S UBHIKSHA P ROSPERITY D ISCOUNTED !

Strategic Management Project

Uday Kamath eEPSM-02-052 29/10/2009

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Contents
Executive Summary ................................................................................................................... 2 Fact Sheet2.................................................................................................................................... 3 Business Model2 Pioneering the Discount Retail Movement ....................................... 3 Expansion or Explosion2 Stores tally: Zero to 1000 in 10years ............................................ 3 Financial Management2 ............................................................................................................ 5 Current Status5, 6 ......................................................................................................................... 6 Analysis ......................................................................................................................................... 8 Corporate Strategy ..................................................................................................................... 8 External Analysis ..................................................................................................................... 10 Internal Analysis ...................................................................................................................... 10 Corporate Governance Issues .................................................................................................. 11 Annexure .................................................................................................................................... 12 Table 1: Subhiksha Stores in India2 ........................................................................................ 12 Table 2: Working Capital & Term Loans Offered to Subhiksha by Banks3 ......................... 12 References .................................................................................................................................. 13

Disclaimer: This case was written by Uday Kamath, as a part of the individual project for Strategic Management for a business school course, the case has been compiled through freely available print and online articles, which are duly acknowledged in the references, the interpretation of Strategic issues faced by the Company are his own analysis and is intended for use as a class project for Strategic Management concepts discussion, rather than to illustrate either effective or ineffective handling of a management situation.

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EXECUTIVE SUMMARY
Subhiksha (prosperity in Sanskrit) was dubbed as a retail chain trying to be an Indias Wal-Mart with over 1600 (table 1) stores selling groceries, fruits and vegetables, medicines and even mobile phones. It was started and managed by Mr. R Subramaniam1, (an alumnus of IIT Madras and IIM Ahmedabad). It opened its first store in Thiruvanmiyur in Chennai in March, 1997 with an investment of about Rs. 5lakhs. The retail chain saw a considerable growth by offering goods at cheaper rates and thereby increasing its customer base. It was also dubbed as India's largest retail chain with a vision to deliver consistently better value to Indian consumers, this vision guided Subhiksha to deliver savings to all consumers on each and every item that they need in their daily lives, through-out the year, without any compromise on quality of goods purchased, later with funding from ICICI Ventures, Azim Premji through Zash Investments Pvt. Ltd. & Debt (working capital & term loans) from 10 Banks and an impressive list3 of external directors on its Board like S. B. Mathur, Kannan Srinivasan, ICICIs Ventures CEO Renuka Ramnath & MD Rajeev Bakshi and eminent marketing strategist and expert in consumer behavior Rama Bijapurkar, the Subhiksha juggernaut seemed to be on a roll. As of January 2009, this multi-location, professionally managed and vibrant organization has been facing severe financial crises pertaining to liquidity. In February 2009 various media announced that Subhiksha had collapsed and this change in fortune has led to the shutting down of a large number of stores across the nation and is facing a bleak future unless it gets the corporate debt restructuring (CDR) process started in its favor. What went wrong? Has the discounted retail model failed? How can a successful model turn into an unsuccessful business? Did it expand too fast too soon? There are many questions being asked more focus seems to be also on the eternal question, where has the money gone?

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FACT SHEET2
Year of Founding: 1997 Business: Discounted Retail Funding: R. Subramanian, ICICI Ventures, Consortium of banks (debt) table 23 Employees: 14,000 (by end of 2008) Revenue: Rs. 2,305 Crores (2007-08)

BUSINESS MODEL2 PIONEERING THE DISCOUNT RETAIL MOVEMENT

When the idea of launching Subhiksha in India was conceptualized, organized retail was non-existent in India. An external analysis was done in India through research which showed that for the average consumer grocery was the largest category for spending but it was extremely price sensitive and that the largest growing format was the discount stores model. Also, as compared to consumer shopping in the Western world, Indian consumers preferred shopping for grocery closer to their homes. R. Subramanian the Managing Director of Subhiksha Trading Services decided on the model which was to pioneer the discounted retail format in India a large number of small stores which offers easy accessibility & offers products at a discount.

