THE RISE AND FALL OF SUBHIKSHA ?

'"Hhe giver of all good things in life"

*Mr. RAVINDRABABUS.

ABSTRACT

Subhiksha was India's largest retail chain based on number of stores. In December 2008, it siiut down over 90
stores around the country. Subhiksha, which had started as a single outlet in Chennai grew rapidly and in a
span of 11 years, the company had over 1,600 outlets throughout the country. The company had been facing
a financial crunch which it revealed publicly only in January 2009 though it was not in a position to pay rents
or employee salaries or other outstanding bills. The management of Subhiksha said that the problem faced
by the retail chain was due to its inability to raise enough equity and was not because of its business model,
which was very efficient. Experts too felt that the crisis faced by the retail chain was due to the management's
decision to not opt for an Initial Public Offering. Subhiksha's operations have come to a standstill due to non-
payment of employees salaries, huge debt burden and arrears to suppliers, and the company is seeking
liquidity infusion to the tune of Rs300 crore to revive its operations. The company would be able to raise
Rs300 crore, required for meeting operational expenses, only after completion of the CDR process, ending
July 3 1 2 0 0 9 managing director R. Subramanian said.

Keywords: Entrepreneurship, marketing strategy like low cost strategy, retail industry, porters model. Business
environment, aggressive expansion strategy. Ethics and corporate governance

"We are a golden egg laying duck, we are in trouble. The company said it was unable to pay the salaries

We need their {bankers and lenders) support and and arrears to its 15,000 employees since October
2008, While announcing that all its 1,600 stores
upon getting it we will restart operations and repay
would remain closed. The company, burdened under
all debt. It is not easy, but we have to make it
a huge debt, recently said that it immediately needs
happen," says R Subramanian(fondly wants to be RsSOO crore.
referred as RS), Founder, Promoter, and Managing
After studying at NT Madras, RS joined IIMA. He
Director of Subhiksha Trading Services, which owns
was very keen on taking on marketing and also the
S u b h i k s h a - t h e India's largest (in terms of number
company he wanted to join (POND's based in
of s t o r e s ) , f o o d a n d g r o c e r y , s m a l l f o r m a t , Chennai).He did his internship in Ponds later got
neighbourhood, convenience, discount retail chain. placement offer. By that time Unilever acquired
Subhiksha which means "the giver of all good Ponds, RS decided to join Citi Investment Banking

things in life"(prosperity) in Sanskrit is on the verge instead. After working with them for fifteen days, he
thought he wanted to do something on his own in
of bankruptcy today, as on 2 Feb, 2009.
life, RS quit Citi.

Senior Lecturer, SRN Adarsh College, Chamarajpet, Bangalore.

Email: [email protected] Mobile : 98805 25788

Vol 2 Issue 2 September 2009 63

He came in contact with Mr S Viswanathan, who put the money into real estate(property). By this
used to run Enfield, the motor company in Chennai. funds were deployed, he was getting good returns
Mr Viswanathan whose company was in huge loss but still RS felt" I am not well occupied .My team is
failing to market its bikes compared with the entry not well occupied". Then RS looked at various
of lighter, cheaper and fuel efficient Japanese bikes. options like software then finally switched on to
RS entered into the marketing division and started retail.
to manage the sinking ship. As RS says "I got a
sense of dealing with people, handling operations, RISEOFSUBHIKSHA
working with institutions to raise money. Macro stuff
Two things drived the team to accept retail, one it
mostly. I don't know how good a job I did, but I
was a service sector and there were hardly an
learnt a lot". All these efforts paid off and Enfield
o r g a n i z e d retail w h i l e t h e m i d d l e class w a s
sales started to improve. At this point Enfield was
reasonably large. The exit barriers were low and
taken over by Greaves Eicher and Viswanath made
competition was very weak.
a good deal out of it. RS thought it was the right
time to move on. Viswanath asked RS what he Retail consists of two main costs space and people.
wanted to do and RS replied" A financial service In the developed countries retail happens outside
company". the city limits where the space is relatively cheaper

