Human Resource Knowledge

Subhiksha's incredible growth story

Subhiksha founder and CEO R Subramanian (inset)


With 157 of them scattered across the capital, you are more likely to walk into a Subhiksha store in New Delhi than into a post office. Mumbai isn't too far behind: at last count, there were 120 outlets of the food and grocery chain in the city.

The pace of Subhiksha's rollout -- more than 750 stores since March 2006 - has been breathtaking. But, in its hurry to grab space, the retailer has slipped up in some critical areas: bare shelves are a common sight in many stores and private label quality isn't consistent.

Meanwhile, as more convenience store chains ready to set up shop across India, competition will only get keener.

Think middle class

Subhiksha's target clientele is the middle class: households with incomes in the 50-90 percentile range. The logic is simple, explains Ramaswami Subramanian, who founded the food and grocery chain in Chennai in 1996.

The top 10 per cent don't spend very much more on food and groceries than those in the income categories below them, nor do they account for large numbers.

But they do expect more in terms of ambience, variety and service. Catering to this group, then, isn't really worthwhile for Subhiksha. Instead, with functional outlets no bigger than 1,200-1,500 sq ft - and no frills like air-conditioning - Subhiksha has set itself up in direct competition with the kiranas.

It may not be easy, though. As Damodar Mall, CEO, innovation and incubation, Future Group points out, the kirana is a high-service format with social capital the organised sector will find hard to match.

"Price and range will be key elements," he adds Mall, explaining that in India the small store model works altogether differently from the way it does overseas, where convenience stores actually charge a premium over supermarkets.

Of course, Subhiksha is prepared to take on the kiranas, and not just on price and range. A basket of goods at its stores is about 10 per cent cheaper than at most corner stores and it offers about 1,500 stock-keeping units (SKUs) at its stores, compared to 750 SKUs at most corner stores.

But where it hopes to score more is with its home delivery option. And then, unlike kiranas, customers at Subhiksha outlets can browse through the offerings - stores are designed such that the exit is reached only after walking through most of the aisles -which will help in impulse purchases.

Size and speed:
Ultimately, though, Subhiksha's USP is its price - cheaper than the kiranas, and cheaper than the hypermarkets. If it is to keep dishing out discounts, the chain needs to keep its costs down to the minimum.

Hence its tearing hurry to build scale quickly: so that procurement costs fall and overheads can be absorbed over a larger base. Stratospheric real estate prices notwithstanding, Subhiksha has opened close to 42 stores every month in the past year and a half, across 20 cities.

It aims to hit the 1,000-store mark by Diwali (next month), and double that by March 2009, occupying 3 million sq ft in all. "We do manage to get space, though it's not always cheap," Subramanian points out.

The momentum seems justified when you consider how close the competition is. The Future Group entered the small-store arena a month ago; Mall says in the next couple of years, the group will roll out 1,000 KB Fair Price shops.

Reliance Fresh, too, although not catering to the same clientele, is expanding from its current 300 stores to 1,000. But where the Future Group, Reliance Retail and Bharti Retail will have both large and small formats, Subhiksha intends to stay with the small store model.

That could make it harder for the chain to scale up. Observes Raman Mangalorkar, head, retail practice, AT Kearney, "Although the small-store format is not in any way logically flawed, the ability to scale up with only a small store format is less than it is for a chain that has both large and small formats."

Interestingly, the TruMart chain - which has stores occupying anywhere between 2,500 sq ft and 8,000 sq ft of space - is opting out of the smaller model.

"Customers want everything under one roof and 2,500 sq ft is simply not enough," explains Upamanyu Bhattacharya, CEO, TruMart. He adds, however, that the market is segmented with enough of a catchment for all formats.

For its part, Subhiksha's convinced that small is the way to go. "We intend to dominate the small store segment. We are already ahead of the pack and while others may be rolling out both large and small stores, our costs are lower," asserts Subramanian.

As for notching up scale, Indian shoppers prefer to buy vegetables and groceries closer home, but are willing to go a little further to pick up apparel or other items.

"People don't want to spend too much time buying essentials. And only high-end shoppers will buy food and groceries in hypermarkets and they are not our customers," he adds.

