Gap Inc.
Executive Summary & Introduction
Gap Inc. is a leading international specialty retailer that markets its wide range of products under three main brands: The Gap, Banana Republic and Old Navy. Each brand offers a unique selection of apparel and accessories, with some brands offering a wider selection than others - The Gap offers the widest selection, including clothing, intimate apparel, maternity apparel, children’s clothing, baby clothes and an array of personal care products. With the combined reach of these brands, Gap Inc. is able to appeal to a variety of different customer preferences in the key areas of style, price and fit. This corporate structure is in line with Gap Inc.’s business-level strategy of differentiation, and further enables Gap Inc. to implement its functional-level strategy of achieving a high level of customer responsiveness.
As advantageous as its business structure has proven to be, Gap Inc. faces challenges that are inherent to having multiple strong brands in one marketplace: preserving a high level of differentiation between brands; avoiding cannibalization; finding and maintaining the delicate balance that exists between taking advantage of economies of scope by leveraging shared resources across the three brand groups, and providing enough independence between the brands that each can maintain its own identity.
Internal challenges aren’t the only issues facing Gap Inc.; it is a major player in a highly-competitive and ever-changing market, and the more market segments that a company competes in, the more competitors and product –preference evolutions it’s going to be faced with. With this in mind, Gap Inc. must move forward maintaining its strengths in diversification, distribution, and differentiation, and add to the list an improved understanding of customer preferences and an advanced insight of market trends, styles, and transformations.
Gap Inc. is a well-known brand in the global retail industry. The clothing retail industry Gap Inc. competes in is fast-paced, and therefore the company must constantly change to keep up with the latest trends in fashion. Recently management changes are helping the firm overcome some of the struggles with customers. The company seemed to have some difficulty with strategies to move into the future, as well as with figuring out how and which markets to focus on, leaving virtually no focus at all. The brand that The Gap offers has traditionally been very dependable for maintaining “the basics.” At a point in time, The Gap changed its focus to trendy clothing, trying to please the young college crowd. However, this conflicted in many ways. Older crowds were turned away because it was too trendy and the younger crowd was stuck on the idea that The Gap offered only the basics - jeans, T-shirts and khakis. Paul Pressler, Gap’s CEO as of 2002, changed the focus to making stores more “shopper-friendly.” Along with these changes, The Gap has focused on adding variety rather than trends and opening a test retailer that concentrates on the baby boomer generation. Ultimately the goal of Gap Inc. is to capture customers in all markets and is attempting to achieve this goal in many ways.
Corporate Description
Gap Inc. consists of three major brands in the international specialty retail industry - Gap, Banana Republic, and Old Navy. The Gap brand has several chains including GapKids, babyGap, the Gap Outlet and Gap Body, all in addition to the regular Gap stores. The major competitors for The Gap are Abercrombie & Fitch, American Eagle Outfitters and Spiegel.
Gap Inc. has world headquarters in San Francisco, product development offices in New York and distribution facilities all over the world. Gap Inc. currently operates approximately 3,000 stores around the world, employing over 150,000 workers (www.gapinc.com).
History
Gap Inc. was started in San Francisco, California, as a jeans-only store in 1969 by a husband and wife team, Donald and Doris Fisher. They began with one store and minimal employees. In 1974, Gap created its own private-label brand of clothing made especially for the company, and by 1991 that was the only brand sold. In 1976 Gap went public, offering 1.2 million shares on the open market. In 1977 the Gap Foundation was established. Millard Drexler was hired as president of the Gap division in 1983, and Gap Inc. purchased Banana Republic, which at the time was running as a “two-store safari and travel clothing company with a thriving catalog business.” (www.gapinc.com) By 1986, the first GapKids was opened. One year later, Millard Drexler was named president of Gap Inc. and Gap opened its first international store in London, England. By 1988 Gap had introduced an award-winning advertising campaign, “Individuals of Style.” Gap “controls all aspects of its trademark casual look.” (www.hoovers.com)
After being in business for 20 years, The Gap opened its first Canadian store in Vancouver, British Columbia. Between 1990 and 1993 “babyGap was born,” (www.gapinc.com) and a department was opened in Paris’ Galeries Lafayette. 1994 and 1995 were big years for Gap Inc. - the Old Navy brand was introduced, Gap Outlet was opened and GapScents entered The Gap stores. Gap Inc. had significant global expansions in 1995, opening the first Banana Republic store in Canada and the first Gap and GapKids in Japan. Banana Republic also introduced a line of personal care products and Millard Drexler was named CEO. As the years continued, Gap and its chains continued to expand across the country and also began marketing in the high tech land of the world-wide-web with gap.com, gapkids.com, babygap.com, BananaRepublic.com, and oldnavy.com. Old Navy reached $1 billion in annual sales in less than four short years of operation. Coinciding with the new Internet marketing, Banana Republic premiered its first TV commercial and introduced its private-label credit card and catalog. During this time, Gap Inc. was busy releasing its formal code of ethics, the Code of Business Conduct.