Mr Viswanath asked RS about his experience and therefore and very body has a car to drive down and

finances for which he replied that he had neither shop moreover people are expensive. They follow
any. Mr Viswanath agreed to give two and half the "very low staff, large space format"
crores and gave initial payment of 50 lakh and asked
But the situation in India, like developing countries
RS to repay the money by the buy back of shares.
it is not the same people are much cheaper and
In 1991 that is how Viswapriya Financial Services space per sq ft are expensive therefore what RS
(VFS) came into existence. According to RS says tried to do was to look for a small space but a
ICICI securities followed the second 1 month latter overmanned format. To compete with the local
.and Giti bank the third after about 2 months. One retailers he thought to deliver the best price and a
proud moment for VFS was when it started the IPO
very good SGM.
financing which RS tells with pride" (IPO Financing)
which was the brain child of Viswapriya. Any bank In 1997 the first store came up in Ghennai was

which does IPO financing today follows the structure c r e a t e d with a unique " n e i g h b o u r h o o d " store

that we created in 94." strategy(with the theme," why pay more when
you can get it for less at Subhiksha"). The primary
VFS made a lot of money. The stock markets were
focus was "aam aadmi" i.e average middle class
doing very well during the phase 94 - 96. During
Indian person. An initial investment of Rs 5 lakh
this period the net-worth of the company grew from
was made in the new company. The first two years
2.5 Gr to 80 Gr. During this period VFS financed
was very tough going for Subhiksha. By 1999 It made
close to 1,500 Gr. Each loan was for the period of
some money and 10 stores were there and the best
IPO,2-3 months so there were many lending cycles.
By 1996 VFS had large amount of money, there is part of it was the model was working. By 2000 there

staff, but not much to do as the markets were weak were 50 stores in Ghennai and IGIGI venture funded

and there was no one to lend to. So RS decided to for a 10% stake.

Adarsh Journal of Ivlanagement Research 64

By 2004 Subhiksha started to expand outside Tamil • Centralised purchasing - gives them a greater
Nadu. The expansion was done in different phases. bargaining power and helps them in getting
Phase I - AP, Karnataka, Gujarat Phase II - Delhi, With its bar coding techniques, Subhiksham card,
Bombay . Then it started to concentrate on the efficient S C M , home delivery system, establishment
metropolitan and 2"" and 3 rd tier cities and towns. of Online retail s y s t e m it started to make its
By November 2007 by the Diwali day it had opened headway. Subhiksha's business is structured and
1000'" store and it was in the Vth phase. run like telecom companies which has the concept
of 'circles'. Certain aspects of subiksha's business
At the time of shutting down its operations the
like financial aspects, IT, marketing and purchasing
company has diversified into four business types
(bulk discount deals) are controlled centrally.
1. Supermarket: includes quality grocery, packed
However regions have flexibility in deciding where
foods, cosmetics, household provisions.
they want to set up the store, how many, at what
2. Fruits and Vegetables: Includes fresh fruits and price and what they want sell is all, marketing etc.
vegetables sourced directly from the farms at The branding strategy for this retail store was
best prices. low-cost and no-frills, i.e., a reliable and trustworthy
store that has the lowest prices.
3. Pharmacy: have a store pharmacy which stores
mostly basic medicines. All medicines are Subhiksha though started in 1997 much before any
available at flat 10% discount. India Retail story was a small retailer till 2006 -
4. Telecom: recently entered irrto mobile retailer after 9 years in business the store count in 2006
business and offers handsets, recharge cards was only 150. The chain aggressively expanded till
and accessories from all the leading cell phone it had nearly 1,600 stores by January 2009.The
manufacturers at lower prices. company though small was a pioneering retailer in
as much as it had a unique India centric model and
Model of Subhiksha
was the only retailer in India focusing on the mass
It focuses on two C's factors
market and weaning away the consumer from the
1, Criticality of Cost kirana habit. Subhiksha was a Value focused retailer
2. Convenience of Buying. born at a time when organised retailing was only for
To achieve this it works on the following aspects the elite. From 150 stores in Sept 2006 all of which
were in Tamilnadu the company grew rapidly to over
Edge over competition - by unique
1600 stores by Sept 2008 across the country.
•neighbourhood" store strategy
Turnover grew in line as well - from merely Rs 330
Lower mai-gins -operates over a margin of 15%,
Cr for FY06 to Rs 833 Cr for FY 07 to Rs 2305 Cr for
others operates at 20%
FY 08. The retail chain is eying a turnover of around
More savings to the customers
Small store/ cost saving - no frills, no air Rs 4,500 crore in FY'09. The company had clocked

conditioning, less interiors a turnover of Rs 2,300 crore in 2007-08, he said.

