Saturday, February 28, 2009

Expansion spree sans strong back-end did Subhiksha in

The collapse of Subhiksha presents a case study for existing and prospective retail companies in India. The Chennai retail major, which grew exponentially since its inception in 1999, is battling for survival, despite two investors in tow — ICICI Venture and Azim Premji’s private investment firm Zash Investment Company. The 1,300 store-strong chain has scripted the first rise-and-fall in the history of India’s fledgling retail industry. Viewed as a sunrise industry, the retail sector has suddenly caved in, with most players either putting expansion plans on hold or re-negotiating rentals. Though rentals are coming down in most parts of the country because of the economic slowdown, rapid expansion without a proper supply chain in place has added to the woes of retail companies. So, was the Subhiksha model flawed or was it just a management failure? The chain was envisaged as a low-cost, no-frills neighbourhood convenient store, which actually did work for some time. But soon enough, the promoters, who held around 60 per cent stake, went on an expansion spree without strengthening the back-end. As a result, customers often had to come back from the store without getting the products that they wanted. To top it, Subhiksha failed to establish an emotional connect with its customers, even though it had built a large consumer base. Hence, its fall can largely be attributed to mismanagement leading to irrational expansion without spreading out the equity base. Also, the retail chain tried to procure supplies against cash, which, many analysts say, was irrational. As if this wasn’t enough, the market meltdown forced the company to defer its proposed initial public offer (IPO) in 2008. The situation worsened in the second half of the year, when a liquidity crisis throttled Indian companies. Subhiksha, which was facing a severe cash crunch, had to face the ire of its suppliers and stockists as well as real estate owners, for delayed payments. By then, the neighbourhood retail chain had lost its credibility and image. Today, the company’s founder R Subramanian is under fire from stakeholders, who have alleged that they were kept in the dark. Following complaints from Subhiksha’s former directors, who stepped down from the board in January, the Registrar of Companies has appointed KPMG as auditor. Meanwhile, the blame game continues. ICICI Venture, which holds 23 per cent stake in Subhiksha, has held the management squarely responsible for the chain’s operational failure. Renuka Ramnath, managing director and CEO of ICICI Venture, claimed that Subhiksha’s board did not receive audited figures even after repeated attempts. The last available figures, according to Ramnath, were for the year-ended March 2007. Subhiksha, however, has refuted these charges. As the company lies in a shambles, what the investors and promoters need to do quickly is get on to the business of rebuilding it. A positive sign is that both ICICI Venture and Zash have said that they are working on a revival plan. Stakeholders, too, are awaiting the next move by lenders, who have an exposure of around Rs 750 crore, and are trying to sew up a revival package. However, the most daunting task for Subhiksha will be to re-establish the consumer connect, without which no retail company can survive.

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