Venture Capital Partnership Fund Case Study

Uprising discount stores – the next Retail Revolution Discount chain Subsidies is on the move. After having established itself as a niche player catering to the middle class through its neighborhood stores in Tamil Undue, Subhead is now expanding ? both geographically and in terms of customer profile.

It has big plans for new stores in Bangor, Iambi and other place. Its acquisition of Female has given it an opportunity to tap the high end segment of the market too.

In the early ass’s, organized food retailing was in its nascent stages and during that erred a number of players like Food World, Inklings and Vitae had Just made an entry into the food retailing space. India is one of the largest producers of milk, fruits and detestable in the world. Yet, the organized food retail business in the country is among the least developed. The irony is not so difficult to comprehend if one looks at the Indian food chain.

From the farm to the store, the links are too many and full of problems.

The trend at that time was to set up large format stores that catered to the high end segment of the market. The whole idea behind Subsidies was to start a spinsterhood store that catered to the middle class segment. Subsidies, works on formula of one store every 1. 5 km.

The first store was opened in Authoritarian in Achaean in March 1997 and now, we have about 142 outlets in Tamil Undue and Benedictory. Subsidies is today one of Chain’s largest supermarket and pharmacy chain. With an annual turnover of RSI. 120 scores in 2000, it is planning to achieve a turnover of RSI 1 500 scores by 2003.

Subsidies is supported financially by an asset management company -Venture Capital Partnership Fund – which belongs to the Visionary Group, a specialist in financial services. From a retail point of view, quality cannot be a differentiated between food retail chains since 60 per cent of the goods sold by them are anyway branded.

Instead, Subtasks decided to be different in their pricing policy-that’s’ now they stepped into discount retailing u retailing format was the outcome of a detailed survey conducted in Achaean, which Nas pretty revealing.

Customers generally looked for accessibility of the store, availability and quality of groceries and price of branded groceries. Customers did not like to travel beyond 5 SMS for purchasing groceries Customers did not lace any premium on shopping in posh air-conditioner set-ups. They found that En choosing a food grocery store, customers were conscious of only two things; the proximity of the store to their homes and the price of the groceries regardless the design of the store or whether it was air-conditioned or not.

Subsidies – Brainchild of Shari. R.

Submarine Submarine, Managing Director points out in offering “low prices by maintaining a lower cost set up. This we manage to do in two ways. One by keeping our real estate costs low and two by sourcing material directly from the manufacturers”. Subsidies has a centralized purchasing system eliminating multiplicity of billings, which would occur if the stores were to make independent purchases. We buy directly from distributors and from the manufacturing companies.

Also, we make spot payments against delivery, which enables us to get cash discounts. This is the discount that we pass on to the consumers. In south Indian cities a very interesting battle is taking place in the retail market. On one hand Afterworld – a supermarket chain has successfully managed to establish itself in Achaean and Hydrated in a span of 5 {ears. It is seeking to rapidly expand in other southern cities.

Subsidies – a discount store chain with 52 stores in Achaean – is hoping to replicate its success story in Hydrated and Bangor.

Whether the discount chain and supermarket chain will eat into each other’s shares or carve a separate niche for themselves remains to be seen. Concept of Discount Retailing rhea survey clearly revealed that setting up a super market chain was not viable. Also, the existing super markets contributed only tool percent of the groceries sold in Achaean. Subsidies realized that, to compete with the unreasoned Koran (grocery) torts, which thrived due to its proximity to the customer and due to the credit system, discount retailing was the only viable way to attract the cost conscious customer.

Discount retailing was favorable in groceries as they were fast moving, large-volume, frequently purchased items. Also, even a 10 percent discount, meant a considerable annual saving for the customer. Discount retailing involves selling products at a lower price than the MR. (maximum retail price) by eliminating the margins in the traditional supply chain consisting of the manufacturer-wholesaler/ dealer-retailer network. Bulk purchases directly from the manufacturers or the stockiest, qualify for deep discounts.

Quick inventory turns also improves the cash flow and reduces operating costs. To cut costs, Subsidies decided on adopting the following: Small sized functional stores with an approximate area 1 500 square feet. All the retail outlets taken on a 10-year lease period. Purchase costs are reduced by having fixed vendors for the store furniture and equipment. Providing customer service and eliminating self-service. This would eliminate customer pilferage, which is normally around 5 percent in the existing retail market.

The customer chooses products from the display on the PC and pays the amount in the cash counter against a composite bill, which does not contain any details to the items purchased. The stocking department processes the order, keys in the details of the order and meanwhile a shop assistant collects the items and delivers it at the delivery counter. The detailed bill is printed only if the data entered by the stocking department matches the composite bill and the goods are handed over to the customer. The bill also shows the market rates and the savings made. Subhuman’s treated is also it weakness.

