08 Oct 2012

John Mullins

This case study highlights the difficulties entrepreneurs can face when their business grows beyond their ability to control it personally. As Jay Gupta of the Indian clothing chain The Loot found, making the shift from operating a successful start-up to running a big operation can present a business-threatening challenge if the business model doesn’t really work.

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The change from operating a nimble start-up to running a larger business is a significant and often difficult step. For entrepreneurs whose success has come from keeping close control of costs and being able to change direction quickly, the shift to an environment of high overheads, slow responsiveness and increased reliance on other people can be challenging.

This case study, conducted under the supervision of John Mullins, Associate Professor of Management Practice at London Business School, examines the reality of that profound shift for one Indian entrepreneur, providing a valuable basis for discussion both of the attributes required to launch a successful start-up and of the new kinds of difficulties that can emerge when a business moves to the next level.

Jay Gupta first set up as an entrepreneur in the Indian clothing retail business at the age of 19 by running temporary clothing exhibitions in his suburb of Mumbai in 1994. The success of these projects and the burgeoning demand for branded clothing from India’s rising middle classes encouraged him to seek a new and more permanent platform, and in 1997 he opened a store offering a wide range of Western brands.

Applying a close attention to detail, personal research into customers’ behaviour and wishes, an understanding of the importance of negotiating the right terms with suppliers and a willingness to remain alert for new opportunities, Gupta made a success of his store and soon launched an exclusive franchised outlet for a new domestic clothing brand. Spotting yet another opportunity, he followed this move, in 1999, by opening India’s first franchised factory outlet for Adidas products, bringing customers’ desire for a high-profile brand together with a demand for discounts.

The success of this concept led him to open five factory outlets for different Western clothing and footwear brands over the next three years, leaving him with a thriving portfolio of 10 stores across three different formats, all of them operated with the hands-on, detailed entrepreneurial approach that had made his first venture a success.

Working across a number of different formats provided Gupta with a fresh insight into the changing behaviour of Indian consumers. He recognised that shoppers wanted aspects of a number of different formats brought together, leading him to the concept of a multi-brand store featuring factory outlet prices but with the shopping environment of an exclusive-brand, full-price store. 

In June 2004, he demonstrated his flexibility by duly opening his fourth retail format, The Loot, accompanied by a precise and carefully planned branding exercise using a prominent Bollywood villain and meticulous design of décor and changing rooms. By the autumn of 2004, there were nine Loot stores, all attracting large numbers of customers and yielding significant revenue, and Gupta was planning a tenth. But all was not well.

At this stage, the realities of operating a bigger business caught up with him. Finding new locations for stores was becoming increasingly difficult and expensive, with each requiring extensive documentation, upfront cash deposits and the right staff and managers. He now needed to pay state taxes previously paid by his franchisors, he needed warehouse space to stock his supplies and he was facing mounting costs from advertising expenses, staff training, architectural services, electricity and software.  Despite high and growing turnover, overheads were eating up margins, which were far lower than in his days as a franchisee. The Loot’s business model wasn’t working.

By March 2005 Gupta’s cash-flow situation was becoming critical. A deposit on a new store was due, the salaries of his staff were payable, a new consignment of denim had to be paid for and interest payments were due on his company’s considerable borrowings.

This case highlights the difference between profits and positive cash flow, as Gupta sought to discover a business model that would permit him to rapidly scale his business. This valuable piece of research forms the basis for wide-ranging discussion of the skills and approach required of the successful entrepreneur and how to deal with the problems of growth.

To read the case study in full, email innovation@london.edu

About John Mullins

John Mullins is an Associate Professor of Management Practice in Marketing and Entrepreneurship at London Business School.

He teaches on the following programmes: