Monday, February 16, 2009

Another week goes by. . .

--originally wrote this post last saturday. Haven't had the time to finish it through the week. Just did so----

So it's the end of another long and stressful week and I've enjoyed my much needed Sunday break. I'm sitting here before I go to bed and wondering about a topic to blog about.

India's business press is filled with news about Subhiksha - one of the largest retail chains in India going through a severe liquidity crisis. I personally feel the chain is probably going to be shut down with the investors (ICICI Venture and Premji Invest) being forced to learn the hard lesson that equity values can be negative.

I'll try and summarize what went wrong:- Subhiksha was trying to become the largest retailer in India. It felt that the best way to do so was to open up 1000+ stores on a national basis, purchase in bulk from suppliers and sell at a discount to the end customer making money on the volume. Unfortunately for Subhiksha and their shareholders, it seems like the management team miscalculated a few things:-
* The time it would take each store to break even and hence the budget they needed to set aside to fund operating expenses till that time.
* The complexity of managing product availability and quality at their stores given the diverse purchasing habits and needs of the different parts of India.
* The change in the fund raising environment making it very difficult to continue to sustain even the minimum cost structure given that most of the company's equity had already been used up in capex for setting up the new stores leaving no money to fund either operations (till break even) or the purchase cycle.

Sadly, while it is easy for a lot of us to stand by and criticize, fact of the matter is that these miscalculations are common to quite a few entrepreneurs. Subhiksha's story is a reminder to get back to the basics:-
1. What are the reasons outside of cost why people would want to patronize your business? Are you offering them convenience? products that are not available elsewhere? Quality?
2. How are you positively impacting all parties? Do they have a vested interest in seeing you succeed? In Subhiksha's case this really goes towards their relations with suppliers - Is it a case that dealing with Subhiksha was more efficient or hassle free for the FMCG companies or was it just the same as dealing with the local grocer but with order sizes larger and profit margins thinner?
3. Is the product the best there is? How are you measuring success? Was Subhiksha going head onVs. a Food Bazaar or a More / Spencers/ Hypercity? Was it measuring by talking to the Colgates and Cadbury's of the world if their stores in the same locality as the other stores were performing better in sales numbers? If no, then why? If you don't fix the product then effectively what you are doing is multiplying mistakes 1000 times when you start replicating the format elsewhere. Is it not better to perfect the format first before going national.

Sadly, these are common mistakes that all entrepreneurs are bound to make. I guess I should count myself as lucky to notice the failures of others and try and avoid making the same mistakes.

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