IndiaRetailBiz

Subhiksha, the Chennai-based small format, neighbourhood, discount retailer, which in the past couple of years had grown at a breakneck speed, after long last has admitted to be facing severe cash crunch.

In a lengthy e-mail sent to ET, the retailer has tried to come clean admitting that; “We mucked up ourselves. We have no reason to blame demand or consumers or markets (the product markets).”

Accepting that while the situation is painful, Subhiksha has assured that it will continue to operate, ”We are in pain but we are not shutting down.”

The food and and grocery retail chain, founded 11 years ago by R Subramanian — a first generation highly educated (IIT and IIMA) and talented banker (Citibank) turned retailing entrepreuner– until a few months ago was riding high on its growth story and was a subject matter of management discussions across the country. Not only the retail chain grew its retail network to 1,600-odd stores (most of which happened in the past two years), it also increased its sales turnover from Rs 330 crore in 2005-06 to Rs 2,305 crore in 2007-08.

However, as it happens with many growth stories, the retailer could not keep pace with its growth and got into liquidity trap as in the hope increasing its valuations, it kept postponing infusion of equity funds.

The retailer for quite some time has been putting up brave front and trying to cover up problems of delayed or non-payment of salaries, rents, and accounts payables by offering difficult to swallow explanations couched in complex management jargons.

The retailer has in the past not only blamed extraneous circumstances like global economic turmoil for its difficulties, but among others has also blamed audit querries, etc, to explain delayed or non-payment of salaries to staff; deployment of new software package (SAP) and new inventory management algorithm for depleting stocks on store shelves; and core vs non-core activity for closure or near closure of fresh food (fruits and vegetables) and pharmaceutical verticals. It is obvious even to a layman that all these problems were mainly an outcome of paucity of funds.

The retailer in the past has also tried to explain fast closure of its stores to renegotiation of rentals with landlords, though, one failed to understand as to why one had to close down the store to renegotiate the terms of lease agreements.In fact, based on reports emanating from various centres, it was obvious that the retailer was failing to make payment of overdue lease rents.

As has been pointed out in these columns earlier, Subramanyam was failing in managing the growth. Not because, he did not understand the importance of cash in growth, but he kept postponing his much talked about IPO, hoping against hope, that he would be able to operate with ever increasing supplier credits and loans from banks and private financiers. He thought that in the meanwhile he would be able to keep on increasing valuations of his company, based both on its size (no of stores) and reach (geographical) of his retail network.

The only visible external funding for the business came a few years ago in the form of equity capital issued to I-Venture (ICICI Venture Capital Limited), the venture capital arm of the country’s largest private bank. ICICI took 24 per cent stake in the company’s equity, which helped Subhiksha to expand its operations at a fast pace beyond the South (predominantly Tamilnadu) to Gujarat, Maharashtra, etc. Rcent purchase of 10 per cent equity for Rs 230 crore by infotech giant Azim Premji was of no help because it was bought by him from I-Venture. Promoters are currently holding 59 per cent of the equity, while 14 per cent should be with I-Venture and 10 per cent with with Azim Premji’s private equity arm.

Accepting paucity of equity as main reason for liquidity crunch, Subhiksha has said, ”Expansion without support of equity was the pain, and not stopping expansion when bank money was getting delayed was also a problem.”

Accepting also that most of the company’s growth came from borrowed capital, the retailer has come clean saying, ”We had expanded rapidly. Most of the growth was debt-led. We had built on a tiny equity base of just Rs 32 crore, and even including share premiums, the company had raised only a total of Rs 180 crore as shareholder funds.”

For the first time, perhaps, the retailer has also admitted that delay in payment of salaries has been on account of shortage of funds. It was otherwise trying to explain away the delays to pending audit objections against its employees. According to Subhiksha, “There are arrears on these (payment to employees), not because we do not want to pay, but because we can’t pay.”

We fervently hope that Subhiksha would soon be able to come out of its difficulties and will restart operations, albeit on a smaller scale, as there is nothing wrong with its business model.

Subhiksha has developed a good base of loyal customers, who should be willing to flock back to its stores once it brings its its operations on a normal level. Although, many of its 15,000-odd financially stressed  employees would have found alternative employment, it should not find it difficult to retain some of them to manage its pruned operations, once their pending claims are settled.