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 Subhiksha’s 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 Subhikshs’s 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 Subhiksha’s 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.
Subhiksha’s 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 debt-
surviving 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 Subhiksha’s fixed
assets. ICICI alleges that Subhiksha’s 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 Subhiksha’s 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 Subhiksha’s 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.