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Subhiksha~ Managing store

operations
1) What is the business model of Subhiksha?

Subhiksha was a chain of no frills discount retail stores that started initially with food &
vegetables but later on added mobile & medicines to its product offerings. It worked on a hub
& spoke model with centralized purchase system & warehouse that dealt directly with
companies to avoid multiple billing & negotiations from suppliers. It optimized on the heavy
discounts it earned from bulk purchases mainly on a regional level since trade with all other
FMCG companies were mainly fixed. The pricing model in all its stores was ELDP across
various SKUs present in the store with a discount of about 8%-10% offered against MRP.
Although in a typical small store 70% of the space was allocated to FMCG products the
margins obtained from it was relatively low as compared to mobile & F&V categories. The
retail model was basically working the Indian way i.e. its primary customer segments
included the middle & lower middle class population. It was also highly customer service
oriented with most of its stores located along catchment areas of residential locations.
Subhiksha also had an aggressive & impulsive expansion policy with growth from just 10 to
1000 stores in less than 8 years.

2) Identify key challenges faced by Subhiksha.

The key challenges faced by Subhiksha would be the following

1) Subhiksha added mobiles to its product offering with the logic that Nokia was
growing faster than HUL back in 2005. However by 2008 smart phone technology
had emerged & it was not a viable option to continue selling mobile phones from the
store. Aiming to gain footfalls from this line of product range was definitely a
counter-productive idea.
2) Subhiksha had allocated 70% store space to FMCG products which were gaining very
thin margins. Added to that it had 1200 different SKUs to cater to 90% need
fulfilment of the customer. This had huge operational & economic considerations
which was not sustainable in the long run.
3) The fact that Subhiksha catered to low-to-middle class people stocking 950 branded &
private label merchandise in FMCG again was not seeming feasible enough to sustain.
4) It was true that Subhiksha offered 8%-10% discount in every item purchased below
MRP. But the same did not result in significant savings from a consumer perspective.
Also from Exhibit 5 we see that the so called EDLP was on similar lines with
comparable stores like Nilgiris & More. & hence loss in differentiation strategy.
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5) Subhiksha had maximum footfalls during the first ten days of the month. However
their minimum inventory was constantly maintained at a fixed level all through the
month. Dynamic inventory was still in experimenting phase.
6) There was a misfit between the companys strategic goals & supply chain goals which
in turn resulted in high expenses all through. While one can observe their motto was
to serve the middle class to lower middle class strata at affordable pricing it was also
catering with best customer service practices. Installing two cash counters, time
motion study etc are examples of the misalignment.
7) Subhiksha paid very little importance to employee satisfaction. One can clearly
observe from the case that the warehouses, stores did not have facilities like air-
conditioning. Instead of rewarding employees through cash Subhiksha incentivised
through in-house coupons which were of no significant use to the semi-rural workers.
This reason could be attributed to the high attrition observe in Subhiksha.
8) Although their inventory levels for grocery & mobiles were close to zero it had huge
inventory of FMCG products that had varying service levels. This in turn increased
overhead costs.
9) Transportation was sourced to a third party who had minimum commitment &
additional rupees/km clause. Instead if Subhiksha could have managed to vertically
integrate into transportation on its own it could have saved crores every year.
10) The Hoskote warehouse made use of minimum technology & almost every operation
was manual in nature. The company was planning to install a SAP module. This again
depicts Subhikshas slow adaptability to technological advances.
11) Owing to the fragile nature of F&V products the company incurred huge pilferage
losses which had no solid mechanism in place for cross-counter.

3) How is Subhiksha different from a regular Kirana store or the grocery section in
Big Bazar?

