Why Did Subhiksha Fail
Post on 03-Apr-2015
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Why did Subhiksha fail: Subhiksha, a venture started in March, 1997, by Subramaniam, an IIT-IIM graduate, collapsed after around 11 years of operations. While analyzing Subhikshas failure, we look into different aspects which can cause a new venture to fail and understand what went wrong with Subhiksha. Subhiksha started around the same time when Big-Bazaar entered in Aug-1997. Thus, the opportunity to see the growth of organized grocery-retail was spotted around the same time. Big Bazaar went through the Hypermarket format, while Subhiksha envisioned the neighborhood Discount Store format, selling grocery, fruits & vegetables & medicines. After initial success, Subhiksha also opened Subhiksha mobile, either as part of main Subhiksha store, or as a separate outlet, which would sell mobile-hansdsets and tariff-plans. The concept was that traditionally, Indian households have been shopping for grocery at the neighborhood local markets. Subhiksha spotted an opportunity to enter this market by opening stores in residential areas, by offering value based grocery items at a discount of 8-10% of market price. The price discount was to be incorporated by making bulk purchases from suppliers, which would be inventorized across stores. With grocery items offered at discount in neighborhood, Subhiksha hoped of quick inventory turnaround and more margin frequency per period. It hoped to keep costs under control by offering no-frills in services, such as no air-conditioning & self-service which were provided by hypermarkets, and by opening grocery stores in residential areas instead to commercial complexes or main roads to reduce rent costs. Subhiksha mobile stores were opened in commercial complexes too. Subhiksha initially started with self-invested equity funds. As growth happened slowly, it arranged private-equity from ICICI-Ventures, to the tune of 24% stake. Subhiksha opened 150 stores in Karnataka over the span of 9 years. ICICI had increased its stake in Subhiksha to 33%, about a third of which was later bought by Zash Investment, an investment company controlled by Azim Premji. However, in next 2 years, its store-count crossed over 1500 stores across India by 2008 a tenfold expansion in just 2 years. There are various reasons cited as the cause of Subhikshss failures. The promoters claim that Subhiksha failed due to cash-crisis. The company owned 150 stores in 2006 only in Karnataka, which they had opened over the span of 9 years. However, in the span of just 2 years, Subhiksha opened over 1300 stores a cross India. Opening so many stores requires lot of capital, both as capital investment, and for working-capital. This is so specially in Retail business, where purchases are driven primarily on margin which gets paid when sales are realized on inventory turn. Subhiksha tried to compete with both, large retailers as well as small neighborhood stores. Competition with large stores was based on Subhiksha being an organized retail chain, providing most Grocery items used for regular household consumption as provided by large chains. Competition with neighborhood stores was based on price-discount model, and concept of Subhiksha being neighborhood-convenience store. However, it could not achieve either set of customers as buyers in both segments are affiliated to their models. Also, buyers who switch from neighborhood stores will not switch to another neighborhood store, rather they would switch to hypermarket format stores. Further, Subhiksha also tried to offer Medicines and in many cases Mobile Phones under the same roof as it was offering Groceries. In the hindsight, we see that for medicines, specialized stores are considered more reliable in India, and the concept of multiple-business segment-mix, as popular in Western countries, did not turn out to be lucrative, rather confusing for customers. Thus, Subhiksha faced lack of growing dedicated buyer base in Groceries, as well as medicines, which resulted in lower sales. Thus, unreasonable & unaffordable expansion and unattractive value-proposition are cited as reasons of Subhikshas failure. Also, reasons of poor operational and financial management are cited as grounds due to which Subhikhsa was not able to sustain. As discussed, opening so many stores require huge capital.
Subhikshas failure came to limelight around the same time when financial crisis had bubbled up, and Subhiksha needed enormous short term capital to keep its operations going. While investors had earlier invested the growth capital, but because of its dwindling sales and lack of confidence due to crisis-ridden economic environment, no one was prepared to provide it more working capital and further capital needed for expansion. Poor operational management was seen in frequent stock-out of stores, leading to customer disenchantment. Subhiksha did not have a proper centralized inventory management system which could trigger buy-signals and ask suppliers to supply required commodities at all stores. Many stores were under-stocked, while many were over-stocked. Poor operational management and lack of adequate financial and human resources growth lead to high operating costs, and burgeoning debtsurviving costs. Growth was ineffectively managed, and as these costs piled up, Subhiksha was not able to sustain the load and finally collapsed. The issues came to limelight when employees complained of non-payment of salaries, and supplies complained of non-payments too. Thus, suppliers stopped making goods available to Subhiksha, and gradually stores got stocked out leading to further decline of sales. Thus, unrealistic expansion led to unsustainable operations and financial positions, leading to doom. The investors, and some employees argue that there were lot of financial irregularities which were not told to them beforehand. ICICI ventures (invested Rs. 150 Cr), and Kotal Bank (lent Rs. 30 Cr), have approached regulators and Debt Recovery Tribunal to seek compensation out of Subhikshas fixed assets. ICICI alleges that Subhikshas management kept the investors in dark regarding the brewing financial trouble in the company, and did not take any action when its stores were being looted & vandalized by its own employees who were not paid salaries for months. Although Subhikshas board had lot of representative directors from different institutions, and they could voice opinions, but they were not kept aware about the event. Finally, when Subramaniam approached them for a liquidity support of Rs. 50 Cr, then they came to know about the inefficiency bubble. Discerning a collapse, they refused to provide more capital. Further, Subhiksha also acquired a Chennai-based non-banking finance company and planned to reverse merge Subhiksha with it in a bid to list and widen the investor base after the near collapse of the global and local stock markets. However this was not successful too and Subhiksha, was left without short term capital generating sources. The real intention of Merger was not brought to news of its investors. However, when the Investor board got to know if it, they asked Subhiksha to appoint KPMG to have independent review of accounts, appoint a CFO and complete the Audit process before Dec-2008. However, Subhiksha was not able to deliver on any message, showing either rigidity of management of some fraud in its accounts. Finally, in Oct-2010, the last ditch attempt made by Subhiksha to survive also failed. Subhiksha had proposed a merger with Blue Green Construction, in an attempt to revive capital raising prospects. Real estate and construction business being in boom currently (before Real estate scam broke out recently), Subhiksha thought that such a merger will help raise it more money and in turn impart much needed capital to revive its business. However, this was turned down in Public Interest by Madras High Court bench. The merger was not agreed to by Subhikshas own investors, who cited that the merger cannot happen unless Subhiksha stabilizes its financial position, precisely for which Subhiksha was planning the merger. Thus, as rightly said by Madras High Court recently, Subhiksha suffered from Multiple Organ Failure. The process of demise of retailer was due to poorly designed & unrealistic growth plan, & poor management of operations, finance and investor faith, all leading to its collapse.