The indian retail industry

REASONS FOR THE FAILURE OF SUBHIKSHA - an SCM Perspective

On the basis of a report published by the India Retail Forum, the Organized retail accounted for Rs 55,000 crore (about $12.4 billion) in the year 2006 and still it is just about 4.6% of the total Indian Retail Value that was about Rs 12,00,000 crore ($270 billion). It means that the major portion of the Indian Retail market is in unorganized retail unlike USA where everything is mainly organized retail. However organized retail in India is expected to grow at a rapid rate of about 37% and 42% in 2007 and 2008 respectively. (India Retail Report 2007)

Of the last year's $270 billion of Retail Value, the major portion was dominated by Food and Grocery Retail which was about 60% of the value (about $160 billion). However in the food and Grocery retail more than 99% of the market is dominated by the neighborhood Kirana Stores.

It is expected that the organized retail will add over Rs 2, 00,000 crore (about $ 45 billion) by the year 2010.

It is also expected that by the year 2010 the organized retail will generate employment for over 2.5 million people in various retail operations and about another 10 million will be employed in retail support activities including supply chain and logistics, contract production and processing, retail real estate development and management, etc.

Organized retail in India has the potential to add over Rs 200,000 crore ($45 billion) business by the Year 2010 generating employment for some 2.5 million people in various retail operations and over 10 million additional workforce in retail support activities including contract production & processing, supply chain & logistics, retail real estate development & management etc. (India Retail Report 2007)

HISTORY OF SUBHIKSHA

A literal translation of the word Subhiksha means "One that gives all good things in Life". This vision was started in India about ten years ago by Mr. R. Subramanian. The journey from a single small store in Chennai to about 760 stores in 10 years has been a phenomenal growth for this company.

Entering into the Retail Scenario 10 years ago:

The history of Subhiksha dates back to the year 1997 when Mr. R. Subramanian thought of the idea of entering into the Retail Industry in India. Back then in India Retail industry was almost a nonexistent one. India was characterized basically by small mom and pop retail stores also known in the local parlance as "Kirana" Stores. They were very small stores catering to a very small nearby locality.

Subhiksha felt that as India was growing and so was the middle class. They realized that if they have to gain volumes then the top end consumers will not be the target, and so they chose to focus on the growing middle class income consumers generally referred to as the "aam aadmi".

The logo shown below of Subhiksha portrays that it's the right of an average Indian to Save money and its Subhiksha that helps him in achieving this.

Establishing In Chennai:

The first of the retail stores was established in Chennai in 1997. This was about a 1500 sq feet big store. The size of the store was relatively bigger than the size of a local mom and pop store in India but was much smaller than that of the major organized players in the retail market like Big Bazaar, etc

As of today's situation Subhiksha has literally more number of Stores in Chennai than the number of Post offices there. Subhiksha thrives here on a Saturation coverage, i.e. they have a store in an area of every 1 - 1.5 sq. Km.

PRODUCT PORTFOLIOS:

As of now the company has diversified into four business verticals:

  1. Supermarket: Includes quality groceries, packaged foods, cosmetics and toiletries,
  2. Household provisions, etc

  3. Fruits and Vegetables: Includes fresh fruits and vegetables sourced directly from farms on city outskirts by Subhiksha and made available to the consumers at very reasonable prices. Consumers get fresh produce at best prices.
  4. Pharmacy: Subhiksha stores generally have a in store pharmacy which stores mostly basic medicines. All medicines are made available to consumers at a flat 10% discount.
  5. Telecom: Subhiksha is recently forayed into mobile retailer business and offers handsets, recharge cards and accessories from all leading cell phone manufacturers' at lower prices.

GROWTH SNAPSHOT OF SUBHIKSHA:

1997: Entering into the retail market in the country. Subhiksha thought that entry into retail at that point of time will be a new industry. Primary focus will be "aam aadmi" i.e. an average middle class Indian person.

March 1997 - Opening of the first retail store in Chennai, India with an investment of about Rs. 400000 - 500000 (10000 - 12500 US $)

March 1998 - About 10 stores being opened in Chennai City.

June 2000 - Reach the mark of 50 stores in the Chennai region. ICICI ventures joins

Subhiksha.

2002 - Opening up of about 120 - 130 stores in the whole of Tamil Nadu State

2004-05 - Decide to move out of Tamil Nadu and expand to 5 other big states in India namely Gujarat, Delhi, Mumbai, Andhra Pradesh and Karnataka.

2006 - Entry into the Subhiksha mobile shop

IMPORTANCE OF SUPPLY CHAIN AND LOGISTICS MANAGEMENT

One of the most important challenge in organized retail in India is faced by poor supply chain and logistics management. The importance can be understood by the fact that the logistics management cost component in India is as high as 7% -10% against the global average of 4% - 5% of the total retail price. Therefore, the margins in the retail sector can be improved by 3% - 5% by just improving the supply chain and logistics management.

The supply chain management is logistics aspect of a value delivery chain. It comprises all of the parties that participate in the retail logistics process: Manufacturers, Wholesalers, and Third Party Specialists like Shippers, Order Fulfillment House etc. and the Retailer. Here, logistics is the total process of planning, implementing and coordinating the physical movement of merchandise from manufacturer to retailer to customer in the timeliest, most effective and cost efficient manner possible. Logistics regards order processing and fulfillment, transportation, warehousing, customer service and inventory management as interdependent functions in the value delivery chain. It oversees inventory management decisions as items travel through a retail supply chain. If a logistics system works well, the retail firm reduces stock outs, hold down inventories and improve customer service - all at the same time.

