S UBHIKSHA – P ROSPERITY

D ISCOUNTED !
Strategic Management Project

Uday Kamath
eEPSM-02-052

29/10/2009
SUBHIKSHA – PROSPERITY DISCOUNTED! S TRATEGIC M ANAGEMENT P ROJECT

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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SUBHIKSHA – PROSPERITY DISCOUNTED! S TRATEGIC M ANAGEMENT P ROJECT

EXECUTIVE SUMMARY

Subhiksha (prosperity in Sanskrit) was

dubbed as a retail chain trying to be an
India’s 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,
ICICI’s 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
Venture’s 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, India’s 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
Supervisor’s 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, Birla’s 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 Subhiksha’s 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 Subhiksha’s 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, Subhiksha’s
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 November-
December 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 Venture’s 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 PF’s 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. Subramanian’s
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 isn’t 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 don’t 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) Corporate Strategy – Growth

2) External Analysis
3) Internal Analysis
4) Corporate Governance Strategy

Corporate Strategy

Sometime in March 2008, the Boston Consulting Group had named Subhiksha one of the
world’s 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) Growth - at what pace?

2) Funding - to support this growth.
3) Tackling a potential future downturn.
4) Differentiated Experience

Subhiksha’s 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 world’s 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 can’t 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 Wal-
Mart where ambience and sales help was least valued by its customers and low prices and
wide selection were more valued. In Subhiksha’s case one wonders by extending the
business line’s 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 Subhiksha’s 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 Subhiksha’s 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
(Subhiksha’s typical store size) to break even is Rs 5,000 per sq. ft6, and several people now
say that Subhiksha’s 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 No. of Stores

1997 0
1999 19
2000 50
2003 140
2007 670
Mar 2008 1,320
Sep 2008 1,650

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

Banks3

Bank Rs. Crores

HSBC 85
ABN AMRO 50
Centurion Bank of Punjab 40
YES Bank 50
Standard Chartered Bank 25
HDFC Bank 65
Development Credit Bank 25
Federal Bank 50
Bank Of Baroda 75
ICICI Bank 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: Subhiksha’s 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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