subhiksha: to make-over or not to make-over?

Journal of Case Research vol: 1 issue: i

81

Subhiksha: To Make-over or not to Make-over?

By

Dr. Paromita Goswami Associate Professor, Marketing Xavier Institute of Management,

Xavier Square, Bhubaneswar, Orissa-751013

[email protected]

mailto:[email protected]


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Subhiksha: To Make-over or not to Make-over?

Susmita Misra, Vice-President, Marketing Services of Subhiksha adoringly looked at the changed ambience of the Shastri Nagar store of Subhiksha in Chennai. It was one of the oldest stores of Subhiksha, the only Indian deep-discount supermarket chain. The Shastri Nagar store in Chennai now sported a swanky look (See Exhibit 1). Susmita had joined Subhiksha three months back in the Marketing and Private Label team headed by Mohit Khattar. She was anchoring the upgradation drive of Subhiksha stores and the Shastri Nagar store was the first store to get a make-over. While Mohit had started the upgradation drive, he needed to focus his attention on private labels and handed over the baton of upgradation to the new recruit, Susmita.

Background

Subhiksha had come a long way since it began operations with the opening of the Thiruvanmiyur store in Chennai in March 1997. It started as a no-frills, deep-discount, supermarket retail chain. It did not even have self-service format in the initial years of its operation. The entrepreneur of the chain was Ramaswami Subramaniam (RS), an alumnus of the premier IIT Madras and IIM Ahmedabad (IIMA). The razor-sharp RS was known as thalaivar (Tamil for chief) at IIMA for consistently topping his class at the business school and consequently went on to win the gold medal at the premier institute. In 2003-7, modern trade grocery business grew at 49 per cent in India1. Subhiksha being a veteran in the trade with its eleven-year long experience, went on to leverage its experience curve and grow out of its home town Chennai. Proximity to the residence of the target market is a major advantage for supermarkets and Subhiksha wanted to get the first-mover advantage. In March 2008, Subhiksha had 1100 stores, 14000 employees and Rs. 2200 crores annual turnover (company sources). By March 2009, the chain is expected to expand to 2000 stores2 (See Exhibit 2 for operational indicators).

The format

1 Gregory R. (2008), ‘Asia’s Retail Markets: An Overview’, 9th Marketing and Retail Conclave, Feb 19-21, Organized by Technopak at the Taj Palace, Delhi, India 2 Gilon C.J. (2008), ‘Value Concepts’, http://www.hindu.com/rp/2008/01/13/stories/2008011350140400.htm, last accessed on July 3, 2008

http://www.hindu.com/rp/2008/01/13/stories/2008011350140400.htm


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Small is beautiful in the chained grocery business in India. The low margins of this business along with high rental costs and lack of retail space in high population density areas has led to opening of smaller stores. Low vehicle ownership and lack of basic infrastructure like quality roads have been detrimental to hypermarket growth in India. This is evident with 58 hypermarkets added in 2007 as opposed to 380 convenience stores launched3. Domestic players to reckon with in the small format are Reliance with its Reliance Fresh, RPG with its Spencers Express and Spencers Daily, Aditya Birla Group with More, Pantaloon Retail India Ltd with KB’S Fair Price and Hypercity Retail India Pvt. Ltd. with Hypercity Express. The competition in the grocery business in India is intensifying with all major multinationals showing interest to enter the market. Wal-Mart has commenced operations in India in a tie-up with the Bharti Group. Among the domestic players, Reliance Retail Ltd started its journey with the first Reliance Fresh supermarket in Hyderabad in November 2006. In 13 months it took a 0.3 per cent value share in the grocery business with as many as 325 stores in 20074. With its deep pockets and ability to take losses for long periods, Reliance Retail achieved 20% value share in supermarkets second only to Subhiksha in 13 months4.

