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A Tale Of Disaster :

The Subhiksha Project

Submitted to :
Prof. Paul Taffe
Dublin Business School

Submitted by :
KrsihnaVatsavayi : 1384095
Saseendran Subin : 1434388
Table of Contents

Topic Page no
Abstract 3
Executive summary 3
Business Mission and Vision 3
Product portfolio 4
The expansion 4
The positioning 4
The retail strategy 5
SWOT analysis 5
Reasons for failure 6-7
Lessons learned 7-8
Possible solutions 8-9
References 10

The facts and figures mentioned in this case have been rounded off and may not reflect the
actual figures of the company. This case study is purely meant for the purpose of academic use and
study and not for commercial use.
Abstract:
The case study's primary objective is to analyze all the facts responsible for the downfall of an Indian
fledging retail chain, Subhiksha. Subhiksha was started by Mr. R. Subramanian, an alumnus of Indian
Institute of Management, Ahmadabad (IIM-A), a prestigious B-school in India. Long-term success,
survival and profitability of Subhiksha was expected.
Subhiksha with a pioneering approach and giving new definitions to retailing, ventured into the Indian
retail industry in 1997. Subhiksha had done extensive research on customer behavior and found that
offering branded goods at a lower price than competitors could make them stand competitive in the
retail industry and they made this their Unique selling proposition (USP).
By 2007, Subhiksha became India's largest retail chain with 1,665 stores across the country with its no-
frill, discount store format. With Indian organized retail industry blooming under the economic
liberalizations and attention from global players, Subhiksha was expected to grow even bigger, but as
global recession set in, credit markets froze, Subhiksha stumbled as its capital structure could not
support the requirement. Lack of liquidity and over expansion troubled Subhiksha as it failed to pay
rent to landlords and salary to its employees. Operations finally had to come to a standstill.

• Vision- “To emerge as the largest retailer in the 'Food Grocery Pharmacy' segment in all the
geographical regions we operate from”.

• Mission- To deliver consistently better value to Indian consumers, has guided Subhiksha to
deliver savings to all consumers on each and every item that they need in their daily lives, 365
days a year, without any compromise on quality of goods purchased.

Executive Summary
Subhiksha, which means ‘prosperity’ in Sanskrit, was one of the largest retail value chains in India (in
terms of no. of stores) with over 1600 outlets selling groceries, fruits, vegetables, medicines and lately,
mobile phones.
Four parts to their corporate strategy-
 Dominance in the Retail Market
 Expansion in the Indian market
 Creation of Positive Brand and Company Recognition
 Branch Out into New Sectors of Retail

Entering into the Retail Industry 12 years ago:


Subhiksha started off in the year 1997 when Mr. R. Subramanian thought of entering into the
Retail Industry in India. Back then, the retail industry in India was almost non-existent. Basically the
country was characterized by small mom and pop retail stores. These are small stores catering to a
small nearby locality. The first outlet of Subhiksha opened at Thiruvanmiyoor in Chennai with an
investment of around Rs 500,000, with the motto “why pay more when you can get it for less at
Subhiksha”
Product Portfolios:
• Supermarket:
-Includes quality groceries, packaged foods, cosmetics and toiletries, household items, etc.

• Fruits and Vegetables:


-Includes fresh fruits and vegetables sourced directly from farms on city outskirts and made available
to the consumers at best prices.

• Pharmacy:
-Subhiksha stores are generally equipped with a pharmacy that stores mostly basic medicines. All
medicines are made available to consumers at a 10% discount.

• Telecoms:
-Subhiksha forayed into the mobile retailer business by 2007 and offers handsets, recharge cards and
accessories from all leading cell phone manufacturers at lower prices.

