Jay Gupta doesn’t like MBAs. He feels they are too process-oriented. “They can drive a car from place A to place B. Ask them to create a road and they cannot do it,” says the 34-year-old founder and managing director of the discount store The Loot. “They don’t know how to deal with entrepreneurs who run our franchises in smaller towns. The franchise owners are much more street-smart than they are,” he adds.
Gupta should know about blazing new roads and negotiating deals with tough cookies. He is the person the Indian garment retail industry credits with pioneering the discount store format. Today, the company he started in 2004 has a turnover of Rs. 108 crore. It’s a far cry from his village in Raxaul-Briganj, at the Bihar-Nepal border where his family ran a food grain business.
Before getting into the details of the business, let’s understand what The Loot is and how it operates. The fashion industry works season to season. When one season comes to an end, the companies try and get rid of their excess stock by having an end of season (EOS) sale. “After EOS sales, companies are stuck with a large amount of unsold inventory,” says Deven Pabaru, business development head, Future Supply Chain Solutions, the logistics arm of the Future Group. The Loot buys this stock at 50-70 percent less than the MRP and sells it at 25-60 percent less than the MRP. The way The Loot operates is different from companies like Vishal Mega Mart which bargain with producers on bulk quantities and source it directly from the manufacturer or distributors.
Who are its customers? Anyone who loves a good bargain.
Here is where you buy a pair of Levi’s jeans for Rs. 600. Of course, there is no guarantee that you’ll get another Levi’s at the same cost the next time you visit.
The first store opened in Marine Lines, Mumbai in 2004. It stocked Levi’s, Lee Cooper, and Spykar among other brands. Sales in 2007 touched Rs. 23.5 crore. By then The Loot had 14 stores across Mumbai. Today it is present in 85 cities with a total of 150 stores and 600 employees.
Expanding on the Idea
Gupta has been in the garment retail business since his second year of college in 1996. He started off with a multi-brand store in Vashi, Navi Mumbai, before moving on to exclusive stores and then factory outlets. Eight years into the business, he realised that there was a section of consumers — value conscious bargain hunters — that no one was targeting. That was the start of The Loot.
Now, Gupta is expanding his business to tier II and III towns. For that, he needs money. He wanted to come out with a Rs. 100 crore initial public offering (IPO) last year but couldn’t do it because the market was depressed. “Let it [the Sensex] settle down above 18,000. Then we’ll take a call,” says Gupta. Till then, the company is getting by with a Rs. 40 crore loan from the State Bank of India and internal profits.
He wants to open 150 stores in the next two years. Why is he being so aggressive? Profits. Margins in the business are a measly 3-4 percent after taxes. He needs scale.
He wants to make sure he grows at such a pace that new entrants cannot catch up. Six years after he began, there have been copycats. But they are small players. No one has been able to replicate his model on a national scale.
Gupta believes his systems are in place; the time is right for expansion.
For that he also needs competent people to run his business. This is where the MBA conundrum comes in. In 2005, when The Loot began to expand, Gupta realised he hadn’t accounted for a lot of factors. “You need tech support, your management cost increases, warehousing comes in, branding, marketing… all these factors that never existed earlier become a cost,” he says. He hired people from the Indian Institutes of Management and poached some from companies like Adidas and Levi’s. But he found that they couldn’t help him with figuring out these processes.
He began employing people from “Hindi medium places”. “They might not be able to speak to you in English, but they’ll get the job done,” says Gupta.
Another solution to the manpower and real estate issue was to opt for the franchisee route, which it did in 2007. Today, out of the 150 stores, only 40 are company run. Franchisees get 28-33 percent of the purchase price depending on store size.
Of course, not having the MBAs has hurt the company. In the initial years, the company often used to misjudge the quality and quantity of stock it needed. Says Kanchan Gowda, who has been working with Gupta since 2000, “We used to get into problems. At the time Jay used to say, ‘We haven’t done any management course. So we did not see this coming. We’ll count this loss as our course fees,’” she adds.
