Subhiksha Case Study

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SUBHIKSHA CASE STUDY

Subhiksha is India's largest retail chain -- or some would prefer to say "it was." Over the past few months, the network of neighborhood discount shops has been coming apart at the seams. Most of the outlets are now closed. The company -- Subhiksha Trading Services -- has been unable to pay salaries and statutory dues for the past few months. With the unpaid security agency staff also not reporting for work, many of the stores have been vandalized. "The properties have become vulnerable targets," founder and managing director R. Subramanian told The Financial Express. The vandals, he said, could include "disgruntled vendors, employees, anti-social elements taking advantage of the situation, and even owners of the real estate" rented by the retail chain.

STRATEGIC ISSUES

Lack of demand is the major problem," says Mathew Joseph, senior consultant with Delhi-based think-tank the Indian Council for Research on International Economic Relations (ICRIER). "Real estate prices are falling, and organized retail would like to wait until the bottom is reached. Finance is also difficult to come by in the context of falling demand and low profitability as banks are becoming risk averse." Gibson Vedamani, director of the Retailers Association of India (RAI), adds: "Like everyone else, the business groups in modern retail have been hit by the global recession by way of a credit squeeze [and a lack of] funding and working capital. The slump in real estate has been a big issue. Those who had big expansion plans had [acquired] real estate earlier at much higher prices. They are now re-looking at their expansion plans and renegotiating the rates."

The future of the kiranas caused so much concern that the Union Commerce Ministry appointed ICRIER to do a special study to find out the impact of modern trade on these small outlets. The ICRIER report, released in the middle of last year, found that it was "a positive sum game in which both unorganized and organized retail [could] not only coexist but also grow substantially in size." The study found that: • The total retail business in India would grow at 13% annually, from US$322 billion in 2006-07 to US$590 billion in 2011-12. • The unorganized retail sector would grow at about 10% per year, with sales rising from US$309 billion in 2006-07 to US$496 billion in 2011-12. • Organized retail, which now constitutes a small 4% of the total retail sector, is likely to grow at a much faster pace of 45% to 50% per year and quadruple its share in total retail trade to 16% by 2011-12. "Small retailers in India have inherent advantages," says the PwC-CII "Rising Elephant" report. "They are located next to the consumer, making it convenient for top-up purchase. They know them well, some even by name. They give credit too -- which no large retailer does. Their fixed costs are so low that their breakeven point is as low as 46% of sales."

The large players usually try to gain on economies of scale and lure customers by reducing the margins," says Bhat of Zinnov. "This would [require] elimination of middlemen and brokers along with established logistics and infrastructure support. However, in the current scenario, lack of infrastructure and inefficient logistics services have dampened the growth of organized retail while providing continued shelter to the middlemen. As a result, organized retailers have not been able to provide higher value. On the contrary, unorganized retailers leverage the inefficiencies of the system and encourage consumers to drive a hard bargain, which enables a win-win situation for both."

ANALYSIS

It is not just Subhiksha but several retail chains that are reeling under the recession. Over the last few months, about 30 supermarkets have shut shop in the city. All the outlets were part of big retail chains, that decided to pull down shutters on these outlets to cut costs. Senior officials of supermarket chains say they are faced...
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