Logistics and Supply Chain enables an organized retailer to move or store products more effectively. Efficient logistics management not only prevents needless movement of goods, vehicles transferring products back and forth; but also frees up storage space for more productive use.

The efficiency and effectiveness of supply chain and logistics management can also be understood by the fact that modern retail stores maintain lower inventories than traditional retail. In India, generally in the traditional Kirana stores, three weeks inventories are kept; while in a modern retail store like Hyper city, it's nine days and it's under two weeks for Food Bazaar. It is beneficial for both the manufacturer as well as the retailer to efficiently maintain the supply chain and logistics.

KEY CHALLENGES FACED BY SUBHIKSHA

  1. Risk in retailing and expansion
  2. Need for an IT Solution
  3. Inefficient Inventory Control
  4. Absence of departmentalization
  5. Absence of performance evaluation programmes
  6. Absence of MIS system
  7. Inadequate logistics
  8. Lack of Decentralized Purchasing

SUPPLY CHAIN PRACTICES AT SUBHIKSHA

  1. They follow category management of supply chain. SKU are divided in two classes A-K in descending order of sales .Greater attention is paid to the A-D category products, each category having 100-125 SKU which account for 80% of the total sales. A class is reviewed on daily basis while B, C, D class of SKU reviewed twice a week and remaining twice a month.
  2. The supermarket stocks around 1200 SKU's that can take care of approximately 90% of the customer value requirements. Typically the store would stock only one product from top three brands in each category this concise choice allowed the store to manage its operations at much lower costs.

WHAT WENT WRONG FOR SUBHIKSHA

Subhiksha focused primarily on food and grocery, on which the net margin is as low as 1% - 2%. To sustain with FMCG, the retailer need to introduce in house brands/private labels, on which they can gain a margin of 13%. However, Subhiksha continued with selling the branded Food and Grocery items at this razor thin margin, without bothering much to introduce private labels. Subhiksha had private labels only in a handful of categories where national brands were absent. Surviving with this narrow margin is sustainable only if the retailer can generate high volume sales continuously. Currently, almost all the retailers across the world, from Wal-Mart to India's own Future Group and Reliance Retail are focusing on private labels to drive up their profit margins.

Apart from Food & Groceries, another category to which Subhiksha diversified was mobile phone retailing. Though mobile phone sales can beef up the top line, it will not reflect much in the bottom-line as the net margin from mobile phone sales are a low 1% - 2%. Another issue, which troubled the retailer, was that they did not have any proper IT infrastructure to back up their aggressive growth. Supply chain worries stalked Subhiksha right from the day they started expanding aggressively against consolidating. By the time, they initiated SAP implementation in their stores, it was pretty too late. Thanks to this, customers were often greeted by empty shelves and continuous stock outs. This, coupled with the un-trained staff of Subhiksha alienated the customers from the retailer. This proved too costly for the retailer who banked upon high volumes for sustenance.

NEED FOR AN IT SOLUTION

The need was first felt when the company began to face problems managing its frontend and supply chain operations using its existing local Enterprise Resource Solution (ERP).

Subhiksha Trading Services faced a lot of difficulty in accessing data across different regions using only localized IT solutions. Business expansion resulted in complexities that required a robust platform to streamline the operations and control process.

Furthermore, the company needed a solution to manage the payroll system. Although it didn't have any HR issues at the ground level, sending the payroll to employees on time was getting difficult. The system worked manually, with a central team taking care of running 2-3 payroll systems in a month depending on the availability of the bandwidth and the entire process.

Keen to avoid further problems, the company decided to invest in a more effective ERP solution and zeroed in on the SAP All-In-One solution in July 2007.

SUPPLY CHAIN WOES

All goods were bought on cash to extract the maximum discount from suppliers. SKUs (stock keeping units, or the number of items on display) were restricted to the fastest moving ones of about 1,500. Most of the SKUs were bought directly from the manufacturer, cutting the intermediary out. Supply chain software, developed in-house, kept track of what items were in demand.

Management was divided into two simple sections: operations, which were centralized and looked after everything from ordering to accounting; and stores, which were responsible for all store level activity. There was one manager for every three stores, and he reported to a chief manager responsible for business development, who in turn reported to a vice president. The VPs were responsible for sales targets.

CONCLUSION:

To be fair enough to the troubled retailer, Subhiksha is not just a story of what not to do in retailing. All the enterprising retailers can take a leaf out of the Subhiksha story to learn how to emerge as a winner by challenging the laid out norms. However, the striking lesson that can be learnt from the rise and fall of Subhiksha is to concentrate on the basics. Subhiksha's failure to live up to its promise was not a failure of the business format which it pioneered, but some basic issues of rapid expansion and diversification which were not supported by supply chain infrastructure.

REFERENCES:

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  12. IndiaRetailReport2007. Source:www.imagesretail.com/india_retail_report.htm
  13. Subhikshadrawsupclusterbombingplan,TheEconomicTimes, Dec 6,2006. Source:http://economictimes.indiatimes.com
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