Business Today

Pushing the accelerator instead of brakes

N. Madhavan | Print Edition: June 28, 2009

Over the last nine months, R. Subramanian has aged much beyond his 43 years. The Managing Director of Subhiksha Trading Services-which pioneered the discounted retail format in India- has been struggling to get his brainchild operational again after it collapsed in February following a cash cycle squeeze. In fact, the change in Subhiksha's fortunes has been as dramatic as its rapid rise from being just a regional player to a national one.

"We were a darling company that could do no wrong till September 2008 and suddenly we were in trouble," rues a dishevelled Subramanian, as he looked back at Subhiksha's early days-clearly successful- and the recent crisis-without doubt an avoidable tragedy.

Vendor payments were defaulted and shelves ran empty
Vendor payments were defaulted and shelves ran empty
It was in 1996 that the idea of Subhiksha (prosperity in Sanskrit) came to his mind. Organised retail, in India, was non-existent. Subramanian, an IIT Madras and IIM Ahmedabad alumnus, was then into the financial services business of asset securitisation.

Research revealed that grocery was one of the largest categories of spending for the average customer, that they were extremely price sensitive on groceries and that discount stores were the largest growing format. But unlike in the West, people in India preferred to shop groceries close by. The model slowly fell into place-a large number of small stores with easy accessibility offering products at a discount.

"We opened our first shop in Chennai in March 1997 with funds from the financial services business, a team of passionate youngsters with little retail experience and a plan to set up a Chennai-centric retail business with low prices and high level of neighbourhood focus as the USP," recalls Subramanian.

In the first year 10 stores were opened and the count rose to 19 by March 1999. By then Subhiksha was breaking even, volumes were picking up and customers were responding. Problems did arise initially though, as its unique discounting model enraged the retail trade in Chennai, which accused it of unfairly undercutting their business.


Year of founding: 1997

Founder: R. Subramanian, IIT Madras and IIM Ahmedabad

Business: Discounted retail

Funding: R. Subramanian, ICICI Venture (equity); consortium of banks (debt)

Employees: 14,000 (by end of 2008)

Revenue: Rs 2,305 crore (2007-08)

The flameout
Year  No. of Stores
1997: 10
1999: 19
2000: 50
2003: 140
Mar 2007: 670
Mar 2008: 1,320
Sept 2008: 1,650
Feb 2009: 0

Key problem: 'Rapid debt funded expansion and cash flow mismanagement'

By 2000 Subhiksha grew to nearly 50 shops in Chennai retailing groceries and medicines. ICICI Venture's decision then to pick up a 10 per cent stake in Subhiksha for Rs 15 crore gave the retailer enhanced credibility in the market.

This money was used to expand outside Chennai, into the rest of Tamil Nadu. By 2002-03, Subhiksha had 140 stores across 30 towns in Tamil Nadu. Sales grew steadily. Cash flows were reasonable and debt, at Rs 15 crore against the net worth of Rs 23 crore, was comfortable.

Expanded too fast too soon
In 2004, the retail sector was seeing an enhanced level of activity. In what proved to be a watershed decision later in its brief history, Subhiksha decided to expand nationally and more so, scale up at a rapid pace.

"We realised that we had done our bit in Tamil Nadu and it was time to go national. The question we faced was do we expand sequentially (one state at a time) or parallely (many states simultaneously)? We opted for the latter," reveals Subramanian.

Between late 2004 and early 2007, Rs 160 crore worth of equity was raised. That apart, a debt of Rs 220 crore and a bridge loan of Rs 125 crore (pending raising of equity from capital markets) was arranged to fund the national rollout. On an average, 60 to 70 stores were added in a month.

The pace of rollout is evident from the fact that till September 2006, Subhiksha had a store count of just 160, but by March 2007 it had shot up to 670 and by March 2008 to 1,320. By September 2008, it was 1,650-in all 1,500 stores were added in just 24 months. "Business was growing like mad.

Despite the cost pressures in 2006 after Reliance, the Birlas and others announced plans to enter retail, between 2006-07 and 2007-08 we doubled our stores (from 670 to 1,320), tripled our revenues (from Rs 833 crore to Rs 2,305 crore) and almost quadrupled our profits (from Rs 11 crore to Rs 39 crore)," says Subramanian.

By then Subhiksha had become the country's largest mobile phone retailer with an annual turnover of Rs 1,000 crore. Buoyed by its performance, Wipro Chairman Azim Premji, in March 2008, picked up the 10 per cent stake in Subhiksha that was offloaded by ICICI Venture for Rs 230 crore, pegging the company's valuation at Rs 2,300 crore.

Chose debt over equity to fund expansion

R. Subramanian
R. Subramanian
It was clearly the highest point in the retailer's history (and, in a way, beginning of its decline too). The company, which had been contemplating and postponing initial public offering (IPO) since 2007, failed to capitalise on Premji's investment and the goodwill it created to raise money from the market.

"We kept thinking: why dilute equity for shareholders? We wanted to keep equity low and raise more debt. This strategy will return better money for shareholders as stock market is booming. But we should have raised equity in March 2008. There was a lot of investor interest in Subhiksha. Not doing it then was a mistake," concedes Subramanian.

Subhiksha entered 2008-09 with a Rs 1,000-crore investment plan for increasing the store count to 2,200 (from 1,320 as of March 2008) and add a new line of business-consumer durables information technology (CDIT) products retailing. It was to be funded by Rs 400 crore equity and Rs 600 crore debt. In June 2008, it announced a merger plan with Blue Green Construction Ltd, a company listed on the Madras Stock Exchange, and which had done some research on the CDIT business.