Gap and Old Navy entered the new millenium by introducing private-label credit cards. Gap also entered the market of clothing for pregnant women with GapMaternity, available exclusively online. In 2001 Old Navy joined the global expansion and opened 12 stores in Canada. Also in 2001, Gap.com was awarded a four star rating by Consumer Reports for its “policies, usability and content.” (www.gapinc.com) In 2002 Millard Drexler retired after 19 years with Gap and Paul Pressler was named the new CEO. In 2003 original founder, Don Fisher, decided it was time to step down as Chairman of the Board and chose his son, Bob Fisher as his replacement in 2004.
Gap Inc. celebrated 35 years in business this year and had several other accomplishments: net sales for the second quarter were $3.72 billion; Domenico De Sole, director of Proctor & Gamble and former CEO of Gucci, joined the board of directors; a catchy, new fall marketing campaign was launched featuring Sarah Jessica Parker; seven new stores were opened in Quebec; Old Navy launched a Women’s Plus line of clothing and the maternity line at Old Navy was expanded into 50 new stores. Banana Republic kept busy in 2004 as well, signing on as a sponsor to the new reality series on Bravo, “Project Runway.”
Ownership Characteristics
Gap Inc. is a wholly owned subsidiary with several chains that are each wholly owned subsidiaries. The chains include Gap, GapKids, babyGap, Old Navy, Banana Republic, Gap Outlet, Gap Body, and Gap Scents. Gap Inc. does not offer any type of franchise or joint venture opportunities and does not sell wholesale products, nor act as a supplier to any other company.
Financial Analysis
In 1987 Gap’s shares were trading at $2.88, achieved a high of $53.75 in 2000 and are currently trading at $23.47 (www.yahoofinance.com). According to the income statement, revenue for Gap Inc. was up more than $2 million from 2002 to 2004. In 2002 the company reported a net loss of $7,764 and has since turned that around to net income for 2004 of $1.03 million. Cash and equivalents has increased nearly $2 million since 2002 and total assets of $10 million are nearly double that of the liabilities, showing the liquidity of Gap Inc. and the ability to pay off debts quickly if necessary (www.gapinc.com).
In comparison to Gap Inc.’s competitors, the company seems to be in line with the industry averages. Gap Inc. is turning over its inventory almost five and a half times a year, which is the same as Abercrombie & Fitch. American Eagle Outfitters, another close competitor, is doing slightly better than Gap Inc. and Abercrombie at about 8 times a year. President and CEO Paul Pressler, said that, “tight inventory management” was the reason for record earnings for Gap Inc. shareholders this year and that “the company will continue to focus on inventory productivity.” (PR Newswire)
Gap Inc.’s performance levels continue to be successful. In October 2004 sales were up 5% from the same time in 2003. Profit margin has nearly doubled to 6.5% so far for 2004 versus the 3.3% from 2003. And gross margin had a five-point improvement in the first quarter of 2004 over the first quarter of 2003 due to the “leveraging of rent, occupancy and depreciation.” (PR Newswire)
External and Industry Analysis
Macroenvironment
Just like with any other industry, there are many macroenvironmental issues that Gap Inc. must be aware of and account for in order to remain successful. Some of these issues include governmental instability, changes in social trends, international market issues, and technological advances. Over the past few months some of these issues have arisen and are providing both challenges and opportunities for Gap Inc. and its competitors.
The biggest single issue to stir up the market was the recent U.S. presidential election. For the last several weeks there was a sense of insecurity in the U.S. market, as nobody knew who was going to be leading the nation over the next four years. Traditionally, most consumers tighten their spending during an election, but to most analysts’ surprise, retailers saw an increase in sales for the month of October versus the sales from the same time last year.
The re-election of President Bush did spawn some concerns on the international front. Europeans are concerned that under the Bush administration the U.S. dollar will continue to weaken (Sommerville). A weaker dollar makes it more difficult for international firms to export their goods to the U.S. because it increases the price of their products for the American consumer. This could actually be viewed as an advantage for companies like Gap Inc. and other American firms who do business on a global level, as the weaker dollar would increase U.S. exports and lower the cost of their products for the international consumer.
