A summary of the talk on ‘Success Stories - How it was done!’ delivered by Mr R Subramanian, Managing Director, Subhiksha Trading Sservices Ltd held on 17 September 2007 at Chennai.

The entire thing about success story is a nice thing. But success is subjective. It is very difficult to say what is success, it is a frame of mind. If you look back and achieve your target, you see it is greatly successful but when look at it more. There is nothing like success. With time we redefine our goals and objectives. And that’s what keeps us going. Leaving the success apart, the story part is very nice because we at Subiksha believe that we are on a path to doing and creating something very different. There is still a lot of work in progress we believe our company is perpetually in work in progress stage and we need to constantly change, innovate, learn and sort of modify ourselves to suit the market
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It all started sometime in 1996, we were in financial services business. We had done what we thought was well for ourselves. Within first IPO finance in the country. We did entire IPO finance market. We were reasonably making good money. And 95-96, was a year when Indian economy hit terrible recession, South East Asia was happening at that time. There was asset bubble burst and lot of pain in the market. We were stuck with lot of money and nothing much to do. We were looking at some other business to think of. We were looking at software, but by then lot of big guys were already in. Retail was possibly the place where there were no big guys. We wanted a space where others were smaller than us. We decided to go and fight with retailers. Once we decided that we wanted to get in retail, we tried to understand the market. We had no clue in what was retail. All we had done was financing. Good thing was we had a fairly academic bend of mind and were trying to understand the retail model.

Retailing is one of the business were typically you talk about success we get success. Winner take all. Easiest example to give is cricket. On a day when a new captain has been appointed you can talk about it. The theme is there may be 1,00,000 people playing cricket but top 10 players probably earn 90 percent of the sponsorship revenues that is there in the market. This is a classic eg of a model – winner take all. That means the guys who do well really take most income. The retail market is like that. In most part of the world, the number one retailer in a geography or country would typically earn about 60 – 70 percent of profit, number two will earn 40 percent of profit, number three onwards will be making losses. This is the true reality of retail. It is such a scale intensive business that unless you are number one, it doesn’t make any sense to be in business at all. Everybody else is trying to play catch up. It is very difficult to play catch up as size drives so many economies. Ultimately, what is retail. It is buying and selling and running your cost. If you are buying and selling, your buying cost is always going to be cheaper if you buy more. It is basic a thing. So bigger guy has an advantage. Your OPEX in running a business does not change significantly if you do more business. The rent, EB charges are all same. So if you put more throughput through that store, cost of earning is also higher per rupee of sale is lower and so you earn more margins. The bigger guys in retail, the guys who do more turnover in retail have a significantly more outsized advantage than the smaller players. So when we were looking at retailing, there were best run model why not just copy them. Chennai in those days was not backward retail market. There were lots of independent super markets. Lots were sprouting in Chennai. Infact, there are probably today fewer independent super markets in Chennai; than they were ten or 11 years back. People like us are possible to blame.

So what were these Super markets doing. They were taking the western model and using it here. They were serving the top end of the people. The perception in a consumer mind was it was a place where people with cars went to. It was not a place for middle class. So when we looked at it, we said what are we doing? We are in the business of running scale efficient business and generate savings. Why should we spend that in fancy looking stores. Is there are different way of deploying the savings with the cost efficient operations and efficient buying? Can you pass the savings back in the form of discounts instead of spending it on the consumer experience. Consumer who spends 10 minutes in a shop buying toothpaste, rice and dal is not experience and only functional transaction. This was the starting point. Fundamental thing that came out was there is economic concept. The Income velocity spent on grocery was not very high. Means, if a person earns 25,000 a month and his salary increases to 50,000 a month his oil consumption does not increase to 4 to 8 litres, remains the same. Rice remains the same 20 kilos. So people earn more money does not necessarily mean that spend more money in a grocery shop. If you look at the market, top 10 percent of any city by way of income, contribute to about 15 percent of the grocery spent. The next middle class contributes 55 percent of grocery, the bottom is 35 percent. That is the typical distribution that we talk about. Each middle class members spend almost as much as each high income members, but there are four times the middle class guys than there are the top guys. It meant if you want to be largest retailer, you can never be the largest retailer in food groceries segment by catering to the top end of the market. You have to cater to the middle market as big chunk of population I was stating, ultimately grocery sales is directly the function of stomachs to fed and clothes to wash. It is not a function of income. In certain other categories of retailing may be. So once we picked on this we realized we wanted to be the largest retailer. We have to be servicing the middle class market. One of the things that is apparent to all of us is you can’t have all things. There is no aspersions cast on anyone, but you cant have an auto driver and a senior executive of a company shopping in same place. Shop is like a club. It is place where people bang into each other, face to face. So there is a sense of “I belong.” It is not being frivolous. That’s the way market works. We decide we are going to be middle market focus.