The expansion:

➔ In March 1997 - Opening of the first retail store in Chennai, with Rs 500,000 initial investment.
➔ March 1999 -14 stores in Chennai
➔ June 2000 - 50 stores in Chennai, ICICI ventures joins Subhiksha
➔ June 2002 - 120 stores in whole of Tamil Nadu
➔ 2004 - Change in principle: from ‘consolidation’ to ‘expansion’
➔ June 2006 - 420 Stores in other big states in India namely Gujarat, Delhi, Mumbai, Andhra
Pradesh and Karnataka.
➔ Feb 2007 - 500 stores across country
➔ Dec 2007 - crosses 1000 stores across India
➔ October 2008 - 1600 stores across India

The crash:

⇓ December 2007 – keeping in view of the uncertain stock market condition, Subhiksha shelves
much needed IPO.
⇓ April 2008 – Subhiksha plans private wholesale markets.
⇓ Aimed to expand to 2300 outlets across India by September 2009.
⇓ June 2008 – Subhiksha searches for alternate routes to generate cash so as to fund expansion.

⇓ September 2008 – breakouts of news on Subhiksha not long delays in vendor payments and
employee salaries.
⇓ October 2008 – newspapers state problems in cash flow. Vendors cutting supplies causes stores
to go dry. Employees shouting for obtaining salaries. Subhiksha defaults on rent for the stores.
⇓ January 2009 – CEO admits Subhiksha needs Rs. 3 billion just to stay afloat. Subhiksha tries
negotiations with property owners on dues and rentals.
The Positioning:

Subhiksha made an extensive research on customer behavior and found that offering branded goods at a
lower price than their competitors could make them stand in the competitive retail industry.

• Low Prices: Subhiksha made extensive research on customer behavior and found that offering
branded goods at a price lower than their competitors could make them stand on firm ground.

• Trust: Subhiksha’s name inspires trust and its consumers rely on it through all times to deliver
larger savings as compared to any other retail chain or stand alone mom and pop stores.

• Savings: It focuses on the concept of constant low pricing so that regular customers see the
same low prices all year round(below MRP) and are able to buy with the assurance that they
stand to save on any commodity on any given day.
The Retail Strategy:

Subhiksha focused on two factors for its model called the two C's:

✔ Criticality of Cost.
✔ Convenience of Buying

The following points will show how Subhiksha is integrating all that it has to achieve the above 2 C’s:

➔ Opening a chain of simple stores with no air-conditioning, no fancy lighting, and no touch and
feel experience was a deliberate strategy.
➔ Their approach combines the simplicity of a local Indian mom and pop shop with the efficient
supply chain of a large retailer.
➔ Their unique selling proposition (USP) is an everyday low price (5-10% less than MRP,
enabled by combining centralized buying and an efficient supply chain, with their simple store
format.
➔ Subhiksha follows an Every Day Low Price Scheme (ELDP). They offer the lowest prices
possible every single day on almost everything that’s sold.
➔ Shops are located just off main roads, to take advantage of vastly lower rentals.
➔ Catchment area of customers is never beyond a two km radius, since its customers usually come
on two-wheelers or on foot.

SWOT analysis of Subhiksha:

Strengths Weakness
-Lack of expertise in Indian Retail
-Combination of Discount and Carpet Bombing environment
model -Low grade lower management team
-Strong experienced Top management -Strategy of debt-led Rapid expansion on a
-High Customer base small equity base
-High Brand Value -Long time taken in IT Implementation
-No funds for operating expenses
Opportunities Threats
-World's most lucrative retail market -Economic uncertainty and Recession
-Heavy Investment industry from FII’s (foreign -Strong Competitors at National and
institutional investors) and Venture Funds Regional Level
-Huge no. of customers -Price war and shrinking margins
-Risk in Retailing and rapid expansion

Galloping on the back of rapid expansion, Subhiksha’s turnover grew from Rs. 3.3billion in 2005-06 to
Rs. 8.33 billion in 2006-07, and then by 2007-08 to Rs. 23 billion. Likewise, having grown from 150
stores in September 2006 to 1600 plus stores in September 2008, Subhiksha managed to become the
envy of its competitors. By the end of 2008, they hoped of grossing Rs. 43 billion from 2300 stores, in
turnover. Intriguingly, all growth was fuelled from a small net worth base of Rs 2.5 billion having
equity component of Rs. 1.8 billion.