Everyday low price system(ELDP) The last audited accounts presented by Subhiksha

Combination of Discount model and carpet to the board was for the year ending March 2007, in
B o m b i n g ' m o d e l - apart f r o m f o l l o w i n g a which it showed a turnover of Rs840 crore, net profits
discount model of Wal-Mart, it follows the of R s l 8.36 crore, inventories of Rs280 crore, and a
c a r p e t b o m b i n g m o d e l so that it c a n be secured loan of Rs245 crore, Ramnath said. The
nearly every corner of a city. company has received strong support from ICICI

Vol 2 Issue 2 September 2009 65

Venture which at a peak held a 38% stake in the merger target. "No, not at all, as that (declaring
company and has since sold 15% of that for a b a n k r u p t c y ) is not a s o l u t i o n . A c c o r d i n g to
handsome profit. The company's present investors documents released by managers to the merger offer
include Wipro's Azim Premji "Premji Invest" and Collins Stewart Inga Pvt. Ltd, Blue Green had
ICICI Prudential Mutual fund apart from the ESOP reported a total income of Rs2.06 lakh and profit
Trust. Subhiksha shelved plans for an IPO last year after tax of Rs19,000 "before prior period expense
citing adverse market conditions adjustment" for the year ended 31 March 2009. While
a Chennai high court verdict on the proposed merger
FALL OF SUBHIKSHA
between ailing retailer Subhiksha Trading Services
In June 2008 The Newspaper headlines read: Ltd and Blue Green Constructions and Investments
Ltd is expected on 9 March 2009. RS was criticized
Subhiksha was planning to invest Rs1,200 crore
for the merger and his decision not to raise
for expansion by 2010
equity by IPO.
It aims to become a $5 billion company by 2011.
The first sign of trouble came towards the end of
Food and grocery retail chain Subhiksha will invest September 2008, when the company approached
around Rs 1,200 crore for expansion by 2010, a top the private equity fund for a Rs50 crore loan. After
company official said."We will have around 3,000 that, the fund visited 200 outlets to size up the scale
stores by 2010 and we plan to invest around R s l ,200 of the problems it faced. In Sept 2008 RS said" banks
crore in the period," S u b h i k s h a ' s promoter R were not even lending to each other forget lending
Subramanian told PTI. The funds would be raised to us ! and in a business like ours where stock and
through a mix of equity and debt," Subramanian cash are like blood we seized up pretty fast when
said. At present, the chain has around 1,480 stores. the blood supply got choked. We were deploying
"We will be present in around 250 cities by 2010," cash for expansion and also for a new business
he said, adding that each store will be of an area of which we were staring - 2 mn sqft of retailing space
15,000 sq ft to 20,000 sq ft. In a move to further for consumer durables etc - this was the year where
accelerate its growth plans, Subhiksha is also we were deploying Rs 1000 cr on expansion and
acquiring a majority stake in a Chennai- based listed we could not raise the money and based on the
company Blue Green Constructions and confidence we would raise equity and debt we were
Investments Limited, he said. stuck midway." The R. Subramanian-promoted chain

In June 2008, Subramanian had picked up a 40% has closed down all its around 1,600 outlets across

stake in little-known Blue Green. Subramanian had the country due to severe liquidity crunch and has

then said the acquisition in the listed company would earlier said it required funds to the tune of Rs300

help it both enter the consumer durables area and crore to re-start operations.