Second learning was nobody is going to buy more because we are going to put up more shops. Is the Adayar consumption of surf going to increase? If at all we get business it is because someone else loses business. Certain incremental business might happen on certain categories ,like indulgences. If you look at what happens, if start a super market in the midst of a catchments area there is going to be no real incremental business that is going to happen in that market. You are in the business of making sure that enough consumer comes to your shop in that catchment. If this is a theory, we are not taking about saying India economic growth story, we got to know the business as entire economy was going thro recession. When we went into this, we said if you have to get a guy to give up a patel or Chandra store and come to you, he has to see you better than that store. He is substituting the existing consumption and coming to you there has to be a rational reason. The issue comes out what and how? The consumer says how I chose a shop depends on what I am doing to buy. If it is a saree for his wife, and if it is 6 months or once in a year, he does not mind travelling 10 kms for that. He wants ambience etc. If I have to buy TV,fridge, ambience does not matter. I want a person who can give me a good deal and there is range. If it once in 3 years, wants good discount and wants to compare. Groceries, 65 percent of what they buy is branded, Colgate toothpaste is the same whether it is in a big shop or small. Quality is warranted by HLL, Nestle etc. I have to buy it 3 to 4 times in a month. Average Indian home buys about 43 to 45 kilos of stuff from a grocer in a month, rice, dal etc. He does not want to commute. Proximity is single largest influencing factor. This is what we found 10 years ago. But we decided that if there is a reason he would travel a short distance. One thing is clear, we need to have large number of stores. If we want to be a leader, creating on e large store in the middle of the city and expect consumers to come there to shop. We had to put large number of stores. Even if you put up large number of stores, why should a consumer give up his kirana and come. There is service. We had to attack something. Quality is the same. Only variable we could pick on was price. We decided to become a discounter. And it was fitting in with original strategy of servicing the mass market. Once we decided to go into that, we had to make money. We stripped the store of all frills. We wanted to get the customer out of the store quickly enough. Our belief was category of goods we are dealing with are 90 percent fixed purchase. By making consumer spend more time in the store, we are not going to get great benefit. Yes, he might buy a soft drink, chips or something. But the cost of real estate where he is lingering is high, so we decided to get him out quickly. So this was the model. Then people kept coming back and said this is retrograde. West is doing big format model. When I started looking at it more deeply. In a retail we talk about – two cost. People and space (including electricity). If you look at any retailers P&L these are two big costs. All other costs are incidental. The way these costs play has a huge bearing on how you try to run your business. The entire west is all about space outside city, where you put up incredible large store, car park. There is no logic to build multi stories. Here we want to build 25 stories every where. If you look at those guys, space is inexpensive, people are expensive. They want to build large stores some stores are so fascinating where they make the customer do everything. Infact there are now stores in the US where you have self service check outs. You do your billing. There is no cashier now. It is ranging all concepts. They would rather put self service check out line, put video camera.

If you look at western model, it is high cost on people and low cost on space. They create large format stores; play the advantage of the fact that it is low cost on space and down play the advantage of high cost of people. In India it is the inverse, we live in a country, where space is expensive. There are two parameters. If you on a PPB basis, we are costliest city in the world. Second is, when you compare Manhattan office space with Nariman Point office space, quality bears no resemblance. High cost property and big stores, India’s strength is relatively low cost labour and you try to do large format stores, you will get killed. Cost economics will not work. There is not a single large format store in India today who is running discount model the way it has to be run. Not viable. Second piece is, you put in a large format store, given the road condition and personal transportation, price of petrol, cost of travel and time taken to travel, no customer wants to spend such time. So you bring stores closer. And closer you bring the store to where the customer lives, costlier it becomes. So costs will kill if you do large format. This is one piece. Another piece, there is something called MRP. Global retailer has never heard this world. But it is the reality only in India. MRP system has a huge bearing in the way retail developed and will develop in India. Lot of organized retailers have been lobbying, till about two to 3 years ago, to get MRP abolished. But government is stuck to this as its excise duty is coming based on MRP linked tariff.

There is a lot of stories about western large format retail being highly efficient. How an hyper market in London is 40 percent cheaper than Seven Eleven or Tesco Express store inside London. It is hogwash. How it happens is, it is not that Tesco inside London is actually cheap. That guy sells what would be a normal price by Indian standard. Guys who sit inside city charge 40 to 50 percent premium to what the prices are outside city because there is no MRP they can charge whatever price they want. We did an experiment. We surveyed prices. Tesco runs two formats in London. Outside London city it has a format Tesco extra, large format. They have Tesco express, inside London city. The same Tesco product, we are not talking about any other products, orange juice which sells for 65 pence in Tesco extra, sells for one pound 25 pence in Tesco express. There is 100 percent premium between two Tesco stores which are hardly 15 miles apart. And this is possible because of lack of MRP. In India it would be been the same. In comparison to 125, this 60 looks cheap. So everybody is saying this hyper market is 40 percent saving. This is what makes people travel long distance. The fact that I pay 70 percent premium to buy near home, vis-a-vis being able to go outside. In India that logic does not exist, because of MRP. Kiran who sits in warrant road charges consumer the same price as the kirana who is in ayodhya kuppam. There is no difference in the price charged by retailers across the city and no difference in location. On retailer is marking up price so much because of using lack of MRP. These are fundamental two differences why grocers retailing in India from a mass market perspective, not talking about niche market. Iam not saying large format stores will not work, it will remain a niche. They will not remain mass format f India, they can never remain mass format because of underlying cost structure and regulatory regime where there is MRP. These are two reasons which make it complex as far as India is concerned.