It does not allow the customers the pleasure of feeling the goods before purchasing as in supermarkets.

The supply chain strategy Subhuman’s strategy revolved around maintaining low real estate costs, fixing furniture vendors, quick inventory turns and customer education. To work out this strategy, Subsidies focuses intensely on its inventory management as well educating TTS consumers . Inventory: Subsidies has 3 separate godsons for stocking pharmacy products, unbranded groceries, and branded FMC. It has a fleet of 10 tempos, Inch supplies its stores once a day.

As the discount format requires holding costs to be at a minimum all the stores are connected in an intranet to facilitate inventory planning.

Subsidies makes spot payments against delivery, which enables it to get cash discounts. The supplier helps in inventory control and in return gets an improved cash flow. Customer Education: Subsidies helps the consumer make informed buying decisions. Smaller packs of products in established brands are usually less economical. However, promotional offers by leading brands usually price smaller packs at lower prices to induce buying.

For example the gingerly oil brand

Dammar was priced at RSI 14 for a 200 ml pack which works out at RSI 70 per liter Nile the mall was priced at RSI 36 which works out at RSI 72 per liter. Here, Subsidies would inform buyers to purchase multiple packs of smaller quantities to save money. On products like tea, which have a nil tax on small packs and an 8 % tax on larger packs, the customers are encouraged to buy multiple units of smaller packs, Inch help them save money. Thus, Subhuman’s strategy of having low real estate costs, quick inventory turns and informed customer buying has helped its meteoric growth.

With a goal of having at least 40 stores in every city, Subsidies hopes to become a RSI 1500 core discount store chain by 2003.

Subsidies is now looking at expanding its presence to Bangor, Moser Iambi, South Gujarat and Mohammedan. We have major plans in Karakas where we plan to open 50 stores in Bangor and another six stores in Moser starting from November this year. In Iambi, we plan to set up 125 stores starting from January, 2005 and we will enter South Gujarat and Mohammedan by July, 2005. The stores will be company-owned Inch is necessary to maintain uniformity and consistency which franchising will not ensure.

Submarine gives himself a smile while reminiscing of reviewing his options and zeroing it to this successful venture.

While asking him about the Meanness they still face, he replies “there have been complaints of non-availability of products. This happens due to different reasons. One, we have a Just-in-time Inventory model because of which there are chances of a delay in sourcing products. Two, because of the low price, other ‘Koran’ shopkeepers buy products in bulk from us. We have been constantly striving to solve this problem.

Female Subsidies has recently completed the acquisition of the Bangor-based Female. Female which started as an online store, had in the last one and a half years opened 10 physical stores all in Bangor nerve IL chain NAS the expertise to deal Witt high-end segment of the market and we plan to leverage Female to target the high end segment too. We plan to take Female to major markets like Achaean, Hydrated, Iambi and Pun growth of Subsidies. We are steadily growing. In 1997-98, we had turnover of RSI 12 scores and a profit of RSI 10 lakes.

In 2003 it has grown to RSI 218 scores turnover and RSI 4. scores profit. For 2004-05, we are eyeing RSI 370 core remover and RSI 6 core profit. Future of food retailing. The food retail market in India is estimated to be around RSI 250,000 core out of which the share of organized retailing is merely RSI 1200 core. This figure is however expected to go up to RSI 10,000 core in five years time and we hope to capture a significant chunk of this market.

We want to be present in every major market so that we can capture tallest RSI 5,000 core of the RSI 10,000 core market. Foreign Direct Investment (FDA) in the retail sector?

FDA will give a boost to the retail industry. The organized retail industry in particular he food retail industry requires a heavy investment if it has to touch the RSI 10,000 core mark in five years time. “At Subsidies, we provide value to the shopper,” remarks Submarine with a positive look as his simple idea made it big . Customers are conscious of the distance of the store from their house, availability, quality and price of branded groceries. People did not seem to care what kind of a shop they bought their groceries from and whether it was air-conditioned or not.

Disenfranchisements Normalized discount retailing of groceries is the fastest growing sector. Groceries constitute the largest component of human expenses. There are 15,000 grocery shops in Achaean. If you have to stand out in the crowd and draw customers, you need to give value to the customer. Subsidies hardly spends money on developing frills like ambiances at the shop.

Their wants are to cater to the middle class segment, which constitute the majority of shoppers. Another role! Tamil Undue-based discount retail chain Subsidies will play a new role.

Very soon it Nil double up as a research outfit to assist FMC marketers in tracking the average consumer’s ‘buying basket’. Our core competence lies in FMC products and retail management. But we have realized we can leverage our geographical spread and experience to function as a research outfit and a relationship management company,” says Submarine. Indeed, the 104-strong discount chain – spread across 24 towns and cities in Tamil Undue and accounting for a claimed 80 per cent of FMC sales there – can effectively track buying behavior on a large scale.

