INDIAN INSTITUTE OF MANAGEMENT, INDORE

Marketing - II Assignment- Failure of Subhiksha Retail Store

Course Instructor: Prof. Sabita Mahapatra Date of Submission: 20th March, 2010

A alumnus. It purchased the green grocery directly from the farmers thus it eliminated the middleman. pharmacy and electronic goods. It provided mobile handsets. Following is the portfolio of Subhiksha Supermarket: It includes all types of groceries and consumable goods available in the market. Indian Retailing Industry The retailing industry in India was estimated at INR 930. and is estimated to reach an astounding INR 1000 billion by 2010. Moving forward.a. Its major attraction is the low prices charged by it compared to other grocery stores. making up a mere 3% of the total retailing market. It offered discounts on the handsets and accessories thereby attracting a lot of customers. R. Pharmacy: Later on Subhiksha opened pharmacy retail stores. Share of Organized Retail in India . It was started in 1997 with its first store opened at Thiruvanmiyur in Chennai. 280 billion in 2004 . It was able to procure the merchandise at a lower cost thus it was able to offer the same at a lower price to its customers. It offered a discount as high as 10% in medicines. Mobile stores: Mobile store was the last type of venture that was included in the portfolio of Subhiksha. Its vision was to become India’s largest retailer in the grocery. Further. Fruits and vegetables: Subhiksha offered fresh fruits and vegetables to the customers. its contribution to total retailing sales is likely to rise to 9% by the end of the decade. thereby. pharmacy and mobiles. an IIM.About Subhiksha Subhiksha an Indian retail chain with 1600 retail outlets was started and managed by Mr.000 crores in 200304 with a a growth rate of 5% p. Subramanian. mobile accessories and recharge coupons of all the leading brands that existed in the country. The size of the organized retailing market stood at Rs. organized retailing is projected to grow at the rate of 25%-30% p.a. It functioned as a low priced retail store that first ventured into grocery items and later on diversified into the retailing of fruits and vegetables.

retailers.8 2005 10000 350 3.70 2002 8250 150 1. The following reasons support why there is a huge potential in the Indian retail market are: • Scalable and Profitable Retail Models are well established for most of the categories Rapid Evolution of New-age Young Indian Consumers Retail Space is no more a constraint for growth Partnering among Brands. franchisees. investors and malls India is on the radar of Global Retailers Suppliers • • • • The following graph exhibits the share of various categories in Indian organized retailing .1999 Total retail ( in billion INR) Organized retail ( in billion INR) % of organized retail 7000 50 0.5 Indian organized retail is at the brink of the revolution.

and gradual internationalization of palates and lifestyle have created (yet not fulfilled) needs to have a significantly wider array of products • Advent of packaged food products such as processed meat requiring quality retail space and refrigeration Porter’s five forces analysis of Indian retail food industry Buyer’s power In order to analyze the food retail industry. which means that an individual consumer can choose between several similar competitors. 'Non-organized' retailers . Today's consumer are demanding wider range and unique merchandise ‘all under one roof ’ as well as consistent quality • Cosmopolitisation of Indian population. most stores are small independents. often family-run. The Indian food retail industry is highly fragmented. End-consumers are considered as buyers. a large chunk of . In a developing country like India.small local stores. and without technical and accounting standardization . which considerably weakens buyer power. Market players generally have a wide variety of potential customers. market players will be considered as retailers of food. With the exception of a few larger outlets in the major urban areas. India has a high ratio of retailers to consumers.are by far the most numerous.Some of the drivers for growth of the organized F&G segment are: • Consumer preferences are changing due to increased disposable incomes.