Unlike other retailers, such as Pantaloon Retail India Ltd and Reliance Retail Ltd, which opened outlets across various formats, Subhiksha so far has concentrated on the supermarket format, with the exception of exclusive mobile outlets4. They have also stuck to the small store format unlike other players like Future group and Reliance Retail who have presence across both small and large formats. As Ernst & Young Partner Pinakiranjan Mishra commented ‘the small store format is obviously a viable model, otherwise the kiranas would not exist. (The) trick is to leverage purchase efficiencies, since costs for an organized chain are higher than those of a kirana’5. However, Raman Mangalorkar, Head, Retail Practice, AT Kearney, observed that ‘although the small format is in no way logically flawed, the ability to scale up with only a small format store is less than it is for a chain that has both large and small formats’ . 3 Euromonitor Report on Indian Retail dt April 4, 2008 4 Chatterjee P. (2007), ‘Retailer’s home runs’, http://www.thehindubusinessline.com/catalyst/2007/08/16/stories/2007081650010100.htm, August 7, last accessed on July 10, 2008 5 Rediff.com (2007), ‘Subhiksha’s incredible growth story’, http://specials.rediff.com/money/2007/oct/01sld2.htm, last accessed on July 5, 2008

http://www.thehindubusinessline.com/catalyst/2007/08/16/stories/2007081650010100.htm

http://specials.rediff.com/money/2007/oct/01sld2.htm


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Continuing with its strategy of having smaller outlets, Subhiksha added 550 outlets in 2007, improving its outlet share from 19% to 28%, and that of value sales from 17% to 22%4. Typically Subhiksha outlets were of 1000-1200 sq ft area, with outlets in cities with high real-estate cost like Mumbai having around 800 sq ft area. In cities like Vadodara their outlets could be around 1800 sq ft. The chain currently operates in four verticals-fruits and vegetables (F&V), mobiles, pharmaceuticals and grocery. In a Subhiksha supermarket, there is generally a small pharmacy of 100 sq. ft. (this differs from one state to another depending on state-level regulations) keeping only fast-moving medicines, especially those of chronic ailments are required by the old and infirm 10 per cent discount is provided on pharmaceutical products (See Exhibit 3). Drug stores generally have a margin of 17-20%; and even by providing a discount of 10%, the percentage margin is double that of grocery and ten times of fruit6. In Hyderabad, one air-conditioned exclusive F&V store is coming up with 1200-1500 sq ft area. Subhiksha is also planning a foray into consumer durables with an estimated prototype store of 15000 sq ft area.

The Dilemma

Susmita has joined Subhiksha as VP of Marketing Services three months back. Her earlier assignment was with IMRB where she was mainly into qualitative research. She was involved with Subhiksha in the capacity of a researcher for about a year before joining it. She is mainly involved in the in-store branding, media buying and overall communication initiative of the chain. The media advertisements of the chain are generic in nature emphasizing lower prices and savings (‘Bachat meri adhikar, Subhiksha mera abhimaan’ meaning ‘Savings is my right, Subhiksha is my pride’). In addition to savings, the in-store communication has to be focused on private labels. The idea is to make customers to shift to private labels where the margin of the chain was substantially higher. Private labels are also priced 30-40% cheaper compared to national labels7 and the stores need to provide cues to the customer on the lower prices. With rapid increase in the number of stores in a short duration of time across regions, rising consumer expectations about store ambience and increasing number of modern trade outlets in the vicinity of existing or upcoming Subhiksha stores, Mohit felt it was imperative that they improve the lackluster ambience of the stores of the chain. With this 6 Varadarajan N. (2004), ‘The Discount Warrior’, Business Today, March 28, http://www.india-today.combtoday/20040328/cover3.html, last accessed on July 10, 2008 7 Verma S., Thakkar K. (2007), ‘The big myth and reality of retail groceries’, Times News Network, September 24

