INDIAN INSTITUTE OF MANAGEMENT, INDORE

Marketing - II

Assignment- Failure of Subhiksha Retail Store

Course Instructor: Prof. Sabita Mahapatra

Date of Submission: 20th March, 2010

 About Subhiksha

Subhiksha an Indian retail chain with 1600 retail outlets was started and
managed by Mr. R. Subramanian, an IIM- A alumnus. It was started in 1997
with its first store opened at Thiruvanmiyur in Chennai. Its vision was to
become India’s largest retailer in the grocery, pharmacy and electronic
goods. 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, pharmacy and mobiles.

Following is the portfolio of Subhiksha

Supermarket: It includes all types of groceries and consumable goods

available in the market. Its major attraction is the low prices charged by it
compared to other grocery stores.

Fruits and vegetables: Subhiksha offered fresh fruits and vegetables to

the customers. It purchased the green grocery directly from the farmers thus
it eliminated the middleman. 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.

Pharmacy: Later on Subhiksha opened pharmacy retail stores. 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. It provided mobile handsets, mobile accessories
and recharge coupons of all the leading brands that existed in the country. It
offered discounts on the handsets and accessories thereby attracting a lot of
customers.

Indian Retailing Industry

The retailing industry in India was estimated at INR 930,000 crores in 2003-
04 with a a growth rate of 5% p.a. The size of the organized retailing market
stood at Rs. 280 billion in 2004 , thereby, making up a mere 3% of the total
retailing market. Moving forward, organized retailing is projected to grow at
the rate of 25%-30% p.a. and is estimated to reach an astounding INR 1000
billion by 2010. Further, its contribution to total retailing sales is likely to rise
to 9% by the end of the decade.

Share of Organized Retail in India

 1999 2002 2005

Total retail ( in billion INR) 7000 8250 10000

Organized retail ( in billion 50 150 350

INR)

% of organized retail 0.70 1.8 3.5

Indian organized retail is at the brink of the revolution. 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, retailers, 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
Some of the drivers for growth of the organized F&G segment are:

• Consumer preferences are changing due to increased disposable incomes.

Today's consumer are demanding wider range and unique merchandise ‘all
under one roof ’ as well as consistent quality

• Cosmopolitisation of Indian population, 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, market players will be considered
as retailers of food. End-consumers are considered as buyers. Market players
generally have a wide variety of potential customers, which considerably
weakens buyer power. The Indian food retail industry is highly fragmented.
With the exception of a few larger outlets in the major urban areas, most
stores are small independents. 'Non-organized' retailers - small local stores,
often family-run, and without technical and accounting standardization - are
by far the most numerous. India has a high ratio of retailers to consumers,
which means that an individual consumer can choose between several
similar competitors. In a developing country like India, a large chunk of
consumer expenditure is on basic necessities, especially food. Median
incomes are not high, even for the growing middle class, which increases
price sensitivity and decreases brand loyalty. These factors ensure that the
food retail industry in India exhibits moderate buyer power.

Low: Buyer size, Oligopsony threat, backward integration

High: Low-cost switching, undifferentiated product, Price sensitivity, Buyer

independence

Supplier’s power

Suppliers to the food retail segment of this industry generally include

manufacturers and distributors. Other suppliers include farmers and
agricultural cooperatives. Supplier power is moderate in the Indian industry.
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, which also tends to weaken
the position of retailers. Smaller, traditional retailers are likely to have long
relationship with suppliers.

Low: Oligopoly threat, player independence, no substitute inputs, forward

integration

High: Importance of quality/cost, differentiated input, supplier size

Threat of new entrants

The threat of new entrants is strong in both non-organized and organized

food retail industries. The capital requirements for entry to the non-
organized sector are low, as are labor costs. In fact, poverty is often cited as
a reason for such businesses starting up. In the organized sector, market
entry is easier for domestic players than foreign companies, although the
situation is changing. Until recently, 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, lead to the
closure of many small trading businesses and result in considerable
unemployment. As a result, foreign retailers could only enter the retailing
industry through franchising agreements. However, increasing liberalization
has now made it possible for wholesalers to be 100% foreign owned, while in
the retail industry, foreign companies can own 51% of a multi-brand joint
venture. This is likely to induce major western players to make further
inroads into the Indian food retail industry going forward. Whereas in many
developed markets, incumbents are well placed to retaliate against new
entrants, the situation in India is that new foreign entrants will be able to
leverage their buying power, and their ability to generate revenue in many
geographical markets, to compete intensely on price with the incumbents.
However, the difficulties of establishing reliable supply chains in India throw
up barriers to entry.
Low: Distribution accessible, suppliers accessible