Expansion or Explosion2 Stores tally: Zero to 1,000 in 10years

The first outlet in Chennai which opened in 1997 was opened by R Subramanian with a team of youngsters all of them had little or no retail experience, the retail business opened with an USP of low prices and with high neighborhood focus. By March 1999, there were 19 stores and Subhiksha started breaking even. More important fact was that volumes picked up and the consumers were responding to the format. The 50 shop level was reached in year 2000 and by now it was retailing groceries and medicines in a big way; this is when ICICI Ventures decided to pick up 10% stake in Subhiksha for Rs. 15 Crores and this gave the retailer enhanced credibility in the market. This fund came in handy, Subhiksha decided to expand beyond Chennai into rest of Tamilnadu. Cash flows were now at reasonable levels and the net worth grew to Rs. 23 Crores.

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By 2004, Indias retail sector started seeing a high level of activity and Subhiksha decided to expand nationally and scale up at a rapid pace. The management faced a dilemma whether to expand sequentially i.e. one state at a time or parallel many states simultaneously, they selected the latter. On an average 60 to 70 stores were added in a month and the pace of the roll out was unimaginable. In September 2006 the store count was 160 but by March 2007 they were at 670 stores and by March 2008 they were at 1,320 stores and soon by September 2008 they touched 1,650. Scorching pace considering 1500 stores were added in just 24 months. R Subramanian, while speaking as the keynote speaker at an annual retail measurement conference4 organized by AC Nielsen in Mumbai (2004) said if possible, I would like to expand and have more outlets, as an analogy he quoted the Indian Postal Service who have Post Offices present in Urban & Rural India, he said Post Offices number more than 150,000 in India and they could be one of the benchmark for Subhiksha. Among the reasons he cited for slower expansion is the amount of litigations Subhiksha faced his discounting model had enraged the retail trade especially in Chennai and many cases were filed against Subhiksha and R. Subramanian in fact even some Government run institutions like the Tamilnadu Co-operative Milk Producers Federation Ltd had reportedly filed a case since Subhiksha used to sell their Aavin branded products like Ghee and Butter at 10% lower than the MRP (maximum retail prices) printed on the packs creating issues and lower sales in the Aavin outlets and with their other channel partners. One wondered if such expansion was well planned apart from the Corporate Strategy on funding, where they geared for managing other resources as well, they claimed to have a very good Operations team which looked at location and Store expansions and the eventual start up. But, retail is a service operations and is dependent on human resource, here too Subhiksha seems to have found the way out, walk in to some shops8 in Chennai showed that majority of the employees where women, in smaller shops 75% were women. As one store manager said women were preferred, they were sourced from the neighborhood wherever possible if not then from outside of Chennai, they are very hardworking (long hours) loyal (less attrition), honest with lots of integrity (less theft) and they are inexpensive (less pay Rs. 3000 - per month onwards). Shopping experience showed that the Manager and the Staff Supervisors where the key persons, rest did menial work and one could not get a standardized experience across the city shops. However, in spite of the shoddy staff and unhealthy stores appeal the friendliness towards the local shopper worked and employee management system seemed to be working. There was some semblance of Customer Management at work too, if you were a local family on your first purchase your personal data would be fed in the computer and once a consumer number was generated you could order on phone too or the next time you can give your number and get a bill with your name on it. Also, the bill would show you what the actual price is (MRP) and how much less you paid for it (discounted price), this was a unique experience as till that time the local grocer always sold on MRP never on discount to MRP. The bill also showed separately the free items you would get with some products as a promotion at the store level or from the brand (company which sells this brand). The offering focus was again on price and discount.