http://www.india


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idea, he convinced Susmita to take up a pilot project of improving the store ambience of one of the oldest stores in Chennai-the Shastri Nagar store (See Exhibit 4 for the floor plan of the Shastri Nagar store and Exhibit 1 for a tour of the Shastri Nagar store). Mohit wanted Susmita to anchor the store upgradation effort of Subhiksha. An obvious disadvantage for Susmita was that she did not belong to the target group of Subhiksha’s customers. Socio-Economic Class (SEC) B1, B2 to lower SEC classes was the target group of Subhiksha. Hence the typical Subhiksha customer did not think like her. To Susmita, the problem was whether the target customers cared about ambience or only about price. Store design and layout has so far been decided by President (Ops) of a state as well as the Projects Division who scout for property, do renovation of stores when required as well as order manufacturing of bays. Store upgradation was a challenging assignment as the RS has himself done the store layout of 700 of their 1000+ stores. Susmita felt with a modest budget of Rs 2-3 lacs for a 1000 sq ft store, she could give the stores a fresh coat of paint, fit GE lighting which provide better illumination, change the flooring in old stores when tiles are broken, and clear the glass storefront from posters of store brands (See Exhibit 5-8). Susmita insisted that the store-front glasses should remain transparent so that customers may see the store interiors (See Exhibit 9). The grocery section was fitted with white tiles and the F&V section was fitted with brown laminated flooring to hide dirt and minimize visible signs of pulled crates. Interiors of the changed store had more brightness with lowered fluorescent tubes and store-signage regarding savings were placed strategically near the cash-counter instead of separate communication about different products strewn throughout the store (See Exhibit 10-12). Layout pattern was changed from grid layout to ‘snake’ layout. This was an innovation by RS which assumes clock-wise movement of store traffic (See Exhibit 4 for the Snaking Layout). Susmita was pleasantly surprised with the results of the upgradation effort of the Shastri Nagar outlet. The sales of the outlet increased 90% post-upgradation. This pilot project included installation of air-conditioning in addition to changed interiors. She felt that if stores across the country were upgraded, the chain would gain in both the long and the short-term. The up gradation effort involved many challenges: s The first ten days of the month has heavy customer traffic making any up gradation work during this time impossible. s Stores remain open from 8:45 a.m. to 8:45 p.m. 365 days a year. For all practical purposes, the store is closed for 4 hours in the afternoon for lunch of store personnel.


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s Store sizes are also not uniform across the country. Store layouts are not uniform across stores even in the same city. The shapes of stores are not same, nor are the square footage or alignment (one/two storey) (See Exhibits 13-14). For example, in Mumbai the stores are smaller in size, while in Indore large stores of around 1800 sq ft are present. s Customization is required in stores of different regions. For example, stores in muslim-dominated areas of Indore have bakeries; while Kolkata stores would have shop-in-shop of Ganguram, the famous traditional sweet confectioner, who would buy ingredients for their merchandise like sugar and flour from Subhiksha. But she was not sure whether RS would agree to her proposal. Subhiksha is a deep discounter in the small store format. RS has been constantly emphasizing on the need to cut out frills, and bring down cost. Would RS agree to such major changes in view of the rapid revenue increase at Shastri Nagar outlet? The layout of rapidly increasing new stores could no longer be handled by RS, Mohit or even Susmita for long. She strongly felt there was a need for standardization of store layout, placement of products in store and mechanized planogram (See Exhibit 15 for lack of standardization in placement of products in store). With SAP up gradation underway, the store staff required training. Competition from Reliance Fresh, Spencers Express and More was building up. Reliance is also likely to go for a cold chain in another 2-3 years’ time which would totally change the supply chain mechanics and cost advantage which Subhiksha has been meticulously building up over the years. Could they afford the ‘frills’ at this stage? Or should they continue with the existing store ambience? The rapidly increasing number of stores required more capital investment. The much-hyped IPO of Subhiksha was delayed due to erratic trends international stock exchanges although Indian stock market was comparatively less affected by the downturn in the US economy in particular. She was supposed to meet RS that evening with her proposals. In the supermarket business with razor-thin net margins, Subhiksha has made profits from the very first year of its operations. Should they go for the make-over?


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Exhibit 1: A Tour of the Shastri Nagar Outlet at Chennai

Flute Board Direction Signage outside outlet Store Front as seen from the road…

Store Front at First Floor On entering the store, to the left…..

