SUBHIKSHA CASE STUDY Subhiksha is India's largest retail chain -- or some would prefer to say "it was.

" Over the past few months, the network of neighborhood discount shops has been coming apart at the seams. ost of the outlets are now closed. !he company -- Subhiksha !rading Services -- has been unable to pay salaries and statutory dues for the past few months. "ith the unpaid security agency staff also not reporting for work, many of the stores have been vandali#ed. "!he properties have become vulnerable targets," founder and managing director $. Subramanian told The Financial Express. !he vandals, he said, could include "disgruntled vendors, employees, anti-social elements taking advantage of the situation, and even owners of the real estate" rented by the retail chain. STRATEGIC ISSUES %ack of demand is the ma&or problem," says athew 'oseph, senior consultant with (elhi-based think-tank the Indian )ouncil for $esearch on International *conomic $elations +I)$I*$,. "$eal estate prices are falling, and organi#ed retail would like to wait until the bottom is reached. -inance is also difficult to come by in the conte.t of falling demand and low profitability as banks are becoming risk averse." /ibson 0edamani, director of the $etailers 1ssociation of India +$1I,, adds2 "%ike everyone else, the business groups in modern retail have been hit by the global recession by way of a credit s3uee#e 4and a lack of5 funding and working capital. !he slump in real estate has been a big issue. !hose who had big e.pansion plans had 4ac3uired5 real estate earlier at much higher prices. !hey are now re-looking at their e.pansion plans and renegotiating the rates."

!he future of the kiranas caused so much concern that the 6nion )ommerce inistry appointed I)$I*$ to do a special study to find out the impact of modern trade on these small outlets. !he I)$I*$ report, released in the middle of last year, found that it was "a positive sum game in which both unorgani#ed and organi#ed retail 4could5 not only coe.ist but also grow substantially in si#e." !he study found that2

!he total retail business in India would grow at 789 annually, from 6S:8;; billion in ;<<=-<> to 6S:?@< billion in ;<77-7;. !he unorgani#ed retail sector would grow at about 7<9 per year, with sales rising from 6S:8<@ billion in ;<<=-<> to 6S:A@= billion in ;<77-7;. Organi#ed retail, which now constitutes a small A9 of the total retail sector, is likely to grow at a much faster pace of A?9 to ?<9 per year and 3uadruple its share in total retail trade to 7=9 by ;<77-7;.

"Small retailers in India have inherent advantages," says the Bw)-)II "$ising *lephant" report. "!hey are located ne.t to the consumer, making it convenient for top-up purchase. !hey know them well, some even by name. !hey give credit too -- which no large retailer does. !heir fi.ed costs are so low that their breakeven point is as low as A=9 of sales." !he large players usually try to gain on economies of scale and lure customers by reducing the margins," says Chat of Dinnov. "!his would 4re3uire5 elimination of middlemen and brokers along with established logistics and infrastructure support. Eowever, in the current scenario, lack of infrastructure and inefficient logistics services have dampened the growth of organi#ed retail while providing continued shelter to the middlemen. 1s a result, organi#ed retailers have not been able to provide higher value. On the contrary, unorgani#ed retailers leverage the inefficiencies of the system and encourage consumers to drive a hard bargain, which enables a win-win situation for both." ANALYSIS It is not &ust Subhiksha but several retail chains that are reeling under the recession. Over the last few months, about 8< supermarkets have shut shop in the city. 1ll the outlets were part of big retail chains, that decided to pull down shutters on these outlets to cut costs. Senior officials of supermarket chains say they are faced with a 7? to ;< per cent dip in footfalls, budgeted spending and worse, rents they can ill-afford now. In addition, manufacturers of various - )/s slashing retail margins is further choking the industry, they say. /iving reasons for the shortage of funds, Subhiksha said it overreached itself. F*.pansion without support of e3uity was the pain, and not stopping e.pansion when bank money was getting delayed was also a problem,G it said. "ith little cash left in its kitty, Subhiksha now has its back against the wall. F!he company is fast shutting stores as it is unable to pay rentals or employee salaries. oreover, it has hardly any supplies in most stores,G said a key industry e.ecutive, who has access to top management at Subhiksha. One reason for shutting stores is that Subhiksha wishes to lower its rent bill. F"e are in the process of relocating H-7<9 of our stores nationally to take advantage of falling rentals across the country, specifically in key metro cities. "e are implementing a S1B supply-chain solution to streamline operations and this could temporarily affect store operations,G it said. !ill recently, Subhiksha was a poster boy for IndiaIs fledgling retail industry and e.panding aggressively. !he companyIs turnover went up seven times in two years, from $s 88< crore in ;<<?-<= to $s ;,8<? crore in ;<<>-<H. !hen it went into a tailspin. F"e had e.panded rapidly. ost of the growth was debt-led. "e had built on a tiny e3uity base of &ust $s 8; crore, and even including share premiums, the company had raised only a total of $s 7H< crore as shareholder funds,G the company added.

