The Global Economic Impact of Private Equity Report 2008 - World ...

investment,” recalled Deshpande. Critics of the Subhikshamodel believed that ‘organized retail’ meant a big‐box format.They argued that the only reason Kiranas could survive in thelow‐margin food and grocery business was that they had nooverheads. A chain of small stores would not achieve scaleefficiency, but its overheads would eliminate all of the margin.RS however was able to counter conventional wisdom bydeveloping a set of unique, innovative practices in his storesthat made a small‐format grocery chain profitable in India.For example:• Careful selection of store location to save on rent:Subhiksha’s stores were located in residential areas whererentals were typically 30%‐50% lower than “high streets”.Traffic into the stores was not affected by the back‐streetlocations because most of Subhiksha’s business wasderived from local residents, who were well aware of thestore’s presence.• SKU control:Subhiksha stocked only the 70%‐80% most frequently usedhousehold items, and for each category only the top oneor two brands were stocked. This practice ensured highinventory turnover and efficient shelf‐space management.For select product categories, Subhiksha was developingprivate label items to increase customer choice.• Eliminating the middlemen:Subhiksha purchased in large volumes directly fromwholesalers and received quantity discounts.• Just‐in‐time inventory management:Subhiksha stores carried very small inventories. The bulkof the inventory was stored in a central depot, serving allstores in a city. Using computerized just‐in‐time inventorymanagement, at the end of each day each store uploadedre‐stocking requests to the central depot; the data wasprocessed overnight and the exact amount of inventorywas delivered the next morning before the store opened.• Value‐adding services but bare‐bones operations:To increase customer loyalty, Subhiksha offered a loyaltyprogramme and home delivery service (via bicycle). Dueto low labour costs and store proximity to customerresidences, each store was able to offer delivery servicefor next to nothing.ICICI Venture’s investment in subhishaBetween 1997 and 2000, RS built a chain of 50 stores acrossChennai and he was beginning to plan a more aggressivegrowth strategy that was contingent on raising outside capital.Familiar with the ICICI brand name, RS contacted ICICIVenture to explore his financing options. Among manyinvestments it made during the technology bubble, ICICIVenture invested 150m Rupees (Rs) (about US$3.4 million) 8 inSubhiksha in June 2000 for 15% of the company. (See Exhibit2 for a time line of ICICI Venture’s investments in Subhiksha.)But shortly after this initial investment ICICI Venture beganto undergo a series of changes, in part caused by thebursting of the technology bubble and the deterioratingperformance of its investment portfolio. One major changewas the hiring of Deshpande, who had more than 10 yearsof operational experience in a number of multinational retailoperations, including Best Foods and Cadbury. Her first taskwas to pare down her inherited portfolio of 39 companiesby 50%. The portfolio review resulted in the retention of18 companies, eight of which were in the retail sector, 9including Subhiksha. 10 Deshpande was attracted toSubhiksha because it targeted the rapidly expanding middleclass, where food and groceries comprised more than 50%of their total spending. But, according to her, that wasn’t themost compelling reason to retain Subhiksha in the portfolio.That reason was “clearly the founder. RS is a maverick, atruly talented entrepreneur”, she said.From its first $3 million commitment in 2000, ICICI Ventureeventually invested a total of $20 million in Subhiksha infour rounds over seven years, and was the company’sonly external source of equity. During this long period, therelationship between ICICI Venture and Subhiksha deepenedas they worked closely to enhance performance and expandthe company’s geographic footprint.2000 – 2002: the early yearsInitially the relationship between Deshpande and RS wasformal and somewhat distant. RS referred to the period asone in which “neither side made many demands on theother… We moved on with our own business. They weretrying to understand what we were doing and also fix theirown portfolio problems. But it was a period in which a lotof comfort and trust was built.”Although ICICI Venture may have appeared relatively passiveon the surface, it was not entirely laissez faire. Deshpandeexplained her approach: “The first question is whether youtrust the entrepreneur. In RS’s case, the answer was yes…But as with all brilliant people, RS has his quirks and ourapproach had to be flexible. You need to maintain theoversight, but also give the entrepreneur space. You don’twant to push him to do things that he does not like to do.”Aside from capital, there was an additional, tangible benefitICICI Venture brought to Subhiksha during this early stage.“Their investment gave us a lot of credibility, which was whatwe wanted. After all, we were an unknown quantity with a newformat. With their investment, we could attract good employeesand negotiate with better suppliers better, etc,” explained RS.8All US Dollar amounts are approximate, converted from average exchange rate during the month of the investment.9The other retail businesses Deshpande kept included Shoppers’ Stop; the Future Group, which operates the department store chain Pantaloon;and Big Bazaar. Today, they are all leading retail groups in different segments of the Indian market.10ICIC Venture closed out or exited the rest of the investments.The Global Economic Impact of Private Equity Report 2008 Case studies: ICICI Ventures and Subhiksha 145