RAMASWAMI SUBRAMANIAN Managing Director, Subhiksha

Three days after Ramaswami Subra-manian opened the first Subhiksha store in Chennai's middle-class neighbourhood of Thiruvanmiyur, he was pleasantly surprised to find a big crowd gathered outside the store around its opening time. Subhiksha, which sells grocery and pharmaceuticals, was the first discount-store chain of its kind in Chennai, and true to its business model, all products were priced an average 8 per cent lower than the maximum retail price (MRP). And although Subramanian, its Managing Director, did expect a warm response to the chain from Chennai's thrifty shoppers, expecting people to literally queue up, as they had that day, was too good to be true.

As it turned out, it was. The crowd outside was not of eager shoppers, but angry pharmacists who had gathered to protest against Subhiksha's cut-price strategy. It took Subramanian two-and-a-half hours to pacify the mob, but it did go away without inflicting any damage to the store. But that was not to be the end of Subhiksha's troubles. In days to come it would get visits almost every day from drug inspectors asking all kinds of questions, customers would suspiciously look at the expiry date on the products to ensure they weren't being sold outdated stock, there would be court cases slapped against it, and even Glaxo (Pharma) would drag the retailer to the Supreme Court to stop it from challenging Glaxo's right of refusal to sell to a retailer merely on account of discounts offered to the public-a case that already went in favour of Subhiksha in the lower court. (Glaxo went on appeal to the Supreme Court and lost.) "It took us two-and-a-half years to win our freedom to operate (the pharmacy business)," says Subramanian, who works six-and-a-half days a week, and more than 12 hours every day.

The initial distrust and opposition had everything to do with the novelty of Subhiksha's retail model. In terms of its stores, it offered a much better shopping experience than the neighbourhood kirana stores, but at the same time was significantly cheaper than bigger retailers like, say, FoodWorld. That's why the drug inspectors thought Subhiksha was selling spurious/dated drugs and consumers thought they were getting products cheaper because they had turned bad.

But opening a chain of no-frills stores-no air-conditioning, no fancy lighting, no touch-and-feel experience (customers have to ask for products at Subhiksha stores)-was a deliberate strategy. In 1996, when Subramanian, who grew up in Chennai, started looking at retail after having done a variety of things at a non-banking finance company (NBFC) called Vishwapriya Financial Services (it still is Subhiksha's promoting company), he didn't want to set up just another retail chain. He wanted to "pioneer a new trend" because of what he had found out about the retail industry: that the No.1 retailer makes the most money, the No. 2 makes some money, while the third (and the others) has to eventually shut shop.

But what would lure customers into Subhiksha? That was a tough question to answer because there were an estimated 15,000 mom-n-pop stores in Chennai. Besides, while Chennai's mamis were willing to travel a great deal of distance to buy silk sarees or jewellery, they could not be expected to do the same for a packet of Surf or a bag of rice.

The answer, as the fast-talking Subramanian discovered, lay in creating a new hybrid model: One that had all the clout of a big retailer and yet was low cost and accessible enough to compete with the neighbourhood stores. No wonder, then, Subhiksha's business model is uniquely Indian. For starters, it doesn't focus on the rich, but the middle-class, upper and lower. Shops are located not on the main road, but just off it, to take advantage of vastly lower rentals. The catchment area of customers is rarely beyond a two-km radius, since its customers usually come on two-wheelers or on foot. Seems painfully methodical? But that's Subramanian. Says Sanjeev Bikhchandani, CEO of Naukri.com and his batchmate at IIM-A: "Unlike the others, he was always a person of regular habits, going to bed at 10 and getting up at five."

Inventory management is austere, too. All goods are bought on cash to extract the maximum discount from suppliers; SKUs (stock keeping units, or the number of items on display) are restricted to the fastest moving ones of about 1,500. Most of the SKUs are bought directly from the manufacturer, cutting the intermediary out. A supply chain software, developed in-house, keeps track of what's selling and what isn't. Management is divided into two simple sections: operations, which is centralised and looks after everything from ordering to accounting, and stores, which is responsible for all store-level activity. There's one manager for every three stores, and he reports to a chief manager responsible for business development, who in turn reports to a vice president. The VPs are responsible for sales targets.

Last year, the chain raked in Rs 200 crore in revenues and net profit of Rs 3 crore, with 145 stores across Chennai (which has 72 stores), Madurai and Coimbatore (eight each), Trichy (six), and the rest of Tamil Nadu. By 2006, Subramanian hopes to have 366 up and running, including ones in markets such as Bangalore, Mysore, Mumbai, Gujarat, and Delhi. Says Bala Deshpande, Director, ICICI Ventures (it holds a 10 per cent stake in Subhiksha): "Few are capable of actually dirtying hands and building an enterprise from the scratch, since it calls for a totally different kind of psyche. Subramanian has that psyche."

He wasn't thinking this big when he kicked off Subhiksha. In fact, he wasn't even thinking retail when he passed out of IIM Ahmedabad in 1989. After a two-week stint at his first employer Citibank, Subramanian joined his mentor (late) S. Vishwanathan, who then ran Enfield Industries. It was a BIFR company and Vishwanathan thought he could use Subramanian's help simply because although he was only 24, he had acquired quite a reputation at the B-school, where he was known as thalaivar (Tamil for chief) for consistently topping the class (he eventually won the gold medal). At Enfield, Subramanian helped professionalise a hitherto family-run set-up and rope in Eicher as a buyer. Says R. Hariharan, who was Executive Director at Enfield when Subramanian was the chairman's Executive Assistant: "I found his knowledge phenomenal-he could handle all issues...legal, financial, and operational with a finesse that was startling for one so young."

By 1991, when Eicher was in place, Subramanian decided to quit and get into financial services. Once again, Vishwanathan decided to help him start an enterprise. Vishwapriya Financial Services was born. Among the first things that Subramanian did was to put together an impressive board of directors, including the former Chairman of LIC R. Narayanan, Justice G. Ramanujam (retd.) of Chennai High Court, Prof. K. Balakrishnan of IIM-A, and Andrew Yule Chairman K.S.B. Sanyal, among others.

Given that Vishwapriya was a start-up, Subramanian had to figure out innovative things to do in the financial services business. Amazingly, he came up with a series of them, moving on to a newer service every time the bigger NBFCs and banks caught up with him. For example, he was the first to introduce debenture consolidation, the first to launch asset securitisation for retail customers, and the first to finance IPO (initial public offer) purchases by small investors. Says Subramanian: "Our strength was in pioneering new concepts. Once others followed, we would lose the first-mover advantage, and we'd move on."

Is something like that likely in retail? "No," says Subramanian. "In Vishwapriya, we were late movers and small in size compared to banks, which can source money more advantageously. In Subhiksha, we are the prime movers and have built a scale and advantage that competitors will find difficult to reach." It can't be ruled out, though. Besides, Subramanian is too much of a realist to let emotions get in the way of a good deal (should somebody want to acquire Subhiksha). Meanwhile, he's betting his company on a conviction that it's a no-frills discount chain that India's booming middle-class needs.