Navigating the Challenges
A major challenge for The Loot is adequate merchandising. Brands do not supply to it throughout the year. Contracts are signed when brands want to offload unsold merchandise. One bad buy can wipe out a large chunk of profits. The Loot has four screenings before it buys merchandise. “The VP of the merchandise department takes a look, then the president, then the CEO and then me,” says Gupta. Even then, around 15 percent of the inventory remains unsold. But Gupta insists, “Everything is saleable. You just have to find the correct price.” The Loot sells it to the unorganised sector at a 20 percent discount to its purchase price.
Once merchandising is sorted, Gupta has to worry about how to supply all of his stores. When he had fewer stores, it was easier. Now stores run a risk of very limited choice because merchandise has to be shared. “We’ve divided our stores into different formats, depending on the size of the store: Small, medium, large and XL,” says Gupta. Only large and XL stores have all the Loot products. The company researches the other formats and only sells the most popular brands in the region.
Gupta has also started his in-house brands to compensate for times when brands may not have extra merchandise to sell. Two of them, Eccentrics and Bus Stop, are already in his stores. Two more, IOU and Road, will debut this Diwali. In 2008, Eccentrics and Bus Stop accounted for 25 percent of sales.
While he seems to have a handle on merchandising, Gupta is grappling with transport. The Loot has a 1 lakh sq. ft warehouse in Mumbai from where he supplies to stores as far away as the North East. A national transport agency is too expensive. But Sanjay Vakharia, marketing director, Spykar, one of India’s largest home-grown youth brands, doesn’t see this as a big hassle. “You have to remember that the garments industry in India is very well settled. So say, if The Loot has trouble supplying merchandise to a franchisee in Jabalpur, the Jabalpur guy will know someone in the town who gets materials from Mumbai. He will tag along with him,” he says.
One reason why transport is an issue is because of haphazard expansion — from Mumbai to Nashik to Delhi to Chandigarh to Ahmedabad, Bangalore and Hyderabad. “Yeah, we made a mistake then. Now we target a state, get into a city and move out into another region only when we have established ourselves properly there,” says Gupta.
With The Loot moving into smaller cities, it is expanding the market for other brands. “He has more reach than hyper-markets. He extends the customer base,” says Abhishek Ganguly, director, sales, Puma. But this could work as a double-edged sword for brands which do not have a presence in these places. “This will make it very difficult for brands to set up full price stores in previously unexplored areas. Once people are used to buying goods at a discount, they will be very hesitant to pay full price,” says Vakharia.
But Gupta isn’t thinking about that as he continues his expansion plan. He has the first mover advantage and he isn’t going to let it slip through his fingers.
THE FIVE WORDS OF CAUTION
Scale
Targeting 150 stores in two years. No guaranteed merchandise from any brand. Sourcing merchandise for 300 stores will be a huge task.
Solution Developing its own brands. Eccentrics and Bus Stop are in stores. IOU and Road will debut this Diwali.
Transport
One centralised warehouse in Mumbai. Rising cost of petrol, delays on road. Difficult to reach far-off stores.
Solution Team up with other retailers in the city. Use common transport.
Quality
The reason why brands sell merchandise to The Loot is because no one wants to buy it; 15 percent of The Loot’s merchandise remains unsold.
Solution Increase filtration levels. Introduce more quality checks.
Space
India is one of the most expensive markets for real estate. Realty makes up 15 percent of total costs.
Solution Continue to rent locations that are away from High Street. Move to the outskirts.
Technology
Tech support is a huge cost. Bar coding from different suppliers. Needs to know individual needs of stores.
Solution TCS is creating an ERP (enterprise resource planning) system for the company to manage internal and external resources.
Source: This article appeared in Forbes India Magazine of 16 July, 2010
Tags:discount store franchise, loot franchise,franchise owners, franchisee route, factory franchise, factory stores, brand factory franchise,low cost franchise,
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