Jul 17, 2008

Mktg - Discount Warrior

It was in 1997 that discount food and grocery retail chain Subhiksha set up its first store as an experiment in Tiruvanmiyur, a suburb of Chennai. To a Subhiksha shopper in upcountry markets it would be in a format quite unrecognisable from the one it is today. No touch-and-feel experience of products for consumers here. Instead, they would write out their orders on a form after seeing a catalogue of goods stocked at the store and would be given a token number. Behind a counter, away from sight, would be the goods which staff would pile up on the counter based on the order form. Shoppers could sit on chairs and watch a TV screen and would be alerted to their order by a buzzer and the token number flashed, akin to a bank. And, on the bill, right at the bottom would be the powerful statement: today’s savings for you!
At the invitation of Subhiksha’s founder and irrepressible 42-year-old Managing Director, R. Subramanian, this writer got to see Subhiksha’s early store operations and its stocking hub. A no-frills, low-cost operation, RS, as he is popularly known, was very clear even then that neighbourhood discount stores selling grocery and consumer goods would be the model he would follow — buying cheap and selling cheap. No fancy air-conditioned stores but workaday stores that would fill at least 75 per cent of the shopping basket of a typical middle-class household. While he scaled up the stores rapidly in the Chennai and Tamil Nadu markets using this model, along the way many of the stores became a bit grungy and complaints of stock-outs of brands became common. It was too early, seeing the initial operations then and seeing Subhiksha’s size today, to say the rest was history.
But 10 years down the line, even as several large corporates with deep pockets in retail still grapple with scale and the roll-out of their stores across the country, Subhiksha has emerged a pan-India retailer with 1,480 stores (and growing with a recent entry into West Bengal) right across the country in 110 cities, among the largest retailers of fast moving consumer goods in most markets and the largest national mobile phones retailer which sold two million phones since it entered this space two years ago.
As Subramanian told Brand Line just after a decision last month to make a public listing of the company, “For the last financial year, Subhiksha doubled stores, tripled turnover and quadrupled profits.” The chain had a turnover of Rs 2,300 crore and a profit-after-tax of Rs 41 crore in the last fiscal and expects to finish this year with sales of Rs 4,500 crore. Around 500 of the stores are exclusive mobile stores while at least 600 supermarkets have a pharmacy attached.
Along the way the ‘rapid-talking, quick-thinking’ RS, an electronics engineer from IIT Madras and an MBA-gold medalist from IIM-A, who drew early inspiration for his model from Sam Walton of Wal-Mart, has had many battles – with FMCG companies, pharma distributors and even with Aavin, a TN government cooperative which retails milk and milk products, for selling much below the maximum retail price, a battle which Subhiksha won in court. Switching gears
A couple of years ago, Subhiksha switched gears. From being perceived as a one-man-driven company it increased managerial bandwidth, observers say at the behest of ICICI Venture, which since 2000 has invested close to Rs 100 crore for a 23 per cent stake in the company, a major chunk of the investment over the past three years. With talent drawn from the top FMCG companies, it took its hub-and-spoke model to other States where each region head operates as if running a separate business division.
From the early format it experimented with, Subhiksha is now a self-service format. With more emphasis on store interiors and lighting, the number of brands stocked too has gone up. Purchase of goods is centralised through 14 hubs around the country which, in turn, consolidate and parcel out the goods to each of the stores. With disaggregation being the buzzword, deals are struck directly with companies, cutting out the distributors and middlemen. At last count, the chain had 125 stores in Mumbai and 175 stores in New Delhi, which is now its single largest market.

As Subramanian points out, the Subhiksha brand too has undergone a change. A few years ago it was perceived as a niche Chennai or South-based retailer, but is today a national brand. Also, as Mohit Khattar, President, Marketing, says, the chain could expand in upcountry markets without the baggage and image problems that it had earlier in the South. Stores in the new markets are all self-service and better stocked and serviced than earlier.
Now that it has achieved scale and size, Subhiksha intends to take the chain up to a new level by making the company publicly traded. While RS was repeatedly asked by the media about an impending initial public offer, the company has instead taken a majority stake in a little-known listed Chennai-based firm, Blue Green Constructions and Investments Ltd. Once merged, the entity will be known as Subhiksha Ltd and is expected to list its shares on the National Stock Exchange, Bombay Stock Exchange apart from the Madras Stock Exchange, where the shares of Blue Green are currently listed.
Subhiksha would also come out with an open offer to the public to acquire another 20 per cent shares as mandated by the Securities and Exchange Board of India under its takeover guidelines. The promoters led by Subramanian hold a 60 per cent stake in Subhiksha, ICICI Venture 23 per cent and other institutions 15 per cent while two per cent is held by the employees.
RS says that since the ultimate object is to get the shares traded, the route taken does not really matter and that anyway the company does not need large capital at one go which is what a IPO would do. The listing could also create an ‘exit window’ for investors in Subhiksha.
However, asked about an impending exit, Bala Deshpande, Senior Director, Investments, ICICI Venture, and a board member of Subhiksha, does not indicate a time frame. Says she: “We look at what works best for the company and shareholders; the company’s interests are first. We will look for an opportune time.” The venture capitalist typically stays invested in a company for about five years. ICICI has invested in several retail plays and Deshpande describes the Subhiksha model as a scaleable and fundable model which caters to a large, price sensitive segment of the consuming public. “RS has managed the extremely rapid rollout quite well. Businesses such as these need that early entrepreneurial drive to move forward,” she adds. Consumer durables in focus
Subhiksha has now trained its guns on the consumer electronics business. Says RS: “We are no longer a food brand but perceived as a value-for-money brand which proposition we extended seamlessly to mobile phones and will now use as an umbrella brand to enter the consumer durables business. Consumers will know they can get the best deal there.” Concurs Deshpande, “If you were to separate out the core of Subhiksha, it is its value-for-money offering. With that you can add on categories.”
As RS explains, the chain will not get into any category unless it can scale up and be among the top two in the business and with the success in mobile phones Subhiksha is confident it can transform that category too. By the first quarter of the next financial year, it expects to have 100 stores of approximately 15,000 sq ft up and running. “We will have the lowest prices,” he declares. It has roped in K.V. Ramachandra, former CEO of confectionery company Lotte India, who has had years of experience earlier at Jumbo Electronics in Dubai, as one of the category heads for the business.
Meanwhile, the chain has an aggressive private label initiative in place which offers the whole range of grocery as in-house brands, including atta and even FMCGs ranging from detergents to shaving creams. Subhiksha’s Khattar says today 25 per cent of company sales come from private labels. With store expansion, he says, the range of brands too was increased from around 400 stock keeping units to almost 1,400 SKUs. “The only constant is the large savings for consumers; it is seen as an ‘honest’ brand which doesn’t make tall claims,” he adds.
Being such a large buyer from most of the FMCG companies, Subhiksha has emerged as a key account for them, ensuring that the retail chain gets higher margins. Comments Ranju Mohan, Vice-President, Sales, Henkel India, “RS has evolved as a retailer in understanding the Indian consumer’s needs and psyche. He runs a tight ship as well.”
The marketing head of a large consumer goods firm, however, says that the rapid expansion of the business sometimes means that the discount chain gets into a bind over cash and payments tend to get delayed. “It faces supply chain issues as the ordering process I feel is not fine-tuned, so I guess they may end up carrying more inventory,” says this executive. But, in the same breath concedes that the throughput of goods that Subhiksha offers makes it a key account for all FMCG firms. But, these are mere hiccups for RS as he hurtles towards his objective of making Subhiksha a $5-billion company and the country’s largest retailer by 2011.

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