Ernst & Young Partner Pinakiranjan Mishra thinks a slightly better corner store makes strategic sense. "The small-store format is obviously a viable model, otherwise the kiranas wouldn't exist. The trick is to leverage purchase efficiencies, since costs for an organised chain are higher than those for a kirana," he advises.

Cost-side story:
That's where Subhiksha has its work cut out. As AT Kearney's Mangalorkar points out, typically, small stores have higher structural costs in terms of rent, labour and overheads.

Subhiksha's marketing head Mohit Khattar observes that as new stores are rolled out, store costs (people, electricity, furniture and so on) will increase in a linear fashion, while non-store costs (technology, sales and marketing) will rise by just about 35 per cent for a 100 per cent increase in the turnover.

At Subhiksha, people accounts for 40 per cent of costs, while rents are only half that - average rents are about Rs 33 a sq ft every month, while Mumbai is naturally higher, at Rs 70 a sq ft. The chain keeps a lid on rentals by opening stores in middle-class localities, most of which are off the more expensive, main roads.

Also, the stores aren't air-conditioned, which slashes electricity costs substantially. "We don't pay a mall premium and we're saving on air-conditioning, which is why we are able to offer far higher discounts than the bigger stores," agrees Subramanian.

The way to save, says E&Y's Mishra, is to sell a larger proportion of store labels. "That way, any disadvantage that the retailer has while procuring from big, branded suppliers can be effectively neutralised," he explains.

The chain has already started doing that. It is sourcing from contract manufacturers for a variety of products, including soaps, toothpaste and instant noodles. While Subhiksha doesn't own the Tatva, Bix and Zoop brandnames (some of the private labels it sells), it has exclusive rights over them and also enforces quality.

"They are twice as profitable as a national brand," says Khattar. Already, private labels account for 12 per cent of volumes, but Subhiksha's counting on that growing exponentially in the coming years.

Out of stock, out of mind:
More than costs, though, it is the supply chain that is Subhiksha's biggest challenge today. With customers often not able to get what they are looking for in the stores, the retailer risks putting them off forever.

As E&Y's Mishra points out, "A store has to deliver on time and in the right quantity, otherwise it will lose customers. As it is, the customer base for a neighbourhood store is a highly loyal one and it is difficult to wean away customers from the local kiranas."

Subramanian admits this has been an issue, with availability of stocks down to a low 68 per cent just a few months ago. "It's better now at about 80 per cent," he claims.

The problem appears to lie in its decision to keep inventories lean - just 18 days against an industry average of 30-35 days. At times, it's "too lean, almost skinny", as an industry watcher points out. Khattar points out that some consumer product suppliers are taking time to adjust to its quicker schedules. That could be an issue, agrees Mishra.

"Even in mature markets, the fill rate for big FMCG firms is only around 95 per cent. In ours, it could be 60-65 per cent," he points out.

Still, that only means Subhiksha needs to work that much harder to ensure its supply chain remains seamless. Khattar agrees. He points out that the company has recently implemented SAP enterprise software systems in a bid to streamline processes further.

Show me the money:
Subhiksha's margins are much lower than the industry norm. While chains like TruMart plan to operate consistently at gross margins of 20 per cent or so, the Subhiksha model pencils in a gross margin of only 15 per cent.

How does that work? Subramanian explains that net margins will improve from around 1.5 per cent (post-extraordinaries) at present to about 2.8-3 per cent as costs get absorbed over a larger base.

From revenues of Rs 811 crore (Rs 8.11 billion) in the year ended March 2007, Subshikha is aiming for Rs 5,000 crore (Rs 50 billion) by March 2009 - already, monthly turnover is close to Rs 250-300 crore (Rs 2.5- 3 billion), which will go up further to Rs 400 crore (Rs 4 billion) by 2009.

It's already got scale. All Subhiksha really needs now, says Mishra, is technology: investments in the back end and supply chain. Surely it can afford to hike margins up a bit? Subramanian disagrees. The price at which it sells now is the price at which the kirana buys from the distributor.

"We want to keep prices down at these levels because we want to keep the competition at bay," he explains. Future Group's Mall predicts that the new winning formats will emerge in the next few years. With some luck and more effort, Subhiksha may well be one of them.


SOURCE: http://www.rediff.com

Labels: Company Profile, General

posted by Paresh @ 11:16 AM