High: Undifferentiated product, low fixed costs, Little regulation, Market

growth
Threat of substitutes

The major substitutes to food retail are food service and subsistence
farming. The former is more significant for the affluent, urban middle
classes; the latter for the rural poor. Also, for the packaged food segment, it
should be noted that home-cooked food is a substitute, not least because it
is much cheaper.

Low: Beneficial alternative

High: low cost alternative

Degree of rivalry

There are a large variety of retailers operating in the Indian food retail
industry. However, traditional types of retailers, who operate small single
outlet businesses mainly using family labor, dominate this industry. In
comparison, supermarkets account for a very small proportion of food sales.
This is because of the strong competitive strengths that traditional retailers
possess. These include low operating costs and overheads, low margins,
proximity to customers, long opening hours, and additional services to
customers (such as home delivery). Nevertheless, supermarket sales are
expanding. This is because greater numbers of higher income Indians prefer
to shop at supermarkets because of convenience, higher standards of
hygiene and the attractive ambience. Rivalry is forecast to increase if, as
expected, India's market becomes more penetrated by the major western
retailers. Overall, rivalry in Indian market is considered to be strong.

Low: Competitor size, Zero-sum game, Storage costs, Low fixed costs, Hard
to exit, Easy to expand

High: Number of players, Undifferentiated product, Lack of diversity,

Similarity of players

Overall

Buyer’s power: High

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. Till March 1999 it
had 14 stores all across Tamilnadu. After that Subhiksha geared into a
rapid expansion phase. It focused on the strategy of opening stores on
region to region basis. It believed that a deep penetration is very
necessary in order to compete with a neighborhood kirana store. By
April 2007 it had 780 stores spread around various regions of the
country including Delhi, Uttar Pradesh , Punjab and Karnataka. It
doubled its count of stores in the next year and a half.

Its M.D. had targets of achieving 3000 stores by the end of 2010. 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. It even planned to enter into
consumer durable segment and eyed at becoming a $5 billion
company.

It raised a major portion of the fund through the means of debt. Thus,
it became a highly leveraged company. Its debt amount of more than
700 crores included lenders like ICICI venture, Kotak Mahindra bank,
HDFC and yes bank along with many other banks.

