Subhiksha Sails Through Choppy Waters
Subhiksha, the retail venture of R Subramanian is facing a crisis of grave magnitude. The supermarket chain which has its roots in Chennai has grown too big, too fast in the last few years. While their model had several flaws (No frills / unattractive stores, frequent stock outs), their aggressive growth outside South India indicated that they were probably doing well. The deterioration in the equity markets put paid to Subhiksha's IPO plans. Poor sales and unavailability of easy credit might have resulted in a situation where Subhiksha is not able to pay employees, suppliers and landlords. The New Indian Express carried a cover story on Monday (8th Dec) explaining the situation. Another report in NowPublic has also mentioned similar complaints.
More than 700 employees of 97 stores run by Subhiksha, the supermarket chain in the city have not been paid their salaries for the last two months by the company, which has told them to pick up groceries from the stores in lieu of their pay packets.However, with the shelves empty — all major suppliers of goods such as HLL have stopped supplies as the firm has defaulted on payments — the employees are in a state of panic. (Link)
Subhiksha has since denied the allegations.
I had tried Subhiksha during their initial days. Back then, the shops didn't allow the customers inside and one had to give a shopping list to the counter staff who would collect the stuff from the respective shelves. With such a concept there was no possibility of an impulse buy as Subhiksha didn't provide a shopping experience. They then tweaked this model to allow customers inside the shop. The shelves were pretty ordinary and one could notice that they had run out of stock for most of the key items. One had to visit other departmental stores to complete their shopping requirements. The only thing which drew people to Subhiksha was the aggressive pricing. They used the pricing power to enter the field of pharma retail. Their offer of 5% discount for pharma products met with strong resistance from the Pharma Distributors and Retailers Association which sensed that their trade will be affected if Subhiksha Medical shops were allowed to expand. Stock outs were another common phenomenon in the Pharma business as well. With so many problems, one could feel that Subhiksha was never among the top of the mind recall of the shoppers.
I could sense Subramanian's ambitions when I spotted him at the Giant Hypermarket in Tampines (Singapore) sometime in 2007. The shop was teeming with weekend shoppers when Subramanian was busy observing the behaviour of the shoppers in the different sections. He came across as unassuming and hardworking. Aggressive expansion, poor back-end infrastructure, improper demand forecasting together with extremely bad credit and equity markets have dented Subhiksha's growth plans.
This is not the first time Subhiksha has been at the receiving end. Even biggies like Reliance Retail are in retrenchment mode. The big question now is whether Subhiksha will fold up. Azim Premji, in his personal capacity, recently picked up a 10% stake in Subhiksha (the stake was acquired from ICICI Ventures). Shutting down unprofitable stores, laying off people and resolving the back-end problems would help them recover somewhat from the current crisis. The other option is to put them up for sale. Whatever be the outcome, Subhiksha has some serious rethinking to do.