Another governmental issue is the recent rise in interest rates by the Federal Reserve. The rate increased a quarter percent from 1.75% to 2%, which has intern raised the prime-lending rate to 5% (Ip). With the rise in the prime rate, consumers can expect to see an increase in interest rates for mortgages, auto loans, and credit cards. Raising these interest rates generally means a reduction in consumer spending, which negatively impacts retail firms such as Gap Inc. This also means that consumers will be less likely to purchase goods on credit, a big source of revenue for a lot of retail firms.
Social trends also have a significant impact on the retail apparel industry. One such trend is the rising number of middle-aged women who have higher incomes. According to Melissa Otto, a vice president for DE Research, “there are 1.6 million women in the 25- to 44- year-old age bracket who make $75,000 or more per year.” Otto goes on to say that “women with more money at their disposal are spending it…” (Krampf). Gap Inc has recognized this trend and sees it as an opportunity, especially because the market for younger women is now saturated. As a result, Gap Inc. has announced that it plans to launch a new retail chain directed at women 35 and older. Other clothing retailers also see the change in the social trend and are looking to make similar moves. The industry, and especially Gap Inc., originally focused efforts on youth when the baby boomers were in that age bracket and “had become the largest consuming population the nation has ever know”. The industry then lost sight of the changing needs as the Baby Boomers began to age. Gap Inc. is expected to make a huge splash with this market since there are currently no “dominant players tapping into the wealth of professional women and young moms” (Boudreau).
Another large social trend that directly affects the retail apparel industry is the holiday shopping season. Normally companies expect significant increases in sales during the holiday season, but this year the experts are having a hard time determining what this holiday season has in store. According to some analysts, the rise in oil prices and low wage growth are named as possible concerns for consumer spending (Merrick A2). However, others believe that after the government reported an increase in the creation of jobs for the month of October that perhaps things won’t be that bad (Lazarowitz 1). For those who believe that this will be a profitable holiday season, they are projecting gains of 4.5% in overall gift spending this holiday season (Krampf). With so many differing opinions, it becomes the responsibility of the firm to do its own research to help them determine what strategy should be employed at this crucial time.
Another holiday concern that came about during the month of October was the huge delays at the two busiest U.S. Ports. The problem arose because shipping companies failed to anticipate the growth in this year’s shipments. As a result, there were not enough dockworkers to unload the container ships at the two ports. This caused great concern for many manufacturers and retailers who became worried that their holiday goods would not be delivered on time for Christmas. Thanks to a change in distribution strategy earlier in the year, this did not have a significant impact on Gap Inc., who had begun steering some shipments to other West Coast ports and through the Panama Canal (Machalaba and Staley B1).
Technology is another area of the macroenvironment that must be considered. More and more, consumers are beginning to shop online and it has become necessary for retailers to provide this service in order to remain competitive. Gap Inc. has done a nice job in organizing web sites for each of its chains (Banana Republic, Old Navy, and Gap) that are user-friendly and well designed. The one downside to its online purchasing technology is that it is currently limited to consumers in the United States and has not been extended to its international customers. A technological strength for Gap Inc. is that it is the first one in the specialty apparel industry to issue a private-label credit card that allows consumers to use one card to shop at all three chains. According to a press release published on the Gap Inc. website, this card will offer increased loyalty rewards to the consumer along with added convenience.
Industry Environment and Strategic Groups
Barriers To Entry
LOW/MODERATE
Porter’s Five Forces:
Bargaining Power of Buyers
LOW
Intensity of Rivalry
HIGH
Bargaining Power of Suppliers
LOW/MODERATE
Threat of Substitutes
HIGH
Barriers To Entry (Low to Moderate)
Among Gap Inc.’s stores in the United States, Canada, United Kingdom, France, and Japan, the various governments impose very small amounts of regulation on apparel retailers. Because textile imports/exports are the Gap Inc.’s main commodity, government regulation of textile tariffs is a factor to be considered.
The Canadian government is in the process of completely eliminating tariffs on goods of U.S. origin, which will eventually lower Gap Inc.’s cost of doing business considerably in that country. Another great reason to further explore the Canadian market is the fact that there are no traditional barriers of entry such as import quotas, local content requirements, or political turmoil.
In the United Kingdom, there are also very few trade barriers for a U.S.- based company such as Gap Inc. to overcome. Tariffs are low, no special forms of documentation or import licenses are required, and no special standards are set.
Trade barriers do not pose a problem in the French market. As a member of the European Union, France can give other European companies minor cost advantages on its textile import duties. However, a U.S. company can make up for this disadvantage in other ways, such as lowering productions costs or slightly narrowing its profit margin.