We started saying we will do small format stores. We set our ground rules, partly as we did not have choice. We said if we start buying properties we will end up locking 60 to 70 percent asset value in property. We decided to lease all out properties. We decided that we have to keep it frill free. So we had decided to go in for a broad model where we said in this business we are going to make thin margins on sales. When I say this, our target is to only make 3 percent margin on sales (we are not there yet, making only 2.7 percent). Only 3 percent, we don’t want to be more. We want to keep it as low as possible so that it makes life difficult for others to compete with us. This is one part of the game. Second part is, we keep our stores so asset light in every possible way. We don’t spend on anything that we can turnover our assets 8 to 10 times in a year. Ultimately what you make as money for business and investor is a multiple of these two – asset turn and margin turn. And ultimately we will try to make low margin with high asset terms which is the way retailing should be. We set out on this path very tough. We had few stores, low cost. Working hands on. We didn’t know anything about merchandise. From there we scaled up and grew. Fortunately in 2000, we got capital funding from ICICI venture. There was a dotcom boom at that time. Everyone was getting money and so did we. Then we decided to go national. We were coming against the mentality of how to expand. We had something slowly over 7 to 8 years. And then we decided to do our bit of copying. We looked at who had done multiregion expansion rapidly. And the only people were from the telecom. They pout high quality regional teams into each part of the country. Each circle was working as independent business. That’s what we did. We created similar teams and started expanding. Along the way we raised debt and equity. By then retail story was happening. Lot were talking about retail and corporate India was getting actively into retail. Those who run large format in India decided to go the small format way. So much so that Walmart and all corporate retailers try to come in from industrial background want to do small format retail. It is extremely challenging business because it is like running a factory without no compound wall. Ultimately we do a repetitive task. We are running it like a factory. Inside a factory you can make products and quality check. You can do certain things and correct it. All your walls are not shown to the public. In retail whatever we do we are doing it fully exposed to public. It is like running a BPO and a factory in the middle of public eye. So whatever you do, I am saying lot so friends in audience who would have given feedback. At the same time, everyone is watching at all points of time. Second is, thin margin of 3 percent, there is no room for error. You make one mistake you are doomed. You need to make sure you do the right thing. And the consumer is changing, the consumer we saw in 1997 is not the consumer we are seeing in 2007. Product categories are evolving, people are becoming more demanding. Something which is ten years back, most people were happy to get a scooter in hand. In India competition in intense in some form or the other. If there is anybody who wants to do something at some point, there are 20 others who want to do the same thing. Enough competition keeps gnawing at your toes. Good thing about business is you are directly interacting with millions of consumers. None of FMCG companies who claim to understand consumers actually directly interact with so many consumers. We had pitch battles with FMCG companies. None of them wanted us to grow. Largest FMCG company in India met us in 1999 and said giving you any support is like feeding milk to a cobra knowing fully well it is going to come back and bite you. The point is that is the attitude that used to be there. Those days organized retail was not very popular and the fear was organized retail would make them lose their marketing power. Which kirana retailer would expect a HLL and nestle to talk to them. The concept that somebody was buying their product and reach to the consumer was actually sitting talking to them was a huge surprise for them. The though that a retailer would want to meet them and talk to them. I remember amusing incidents of how FMCG companies used to deal with retailers in those days. But times have changed. All the FMCG companies today are actively working with retailers. This is the way the piece is.

To summarise, the pieces that we did right were fewer than the pieces we did wrong. Out of politeness, I have not said much that we did wrong. Only good thing we did was, every time we did something wrong we kept correcting ourselves. Our foot was on the ground. AS long as organizationally we stay committed to our principles of low, discount retail is not about theory ,it is all there. But you need to live and walk the talk if you claim that you are discount retailer and committed to low cost, all of us who work in that business have to show that we believe in those principle. If we do not practice low cost. If we run our own operations in a manner in which it is lavish, then we can instill discipline in the system. We do everything possible to instill low cost. We got in to mobile phone retailer a year back. Within one year we have become India’s largest mobile phone retailer. Primarily out of Delhi, Gujarat. Punjab Haryana. Again the lesson there is the same. Stay committed to core principles low cost. You need to be extremely aggressive and fast in terms of being able to react to competition and don’t overreach for profits. Lot of time markets presents opportunities where we can actually eat profit. Temptation is always high to increase profit margins when there is opportunity. If you are in long term consumer business, our point is stay with steady pricing policy. We run pricing policy with a term “everyday low price”. This is typically retail. There are two ways in which retailers price – EDLP and promotional price. EDLP – we have all prices at discounts at all points of time and discounts are invariate. Advantage is if consumers buys 43 to 45 kilos, he also buys 30 to 50 things. No consumer can compare prices on all products, week after week, month after month. So the consumer buys, he believes it to be lowest. This can be brought through EDLP strategy. The point is not to be too greedy. Consumer is smart, knows when to get a good deal. If he is not smart there is a competitor working somewhere to make him smart.