On entering the store, to the right…. …..the F&V section to the left..…..


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Looking to the left of F&V section, the atta station… Then to the Snaking Interior…

To the right… And a little Beyond….

And the left…. And left and then….


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Towards the glass store-front…. Glass-front to left…towards the cash counter…

Towards the cash counter… people can be seen shopping from outside the store…..

Exhibit 2: Operational Indicators of Subhiksha Trading Services Pvt Ltd 2006 2007

Year end (March)

Net sales (Rs million) 3,300 –

Operating profit (Rs million) 100 –

Outlets 450 1,000

Selling area (‘000 square meters) 41.8 91.2


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Exhibit 3: Pharmaceuticals targeting the old with chronic ailments

Exhibit 4: Floor Plan of Shastri Nagar Store

M O B I L E

PHARMA F & V

F & V

F & V

Back room

Atta Stand Cash

counter

Glass front

Entry Exit


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Exhibit 5: Store lighting (Old) Exhibit 6: Store lighting (New) with lowered

heights

Exhibit 7: Old Flooring Exhibit 8: New Flooring


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Exhibit 9: Store with transparent Glass Front

Exhibit 10: Old Price Savings Signage


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Exhibit 11: Old Price Savings Signage Exhibit 12: New Price Savings Signage

Exhibit 13: Floor Plan of a Mumbai Store

Gat

e K

eepe

r

Cash

Cash

Comp

F & V

Pharma

Entry

Atta Station

Atta Station Exit

Entry


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Exhibit 14: Floor Plan of a Chennai Store

Exhibit 15: Store brand above eye-level, below eye-level and at eye-level

Store brand above eye-level Below eye-level At eye-level

Cas

h C

ount

er

Back room

Blank

Rack

M O B I L E


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Annexure: Recommended Background Reading:

1. Dunne P.M., Lusch R.F. (2002), Retail Management, Cengage Learning, India Edition, New Delhi, pp 322-347 (special attention to pp 325-326)

2. Levy M., Weitz B.A., Pandit A. (2008), Retailing Management, Tata McGraw-Hill Publishing Co. Ltd., pp 564-593

Annexure 1: Competitive Position of Subhiksha in 2007

Format/channel Share (%) Rank

Retailing 0.2 3

Supermarkets 22.4 1 Source: Euromonitor International from trade press (The Economic Times, Business Standard, The Financial Express, The Hindu Business Line, The Times of India, Retail Biz, Images Retail, Inside Franchising, Telegraph, Hindustan Times), company reports, trade interviews, Euromonitor International estimates

Annexure 2: Supermarkets: Value Sales, Outlets and Selling Space 2002-2007

2002 2003 2004 2005 2006 2007

Value sales Rs million

14,000.0 18,500.0 22,108.0 28,298.0 39,617.2 69,330.1

Outlets 980.0 1,200.0 1,368.0 1,683.0 2,380.0 3,600.0

Selling Space '000 sq m

150.0 200.0 249.0 332.0 481.4 746.2

Source: Official statistics, trade associations, trade press, company research, trade interviews, Euromonitor International estimates


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Annexure 3: Supermarkets: Value Sales, Outlets and Selling Space: % Growth 2002-2007

% growth 2006/07 2002-07 CAGR 2002/07 TOTAL

Value sales Rs million 75.0 37.7 395.2

Outlets 51.3 29.7 267.3

Selling Space '000 sq m 55.0 37.8 397.4 Source: Official statistics, trade associations, trade press, company research, trade interviews, Euromonitor International estimates