Reasons for failure of Subhiksha:


The management had committed certain mistakes which has led the company towards a downward
position.
✗ The biggest mistake by the management was expanding the number of stores rapidly
without having sufficient funds in hand: They thought of raising equity during September
2008 but things had gone too far. Global markets were reported collapsing and no possible
chances of raising funds remained. By October 2008, the company ran out of enough funds to
run the organization. Since then, Subhiksha has been continuously troubled by a set of problems
from all sides.
✗ Poor financial management: Subhiksha Trading Services has come under fire from television
channels for not clearing advertising dues that run around Rs 80 Million. Subhiksha is believed
to owe Rs 350 million against goods, Rs 180 million against wages, and Rs 200 million against
lease rents. According to the reports, Subhiksha is also carrying a debt of Rs 70 Billion at an
average interest cost of 12 per cent per annum. Uncontrolled increase in no. of stores and
personnel were bleeding their treasury. Subhiksha worked on very slim & zero margins. Thus
cash flows were high where as inflows in terms of margins were non-existent.
✗ Expansion of Stores without adequate system control and IT Support: On auditing, huge
gaps were revealed financially as proper documentation was not performed. They started
implementation of SAP, but it was too late by then.
✗ Government Intervention: Maharashtra Food and Drug Authority had asked Subhiksha to
suspend operations of its warehouses at Mumbai for 20 days as well as had cancelled licenses of
three of its vendors, stating that they had failed to maintain health and hygiene norms as
prescribed by regulations.
✗ Supplier Bargaining Power: Many wholesale suppliers in Azadpur vegetables market have
stopped supplying fruits and vegetables to Subhiksha’s outlets in the national capital region
(New Delhi). This was due to the company holding up payments for two to six months against
the normal credit period of one month.
✗ Lack of strong HR policy and Staff : Subhiksha was not able to retain the talent which was
initially brought into Junior, Middle and High level management. It was like a family bound
with no commitment. Locals were recruited as the personnel for operations of each store. There
were tendency towards dishonest practices in face of turnover pressure. Quality of store service
was poor. Adherence to rules of retail was minimal.
✗ Huge Rental and Lease Bills: They were paying huge rentals for some stores, which was a
huge drain on the company's finances. Frauds were committed while entering into rental
agreements by their own management people. There were no procedures to check and control
on this cost. Rents play a crucial part in defeating competitors and gaining profitability in
future. This, coupled with almost expected other issues, drove the operational costs to
unsustainable levels.
✗ Wrong assumption that telecom segment would be a safe and profit bearing segment.
The CEO never looked in to system losses that arose from telecom. Subhiksha stores always
sell handsets below DP while its benchmarking is to match DP. There was no control on
inventory of mobile accessories and stock value and finally ended up unable to circulate the
working capital.
✗ Poor inventory management:
Shelves at Subhiksha stores were usually empty. Stock-outs in the store led to loss of business
for the retail giant. Lack of communication (delay in implementation of SAP) between the
storage facilities of Subhiksha and their outlets proved to be costly. Customer dissatisfaction
was the overall result.
✗ Strong Competition: Thus sinking, Subhiksha had to compete with its high profile competitors
like RPG, Reliance retail, Future group etc. Reliance Retail has set up 700 odd stores by 2008
almost at the rate of one store per day. Future Group has begun opening a new no-frills discount
retail chain called KB’s Fair Price Stores, a format similar in concept to Subhiksha stores.
Reliance Fresh on the other hand is high-end in terms of display, ambience and size.
✗ Over confidence and Aggressiveness: The once titan company thus began collapsing slowly.
The management admits that their over-confidence and aggressiveness are the main reasons for
their loss. They now regret not going for an IPO when the things were well and good to prevent
such a downfall. In a rush to build turnovers and meet targets, lower level managers resorted to
reselling products to retailers and emptying their inventories. In effect, target pressures impacted the
unique selling proposition since consumers chose to buy from other stores since the Subhiksha was ‘sold
out’.
✗ Poor supply chain management: Downstream supply chain of Subhiksha was not integrated.
Subhiksha acted as a re-seller at times by buying products from other vendors and selling them
at almost zero margins. Subhiksha tried to increase scale on bulk quantity purchases from
vendors and a very liberal credit term handed to them. Subhiksha delayed most of their
payments to vendors and this resulted in vendors moving back from further business with them.