It currently has a database of 1. 35 lack consumers and it has made a beginning by tracking their purchases for corporate like Hinkle-Spin, Colgate, Cavalier, Agro Tech Foods owners of Sunders oil brand), and Marino, among others. Not everybody supports Subhuman’s claims of having cornered 80 per cent share in the sale of FMC products in the state though. For one, Aragua Pillar, CEO, RPG Enterprises (retail group), says, “l do acknowledge that Mr. Submarine has done a fantastic Job of pushing through a great concept in the retail industry, but his estimate is incorrect.

According to me, Subsidies would account for under 10 per cent of FMC sales in Tamil Undue. ” He admit TTS though that G’s retail chain, does not undertake such tracking exercises for corporate. It does track buying behavior, but that’s only for “internal consumption”, though it is occasionally shared with suppliers ‘for better category management”. World A pioneer in the business of organized retail in India, Afterworld, the RSI. 300 core company part of RPG Group, is the first national chain of supermarkets.

It provides customers with a wide range of quality products at a reasonable price all under one roof, in a convenient location, in a clean, bright and functional ambiance.

Part of self- service format Food World follows the service of clearly marking on the shelf, relevant details of the product displayed, including the name and price. This provides immense convenience to the shopper. Afterworld started as a division of Spencer ; Co, a part of the RPG Group, in May 1996, and opened its first supermarket in Achaean. Three years later, in August 1999, Afterworld was hived off as a separate company.

The company has grown rapidly from being a one-store one-city operation in 1996 to an 89-store operation today, thus becoming Indian’s largest and fastest growing supermarket chain.

Afterworld’s share of the organized retail market in the cities in which it operates is 62%, clearly a dominant share. In the last 5 years, the CARR, in terms of turnover has been at 30%. Apart from this, Subsidies has also participated in test marketing of products on behalf of FMC marketers and hopes to conduct marketing audits as well. We have undertaken to check out the ‘brand share premium’, wherein we see if the market share of a client can be shored up. Rat is, if a client has a share of 20 per cent in a category, we try to ascertain if that can be taken up to, say 35 per cent, and suggest ways and means of doing so,” Submarine says.

Subsidies is on the right track, feels R. Shoo, general manager, ORG-Mar, Achaean. It is certainly possible for any good retail chain with an up-to- date database to track consumer buying behavior; but then I don’t know how many are into this.

Moreover, any client looking to use such data must know that the sample pertains only to that particular chain’s consumers. It may not necessarily represent all the consumers in that state/city/region,” he adds. But the retail chain is careful.

Submarine says, “As a retailer, we know we cannot afford to endorse a bad product. We help generate trials for those products that we know are of good quality or those that we feel comfortable with. To support its discounting efforts and maintain a consistency in its product offering, the chain publishes a free monthly news bulletin for its consumers.

This bulletin, also called Subsidies, not Just provides the MR. of products, it gives the discounts available at its outlets.

It also highlights marketing news – such as mergers among companies, product launches, news related to price hikes etc – and gives a detailed list of gifts being offered by companies. There is a separate page devoted to the special offers from the store itself. Its pro-consumer initiatives have faced a lot of flak on the way. In July 1999, milk co-operative Vain stopped supplying cooking butter as the chain was retailing it for RSI 51. 95 for a 500-GM brick against the then MR. of RSI 55.

The issue was resolved at the Achaean High Court in Subhuman’s favor. Again, in November 1999, Subsidies got into a tussle with the pharmaceutical trade over its decision to make public the sourcing prices to generic drugs. The trade was obviously mi Ted and start boycotting the chain. The Supreme Court of India settled this issue in Subsidies favor.

With such tremendous consumer goodwill in its favor, it is not surprising hat the chain plans to step out of Tamil Undue and set up shop in Karakas and Andorra Pradesh by 2002 and open outlets in Maharajah’s and Gujarat at a later date.

It hopes to have 500 outlets in three years’ time. With all this in place the retail chain hopes to increase its turnover to RSI 1,500 core by 2004, against RSI 150 core currently. Questions 1 . How does Subsidies stand apart from neck-to-neck competitors like Afterworld? 2. While planning on expansion to the north of India, how will Subsidies sustain its value for shopper’s concept amidst already established Big Bazaar? 3.

Subsidies is ring to concentrate heavily in southern regions of India,will it be able to settle in Kraal alongside margin free markets. . How does Subsidies plan its outlets in Achaean geographically? 5. Briefly discuss the future of discount retailing in India ,and which type of retail formats can operate it at ease? 6. Afterworld and Inklings seem to be treading a middle path – some amount of discounting combined Ninth some effort at ambiance. Will some change in design and d©cord boost Subhuman’s consumer segment to another level? 7.

Discuss the supply chain strategy adopt by Subsidies and work out a SOOT analysis ?