access capital markets without going through Azim Premji-owned Zash Investments, which have
a fresh listing process. "We want to enter the a 1 0 % s t a k e in c a s h - s t r a p p e d r e t a i l c h a i n
consumer durables space in a big way and Blue Subhiksha, has sent legal notices to six serving
Green also had similar plans," Subramanian was and former directors of the company charging them
quoted as saying at that time. The information of f a i l u r e in " p e r f o r m i n g o f f i c i a l duty". Z a s h
sourced from Blue Green's website raises fresh Investments had acquired 10% stake in Subhiksha
questions about prior relations between Subhiksha from ICICI Venture in late 2008 for Rs230 crore.
promoter R. Subramanian and the potential reverse Private equity firm ICICI Venture Funds Management

Adarsh Journal of Ivlanagement Research 66

Co. Ltd, which holds a 23% stake in Subhiksha 4. Maharashtra FDA, the state government's
Trading Services Ltd, is engaged in an effort to regulatory authority for food and drugs, had
salvage the troubled discount retailer. asked Subhiksha to suspend operations of its
warehouses at Bhiwandi (Mumbai) for 20 days
Until the end of September 2008, there was no
communication to IClCi Venture or to the Subhiksha as well as had cancelled licences of three of its

board on any difficulties faced by the retailer, said v e n d o r s , c h a r g i n g that they had failed to

R e n u k a R a m n a t h , chief executive officer and maintenance health and hygiene norms as

managing director of ICICI Venture. She said. "We prescribed by the regulator.

were continuously given information about the roll- 5. Many wholesale suppliers in Azadpur subzi
out plans of the company, and how the IPO (initial mandi, or vegetables market, have stopped
public offehng) plans of the company would take supplying fruits and vegetables to Subhiksha's
shape as things evolved." She along with LIC outlets in the National Capital Region (NCR)
chairman S B Mathur, Carnegie Mellon University surrounding the national capital. This comes in
faculty member Kannan Srinivasan, independent the wake of the company holding up payments
consultant Rama Bijapurkar (all three of whom have for two to six months against normal credit
resigned from Subhiksha's board),quit because they period of one month.
hadn't been informed about the full extent of liquidity 6. Lack of strong HR policy and Staff— Due to
and operational issues the retailer faced. this Shubiksha was not able to retain the talent
which he initially bring into Junior, Middle and
Reasons for the fall of Subhiksha
high level m a n a g e m e n t . W h a t e v e r was
Consequently, in the following month (October, 2008) remaining with it is all family bound with no
the company ran out of enough funds to run the commitment policy.
organization .Thereafter, S u b h i k s h a has been
7. They were paying huge rentals for these stores,
continuously besieged by a set of problems from all
which was a huge drain on the company's
sides.
finances. There are huge frauds while entering
1. Subhiksha Trading Services has come under in to rental agreements by t h e i r own
fire from television channels for not clearing management people. There was no proper check

advertising dues that run around Rs 8 crore. and control on this cost though this is a very
crucial part to defeat competitors and to gain
2. Subhiksha is believed to owe Rs 35 crore against
profitability in future. This, coupled with less
goods, Rs 18 crore against wages, and Rs 20
than-expected footfalls, drove the operational
crore a g a i n s t l e a s e rents. T h e c o m p a n y , costs to unsustainable levels
according to the report, is also carrying a debt
8. The wrong assumption that telecom segment
of Rs 700 crore at an average interest cost of
is a sound, and profit making segment. The
12 per cent per annum. CEO never looked in to system losses arise
3. Expansion of Stores without adequate system from telecom. Subhiksha stores always sell
control and IT Support. That's why there was a handsets at below DP while its benchmarking
huge Audit and abnormal losses in the system. is to match DP. No control on inventory of mobile
And when they have started implementation of accessories and there stock value and were
SAP the time has gone for survival of Subhiksha. unable to circulate the working capital.

