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SUBHIKSHA CASE STUDYSUBHIKSHA

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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. Most of the outlets are now closed. The company -- Subhiksha Trading
Services -- has been unable to pay salaries and statutory dues for the past few months.
With the unpaid security agency staff also not reporting for work, many of the stores have
been vandalized. "The properties have become vulnerable targets," founder and managing
director R. Subramanian told The Financial Express. The 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
Lack of demand is the major problem," says Mathew Joseph, senior consultant with
Delhi-based think-tank the Indian Council for Research on International Economic
Relations (ICRIER). "Real estate prices are falling, and organized retail would like to
wait until the bottom is reached. Finance is also difficult to come by in the context of
falling demand and low profitability as banks are becoming risk averse." Gibson
Vedamani, director of the Retailers Association of India (RAI), adds: "Like everyone
else, the business groups in modern retail have been hit by the global recession by way of
a credit squeeze [and a lack of] funding and working capital. The slump in real estate has
been a big issue. Those who had big expansion plans had [acquired] real estate earlier at
much higher prices. They are now re-looking at their expansion plans and renegotiating
the rates."
The future of the kiranas caused so much concern that the Union Commerce Ministry
appointed ICRIER to do a special study to find out the impact of modern trade on these
small outlets. The ICRIER report, released in the middle of last year, found that it was "a
positive sum game in which both unorganized and organized retail [could] not only
coexist but also grow substantially in size." The study found that:
The total retail business in India would grow at 13% annually, from US$322
billion in 2006-07 to US$590 billion in 2011-12.
The unorganized retail sector would grow at about 10% per year, with sales rising
from US$309 billion in 2006-07 to US$496 billion in 2011-12.
Organized retail, which now constitutes a small 4% of the total retail sector, is
likely to grow at a much faster pace of 45% to 50% per year and quadruple its
share in total retail trade to 16% by 2011-12.

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"Small retailers in India have inherent advantages," says the PwC-CII "Rising Elephant"
report. "They are located next to the consumer, making it convenient for top-up purchase.
They know them well, some even by name. They give credit too -- which no large retailer
does. Their fixed costs are so low that their breakeven point is as low as 46% of sales."
The large players usually try to gain on economies of scale and lure customers by
reducing the margins," says Bhat of Zinnov. "This would [require] elimination of
middlemen and brokers along with established logistics and infrastructure support.
However, in the current scenario, lack of infrastructure and inefficient logistics services
have dampened the growth of organized retail while providing continued shelter to the
middlemen. As a result, organized retailers have not been able to provide higher value.
On the contrary, unorganized 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 just Subhiksha but several retail chains that are reeling under the recession. Over
the last few months, about 30 supermarkets have shut shop in the city. All 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 15 to 20 per cent
dip in footfalls, budgeted spending and worse, rents they can ill-afford now. In addition,
manufacturers of various FMCGs slashing retail margins is further choking the industry,
they say.
Giving reasons for the shortage of funds, Subhiksha said it overreached itself. “Expansion
without support of equity was the pain, and not stopping expansion when bank money
was getting delayed was also a problem,” it said.
With little cash left in its kitty, Subhiksha now has its back against the wall. “The
company is fast shutting stores as it is unable to pay rentals or employee salaries.
Moreover, it has hardly any supplies in most stores,” said a key industry executive, who
has access to top management at Subhiksha.
One reason for shutting stores is that Subhiksha wishes to lower its rent bill. “We are in
the process of relocating 8-10% of our stores nationally to take advantage of falling
rentals across the country, specifically in key metro cities. We are implementing a SAP
supply-chain solution to streamline operations and this could temporarily affect store
operations,” it said.
Till recently, Subhiksha was a poster boy for India’s fledgling retail industry and
expanding aggressively. The company’s turnover went up seven times in two years, from
Rs 330 crore in 2005-06 to Rs 2,305 crore in 2007-08. Then it went into a tailspin.
“We had expanded rapidly. Most of the growth was debt-led. We had built on a tiny
equity base of just Rs 32 crore, and even including share premiums, the company had
raised only a total of Rs 180 crore as shareholder funds,” the company added.

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 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. Most of the outlets are now closed. The company -- Subhiksha Trading Services -- has been unable to pay salaries and statutory dues for the past few months. With the unpaid security agency staff also not reporting for work, many of the stores have been vandalized. "The properties have become vulnerable targets," founder and managing director R. Subramanian told The Financial Express. The 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 Lack of demand is the major problem," says Mathew Joseph, senior consultant with Delhi-based think-tank the Indian Council for Research on International Economic Relations (ICRIER). "Real estate prices are falling, and organized retail would like to wait until the bottom is reached. Finance is also difficult to c ...
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