Subhiksha employees, current and former, contacted by *! said the company hasnIt paid salaries or rentals since October ;<<H. !here has been a flight of key e.ecutives, including (elhi market head 1shu Bhake and 1tul 'oshi, who was leading the companyIs proposed consumer durables chain. SubhikshaIs anaging (irector $ Subramanian said that Subhiksha needs li3uidity in&ection of around $s 8<< crore to restart its business and that the company is in talks with e.isting lenders to raise money. Ee added that the growth of 7,=<< stores and $s A,<<< crore turnover this year has been achieved through high level of debt. Ee also confirmed that employee salaries have not been paid since October J the retail chain employs about 7?,<<< people. Subramaniam said, F!here have been a lot of arrears of salaries that has happened and it's a completely inhuman tragedy that has happened that we have been not able to pay because of the fact that there has been a huge inability and an unwillingness to pay." Ee added the company became illi3uid "and we had to prioriti#e certain obligations and the payments for employees could never happen because of the kind of tight li3uidity we were over in the last 3uarter. RIGHT STRATEGY WRONG FORMAT OR WRONG STRATEGY RIGHT FORMAT !he collapse of Subhiksha presents a case study for e.isting and prospective retail companies in India. !he )hennai retail ma&or, which grew e.ponentially since its inception in 7@@@, is battling for survival, despite two investors in tow J I)I)I 0enture and 1#im Brem&iIs private investment firm Dash Investment )ompany. !he 7,8<< storestrong chain has scripted the first rise-and-fall in the history of IndiaIs fledgling retail industry. 0iewed as a sunrise industry, the retail sector has suddenly caved in, with most players either putting e.pansion plans on hold or re-negotiating rentals. !hough rentals are coming down in most parts of the country because of the economic slowdown, rapid e.pansion without a proper supply chain in place has added to the woes of retail companies. So, was the Subhiksha model flawed or was it &ust a management failureK !he chain was envisaged as a low-cost, no-frills neighbourhood convenient store, which actually did work for some time. Cut soon enough, the promoters, who held around =< per cent stake, went on an e.pansion spree without strengthening the back-end. 1s a result, customers often had to come back from the store without getting the products that they wanted. !o top it, Subhiksha failed to establish an emotional connect with its customers, even though it had built a large consumer base. Eence, its fall can largely be attributed to mismanagement leading to irrational e.pansion without spreading out the e3uity base. 1lso, the retail chain tried to procure supplies against cash, which, many analysts say, was irrational. 1s if this wasnIt enough, the market meltdown forced the company to defer its proposed initial public offer +IBO, in ;<<H. !he situation worsened in the second half of the year, when a li3uidity crisis throttled Indian companies.

Subhiksha, which was facing a severe cash crunch, had to face the ire of its suppliers and stockists as well as real estate owners, for delayed payments. Cy then, the neighbourhood retail chain had lost its credibility and image. !oday, the companyIs founder $ Subramanian is under fire from stakeholders, who have alleged that they were kept in the dark. -ollowing complaints from SubhikshaIs former directors, who stepped down from the board in 'anuary, the $egistrar of )ompanies has appointed LB / as auditor. eanwhile, the blame game continues. I)I)I 0enture, which holds ;8 per cent stake in Subhiksha, has held the management s3uarely responsible for the chainIs operational failure. $enuka $amnath, managing director and )*O of I)I)I 0enture, claimed that SubhikshaIs board did not receive audited figures even after repeated attempts. !he last available figures, according to $amnath, were for the year-ended arch ;<<>. Subhiksha, however, has refuted these charges. 1s the company lies in a shambles, what the investors and promoters need to do 3uickly is get on to the business of rebuilding it. 1 positive sign is that both I)I)I 0enture and Dash have said that they are working on a revival plan. Stakeholders, too, are awaiting the ne.t move by lenders, who have an e.posure of around $s >?< crore, and are trying to sew up a revival package. Eowever, the most daunting task for Subhiksha will be to re-establish the consumer connect, without which no retail company can survive. STRATEGY TO REVIVE THE LOST BUSINESS 1fter deciding to stop selling fruit and vegetables at its stores, food and grocery retailer Subhiksha has now postponed plans to open consumer durable outlets. $eopening the outlets in four to five months and ac3uiring nearly ; million s3uare feet of space for this venture, with a monthly bill of $s 7< crore +$s 7<< million, and negotiating with developers /etting the developers at good prices, but 1ugust prices cannot be called good in Movember given the current market conditions. 1 further crash of 8?-A< per cent in rentals is e.pected -ruit and vegetables is a neutral margin business and we keep it to draw traffic to our stores. Cesides, fresh produce retailing is a very regional opportunity !here is pain in the business when you e.pand and bank credit is difficult to come by. *verybody has to read&ust the pace and speed with which they are growing. Once you know where you can make money and where you cannot, you can ad&ust your business. !hings were much difficult in September and October. Mow, it is much better. "e will wait for another two to three months to decide how to go about it. "hen you have 7,?<< stores, it is all part of the business. If someone pays $s A< per s3 ft and get a deal for $s 8< ne.t door, we will definitely shift.