Vol 2 Issue 2 September 2009 67

9. Meanwhile, the company has closed around 90 no money, we can't run operations but if there is no

grocery stores across the country over the last debt, we have to look at options like equity," he said.

one m o n t h or so. T h e c o m p a n y has also "As part of CDR, the banks would need to get a

significantly reduced the inventory levels in its current balance sheet rather than a 31 March 2008

mobile retail arm - Subhiksha Mobile stores. balance sheet and they also want to ensure that

T h u s s i n k i n g into u n r e p a i r e d conditions events of the kind that happened in the last three-

Subhiksha has to compete with its high profile four months do not recur," he said

competitors like RPG, Reliance retail and Future The company would be able to raise Rs300
group etc. Reliance Retail has set up 700-odd crore, required for meeting operational expenses,
stores in the past two years, almost at the rate only after completion of the CDR process, managing
of one store per day. Future Group has begun director R. Subramanian said. "We are coordinating
opening a new no-frills discount retail chain this review as this helps us as well...We are wholly
called KB's Fair Price Stores, a format that is part and parcel of this review and the idea is to ensure
s i m i l a r in c o n c e p t to S u b h i k s h a stores. that the revival plan (for the company) is well crafted
Reliance's food and grocery format Reliance with learnings from the review," he said.
Fresh on the other hand is high-end in terms of
India's largest chain of supermarkets Subhiksha
display, ambiance and size.
Trading Services Ltd is indefinitely delaying a
State of Subhiksha as of Today planned initial public offering (IPO) because it has
enough money to fund its expansioh and will look
S u b h i k s h a is u n d e r g o i n g a c o r p o r a t e debt
for a listing at a "later point of time" as the stock
restructuring programme to make the cash-strapped
market builds or, its highs.
retail chain eligible for receiving funding to re-start
According to EPFO officials, Subhiksha had been
its operations. The debt restructuring of the company,
given a 15-day time from 19 February 2009 to pay
key to the survival of the retail chain, has to be
up dues amounting to a sum of R s l .76 crore. PF
completed by 31 July, or six months since the
officials are understood to have planned to attach
beginning of the process in Janauary 31=' 2009.
the personal bank accounts of Subhiksha MD R
Subhiksha, which owes 13 banks about Rs8 billion
Subramanian and properties of the retail chain as
($165 million), s a i d 12 of the banks a n d the
the 15-day deadline given by the EPFO to the
company's three largest stockholders are working
company for paying provident fund dues has ended.
to restructure the debt and infuse funds needed for
the company to reopen its stores, Subramanian said. Subramanian attributed the "collapse" to a strategy
of debt-led rapid expansion on a small equity base.
According to RS the company is going for corporate
He said the growth to 1,600 stores and nearly a
debt restructuring (CDR) which will need a six month
Rs4,000 crore annual revenue rate was achieved
period i.e from 31 January 2009 to 31=' July 2009.
through a high level of debt, "...we had expanded
We have a viable business which is cash-starved
rapidly... Most of tne growth was debt-led... We had
and CDR will help us revive this," Subhiksha Trading
built on a tiny equity base of just Rs32 crore, and
Services m a n a g i n g director said. He said the
even including share premiums, etc., the company
company, which has a total debt of around Rs750
had raised only a total of R s l 80 crore as shareholder
crore, may have to look to the equity route to raise
funds..."
money in order to find cash for preventing the
company from stopping its operations. "If there is

Adarsh Journal of Ivlanagement Research 68

Lack of funds led the company's trading cycle to 3. http://www.chennaibest.com/cityresources/
"collapse" as the company ran out of cash in Home_Needs/profiles02.asp
October, bringing its operations to a "standstill",
Subramanian said in the note. 4. Subhiksha to increase retail outlets. The Hindu
Source: http://www.hindu.eom/2006/07/15/
Today RS is in a very difficult phase of his life to
stories/2006071517851900.htm
revive Subhiksha and also to protect the interests
o1 all the stake holders of Subhiksha. Time only 5. Subhiksha growing at a scorching pace; to

