 10 September 2007
6 Mail
Today Bureau, Subhiksha faces nationwide
attacks,http://businesstoday.intoday.in/content_mail.php?option=com_content&name=print&id=10086
7Rasul Bailay, Dead end for Subhikshas debt restructuring plan
http://www.livemint.com/2009/09/02212305/Dead-end-for-Subhiksha8217s.html

References

Lily Fang & Roger Leeds, Case Studies: ICICI Ventures and Subhiksha: page
1http://www.insead.edu/facultyresearch/faculty/personal/lfang/cv/documents/Subhiksha.pdf
Noeimie Bisserbe, The Strategist, Business World magazines,http://www.businessworld.in/index.php/Telecom/The-
Strategist.html
Success story of Subhiksha, India's largest retail chain, Rediff Articles, 05 February,
2007http://www.rediff.com/cms/print.jsp?docpath=//money/2007/feb/05bspec.htm
N. Madhavan, Business Today magazines, 13 June 2009,http://businesstoday.intoday.in/bt/story/4268/1/pushing-the-
accelerator-instead-of-brakes.html
Tanvi Varma, Purveyor of retail prosperity, 03 February
2009,http://businesstoday.intoday.in/bt/story/7943/1/purveyor-of-retail-prosperity.html
pitstop4performers, How People Buy Grocery, August 30, 2008, www.youtube.com , At the IACC-Fourth Breakfast
Meeting, R. Subramanian, Managing Director, Subhiksha Trading Services Ltd
Chandra Ranganathan, ET Bureau, Banks may give Subhiksha a helping hand, 31 March
2009http://economictimes.indiatimes.com/news/news-by-industry/services/retailing/banks-may-give-subhiksha-a-
helping-hand/articleshow/4340903.cms
Chandra Ranganathan, ET Bureau, ICICI Venture hints at corp governance lapses by Subhiksha MD, 13 March 09
http://economictimes.indiatimes.com/news/news-by-industry/services/retailing/icici-venture-hints-at-corp-governance-
lapses-by-subhiksha-md/articleshow/4257902.cms
Mail Today Bureau, Subhiksha faces nationwide
attacks,http://businesstoday.intoday.in/content_mail.php?option=com_content&name=print&id=10086
Rasul Bailay, Dead end for Subhikshas debt restructuring plan
http://www.livemint.com/2009/09/02212305/Dead-end-for-Subhiksha8217s.html
Subhiksha's Story Underlines Retail Challenge, Business Monitor International, 09 Feb 2009
http://store.businessmonitor.com/article/233418
(RAVINDRABABUS, September 2009)

(Dr. S. Mani, March 2011)

(Nishchala Bhaskar, 2016)

(Aseem Rastogi, May 30, 2014)

(Abhik Bhattacharya, n.d.)

(Nidhi Acharya, 2011)

(Ashutosh Rastogi, 9th May 2012)

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Aseem Rastogi, May 30, 2014. Indian Retail The Fall Of Subhiksha And Vishal!. [Online]
Available at: http://trak.in/tags/business/2010/08/07/indian-retail-industry-subhiksha-vishal-retail-fall/

Ashutosh Rastogi, 9th May 2012. Strategy - Subhiksha. [Online]

Available at: http://mbacase.blogspot.in/2012/05/strategy-subhiksha.html

Dr. S. Mani, A. S., March 2011. PRERANA Journal of Management Thought and Practice, Issue Volume: 3
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Available at: http://www.indiaretailing.com/uploads/Market_Research_pdf/8-Subhiksha-MICA-Soch.pdf

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