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Subhiksha’s Last Chance

By VISHAL KRISHNA

Businessworld

20 Feb. 2009

Lesser stock on display racks in your neighbourhood Subhiksha, and may have started going elsewhere instead. One fine day, you may have even noticed that the shop was shut. What happened was this: Chennai-based value retailer Subhiksha Trading Services, neck-deep in Rs 600 crore of debt (plus Rs 180 crore raised internally as shareholders’ funds) accumulated over the past three years, could not pay its vendors as all its earnings was going to service the debt. So, over the past six months, it temporarily shut all 1,600 of its outlets in 110 cities.

Yet, till recently, Subhiksha’s managing director and promoter, R. Subramanian, was thinking of expansion. “I will add another 2 million sq. ft by the end of the fourth quarter of 2009,” he had told BW in December 2008, a move that would have raised his store count to 2,200 for an additional Rs 1,000 crore. Today, the company is on the threshold of a closure — it has no money to run its operations, its senior staff are deserting, many of its stores have reportedly been looted, and the government may initiate an independent audit of accounts at the instance of ICICI Ventures, the second-largest shareholder with 23 per cent stake.

However, Subramanian has not given up. Firm in the belief that Subhiksha can still be a viable business, he is making a last-ditch effort to survive by pitching for a Rs 300-crore loan from a consortium of 13 banks, besides attempting a debt restructuring exercise. In a letter sent to BW, Subramanian says, “The infusion of Rs 300 crore would revive Subhiksha soon.” That would allow him to pay off the vendors and resume operations at a minimal level, though he might also have to shell out a significant chunk of his 59 per cent stake. Subramanian’s confidence stems from his belief that his business model is viable. “We did not raise enough equity, and we paid the price,” he says. “It was a capital structure problem rather than a business model problem.”

Analysts agree that Subhiksha’s low-cost model was sound. They blame the company’s troubles on its rapid expansion with debt capital to open 800 stores in a year. Although the same store sales were as high as Rs 12,500 per sq. ft during the first few months of 2008, the debt taken on a number of new stores and the financial crisis put paid to Subhiksha’s exuberance. The industry average for stores of 2,000 sq. ft (Subhiksha’s typical store size) to break even is Rs 5,000 per sq. ft, and analysts say that Subhiksha’s new stores never achieved break-even levels.

The desire to expand at breakneck speed is not typical of Subhiksha alone. “All retailers have read the Indian market wrong,” says Devangshu Dutta, who runs retail consultancy Third Eyesight in Delhi. “There was no prudence; (there was a mismatch) between what the real consumer demand was and the number of stores opened.” Pinakiranjan Mishra, partner of retail and consumer product practice at Ernst & Young, says, “Retailers have spread themselves too thin to benefit from scale.”

The Rs 300-crore and the restructuring may help Subhiksha revive, but only if it closes at least 40 per cent of its stores. That may keep it afloat, but would be disastrous for a company that fundamentally offers low prices and relies heavily on high volumes for better discounts from consumer companies.

(Businessworld Issue Dated 24 February-02 March 2009)

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