By then the stock markets had begun to weaken. "A weak market, we thought, would at best lower our valuation by 10 per cent or so. There was nothing to tell us that we were in for a complete collapse of the equity markets," explains Subramanian. The banks were getting worried too. The bridge loan of Rs 125 crore was coming up for repayment in September 2008 and there was no sign of equity. They were finding it difficult to lend.

Used working capital for expansion
"By July 2008, we were finding it difficult to borrow. But we kept the expansion going as we were confident of raising equity. In fact, in September we had some good offers for equity but before we could grab it Lehman Brothers collapsed and the markets fell off," reveals Subramanian.

In the absence of borrowings, Subhiksha made the cardinal mistake of diverting working capital to fund expansion. Consequently vendor payments were defaulted. They stopped supplies and the shelves ran empty. Salaries and other statutory dues were not paid. Security staff deserted their jobs and over 600 stores were vandalised in November-December 2008.

"We desperately worked with various stakeholders to put something together to prevent a collapse. All we needed then was Rs 125 crore to be back in shape. Between September and November 2008, we had four meetings of the collective financial stakeholders. But unfortunately it was a period when liquidity was tight. Investors, too, could not do much as the markets were crazy," rues Subhiksha's founder, adding, "In a way we got into trouble at the wrong time."

By end-February 2009 operations came to a standstill. Says Subramanian, "At this stage, everybody's reaction was emotional. There were people who said we should have been more careful in managing our money, which is perfectly right, and that we did not have a plan B."

Independent directors quit, relations with ICICI Venture soured (it withdrew its nominees from the board and reportedly sought government investigation into the affairs of Subhiksha). Premji and ICICI Venture objected to the merger of Subhikhsa with Blue Green Construction Ltd.


Cash flow mismanagement
Subramanian is now banking on the much-delayed corporate debt restructuring (CDR) process (involving 13 banks with cumulative exposure of over Rs 800 crore) to bring Subhiksha back to life. "I don't see ourselves getting back to 1,650 stores. We will probably restart about 1,200 stores once the CDR process is through. We should clearly be back in business in the second quarter of the current fiscal," claims Subramanian. He adds: "Regaining the credibility of vendors, lenders, investors and the employees will be the toughest challenge for us."

Has the discounted retail model failed? His response is quick: "Subhiksha's problem was cash flow mismanagement. We ran a profitable business. We were completely overconfident when it came to raising equity. If anybody wants to be a serious grocery player in India, they have to follow our path. The model is eminently successful."


Geoff Hiscock
Geoff Hiscock
 'Junk Brand Subhiksha. Start afresh'
Geoff Hiscock
Author, India's Store Wars

In March 2008, the Boston Consulting Group named Subhiksha one of the world's top 50 "local dynamos". Less than a year later, the Subhiksha brand was in tatters, proving once again that in business, timing is everything. Launch or expand at the right time and a rising tide lifts even the slowest of ships. Likewise, the most brilliant idea and the best execution can come unstuck if the business mood swings to negative, as it most certainly did in the second-half of 2008. Once the credit shutters go up, only cash will save the day.

With a business strategy running on breakneck debt-funded expansion, this is when Subhiksha Founder R. Subramanian hit trouble. Subramanian's early business life included working through a turnaround and restructuring of the troubled Enfield motorcycle company between 1989 and 1993. With that experience, he should have anticipated the need for a bigger buffer to handle a downturn. He had an opportunity in 2007 and early 2008 to raise money through a private placement or an initial public offer, but the timing didn't suit and by July 2008 the chance was gone. Last August, as credit everywhere started to tighten up, I got a glimpse of what might be ahead for Subhiksha when I ducked into one of its Bangalore stores. The shop was in unexpected disarray; the shelves already were understocked and the staff seemed unmotivated.

Most disturbing of all was the distinct lack of customers, despite the thrum of retail activity elsewhere along the street. India's modern retail boom still has a long way to run, and Subramanian may yet pull off a corporate debt restructuring. But the Subhiksha brand, like its stores, has been trashed since February. It is now not worth reviving. If he wants to stay in retail, Subramanian might be better off using his skills to prepare a fresh iteration of the low-cost supermarket model under a new name.


Arvind Singhal
Arvind Singhal
'Successful model turned into usuccessful business'
Arvind Singhal
Chairman, Technopak

Why did Subhiksha apparently succeed in the first place, and why did the business unravel so quickly? More importantly, is there any way the business can be resurrected or even salvaged partially? Subhiksha's early success was due to the fact that the big opportunity for Indian retail lay (and still lies) in a no-frills/ deep-discount business model. Other than Future Group's Big Bazaar to some extent, and another South-based regional player (Trinethra in Andhra Pradesh), no other entrant in the retail sector acknowledged this fact. Subhiksha made no bones about reaching out to the relatively lower income strata families, and cut costs everywhere, as in store locations, fit-outs and in-store service and experience.

It also operated on very low backend and corporate overhead costs. As long as it remained focussed on this core group, and operated within a small geography, the model worked.

However, as its ambitions grew, the focus of its promoter and other investors also apparently shifted from delivering value to its customers to creating valuation for themselves. Reckless expansion across disconnected geographies required a reckless increase in debt. The humungous quantum of money raised was spent largely on store expansion (without caring about store-by-store viability) and not on strengthening the backend including supply chain, distribution and replenishment logistics or improving customer experience or even building employee capabilities.

Sadly, once the business started to unravel, all these flaws began to surface: Angry suppliers and other vendors, dissatisfied customers, agitated employees and worried lenders. All these led to a sudden seizure of the operations. Revival, even in a truncated form, at this stage looks nearly impossible. While the original premise for the business (no frills/deep-discount retailing) remains powerfully intact, it is unfortunate that this once promising business itself is poised to become history.

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