The Anatomy Of A Bust

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My thoughts about the Seizure (and failure?) of Subhiksha Retail in India

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The Anatomy Of A Bust

  1. 1. The Anatomy of a Bust: Subhiksha Retail 31 st January 2009
  2. 2. Views expressed hereby are mine . I formed these views initially through interactions with Subhiksha on business levels and later through follow ups of the newspaper reports and conversations from sources from the industry and employees at Subhiksha. Refer to my blogs on 5 th September 2008 and 30 th January 2009 as reference. http://newspaper-posts.blogspot.com/2008/09/subhiksha-perfect-go-bust.html http://newspaper-posts.blogspot.com/2009/01/subhiksha-perfect-go-bust-part-ii.html more references…
  3. 3. References <ul><li>Subhiksha founder admits chain is in deep financial trouble : http://www.livemint.com/2009/01/30180828/Subhiksha-founder-admits-chain.html </li></ul><ul><li>Subhiksha seeks renegotiation with property owners http://www.livemint.com/2009/01/20160213/Subhiksha-seeks-renegotiation.html </li></ul><ul><li>Subhiksha says it’s not facing financial crisis : http://www.livemint.com/2008/10/03003508/Subhiksha-says-it8217s-not.html </li></ul><ul><li>Subhiksha to invest Rs1,200 crore for expansion by 2010 http://www.livemint.com/2008/06/29151428/Subhiksha-to-invest-Rs1200-cr.html </li></ul><ul><li>Subhiksha not paying some bills http://www.livemint.com/2008/09/05001546/Subhiksha-not-paying-some-bill.html </li></ul><ul><li>Wipro buys 10% stake in Subhiksha http://www.livemint.com/2008/09/05201709/Wipro-buys-10-stake-in-Subhik.html </li></ul><ul><li>Denying stake sale, Subhiksha to foray into durables http://www.livemint.com/2008/09/08145401/Denying-stake-sale-Subhiksha.html </li></ul><ul><li>Subhiksha plans to set up private mandis http ://www.livemint.com/2008/04/01185306/Subhiksha-plans-to-set-up-priv.html?atype=tp </li></ul><ul><li>Subhiksha enters Kolkata, Kerala telecom retail markets http://www.livemint.com/2008/04/23153853/Subhiksha-enters-Kolkata-Kera.html </li></ul><ul><li>Subhiksha defers IPO indefinitely, looks at banks www.livemint.com/2007/12/05001951/Subhiksha-defers-IPO-indefinit.html </li></ul><ul><li>Rs350 crore IPO to fund Subhiksha expansion http://www.livemint.com/2007/10/30010920/Rs350-crore-IPO-to-fund-Subhik.html </li></ul>
  4. 4. Chronicles of the Indian Sam Walton and the desi Wal Mart! <ul><li>R Subramaniam, IIT Chennai and IIM A alumnus started a chain of Discount stores “Subhiksha” in 1997 in Chennai. </li></ul><ul><li>The first venture was in grocery </li></ul><ul><li>Quickly, diversified into medicine retail as well </li></ul><ul><li>The USP of these stores were the discount pricing (a take on Wal Mart, USA) </li></ul>
  5. 5. Timeline: The Ascent <ul><li>1 st store in Chennai in 1997 selling groceries and medicine </li></ul><ul><li>March 1999: 14 stores in Chennai </li></ul><ul><li>June 2000: 50 stores in Chennai </li></ul><ul><li>2000: ICICI ventures invests in Subhiksha </li></ul><ul><li>2002: 120 stores across the state of Tamil Nadu! </li></ul><ul><li>2004: Change in principle. From “Consolidation” to “Expansion” </li></ul><ul><li>2005: Recruits personnel across the country </li></ul><ul><li>End 2006: 420 stores in Gujarat, Tamil Nadu, Delhi, Mumbai, Andhra and Karnataka. </li></ul><ul><li>Feb 2007: 500 stores across the country </li></ul><ul><li>End 2007: Crosses 1000 stores across the country </li></ul>
  6. 6. Timeline: The Crash <ul><li>October 2007: Subhiksha mulls a Rs.350 crore IPO to finance growth </li></ul><ul><li>December 2007: Subhiksha shelves IPO in view of uncertain stock market conditions </li></ul><ul><li>April 2008: Plans foray into East market </li></ul><ul><li>April 2008: Subhiksha plans private wholesale markets </li></ul><ul><li>June 2008: Subhiksha looks at alternate routes to generate cash to fund expansion </li></ul><ul><li>September 2009: Reports on Subhiksha defaulting on vendor payments, Employee salaries/ Wipro takes 10% stake in Subhiksha/ Subhiksha hints at large format Consumer durables and IT stores </li></ul><ul><li>October 2009: Tabloids report problems in the cash flows @ Subhiksha/ Employees clamor for salaries/ Vendors cutting off supplies cause Subhiksha stores to go dry/ Subhiksha defaults on rents for the stores </li></ul><ul><li>January 2009: RS admits Subhiksha needs Rs.300 crores to keep afloat / Subhiksha enters negotiations with property owners on arrears and rentals </li></ul>
  7. 7. From Largest Indian retailer  Doom The mechanics for seizure!