Particulars Mar-06 Mar-05 Mar-04 Mar-03

Share Capital 29.2 24.7 20 20
Equity Share Capital 29.9 24.7 16.65 16.65
Adjustments to equity -0.7 0 0 0
Preference Share Capital 0 0 3.35 3.35
Face Value 1 1 1 1
Number of Equity Shares 299037040 247037038 166468600 166468600
Paid Up
Number of Equity Shares
Subscribed 299037040 247037038 166468600 166468600
Equity- Subscribed 29.9 24.7 16.65 16.65
Reserves & Surplus 87.27 40.66 5.19 5.05
Share Premium 71.05 30.55 0.25 0.25
Profit & Loss Account
Balance 16.22 10.11 4.94 4.8
Networth 117.17 65.36 21.84 21.7
Shareholder's Funds 116.47 65.36 25.19 25.05
Secured Loans 80.01 20.54 16.73 15.68
Term Loans Banks 35 0 0 0
Other Secured 45.01 20.54 16.73 15.68
Unsecured Loans 0 0.31 0.4 0.5
Loans from Banks/
Institutions/Advances 0 0 0 0.5
Other Unsecured 0 0.31 0.4 0
Total Debts 80.01 20.85 17.13 16.18
Total Liabilities 196.48 86.22 42.32 41.23
Gross Block 39.08 23.31 20.21 15.46
Less: Accumulated
Depreciation 10.37 7.75 5.26 3.01
Net Block 28.71 15.56 14.95 12.46
Capital Work in Progress 50.04 0 0 0
Inventories 57.29 34.44 28.05 24.15
Raw Materials 57.29 0 0 0
Finished Goods 0 34.44 28.01 24.06
Stores and Spares 0 0 0.05 0.09
Sundry Debtors 0.01 0.83 0.25 0.4
Debtors more than Six
months 0 0.06 0.04 0
Debtors Others 0.01 0.77 0.21 0.4
Cash and Bank 65.04 37.8 1.2 1.99
Loans and Advances 22.66 7.59 4.08 3.98
Total Current Assets 145 80.66 33.58 30.52
Current Liabilities 21.69 2.67 2.63 2.26
Sundry Creditors 19.85 1.62 2 1.34
Other Liabilities 1.84 1.04 0.63 0.92
Provisions 3.94 5.74 1.98 0.84
Provision for Tax 3.69 5.68 1.93 0.81
Other Provisions 0.25 0.07 0.06 0.04
Less: Total Current
Liabilities 25.63 8.41 4.62 3.1
Net Current Assets 119.37 72.25 28.97 27.42
Miscellaneous Expenses
not written off 0 0 0 1.36
Deferred Tax Liability 1.63 1.59 1.59 0
Net Deferred Tax -1.63 -1.59 -1.59 0
Total Assets 196.48 86.22 42.32 41.23
Buildings 4.14 2 2 1.97
Plant& Machinery 4.18 1.17 1.13 0.12
Furniture & Fixtures &
Office Appliances 17.38 9.3 8.03 6.84
Electrical installations &
plants 3.61 2.04 1.52 1.3
Vehicles 0.62 0.49 0.34 0.32
Computer Software 8.3 7.45 6.55 4.38
Other Fixed Assets 0.85 0.85 0.65 0.53
Contingent Liabilities 0 4 0 0

Value proposition

Subhiksha offered a lot of value to its consumers. Some of them are:

One stop shop: Subhiksha focused on selling FMCG, fruits and

vegetables, medicines and mobile through a single location thus
reducing the consumer’s time and energy to go to different locations to
fulfill different needs.

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. Thus it attracted a lot of customers.

Subhiksha Price vs
MRP
Subhiksh MRP
a
Rice 5 kg 102 119
Urd dal 1kg 28 32
Sugar 1 kg 15 17
Ponds Dreamflower 25.5 28
100gm
Tide 1 kg 43 46
Lifebuoy Gold 100 gm 11.75 12.5
Colgate Dental 200 59 65
gm
Britannia marigold 21 24
400 gm
 Top ramen 400gm 33 36
Horlicks 500gm 91 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.

Home delivery: They also offered home delivery of the goods that the
customer purchased. This way they also attracted a lot of orders
through telephone calls alone.

Retail strategy

Subhiksha positioned itself as a discount store. Its target market was

the middle and lower income level group in India. Its strategy consisted
of two models

1. Discount Model: It was based on Wal-Mart’s Every Day Low Price

Model (EDLP). They offered a discount of 10% apart from loyalty
discounts and special promotions.

2. Carpet Bombing Model: It was based on Starbuck’s approach. In

this strategy retail chain opens a cluster of stores in close proximity
to each other, 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.

Supply Chain and Inventory Management

Subhiksha’s strategy revolved around maintaining low real estate costs,

fixing furniture vendors, quick inventory turns and customer education.
Following are the inventory management and consumer focus practices
followed by Subhiksha:
Inventory

Subhiksha had a centralized purchasing system. This eliminated multiplicity

of billings, which would occur if the stores were to make independent
purchases. 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,

unbranded groceries and branded FMCGs. It had a fleet of 10 tempos, which
supplies its stores once a day. 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 made spot payments against delivery, which enabled it to get

cash discounts. The supplier helpd in inventory –control and in return got an
improved cash flow.

Customer Education

Subhiksha helped the consumer make informed buying decisions. Smaller

packs of products in established brands are usually less economical.
However, promotional offers by leading brands usually price smaller packs at
lower prices to induce buying. 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. Here,
Subhiksha would inform buyers to purchase multiple packs of smaller
quantities to save money.

On products like tea, which have a nil tax on small packs and an 8 % tax on
larger packs, the customers are encouraged to buy multiple units of smaller
packs, which help them save money.

Thus, Subhiksha’s strategy of having low real estate costs, quick inventory
turns and informed customer buying helped its meteoric growth.