poverty is often cited as a reason for such businesses starting up. Whereas in many developed markets. Fragmentation in the retail industry means that retailers are rarely in a strong position when it comes to negotiating prices and product quality. It is often difficult to establish good supply networks. player independence. Price sensitivity. foreign companies can own 51% of a multi-brand joint venture. In fact. Low: Buyer size. differentiated input. Buyer independence Supplier’s power Suppliers to the food retail segment of this industry generally include manufacturers and distributors. As a result. The capital requirements for entry to the nonorganized sector are low. traditional retailers are likely to have long relationship with suppliers. especially food. Median incomes are not high. which also tends to weaken the position of retailers. lead to the closure of many small trading businesses and result in considerable unemployment. supplier size Threat of new entrants The threat of new entrants is strong in both non-organized and organized food retail industries. although the situation is changing. backward integration High: Low-cost switching. foreign retailers could only enter the retailing industry through franchising agreements. incumbents are well placed to retaliate against new . This is likely to induce major western players to make further inroads into the Indian food retail industry going forward.consumer expenditure is on basic necessities. no substitute inputs. Smaller. as are labor costs. However. Oligopsony threat. forward integration High: Importance of quality/cost. which increases price sensitivity and decreases brand loyalty. Supplier power is moderate in the Indian industry. market entry is easier for domestic players than foreign companies. increasing liberalization has now made it possible for wholesalers to be 100% foreign owned. undifferentiated product. there had been vigorous opposition to foreign direct investment (FDI) in retailing from small traders fearing that foreign retailing companies would take away their business. In the organized sector. These factors ensure that the food retail industry in India exhibits moderate buyer power. while in the retail industry. even for the growing middle class. Until recently. Low: Oligopoly threat. Other suppliers include farmers and agricultural cooperatives.

Lack of diversity. Hard to exit. However. rivalry in Indian market is considered to be strong. Similarity of players Overall Buyer’s power: High . Also. These include low operating costs and overheads. Undifferentiated product. Little regulation. Market growth Threat of substitutes The major substitutes to food retail are food service and subsistence farming. who operate small single outlet businesses mainly using family labor. Storage costs. However. low fixed costs. Nevertheless. This is because of the strong competitive strengths that traditional retailers possess. India's market becomes more penetrated by the major western retailers. the situation in India is that new foreign entrants will be able to leverage their buying power. Zero-sum game. This is because greater numbers of higher income Indians prefer to shop at supermarkets because of convenience. The former is more significant for the affluent. Overall. higher standards of hygiene and the attractive ambience. low margins. Low: Distribution accessible. not least because it is much cheaper. Easy to expand High: Number of players. dominate this industry. Low: Beneficial alternative High: low cost alternative Degree of rivalry There are a large variety of retailers operating in the Indian food retail industry. and their ability to generate revenue in many geographical markets. for the packaged food segment. In comparison. long opening hours. Low fixed costs. the difficulties of establishing reliable supply chains in India throw up barriers to entry. and additional services to customers (such as home delivery). urban middle classes. supermarkets account for a very small proportion of food sales. it should be noted that home-cooked food is a substitute. the latter for the rural poor. traditional types of retailers. suppliers accessible High: Undifferentiated product. Rivalry is forecast to increase if. proximity to customers.entrants. to compete intensely on price with the incumbents. as expected. supermarket sales are expanding. Low: Competitor size.

7 0 1 299037040 Mar-05 24. Till March 1999 it had 14 stores all across Tamilnadu. After that Subhiksha geared into a rapid expansion phase.Supplier’s power: Low Threat of new entrants: High Threat of substitutes: Low Degree of rivalry: High Expansion Subhiksha opened its first store in Chennai in 1997. had targets of achieving 3000 stores by the end of 2010. it became a highly leveraged company. Particulars Share Capital Equity Share Capital Adjustments to equity Preference Share Capital Face Value Number of Equity Shares Mar-06 29.2 29. By April 2007 it had 780 stores spread around various regions of the country including Delhi.65 0 3. Its M. Kotak Mahindra bank.35 1 166468600 Mar-03 20 16. Uttar Pradesh . It even planned to enter into consumer durable segment and eyed at becoming a $5 billion company.35 1 166468600 . It aimed at having its presence across 250 cities of the country. It also planned to hold majority stake in a Chennai based construction firm as a part of their process of expansion. Punjab and Karnataka. Its debt amount of more than 700 crores included lenders like ICICI venture.D. It raised a major portion of the fund through the means of debt. It doubled its count of stores in the next year and a half. Thus.7 0 0 1 247037038 Mar-04 20 16. It focused on the strategy of opening stores on region to region basis.65 0 3.9 -0. HDFC and yes bank along with many other banks. It believed that a deep penetration is very necessary in order to compete with a neighborhood kirana store.7 24.