Subhiksha is a no frills EDLP format store. It is different from the Kirana stores the
traditional mom & pop stores in the following ways

1) It sells products to its customers at an assured 8%-10% discount below the MRP.
Whereas Kirana stores always sell their items at fixed MRP.
2) Kirana stores have high level of customer trust because of their credit lending
capacity. The same trust cannot be built in Subhiksha which could not offer any such
facilities to its customers.
3) The Kirana stores are very small in area & can accommodate only few SKUs. Hence
they store items that are most relevant to the target segment. Unlike Subhiksha they
are also no frills store but they incur very low inventory & storage costs because of
low SKUs
4) Kirana stores primarily focus on one category for sale like FMCG & F&V
5) Kirana stores are generally family businesses & hence problems related to human
resource is easily solved.
6) Kirana stores basically cater to the urgent & every day needs of the customer. Hence
footfalls remain fairly constant overall throughout the month.
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7) There is hardly any IT involvement in Kirana stores.

Subhiksha is different from the grocery section in Big Bazar supermarket because

1) Big Bazar is concentrated to selling only FMCG & F&V products unlike Subhiksha
which sold medicines & mobiles.
2) Big Bazar offers a slew of promotions all throughout the week & attracting footfalls
into grocery is not very difficult as it forms a part of the bigger chain. Whereas
attracting footfalls into Subhiksha was difficult all through the month.
3) Subhikshas motto was to cater to the needs of lower middle class & middle class
families whereas Big Bazar is just focussed on cost leadership like Wal-Mart &
does not differentiate on basis of customer segments.
4) Big Bazar has IT solutions like ERP implementation unlike Subhiksha.
5) The scale of operations in one Big Bazar grocery store is very high as compared to
Subhiksha. Hence the fixed costs & other overhead costs accumulated over a period
of time get distributed evenly.
6) However unlike Big Bazar, Subhiksha is located closer to neighbouring households 7
is far more accessible than Big Bazar.

4) Subhiksha had been facing serious problems in 2010.What might be the

reasons behind this?

The reasons behind the serious problems faced by Subhiksha back in 2010 were

1) Poor inventory management: Subhiksha had huge warehouses that functioned in the
hub & spoke model storing excess inventory & increasing expenses eventually.
2) Lack of strong HR policies: The company was not swift enough in reforming the
policies relating to employees to retain skilled workforce.
3) Lack of inter-function alignment: The company had no standardized procedure for all
outlets to perform exactly in the same way. Hence the misfit.
4) Misfit in the Responsiveness & Efficiency frontier: The core competence around
which Subhiksha drew its model was EDLP. However it also tried to capture
responsiveness towards its customers by installing several cash counters, time motion
study, free home delivery & so on.
5) High implied Uncertainty: Due to its huge variety of SKU & large inventory it
increased the high uncertainty in selling each items.
6) Low focus on supply chain surplus: Subhiksha had extremely low focus on supplier
performance & hence higher costs incurred from suppliers resulted in low supply
chain surplus. Their value proposition of low prices was as good as any other store
like More or Nilgiris.

Profit & sales in each category

Average business volume per year = Rs.80 crore => per month= 80 crore/12= 66666666/-
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Pharmacy = Rs.3 lacs

Mobile store operated in a high volume to the extent of Rs.60+/-Rs.80 lac per month=>
average= Rs.70 lac per month

FMCG and grocery unit sales per month= Rs.10+/-12 lacs => average = 11 lacs per
month

F & V = Rs.3 lacs

Total sales (lacs) = 66666666+3lac+70lac+11lac+3lac=75366666

Costs:

Total fixed cost = Rs.1.2 lacs

Investment at inventory = Rs.1 crore

Inventory worth every month = Rs. 6 lacs

Total cost of managing warehouse = Rs.2.4 crore/year => per month = 20, 00,000/-

Rental cost per year = Rs.25 lacs=> per month = 2,08,333/-

Per store = 208333/59=3531/-

Total cost= 1.2lac+169491+600000+33898+3531 = 926920/-

Profit = Total sales Total costs = 9829943-926920= 8903023/-

Submitted by:
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Shalini Tripathy

DM16141