Subhiksha was a dream flight, which crash-landed as soon as it took off; B&E presents a decisive story covering a summary of its flawed strategies and the way forward. by Pawan Chabra
Surviving One Bad Year: 7 Spiritual Strategies to Lead You to a New Beginning. In this shallow chick lit, Nancie Carmichael – an author who seems to have graduated from parenting books to self help hocus – spawns chapter after chapter of spiel on not only how to handle personal loss, but even bankruptcy! She doesn't stop there – there's more mumbo jumbo on how to handle depression, disappointment, betrayal, and yes, job losses too! Hilariously, if one does a post-hoc analysis, it just seems that if R. Subramanian, founder, Subhiksha, had even blindly followed the quirky advice conjured up by Ms.Nancie, Subhiksha might have been a better company than what it is now. But as they say, journalistic advice is as infidel a virtue as the devil's religion. Be that as it may, we still decided to go ahead and present a contemporary synopsis of what went wrong with Subhiksha and where is the erstwhile retail star heading to now!
Prosperity is the literal translation of the name Subhiksha from the Sanskrit language. To its credit, the retailer did remain true to the name for more than a decade with its business model, a legacy that even saw eulogies emanating sporadically from industry associations. Then how did the company manage to literally shoot itself? This case study provides lasting lessons in retail strategy.
Subhiksha commenced operations in 1997 and took the conservative route for nine years in the booming retail industry. The clear focus was on establishing its brand name in the country before going for the kill. After making consistent efforts to get a tighter grip on the Indian consumer for the past 11 years, it was announced in early 2008 that the retail chain will invest a whopping Rs.500 crore to increase the number of outlets to 2000 across the country by 2009. Was this target too aggressive, critics asked, keeping in mind that the company had just touched 150 stores across the country in the first nine years of its operations?
Quite possibly. Nevertheless, the company's sales were also growing by leaps and bounds; from a mere Rs.3.3 billion for financial year 2005-06 to Rs.8.33 billion for FY 2006-07, going on further to touch a mind-boggling figure of Rs.23.05 billion for FY 08. Soon enough, media and industry experts were reporting the Subhiksha model (a no-frills model aimed at gaining consumer confidence by offering the lowest prices in the industry attracting the price-sensitive segment of Indian consumers – the largest) as the most successful one in retail; even home-grown counterparts and several multinational firms started rolling out formats inspired from its business model. It was all looking like a dream come true, with R. Subramanian – an IIT & IIM alumnus – driving the growth story. Money was flowing in from PE players and industrialists. ICICI Ventures, which was an entrant during the early years of Subhiksha, became the second largest shareholder after promoters with an exposure of billions of rupees. Notably, PremjiInvest, the PE arm of billionaire Azim Premji, bought a 10% stake in Subhiksha from ICICI Venture in 2008 for Rs.2.3 billion. Subhiksha itself invested in an NBFC for future long term growth funding. With 1,600 stores already set up, even the ambitious target of 2,000 stores for the year looked very achievable.
But something, somewhere, started to go wrong. Reports started filtering in – employees complaining about unpaid salaries, suppliers complaining about huge outstanding payables, rents, bills, and more... Stores started shutting down when funds started drying up. However, the company claimed strongly that there was nothing wrong as these were normal economic slowdown issues and that the stores will be reopened by June 2009.
And then came the shocker! Reports came in that Subhiksha had inflated revenue figures, fudged accounting transactions, and transferred money to non-existing companies. An adamant Subramanian refuted all allegations, and refused to handover the company's reins. Push ultimately came to shove, and finally, facing extremely angry creditors, employees, shareholders (even Premji sent legal notices), and left with a bleeding skeletal firm, R. Subramanian, the brain behind Subhiksha, grudgingly shut shop, yet refusing to "run away."
As it now goes through a corporate debt restructuring plan, the chances of the retailer making a comeback look very bleak. “Subramanian is a great mind and his model was very successful but he was at the wrong place with the wrong people and took the wrong decisions. He has today lost his credibility in the Indian retail market,” says an industry expert to B&E on the condition of anonymity.
On hindsight, considering the fake inventory, fake bills and fake companies to which money was transferred, Subhiksha shares a lot of similarities with the largest scam in the Indian market, Satyam Computers Services – though Premji minces no words while referring to his investment in the retail chain as an error and titles the company 'the Satyam of the Indian retail industry’ in an interview to a business daily. But the bleeding retailer is quite fortunate as it has been able to stay out of problems of the magnitude that Satyam faced, where the founder Ramalinga Raju is behind bars and even the auditors and the sister concerns have tasted rough waters.
It is widely believed that the massive expansion plan – mistimed horribly with the onset of the economic slowdown – was the critical tipping point. “The business model per se was very strong and also makes sense in today’s environment; but it was the massive expansion that caused the failure. The empty shelves and a weak back-end changed the consumers’ perceptions about the company,” says Zahir Abbas, Associate Director-Retail, KSA Technopak. Our text messages and phone calls made to R. Subramanian are left unanswered. Even ICICI Ventures, which now holds about 23% in Subhiksha, and still has an estimated exposure of about Rs.1.06 billion in it, chooses to abstain from answering B&E's queries.