42 .01 0 0.54 0 20.66 145 21.01 0 0 0 80.47 80.37 247037038 24.05 0.8 21.29 0 0 0.93 0.13 42.73 0.23 15.66 2.21 1.46 3.66 30.68 0.97 166468600 16.06 4.Subscribed Reserves & Surplus Share Premium Profit & Loss Account Balance Networth Shareholder's Funds Secured Loans Term Loans Banks Other Secured Unsecured Loans Loans from Banks/ Institutions/Advances Other Unsecured Total Debts Total Liabilities Gross Block Less: Accumulated Depreciation Net Block Capital Work in Progress Inventories Raw Materials Finished Goods Stores and Spares Sundry Debtors Debtors more than Six months Debtors Others Cash and Bank Loans and Advances Total Current Assets Current Liabilities Sundry Creditors Other Liabilities Provisions Provision for Tax Other Provisions Less: Total Current Liabilities Net Current Assets 299037040 29.11 65.98 30.06 0.67 1.08 33.04 0.34 0.52 2.09 0.63 2 0.9 87.05 0.29 57.04 22.01 65.81 0.62 28.62 1.22 117.59 80.05 15.25 4.56 0 34.31 7.58 2.08 10.26 1.25 166468600 16.68 0.01 0.25 4.37 28.22 23.48 39.25 25.92 0.63 1.84 25.18 41.36 65.84 3.5 0.05 0 28.69 19.54 0.Paid Up Number of Equity Shares Subscribed Equity.7 25.27 71.4 0 0.71 50.05 16.69 0.21 5.46 0 24.84 0.19 0.65 5.74 5.19 16.98 1.8 7.4 0 0.06 0.32 20.07 8.44 0 34.1 27.63 119.85 1.5 0 16.7 40.31 20.26 14.68 0 15.2 4.55 10.15 0 24.95 0 28.65 5.04 57.4 17.25 0.77 37.73 0 16.01 12.41 72.01 35 45.99 3.04 3.83 0.85 86.75 15.01 196.4 1.44 0 0.17 116.31 0 0.94 3.36 20.04 5.94 21.

45 0.84 1. A discount store: Subhiksha offered a discount of about 10% on almost all of its products be it fruits and vegetables or the FMCG items and even on pharmacy products.62 8.23 1.5 65 24 .22 2 1.85 4 0 1.97 0.Miscellaneous Expenses not written off Deferred Tax Liability Net Deferred Tax Total Assets Buildings Plant& Machinery Furniture & Fixtures & Office Appliances Electrical installations & plants Vehicles Computer Software Other Fixed Assets Contingent Liabilities 0 1.52 0.59 -1.13 8.63 -1.59 -1.04 0.18 17. fruits and vegetables.14 4.75 59 21 46 12.12 6.48 4.3 0.38 3.32 2 1.49 7.32 4.5 28 43 11. medicines and mobile through a single location thus reducing the consumer’s time and energy to go to different locations to fulfill different needs.53 0 Value proposition Subhiksha offered a lot of value to its consumers.3 2.34 6.61 0.59 86.63 196.85 0 0 1.55 0. Thus it attracted a lot of customers.65 0 1.3 0.38 0.17 9. Some of them are: One stop shop: Subhiksha focused on selling FMCG.36 0 0 41. Subhiksha Price vs MRP Rice 5 kg Urd dal 1kg Sugar 1 kg Ponds Dreamflower 100gm Tide 1 kg Lifebuoy Gold 100 gm Colgate Dental 200 gm Britannia marigold 400 gm Subhiksh MRP a 102 119 28 32 15 17 25.03 1.59 42.

