While Subhiksha is figuring out different ways to restart it’s business (they plan to close the debt restructuring round by April 2009), there are a few very important lessons from Subhiksha’s story: (Read: Subhiksha Story – Anatomy of Bust):
Subhiksha story highlights the perils of growth at any cost and challenges of scaling a business – something which today’s startups will face tomorrow.
- Thin margin business remains a thin margin business despite the scale it can achieve, Walmart grew first in areas where it had less competition. Subhiksha on the other hand at least in NCR was within walking distance from numerous kirana, spencers, and other branded retailers
- Cash is king (read: money saving tips for entrepreneurs), again highlights what happens when you run out of cash. If you are a startup and are in growth stage, do understand that managing cashflow is key.
- Retail after the initial few stores ends up becoming a real estate business. Starbucks in the US is also going through similar issues. High growth means 2-3 store openings every other day. often you pick the wrong locations, expensive leases and poorly trained staff and this comes back to haunt you, as Subhiksha is experiencing first hand now
Subhiksha’s investors – What to keep in mind?
Qn to startups – How should you react when your VC wants you to grow fast so that the VC can exit, vs. what you think is right for the business for the long-term?
Infact, how many VCs in India understand the complexity of the retail business and what were Subhiksha ‘s investors doing as this business was imploding. not saying that their VCs were ignorant or demanded high growth but what value did they add to the business? [read: “Why should I marry you?” and other questions to ask VCs (during fund raising process)].
What’s your opinion?
Subhiksha gamble would have paid off had this recession not stepped in. Subhiksha, and other smaller retailers, were expecting to get acquired by foreign retail biggies as FDI regulation around retail were relaxed. But economic scene turned to worse, and all plans failed. Some retailers were also buying up real estate at prime urban localities, but with downturn even those assets value kept on diminishing. Consumer spending came crashing down with downturn.
Had we continued with the boom time for another year, Subhiksha owner would have been rolling in money with a very lucrative acquisition deal.
RT @achitnis: The lesson from Subhiksha is that competing on price is stupid. Quality and sustainability are more important in the long run.
Also I feel that they tried too many things (groceries,mobiles and medicines) and scaled up too fast instead of creating sustainable
business , their employee morale was too bad even before all worst things happened.As Puneet pointed if recession not stepped in then Mr.RS would have made lot of bucks.
I have two questions:
1. Don’t you think recession is becoming easy reasoning for the failures which would have eventually occurred?
2. How good of a business can an entrepreneur create if s/he has the goal of being acquired by a ‘foreign biggy’ and not of creating a sustainable business model? Can the foreign investors not see the difference between a sustainable business and a potential future liability?
@Mayur:
Acquisition is a very valid and sought after exit route for most of the entrepreneurs.
Sustainability of business model is linked to the scale it achieves. Ashish has commented about low margin business being low margin even when operated at higher scale, but when we are comparing a scale that Subhiksha alone could have achieved and that of a foreign biggy like Tesco or Careffour or Walmart can achieve is huge, and model might actually start working.
Also we should not forget that Subhiksha started with a different model wherein they will stock only samples in stores, and deliver at customers from their central godowns (for items like foodgrains and all). That would have provided them with enough breathing space to play the low margin game, but that model did not click.
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