has the answer for this. We can only wait and watch double network and revenue in six months;
betting big on mobile phones, India Retail Biz,
Questions:
Source: http://indiaretailbiz.wordpress.com/
1. What are the challenges and opportunities for 2006/11 /15/subhiksha-doubling-revenue-and-
RS when he started Subhiksha network-in-six-months-betting-big-on-mobile-
2. Why this sudden collapse for subhiksha phones/
3. Has the business model failed - is it right to
6. Subhiksha Website, Source: www.subhiksha.in
say the format is not working
7. Subhiksha to open 100 stores in Mumbai in one
4. If you had a option to do things differently
month; announces 1,000 stores within one year.
what would you change of the things what
India Retail Biz, December 13, 2006
RS did in the last 12 months.
Source:http://indiaretailbiz. w o r d p r e s s . c o m /
5. Do you think Subhiksha can revive - and why
2006/12/13/subhiksha-to-open-100-stores-in-
6. Is liquidity and lack of enough equity and
mumbai-plans-1000-in-india-within-one-year/
money the real issue of the fall of Subhikha
7. Is RS a good Entrepreneur. 8. Success story of Subhiksha, India's largest retail
8. Do you think ; Is the recession the pain - is chain, February 05,2007 http://www.rediff.com/
economic contraction the reason for collapse money/2007/feb/05bspec.htm
of Subhiksha 9. Subhiksha to enter into online Stores, The
Economic Times

Source:http://economictimes. indiatimes.com/
REFERENCES
articleshow/2456436.cms
BOOKS: 10. Subhiksha to create private label portfolio. The
Subhiksha: A Saga of Ups and Downs by Economic Times 15 Nov, 2006,
Bindu Rathore Source: http://economictimes.indiatimes.com/
articleshow/447925.cms
INTERNAL SOURCES
11. fvlaking of L a r g e s t Retail c h a i n in India :
1. Subhiksha ties up with vdive Networks, The Subhiksha.- Dec 12
Economic Times, 20 Mar, 2007
Source: www.startupavenues.eom/news/2007/
http://economictimes.indiatimes.com/News/
02/08/making-of-largest-retail-chain-in-india-
News„By_ Industry/Services/Retailing/
subhiksha/
Subhiksha_ties.._up__with__vJive_Networks/
articleshow/1785276.cms 12. S u b h i k s h a aims 1000 retails stores
2. Subhiksha, India's largest retail chain Source: Source: in.news.yahoo.com/061212/43/
http://www.rediff.eom/money/2007/feb/ 6a8e0.html -
05bspec.htm

Vol 2 Issue 2 September 2009 69

13. After grocery, Subhiksha eyes mobile phone R_Subramanian_MD_Subhiksha_Trading_
market Business Daily from THE HINDU group Services/articleshow/2420996.cms
of publications Thursday, Jul 26, 2007 17. Subhiksha addressing the needs of masses,
http://www.thehindubusinessline.eom/2007/07/ not the elite. The Economic Times,20 Jun, 2007
26/stories/2007072651350500.htm Source: http://economictimes.indiatimes.com/
14. IMAGES India Retail Report 2007 articleshow/2135104.cms
Source: www. imagesretail.comindia_retail 18. Subhiksha tides over stock issues, logs better
_report.htm sales. The Economic Times,10 May, 2007,
15. Subhiksha draws up cluster-bombing plan, The Source:http://economictimes.indiatimes.com/
Economic Times,6 Dec, 2006, Source: News/News_By_lndustry/Services/Retailing/
http://economictimes.indiatimes.com/News/ Subhiksha_tides_over_stock_issues_logs_
News_By_Company/Companies_A Z/ better_sales/articleshow/2024239.cms
S _ C o m p a n i e s _ / S u b h i k s h a / 19. http://www.indiaretailbiz.com/blog/category/
Subhiksha_draws_up_clusterbombing_plan/ indian-retalers/subhiksha-subramanians/
articleshow/726435.cms
20. http://www.livemint.com/subhiksha.htm
16. Subhiksha: The common man's retailer. The
21 . h t t p : / / w w w . f i n a n c i a l e x p r e s s . c o m / n e w s /
Economic Times. 2 Oct, 2007,0005 hrs Source:
subhiksha-charts-rs-1-000-crore-investment/
http://economictimes.indiatimes.com/lnterview/
373019/

Adarsh Journal of Ivlanagement Research 70