this strategy retail chain opens a cluster of stores in close proximity to each other. Retail strategy Subhiksha positioned itself as a discount store. in a geographical area which has high population density with purchasing potential. This enables the chain to cannibalize sales within its own network rather than allowing them to go to other individual stores or retail chains. Its target market was the middle and lower income level group in India. This way they also attracted a lot of orders through telephone calls alone. Following are the inventory management and consumer focus practices followed by Subhiksha: . Discount Model: It was based on Wal-Mart’s Every Day Low Price Model (EDLP). Supply Chain and Inventory Management 2. fixing furniture vendors. In Subhiksha’s strategy revolved around maintaining low real estate costs.Top ramen 400gm Horlicks 500gm 33 91 36 99 Introduction of Subhiksham card: They introduced Subhiksham card which they used to give ti their customers. The customers can use this card to get a certain amount of discount at their purchases. Carpet Bombing Model: It was based on Starbuck’s approach. quick inventory turns and customer education. They offered a discount of 10% apart from loyalty discounts and special promotions. Its strategy consisted of two models 1. Home delivery: They also offered home delivery of the goods that the customer purchased.

Inventory Subhiksha had a centralized purchasing system. Its stock outs were as high as 30%. Supply Chain Management Subhiksha eliminated the concept of wholesaler from the retail chain. quick inventory turns and informed customer buying helped its meteoric growth. Subhiksha made spot payments against delivery. Since it kept the inventory lean it faced frequent stock outs. unbranded groceries and branded FMCGs. It procured the goods directly from the manufacturers at ex factory prices thus it saved a lot in its purchases. Customer Education Subhiksha helped the consumer make informed buying decisions. which help them save money. which would occur if the stores were to make independent purchases. This eliminated multiplicity of billings. which supplies its stores once a day. It had a fleet of 10 tempos. On products like tea. Subhiksha would inform buyers to purchase multiple packs of smaller quantities to save money. the customers are encouraged to buy multiple units of smaller packs. . Smaller packs of products in established brands are usually less economical. For example the gingerly oil brand Idhayam was priced at Rs 14 for a 200 ml pack which works out at Rs 70 per litre while the 500ml was priced at Rs 36 which works out at Rs 72 per litre. It had inventory turnover ratio of 18 days which was very low as compared to the industry average of 30 to 35 days. The supplier helpd in inventory –control and in return got an improved cash flow. which enabled it to get cash discounts. Thus. It bought directly from distributors who sell at only a small margin above the mill prices Subhiksha had 3 separate go downs for stocking Pharmacy products. Here. As the discount format requires holding costs to be at a minimum all the stores are connected in an intranet to facilitate inventory planning. Subhiksha’s strategy of having low real estate costs. Its fill rate was very low at 65% as compared to the other FMCG firms. which have a nil tax on small packs and an 8 % tax on larger packs. It used to pass a portion of the benefit of procuring at a low cost to its customers by offering them discounts. promotional offers by leading brands usually price smaller packs at lower prices to induce buying. However.

Spencer’s Food world. Instead. then. has adopted the negotiated and predetermined' model to source vegetables and fruit from farmers across states. variety and service. Food Bazaar is a chain of supermarkets . isn't really worthwhile for Subhiksha.Target market Subhiksha's target clientele is the middle class: households with incomes in the 50-90 percentile range. They focused a lot on cost cutting Competetive analysis Organised retail in Food and frocery has many national players. Nilgiris Subhiksha. the supermarket variant of Pantaloon Retail (India) Ltd. Catering to this group.500 sq ft .and no frills like air-conditioning . Margin free Following are the other major players in the retail sector: Food Bazaar Food Bazaar.Subhiksha set itself up in direct competition with the kirana shops. Different formats of Food retail Format Hypermarket Food-Supermarket Discount Stores Major players Food bazaar. Following are the formats in which this type of retailing is prevelant. But they do expect more in terms of ambience. nor do they account for large numbers.200-1. with functional outlets no bigger than 1. It believed that top 10 per cent don't spend very much more on food and groceries than those in the income categories below them.