Supply Chain Management

Subhiksha eliminated the concept of wholesaler from the retail chain. It

procured the goods directly from the manufacturers at ex factory prices thus
it saved a lot in its purchases. It used to pass a portion of the benefit of
procuring at a low cost to its customers by offering them discounts.

It had inventory turnover ratio of 18 days which was very low as compared to
the industry average of 30 to 35 days. Since it kept the inventory lean it
faced frequent stock outs. Its stock outs were as high as 30%. Its fill rate was
very low at 65% as compared to the other FMCG firms.
 Target market

Subhiksha's target clientele is the middle class: households with incomes in

the 50-90 percentile range. 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, nor do they account for large numbers. But they do expect more in
terms of ambience, variety and service. Catering to this group, then, isn't
really worthwhile for Subhiksha.

Instead, with functional outlets no bigger than 1,200-1,500 sq ft - and no

frills like air-conditioning - Subhiksha set itself up in direct competition with
the kirana shops. They focused a lot on cost cutting

Competetive analysis

Organised retail in Food and frocery has many national players. Following are
the formats in which this type of retailing is prevelant.

Different formats of Food retail

Format Major players

Hypermarket Food bazaar, Spencer’s
Food-Supermarket Food world, Nilgiris
Discount Stores Subhiksha, Margin free

Following are the other major players in the retail sector:

Food Bazaar
Food Bazaar, the supermarket variant of Pantaloon Retail (India) Ltd, has
adopted the negotiated and predetermined' model to source vegetables and
fruit from farmers across states. Food Bazaar is a chain of supermarkets
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, as it aims to cash in on local
flavors.

Nilgiris
It was established as a modest store carrying Nilgiris' own products, mostly
dairy and bakery. Eventually, later on it evolved into a supermarket when its
owner took inspiration from the supermarkets of US and Europe. This chain
has blossomed to cover a vast region in South India with 26 outlets and
annual sales of about Rs 2,300 million

Spencer’s
RPG group's retail arm Spencer’s Retail is one of the largest supermarket
chains in India. They are having more than 400 stores across 65 cities
covering a retail trading area of 2million square feet and an astonishing
3.5million customer a month. The USP of Spencer’s is their high quality
service.

Reliance Fresh
Reliance Fresh is the retail chain division of Reliance Industries of India,
headed by Mukesh
Ambani. Reliance has entered into this segment by opening new retail stores
in almost every metropolitan and regional area of India. Reliance plans to
begin retail stores in 784 cities across
the country. The Reliance Fresh supermarket chain is RIL’s Rs.250 billion
venture.

Regional Dominance in Food Retail

North South East West

Sabka bazaar Subhiksha Not Available Food land
Food bazaar Nilgiris Reliance fresh
Margin Free

Fall of Subhiksha

The major food retail chain Subhiksha’s crisis was felt during September
2008. Following things signified that Subhiksha is under huge crisis:

• Inability to repay the debts of the bank

 • 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. It
eyed on having as many stores in the country as possible. In the process
it ignored to manage its stores efficiently.

Cannibalization of its own sales: Some of its stores were located

within 500 km range of its own store. Thus there happened an
intersection of the target customers hence causing cannibalization of its
own revenues and profits.

High debt: It planned its expansion by using a high amount of debt. 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. The special format requires a special plan that Subhiksha
was not able to implement. As a result it faced an intense competition with
both the big players as well as from the local grocery shops.

Inefficient management: Its focus was on increasing its turnover and

they did not paid attention over their management and service. 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, pharmacy, mobile and accessories. All of them require a different
level of expertise lacking which it was anot able to sustain. It did not create
growth platform for its expansion.

Inefficient supply chain management: Its downstream supply chain was

not integrated. The bargaining power with its suppliers was very low. Its
business model was based on getting discounts at bulk buying which is not
at all sustainable.
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 owed to the suppliers as well as to its employees. 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.

Low margin: To offer its customer at a lower price it compromised on a

very low margin. It focused on getting profit by volume rather than profit by
price. But it could not get the required amount of volume transactions.

Lack of HR policy: Due to the absence of proper HR policies it was able to

neither recruit nor retain the talented staff. It did not give training to its staff
that resulted into the degraded service offered by its employees.