Lessons learnt
Subhiksha story highlights the perils of growth at any cost and challenges of scaling a business –
something which today’s startups will face tomorrow.

 Never overlook the fundamentals of running a business while easy money is flowing in.
Healthy management of cash-flow is key in deciding the fate of an enterprise.
 Every retail giant faces some common problems while their empire is in the process of ever-
expansion. High level of growth means a store is opened every other day at least. Often it can
be seen that wrong locations might be selected. Expensive leases may be agreed upon and
poorly trained staff might be employed. These can prove to be a massive headache for the
organization.
 Monetary greed should never be the motivation behind a project/business. Striving to reach the
pinnacle/the number one position is an admirable trait, but it should not be with an ‘at any cost’
attitude.

 Implementation of proper HR policies is required for retaining and motivating existing


employees. Training costs and inadequately working employees may prove costly in terms of
money and might even tarnish the reputation of the enterprise. Inexperienced lower
management will affect the smooth functioning of any business.

 Any business would require the proper documentation of all processes and performance.
Therefore all businesses should be backed by a sound and well-defined IT structure.

 Finance should be managed with utmost care. Operational expenses must be considered before
indulging into costly advertisements and expansion projects.

 Strategy of debt-led rapid expansion is not advised

 Foraying into new ventures requires thorough research and analysis of that particular venture
and its possible outcomes.

 Overconfidence and over-aggressiveness will result in the downfall of a business.

 Strategic planning plays a pivotal role in the sustenance of any establishment.

 Never go in to expansion without safeguarding the principles in retail and customer


management. Multiplying turnovers should not be the only goal in mind.

Possible solutions
• MONETARY CONTROL - Instead of huge advertisements, Subhiksha should have
concentrated on quality control, improvement of their outlet conditions and their infrastructure.
They targeted customers in the immediate vicinity of their outlets; therefore the advertisements
did not exactly serve the purpose they were supposed to.

• Early implementation of IT would have helped in the organized running of the business.

• Introducing effective measures for tracking employee activities and having stringent rules and
regulations within the corporation would have helped them.

• PULLING THE BREAKS - Subhiksha should have slowed down their expansion process and
concentrated more on the smooth working of the retail empire. Huge investments and cash
flows were involved and Subhiksha did not have the right expertise to cope with it.

• WHERE NEXT - Should have done more research on the places they opted for opening their
outlets. Most of the outlets turned out to be quite costly and Subhiksha ended up in huge debt
due to rent payment issues with landlords. Only few stores would have been profitable in terms
of cash flows.

• CONSOLIDATE – Subhiksha was doing very well until the global recession crisis. But
recession was never the fault for their collapse. They should have consolidated their business
before dwelling on expansion.

• GOVERNMENT HELP – The business model of Subhiksha is infact quite effective and they
do have a large number of loyal customers. The government could help by providing financial
assistance for Subhiksha’s running which inturn is going to benefit the common man of India.

• IMPROVING RETAIL AND CUSTOMER MANAGEMENT – Subhiksha should introduce


healthy shop appeal to customers. This would help them compete against their rivals in the
retail market.

• FRANCHISING OF OUTLETS – Most of the 1600 odd stores could be given out on franchisee
basis. This would help them in raising some funds.
References:

http://en.wikipedia.org/wiki/Subhiksha

http://trak.in/tags/business/2009/02/10/the-rise-and-fall-of-subhiksha/

http://www.business-standard.com/india/search_news.php?
search=Subhiksha&select=keyword

http://www.linkedin.com/companies/subhiksha

http://www.rediff.com/money/2009/jan/31inter-subhiksha-has-run-out-of-cash.htm

http://www.indiaretailbiz.com/blog/category/indian-retailers/subhiksha-subramanians/

http://www.phadoogyan.com/2009/07/subhikhsa-price-warrior.html

http://www.rediff.com/money/2007/feb/05bspec.htm

http://www.scribd.com/doc/11968427/Subhiksha-Case-Study

http://www.scribd.com/doc/20097640/Subhiksha-crm-prm-Case-Study-Iim-Indore-Pgcrm-
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