Regional Dominance in Food Retail North Sabka bazaar Food bazaar South Subhiksha Nilgiris Margin Free East Not Available West Food land Reliance fresh Fall of Subhiksha The major food retail chain Subhiksha’s crisis was felt during September 2008. The Reliance Fresh supermarket chain is RIL’s Rs. later on it evolved into a supermarket when its owner took inspiration from the supermarkets of US and Europe.focusing on eatables. The Future Group's Rs10 billion business unit Food Bazaar is embarking on a product category expansion within its existing formats to add new items like regional foods. This chain has blossomed to cover a vast region in South India with 26 outlets and annual sales of about Rs 2. Following things signified that Subhiksha is under huge crisis: • Inability to repay the debts of the bank . headed by Mukesh Ambani. Reliance Fresh Reliance Fresh is the retail chain division of Reliance Industries of India. The USP of Spencer’s is their high quality service. as it aims to cash in on local flavors. Nilgiris It was established as a modest store carrying Nilgiris' own products. They are having more than 400 stores across 65 cities covering a retail trading area of 2million square feet and an astonishing 3. Eventually. Reliance has entered into this segment by opening new retail stores in almost every metropolitan and regional area of India. mostly dairy and bakery.5million customer a month.250 billion venture.300 million Spencer’s RPG group's retail arm Spencer’s Retail is one of the largest supermarket chains in India. Reliance plans to begin retail stores in 784 cities across the country.

mobile and accessories. It did not create growth platform for its expansion. Cannibalization of its own sales: Some of its stores were located within 500 km range of its own store.• • • • Nonpayment of salaries to its employees Accumulation of a huge amount of arrears Shuttering down of many of its stores Failed to pay back the suppliers Following were the reasons for the failure of Subhiksha: Rapid expansion without consolidation and focus: Subhiksha kept on expanding its stores without focusing on consolidating the growth. pharmacy. Inefficient management: Its focus was on increasing its turnover and they did not paid attention over their management and service. High debt: It planned its expansion by using a high amount of debt. The staff service was very poor which proved to be a horrible experience for their customers Improper diversification: Subhiksha ventured into various areas like grocery. Thus there happened an intersection of the target customers hence causing cannibalization of its own revenues and profits. All of them require a different level of expertise lacking which it was anot able to sustain. The special format requires a special plan that Subhiksha was not able to implement. Its business model was based on getting discounts at bulk buying which is not at all sustainable. The bargaining power with its suppliers was very low. A high financial leverage induced very high financial risk to it Incorrect format: Subhiksha was neither a supermarket nor it was a local kirana store. . As a result it faced an intense competition with both the big players as well as from the local grocery shops. Inefficient supply chain management: Its downstream supply chain was not integrated. It eyed on having as many stores in the country as possible. In the process it ignored to manage its stores efficiently.

. It did not give training to its staff that resulted into the degraded service offered by its employees. Lack of HR policy: Due to the absence of proper HR policies it was able to neither recruit nor retain the talented staff. But it could not get the required amount of volume transactions.Poor inventory management: It used to keep an inventory of about 15 days against the industry average of around 35 days. The high inventory turnover and low fill rate resulted into a high stock out thereby a high amount of opportunity loss in revenues Economic slowdown: In 2008 it was already under a huge debt (around 700 crores). It focused on getting profit by volume rather than profit by price. It owed to the suppliers as well as to its employees. Low margin: To offer its customer at a lower price it compromised on a very low margin. It planned to raise further debt to repay its current debts but due to advent of the slowdown in the economy it was unable to raise the much needed debt.

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