Annexure 4: Supermarkets Company Shares by Value 2004-2007

% retail value rsp excl sales tax 2004 2005 2006 2007

Subhiksha Trading Services Pvt Ltd 12.0 11.2 17.4 22.4

Reliance Retail Ltd - - 3.8 20.0

Spencer's Retail Ltd - - 8.7 7.4

Pantaloon Retail India Ltd 4.7 5.5 6.7 6.5

Aditya Birla Retail Ltd - - - 5.4

Nilgiri's Franchises Ltd 7.5 6.4 5.3 3.9

Foodworld Supermarkets Ltd 17.3 5.4 4.5 3.2

Radhakrishna Foodland Pvt Ltd 0.0 0.4 0.7 0.5

Trinethra SuperRetail Ltd 5.5 7.0 8.2 -

Great Wholesale Club Ltd - 6.4 - -

Adani Retail Ltd - 4.1 - -

B2C India Ltd 3.4 - - -

Fabmall (India) Pvt Ltd 2.0 - - -

Others 47.7 53.6 44.9 30.9

Total 100.0 100.0 100.0 100.0


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Source: Official statistics, trade associations, trade press, company research, trade interviews, Euromonitor International estimates

Annexure 5: Supermarkets Outlets by Brand 2004-2007

sites/outlets Company 2004 2005 2006 2007

Subhiksha Subhiksha Trading Services Pvt Ltd

142.0 150.0 450.0 1,000.0

Reliance Fresh Reliance Retail Ltd - - 22.0 325.0

Spencer's Daily Spencer's Retail Ltd - - 140.0 250.0

Trinethra Super Market


Food Bazaar Pantaloon Retail India Ltd 23.0 37.0 63.0 110.0

Food World Foodworld Supermarkets Ltd

94.0 46.0 55.0 70.0

Nilgiri's Nilgiri's Franchises Ltd 31.0 31.0 35.0 45.0

Fab Mall Aditya Birla Retail Ltd - - - 26.0

Spencer's Super Spencer's Retail Ltd - - 8.0 20.0

Spar Radhakrishna Foodland Pvt Ltd

1.0 1.0 2.0 2.0



Adani Supermarket Reliance Retail Ltd - - 54.0 -

Fab Mall Trinethra SuperRetail Ltd - 14.0 26.0 -

Spencer's Daily Great Wholesale Club Ltd - 55.0 - -

Adani Supermarket Adani Retail Ltd - 47.0 - -

Adani Supermarket B2C India Ltd 35.0 - - -

Fab Mall Fabmall (India) Pvt Ltd 12.0 - - -

Others 954.0 1,217.0 1,379.0 1,606.0

Total 1,368.0 1,683.0 2,380.0 3,600.0

Source: Trade associations, trade press, company research, trade interviews, Euromonitor International estimates


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Annexure 6: Supermarkets Selling Space by Brand 2004-2007

surface area '000 sq m Company 2004 2005 2006 2007

Spencer's Daily Spencer's Retail Ltd - - 52.0 92.9

Subhiksha Subhiksha Trading Services Pvt Ltd

13.4 14.2 41.8 92.9

Reliance Fresh Reliance Retail Ltd - - 6.1 86.1

Food Bazaar Pantaloon Retail India Ltd 16.1 26.3 44.8 76.9



Food World Foodworld Supermarkets Ltd

33.0 16.2 19.5 24.8

Spencer's Super Spencer's Retail Ltd - - 7.1 17.7

Nilgiri's Nilgiri's Franchises Ltd 11.9 11.9 13.3 17.1

Fab Mall Aditya Birla Retail Ltd - - - 5.2

Spar Radhakrishna Foodland Pvt Ltd

0.3 0.3 0.4 0.4



Adani Supermarket Reliance Retail Ltd - - 11.0 -

Fab Mall Trinethra SuperRetail Ltd - 3.2 5.2 -

Spencer's Daily Great Wholesale Club Ltd - 19.3 - -

Adani Supermarket Adani Retail Ltd - 9.6 - -

Adani Supermarket B2C India Ltd 7.0 - - -

Fab Mall Fabmall (India) Pvt Ltd 2.8 - - -

Others 145.4 203.0 232.1 284.2

Total 249.0 332.0 481.4 746.2 Source: Trade associations, trade press, company research, trade interviews, Euromonitor International estimates

subhiksha: to make-over or not to make-over?

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