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In 2006, Reliance, Birlas and others announced plans to enter the retail market segment and cost pressures started creeping in, however business was growing at a fast and furious pace, Subhiksha between 2006-07 and 2007-08 doubled the number of outlets (670 to 1,320), tripled the revenues (Rs. 833 Crores to Rs. 2,305 Crores) and their profits quadrupled (from Rs. 11 Crores to Rs.39 Crores). It also achieved the unique distinction of being the largest mobile phone retailer with an annual turnover of Rs. 1,000 Crores. Institution and markets started noticing the Subhikshas golden run, at this time around March 2008 ICICI Ventures offloaded 10% of stake to Zash Investments Pvt. Ltd. owned by Wipro Chairman Azim Premji for Rs. 230 Crores. Clearly, Subhiksha had reached a high point in its history it also generated a lot of goodwill in trade due to this high level investment by Azim Premji and the valuation of the company was now pegged at Rs. 2,300 Crores. The company had been contemplating and postponing the initial public offer (IPO) since 2007. The Management went into a huddle again in 2008 and arrived at a decision that they will stick to debt and not dilute the stakes. Raise more debt for growth was the way forward. Meanwhile, the Indian stock market was booming and Subhiksha entered 2008-09 with a plan of investment of Rs. 1,000 Crores for taking the stores count from 1320 in March 2008 to 2,200 stores. It also decided to add a new vertical business that of consumer durables information technology (CDIT) products retailing.

FINANCIAL MANAGEMENT2
The 2008-09 Business plan looked robust on paper, where was the investment needed being funded from? The, management decided to go for Rs. 400 Crores equity and Rs. 600 Crores debt. In June 2008 it announced a merger plan with Blue Green Construction Ltd a listed company on the Madras Stock Exchange who had some research background on the CDIT business. By this time the stock markets had started weakening and everyone assumed that the weak market will lower the Subhiksha valuation by only 10%. In the meanwhile, a bridge loan of Rs. 125 Crores was coming up for repayment in September 2008 and there was no sign of equity. The banks were a worried lot, they were finding it difficult to lend. At this point of time, things started going terribly wrong, just when some good offers were coming Subhikshas way in September 2008, India woke up to the news announcement of Lehman Brothers collapse and this started a domino effect, all around markets fell off, not only in USA but everywhere. Suddenly, Subhikshas management found that they could not borrow anymore; they just needed Rs. 125 Crores to prevent a collapse. An emergency meeting was called with the stakeholders between September and November 2008, they went on to meet four times in this period but liquidity was tight and investors could do nothing as markets had collapsed. In the absence of funds but with unwarranted zeal to maintain the expansion plan the management diverted working capital to fund. Consequently, the vendor payments were defaulted, who in turn stopped supplies and the shelves started to run empty. At one point

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when the Security staff deserted their jobs, over 600 stores were vandalized in NovemberDecember 2008.

CURRENT STATUS5, 6
Subhiksha operations came to a standstill by end-February 2009. All around the print media and vendors were screaming for Government intervention. Industry experts came in saying the management did not have a plan B, some were direct in saying they were not careful in managing their money. Independent directors quit, relations with ICICI Ventures soured and it withdrew it nominees from the board. Both Zash Investments and ICICI Ventures objected to the merger plan of Subhiksha with Blue Green Constructions Ltd. Several top managers have quit the jobs at Subhiksha and the employees are clamoring for 4 months wage arrears and were planning to press charges against the company. Vendors and lease rentals of stores remain unpaid and now the vendors and property owners have threatened more legal action. Subhiksha lawyer has said this is the case where the party (Subhiksha) is not able to pay and it is not a case of un-willing to pay. There is also the case brewing up with Employee Provident Fund Organization (EPFO) where an enquiry was initiated as to why Subhiksha has not remitted to the employee PF account though Subhiksha has clarified that in view of non-payment of salaries there is a corresponding non-payment of PFs and the two are related the amount in question is Rs. 5 Crores and the matter is not closed yet. R. Subramanian is banking on the much delayed corporate debt restructuring process (CDR). He wants to start with 1,200 stores again once the CDR process is through. He knows the biggest challenge is to win back the credibility from vendors, lenders, investors and the employees. However, he has not given up. Firm in the belief that Subhiksha can still be a viable business, he is making a last-ditch effort to survive by pitching for an Rs 300-crore loan from a consortium of 13 banks, besides attempting a debt restructuring exercise. In a letter sent to Business World5, Subramanian says, The infusion of Rs 300 Crores would revive Subhiksha soon. That would allow him to pay off the vendors and resume operations at a minimal level, though he might also have to shell out a significant chunk of his 59% stake. Subramanians confidence stems from his belief that his business model is viable. We did not raise enough equity, and we paid the price, he says. It was a capital structure problem rather than a business model problem. As of the now the compromise formula6 is running into trouble. The compromise suggestion with creditors offered for settling the Subhiksha Trading Services imbroglio isnt going to be decided quickly, for one thing, Subhiksha says it can offer the needed funding, of Rs 250 Crores, only after the court approves its proposed merger with Chennai-based Blue Green

