The famous proverb – “By others faults, the wise correct their own” should be the mantra for every budding entrepreneur. Startup success stories inspires you, where as failed startups stories will teach you invaluable business lessons. In this blog, I would be talking about one such biggest failed startups in the retail business sector in India – The Story of Subhiksha.
The Failed Startups Story:
This is the failed startups story of R.Subramanian, an IIT and IIM alumunus, in the year 1997, who observed that, about 90% of FMCG (Fast moving consumer goods) sales occur through the local grocery stores compared to the big retail outlets. After seeing a great opportunity in this area he entered into grocery retailing business and called it Subhiksha. Subhiksha’s model of operation was to benefit the consumer largely from the constant everyday low price offer, along with the convenience of neighbourhood shopping that lower middle class and middle class consumers are used to.
After a detailed research on Indian consumer behaviour, especially the middle class segment, Subhiksha understood that, for buying groceries consumers generally looked for three factors – easy accessibility of the store(Consumers did not like to travel beyond 5 km for purchasing groceries.), availability and quality of groceries and competitive price of branded groceries. Subhiksha aimed at being perceived as trusted source of household needs, providing high convenience and accessibility. It adopted a stand-alone-store format and always placed themselves in the nearby streets of a residential area thus saved money by not opting for renting a commercial space on busy main roads. Also, in an attempt to cut cost it did not mind opting for shop space on the first floor of the buildings where normally you do not find a grocery shop. With a futuristic view, Subhiksha concentrated and focused on building lifetime customer relationship rather looking at ways to make the company profitable which could have been the main reason for it to become a failed startups story.
Subhiksha created a unique “neighbourhood” store strategy something that looks similar to a local grocery shop and differentiates itself from local stores in terms of professionalism and cost effectiveness.
Subhiksha opened its first outlet in Chennai with an initial investment of Rs. 5 crores in the year 1997. By March 1999, the company had 14 stores in Chennai and by mid-2000, the number of stores increased to 50. Executing the company’s massive expansion plans, it expanded to others states with 420 stores Gujarat, Delhi, Mumbai, Andhra Pradesh and Karnataka.
Though, it started by selling groceries, by October 2008, the company had emerged a major player with 1,600 outlets, selling groceries, fruit, vegetables, medicines and mobile phones (under the banner Subhiksha Mobiles).
Subhiksha bought commodities directly from distributors who sold at only a small margin above the mill prices and from around 150 manufacturing companies. It needed to integrate backwards into the supply chain, cut out middleman and offer better prices to consumers. Huge quantity of purchase by consumers helped Subhiksha to cut costs by bargaining discounts. In order to cut cost, along with huge discounts on national brands it went a step further and aggressively promoted certain groceries and other items with its private label. By the end of 2004,around 25% of the company sales came from private labels. Packing of commodities like daal, sugar, rice and other household grocery items with Subhiksha’s logo on the front cover is called private labels.
The unique selling point of Subhiksha was its pricing strategy. Customers received same discounted prices on all items, on all days irrespective of the size and quantity of the purchase. Most importantly, the discount and customer savings at Subhiksha was comparatively higher than to those offered by other local and bigger retailers.
Then came the big fall of Subhiksha – it filed for bankruptcy and India’s most talked about retail stores came to an end in the year 2009 citing cash crunch as the reason. It is said that, Subhiksha could did not even have enough money to pay its employees salary for the last 6 months. Subhiksha’s story was scripted in the records of India’s worst failed startups stories. Subhiksha’s story is a topic for case study in several management institutes.
What could have gone wrong ?
After a thorough research on the failure of this startup, I have found five points that could have led to the downfall of Subhiksha. Let us have a look:
First – Premature Scaling. I feel, anything that expands and gets created too fast is not healthy (Though there could be a rare exception to this). As a business consultant, I strongly believe, slow and steady wins the race. Rapid expansion requires loads of money. Subhiksha with such a wonderful concept could have scaled linearly one step at a time by reserving cash and focusing on improved profits. Also, as Subhiksha’s pricing strategy was built around discounts and low prices, there is no wonder, they ran into cash problem while simultaneously trying to scale up rapidly.
Second – the same pricing strategy may not be workable for selling other items like drugs and mobile phones. Even product mix could be one of the reasons for Subhiksha’s failure. Product mix sometimes creates confusion among customers which leads to poor brand recognition. Product mix under the same brand name should be done carefully under constant observation.
Third – Hiring disaster as usual. The company hired people from across industries to run a retail industry. Lack of expert’s experience in running a massive retail industry could also be one of the reason for this failed startups story.
Fourth – The IT infrastructure could not match up with the speed at which Subhiksha was scaling. The company lacked a centralised system for procurement and inventory management. Due to lack of funds, the plans to achieve operational excellence by integrating all its stores via wireless communication was also shelved.
Fifth – Due to the changing lifestyle of consumers, Subhiksha faced tough competitions from other retail stores like Reliance Fresh and More. Subhiksha’s model of serving consumers was totally different from other retail stores that allowed consumers to go around the store to choose their items in the cart before billing. Whereas, Subhiksha’s consumers had to select the items on a point of sale terminal which generated a simple bill with item code listed which when submitted to the processing department, the consumers would get their chosen items delivered in the billing section. Though Subhiksha tried to change this model to match the ones like other retail competitors, it failed as its existing infrastructure did not support it.
Sixth – The blunder that every over funded start-up does – Mismanagement of funds leading to a severe cash crunch. They spent funds on scaling rapidly without expecting the change in customer behavior and markets. They focused extensively on coming up with newer outlets without questioning their IT infrastructure’s capacity to support such massive number of outlets.
After my analysis, these are the six reasons that I found that led to the startup failure of India’s largest retail store – Subhiksha.
What can every business owner learn from this great fall of Subhiksha?
- Slow and steady wins the race
- Research on the technology change – that results in a change of customer behavior and the way it affects your business
- Hire smart. Do not hire executives from industries unrelated to yours, just because they are the best in theirs. They might not become the best in your industry.
- Managing finance is an art, that can learned. Manage cash efficiently. Take calculated risks. Do not go over-optimistic and later end up becoming a fool.
What do you think, that, Subhiksha could have done to save itself? Any ideas? Please feel free to comment below:
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