  8. 8. Reason 1 : Unmindful Expansion Across states from South to West and North and East  Rapid store expansion Rapid increase of personnel From groceries and medicines  Mobiles and Electronics  Consumer durables and IT (Too fast too furious!) Huge investments and cash flows …
  9. 9. Reason 2 : Growth ... without Consolidation 2004 marked a departure in Subhiksha philosophy from Consolidation & Growth to uncontrolled growth! Very few stores would have been profitable in terms of cash flows
  10. 10. Reason 3 : Whither Retail management The focus was towards multiplying turnovers! Expansions happened without an eye to principles in Retail and Customer Management Staff service was shoddy and stores lacked a healthy appeal to Consumers A Subhiksha store often looked like a Government uniform Pricing Store!
  11. 11. Reason 4 : Profit and Loss? Balance Sheets? Cash Flows! Uncontrolled increase in store and personnel were bleeding the Treasury Turnover being the mantra, Subhiksha worked on slim and zero margins, Often invoking the wrath of other players in the market Thus Cash outflows were high where as inflows in terms of margins were non existent
  12. 12. Reason 5: Mastering the Supply Chain A Wal Mart builds scale through integrated Supply chain, not by being a re-seller! Downstream supply chain was not integrated. Bulk buying is not a source of advantage. In effect, Subhiksha was being a reseller buying products from vendors and selling them at zero margins
  13. 13. Reason 6 : Managing Vendors! Subhiksha tried to build scale on bulk Quantity purchases from vendors and a liberal credit term extended to them Your vendors only have a limited leash...expecting huge credit cycles to make up for your RoIs is hardly “good” vendor management
  14. 14. Reason 7 : Inventory management! Credit defaults caused supply breakages Hence it led to situations where either there were huge store Inventories going bad… … Or the stores simply did not have stocks! Inconsistency resulted in customer dissatisfaction with Store franchise! Furthermore, unrestrained practices like reselling to other retailers, made companies squeeze supplies In the rush to pump RoI and turnovers, Subhiksha stores were resorting to indiscipline and wasteful practices!
  15. 15. Reason 8 : Discounts as USP The only USP was discounts... hardly a sustainable competitive edge! Footfalls, turnaround and turnover being the guru mantra: Subhiksha never understood its consumers In a rush to build turnarounds and turnovers and meet targets, Lower level managers resorted to reselling it to retailers and emptying their inventories In effect, target pressures impacted the USP since Consumers chose to buy from outside the store since the store was “sold out”
  16. 16. Reason 9 : Quality of ground level management! Personnel recruited to run operations were locals Tendency towards dishonest practices in face of turnover pressure! Scored “own goals” by playing into the turnover traps Quality of store service was bad, adherence to rules of retail were minimal
  17. 17. Reason 10 : Diffused focus Subhiksha sold fresh vegetables, medicines, groceries, mobile phones, accessories and more.. where was the focus? How robust was the business model and the manpower to handle such diversity? Did they ever stop to catch a breath and consolidate?
  18. 18. On Hind sight <ul><li>In 2007 – 2008, there were rumors about Subhiksha wanting to sell off to a larger player ( Reliance Retail ) </li></ul><ul><li>While it was hush-hush all through, it is believed that Reliance did not take the bait (it is believed that Subhiksha quote was over priced!) </li></ul><ul><li>Whether “selling off” was on Subramaniam’s agenda will perhaps be a secret always! </li></ul>
  19. 19. On Hind Sight <ul><li>We certainly know, that Subramanian wanted to go for an IPO in October 2007. </li></ul><ul><li>He didn’t because the markets were touching their peaks and a correction was expected! </li></ul>
  20. 20. On Hind Sight <ul><li>Subramanian was trying to get his supply chain in order by opening his opening Private Mandis </li></ul><ul><li>This was a sound thought but it came late and has not seen fulfillment! </li></ul>
  21. 21. End Lines <ul><li>Subramanian and Subhiksha have given misleading statements about the health of the organization earlier </li></ul><ul><li>There are legions of embittered employees and vendors chasing Subhiksha for unpaid salaries and payments </li></ul><ul><li>Now, Subraminian has indicated a infusion of Rs.300 crore would bail Subhiksha out </li></ul><ul><li>Can he be trusted? </li></ul><ul><li>Or is it another B Rama Rao (Satyam) in happening? </li></ul>
  22. 22. Thanks

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