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Construction Pvt. Ltd, already a contentious issue. For another, some of the creditors say they dont agree with the scheme; Kotak Bank, ICICI Ventures and Zash Investments have told the court they have various objections. Accordingly, the court decided to defer the hearing on the issue. It wants first to focus on the amalgamation scheme with Blue Green Construction Pvt. Ltd.. The compromise formula with its various creditors was offered by the cash-strapped retail chain through its subsidiary, Cash and Carry Wholesale Traders Pvt Ltd. According to the scheme, secured creditors should settle for half the principal amount taken from October 2008 and the remaining amount will be paid in installments after a while. For the unsecured lenders, the company would start repaying the principal amount from January to December 2011. How many are willing to wait?

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ANALYSIS
The case analysis below is approached by using the following concepts in Strategic Management. 1) 2) 3) 4) Corporate Strategy Growth External Analysis Internal Analysis Corporate Governance Strategy

Corporate Strategy
Sometime in March 2008, the Boston Consulting Group had named Subhiksha one of the worlds top 50 local dynamos Everything seemed to be in place when R. Subramanian envisioned a discount store model in every nook and corner firstly at the state level then at the National level, the research supported his model and he had the first mover advantage at least in the discount format model. But if the only USP is discounts will it be a sustainable competitive edge. The Corporate Strategy of growth too was well executed and the business was generating cash and it was even turning out to be a profitable business, four things though that seemed to be lacking in the overall strategy formulation, were planning for: 1) 2) 3) 4) Growth - at what pace? Funding - to support this growth. Tackling a potential future downturn. Differentiated Experience

Subhikshas early success was due to its no frills model it had read the external environment very well and identified deep discount business model which appealed to the middle and lower income strata families which went for the convenience of the location and the price as after all it was mostly the groceries that they bought. It also seemed to have operated on a very low back end and corporate overhead costs. So long, as Subhiksha focused on its core competency and operated with in a small geography the model worked. It was not geared to handle a fast pace of expansion primarily due to increase in costs and availability of funding. The increase in stores and personnel were affecting the financial controls. A classic case of not doing Consolidation before Expansion sealed its fate. The management failed to capitalize on the good will it had generated in the market for funding expansion, since the strategy was for growth they should have seized the opportunity of going in for equity through initial public offer (IPO) and should have raised money from the market. They error of choice to stick to debt over equity was to prove costly in the end.

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Again, in the boom period of 2007 and 2008 by not raking in money through private placement or/and equity offer it lost out creating a fund buffer which would have allowed it to handle the downturn. Just by the having a discounted model all the time the business would not have sustained Subhiksha would have become a re-seller, it was also a matter of time when some competitor would have replicated the model in other part of the country the management should have after the initial run of success, like Wal-Mart had done should have planned investments in strengthening the backend like the supply chain, distribution and replenishment logistics, building employee capabilities and of course doing some innovation to improve customer experience.

External & Internal Analysis

An HBR report, The Four Things a Service Business Must Get Right7 an extensive study of the worlds best services companies reveals the principles on which they are built. This report lists 4 factors which I quote in support of the External & Internal Analysis of the Subhiksha case.

External
1) Offering 2) Customer Management System

Internal
3) Funding Mechanism 4) Employee Management System

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External Analysis
The Offering A services business cant last long if the offering itself is flawed. Managers have to focus on the experiences a customer wants to have. E.g. the customer attributed convenience, price and friendly neighborhood interaction as a Subhiksha offering and compared this closer proximity, lower prices favorably against any competition. The management must be very clear on which attribute the business wants to be in like in WalMart where ambience and sales help was least valued by its customers and low prices and wide selection were more valued. In Subhikshas case one wonders by extending the business lines to include mobile and other consumer durables information technology products (CDIT) products retailing that too in the smaller size of the stores they operate in would it have continued to keep its offering valued by customer intact in the future. Add fresh vegetables and medicines to the grocery verticals and one wonders, where is the focus? Customer Management System As seen above in the Strategy part the focus was not on improving customer experience over a period of time instead keep them involved only on the price advantage which can be easily dislodged when a new more focused competitor or a local entrant comes into play.

