Case study on Subhiksha retail chain. -Srinivas R Khode.
R Subramanian Founder & MD
• “We are a golden egg laying duck, we are in trouble. We need their (bankers and lenders) support and upon getting it we will restart operations and repay all debt. It is not easy, but we have to make it happen,” says R Subramanian, Founder, Promoter, and Managing Director of Subhiksha Trading Services, which owns Subhiksha– the India’s largest (in terms of number of stores), food and grocery, small format, neighbourhood, convenience, discount retail chain. Subhiksha (prosperity) which means prosperity in Sanskrit is on the verge of bankruptcy today, as on 2 Feb, 2009.
• Subramanian wasn't thinking this big when he kicked off Subhiksha a retail value chain in 1996. In fact, he wasn't even thinking retail when he passed out of IIM Ahmadabad in 1989. After a two-week stint at his first employer Citibank, Subramanian joined his mentor (late) S. Vishwanathan, who then ran Enfield Industries. At Enfield, Subramanian helped professionalize a hitherto family-run set-up and rope in Eicher as a buyer. After working for two years at Eicher, he started his first company called Viswapriya, and made profits up to 25 crores, until the share market collapsed in 1995.
• In the year 1997, Subhiksha opened its first store at Thiruvanmiyoor in Chennai with an investment of around Rs 4-5 lakh, with the theme,” why pay more when you can get it for less at Subhiksha”
Offering the branded goods at a lower price than their competitors Which could make them stand in the competitive retail industry.
The expansion of the stores:
• By March 1999, Subhiksha started expanding rapidly. From 14 stores, it expanded to 50 stores by June 2000. In the next two years, it had 120130 stores across Tamil Nadu. • They decided to look at every part of India which is significantly literate and is a significant consumption market. Telecom companies are their role model. In 2004-05, they decided to have 420 stores in places like Gujarat, Delhi, Mumbai, Andhra and Karnataka by 2006.
Subhiksha is currently operating over 1,500 supermarket stores across more than 100 cities selling food, grocery, drugs, and telecom products across INDIA.
Cut price strategy:
Opening a chain of no-frills stores-no airconditioning, no fancy lighting, and no touchand-feel experience (customers have to ask for products at Subhiksha stores)-was a deliberate strategy. Shops are located not on the main road, but just off it, to take advantage of vastly lower rentals. The catchment area of customers is rarely beyond a two-km radius, since its customers usually come on two-wheelers or on foot.
Until little over two years ago, Subhiksha was only a local player with 150 stores (September 2006) operating mainly in Tamilnadu. The retailer began growing rapidly outside the state, soon after infusion of private equity capital by I-venture, the venture capital arm of ICICI. I-Venture took 24 per cent stake in the company’s equity, which until then was primarily held by Subramanian and his associates.
Subhiksha’s turnover grew from Rs 330 crore in 2005-06 to Rs 833 crore in 2006-07, and then to Rs 2,305 crore in 2007-08 (year ending March 31, 2008). Likewise, having grown from 150 stores in September, 2006 in Tamilnadu to 1,600-odd stores across the country in September, 2008, Subhiksha has been the envy of its competitors. By the end of this year, it was looking at grossing a turnover of Rs 4,300 crore from 2,300 stores.
The problem starts….
"We were facing a lot of difficulty in accessing data across different regions using this local solution," concurs Ankur Saigal, vice president (Tech Initiative), Subhiksha Trading Services. "Besides business expansion brings its own complexities and we needed a robust platform to streamline our operations and control."
Furthermore, the company needed a solution to manage the payroll system. Although it didn't have any HR issues at the ground level, sending the payroll to employees on time was getting difficult. The system worked manually, with a central team taking care of running 2-3 payroll systems in a month depending on the availability of the band width and the entire process.
The first and big mistake committed by the management of Subhiksha is expanding the number of stores rapidly without sufficient funds in hand. They thought of raising equity during last September but the things had gone too far before they woke up. The global markets had started collapsing and there were no possible chances of raising funds.
1.Subhiksha Trading Services has come under fire from television channels for not clearing advertising dues that run around Rs 8 crore. 2. Subhiksha is believed to owe Rs 35 crore against goods, Rs 18 crore against wages, and Rs 20 crore against lease rents. The company, according to the report, is also carrying a debt of Rs 700 crore at an average interest cost of 12 per cent per annum. 3. Expansion of Stores without adequate system control and IT Support. That’s why there was a huge Audit and abnormal losses in the system.
Subhiksha, which was forced to shut all its stores as it ran out of cash, is in talks with over ten banks to restructure loans of nearly Rs 750 crore through a CDR (corporate debt restructuring) exercise. Its promoter R Subramanian has said that the company can resume operations after it gets cash of Rs 300 crore.
In all, 13 banks have cumulatively lent Rs 750 crore to the company. The banks that are part of the restructuring include ABN AMRO Bank (Rs 50 crore), Bank of Baroda (Rs75 crore), Centurion Bank of Punjab (Rs 40 crore), Development Credit Bank (Rs 25 crore), Federal Bank (Rs 50 crore), HDFC Bank (Rs 65 crore), ICICI Bank (Rs 155 crore), Standard Chartered Bank (Rs 25 crore), The Hongkong and Shanghai Banking Corporation (Rs 85 crore) and Yes Bank (Rs 50 crore)