Internal Analysis
Funding Mechanism With a tangible product offering Subhikshas mechanism for superior performance was relatively simple the price tags. The products were offered at a discount and lapped up by customers. All agree that Subhikshas low-cost model was sound. Troubles started due to the rapid expansion with debt capital to open 800 stores in a year. Although the same store sales were as high. The industry average for stores of 2,000 sq. ft (Subhikshas typical store size) to break even is Rs 5,000 per sq. ft6, and several people now say that 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 following quote6 sets the perspective The desire to expand at breakneck speed is not typical of Subhiksha alone. All retailers have read the Indian market wrong, says D. Dutta, who runs retail consultancy Third Eyesight in Delhi. There was no prudence; (there was a mismatch) between what the real consumer demand was and the number of stores opened. P. Mishra, partner of retail and consumer product practice at Ernst & Young, says, Retailers have spread themselves too thin to benefit from scale. Employee Management System It is quoted7 that if your business requires heroism of your employees to keep the customers happy, then you have a bad service by design. Employee self sacrifice is rarely a self sustainable resource, and the system at Subhiksha could have been designed to allow an average employee to thrive. They did see the simple reality that employees who are above average in both attitude and aptitude are expensive to employ a simple diagnostic tool could have given the directions like what will make the employees reasonably able to achieve excellence and then what makes the employee reasonably

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motivated to achieve excellence. In the long run Subhiksha would have faced the economic reality of flawed service from employees. The fast paced growth and increase in stores at Subhiksha led to rapid increase in personnel and they should have put an Employee Management System in place. Was the employee geared to handle the diversity of business the Management growth strategy envisaged? There is no direct reference in the case but the employee factor has a direct impact on the business efficiency quotient in retail.

Corporate Governance Issues

Business decisions of reckless expansions across disconnected geographies required a reckless increase in debt these decisions seems to have got the nod from the Board. The ambitious growth strategy grew on the promoters and other investors and the focus seems to have shifted from delivering value to customers to creating valuation for self. Cash flow mismanagement which ultimately led to the downfall showed lack of implementation of management control systems. Market seems to be getting now on now off signal for the Initial Public Offering (IPO) for the equity, transparency was lacking. Also, absence of audits and non availability of the financial statements, a lot of things could be guess work or estimation. For a business which was generating approx. Rs. 200 Crores in revenue per month (2007-2008 Revenue Rs. 2,300 Crores) why did it not service even Rs. 125 Crores bridge loan? It appears that there was severe cash mismanagement. Subhiksha made the hugely erroneous decision of funding expansion by diverting the working capital, which then leads to the boomerang effect of vendors not supplying goods stores running dry.

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ANNEXURE
Table 1: Subhiksha Stores in India2
Year 1997 1999 2000 2003 2007 Mar 2008 Sep 2008 No. of Stores 0 19 50 140 670 1,320 1,650

Table 2: Working Capital & Term Loans Offered to Subhiksha by Banks3

Bank HSBC ABN AMRO Centurion Bank of Punjab YES Bank Standard Chartered Bank HDFC Bank Development Credit Bank Federal Bank Bank Of Baroda ICICI Bank Rs. Crores 85 50 40 50 25 65 25 50 75 155 620

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REFERENCES
1. Wikipedia, the free encyclopedia 03August, 2009 2. Business Today Article Subhiksha - Pushing the Accelerator Instead of Brakes N. Madhavan, 28June, 2009 3. Anatomy of Bust Manas Ganguly on slideshare.net February, 2009. 4. Met Mr. R. Subramanian at the AC Nielsen Conference and interacted with him, as we (Wyeth Consumer) were negotiating for shelf space for our consumer goods products in the Subhiksha chain. 5. Business World: Subhikshas Last Chance Vishal Krishna, 20February, 2009 6. Business Standard: Shahani Fatima / Chennai 08 August, 2009 7. Harvard Business Review: The Four Things a Service Business Must Get Right by Frances X. Frei, 06 June, 2008. 8. Personal tour experience while working in the Marketing Dept. at Wyeth Consumer.

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