Japan comprises the “moderate” aspect of barriers to entry. There are vast amounts of government regulations in the Japanese market. To enter the Japanese business environment, a firm must complete incredible amounts of paperwork and go through extensive approval processes. Traditionally, the Japanese government supported anticompetitive and prohibitive business practices; however, they are now aggressively pursuing an increase in foreign investment and imports.
Aside from the regulatory barriers, perhaps the largest barrier for Gap, Inc. is the huge amounts of capital investment necessary to market and build brand image and loyalty in these countries. This is a key issue if the firm wants to profit from the same competitive advantage it enjoys from its advertising strategies used in the United States.
Intensity of Rivalry (High)
Gap Inc.’s main competition for men and women’s apparel is Abercrombie & Fitch Co., American Eagle, and Eddie Bauer. The Gap caters to young, college-age consumers as well as the 35-and-older crowd with apparel items ranging from very casual to dress-casual. For the teen to college-age consumers, the biggest competitors are Abercrombie & Fitch Co. and American Eagle. For the slightly older crowd, the Gap competes for market share with Eddie Bauer.
Old Navy Clothing Company finds itself in direct competition with off-price retail outlets such as Ross and T.J. Maxx. Because Old Navy offers affordable clothing for the whole family in one store, Target and Wal-Mart are also considered serious competitors. Banana Republic’s main competitors are J. Crew and Ann Taylor Loft. These three stores enjoy a commonality of finer, higher-priced men and women’s apparel (www.umich.edu).
Specialty stores are fiercely competing for the same market share and consumer dollars, thereby creating a high intensity of rivalry in the specialty apparel market. They strive to differentiate themselves based on branding and their interpretation of fashion trends. Advertising dollars are mainly spent on capturing consumer awareness and stimulating purchasing results (Funk 11).
Gap Inc.’s competitive environment expanded into cyberspace when it started selling its merchandise online in 1997. To its advantage, the company was an early convert to web apparel retailing and continues to have an extremely strong presence in the online industry (Lee 1).
Threat of Substitutes (High)
Unfortunately for Gap Inc., the threat of substitutes in the apparel industry is extremely high. If consumers are unable to find what they need at one of Gap Inc.’s many types of stores, they can just walk a few yards to the next store in the mall to explore the offerings there. Or even worse, they can just move onto the next website that offers exactly what the consumer is looking for. As mentioned earlier, another substitute threat lies in the fact that Old Navy stores are beginning to cannibalize The Gap in its retail sales.
Bargaining Power of Buyers (Low)
In the retail apparel industry, the bargaining power of the consumer tends to be low. Ultimately, consumers must pay the price the retailers charge for their goods. Consumers gain some amount of control by taking advantage of price cuts and sales, but at the end of the day, they have little control over the final price. Basically, their bargaining power comes from high quantities of substitute products. A potential buyer can exercise his or her “power” by choosing which retailer to shop at.
Bargaining Power of Suppliers (Low to Moderate)
“Gap purchases merchandise from some 700 sources located both in the United States and overseas. This procurement strategy is designed to reduce each supplier’s importance, so that no single supplier can affect Gap’s overall operations significantly. All suppliers account for no greater than 5% of the purchase” (Kotabe 3). Consequently, this strategy greatly reduces the bargaining power of any single supplier. By taking advantage of low labor costs in countries such as Hong Kong, Taiwan, South Korea, Singapore and China, Gap Inc. has found itself in the hypersensitive position of contending with garment factory labor standards and worldwide working conditions. In an effort to support the improvement of garment factories worldwide, Gap Inc. has joined the Ethical Trading Initiative (U.K.-based) and has begun to publish social responsibility reports on its website. The social responsibility report offers a comprehensive look at the company’s efforts to improve labor standards in the factories that supply its retail merchandise (www.gapinc.com). The bargaining power of the suppliers is not likely to marginally increase anytime soon; nevertheless, Gap Inc. cannot afford to overlook the potential impact that social irresponsibility could have on its market value.
Opportunities and Threats
Gap Inc.’s broad brand portfolio represents an opportunity in that it provides a large market share – one of the three retailers will most likely attract a customer, if not all three, which is often the case. Further, by being a first mover in the baby boomer retail market not only serves to broaden the brand portfolio, but also to attract more potential customers. Another opportunity is the company’s broad base of consumer research. By asking customers what they want and providing it, brand loyalty is sure to increase even further. Yet another opportunity for the firm is its online real estate, in which it has a strong presence. To further develop this presence and make sure that all products are available online could facilitate increased sales.
One of the threats to Gap Inc.’s business includes the cannibalization of existing sales through customers switching between brands. Substitute products are another threat – both from outside sources, as well as within the company. Off-price retailers, such as T.J. Maxx and Ross Dress for Less, represent a threat in that they offer lower prices on higher-end clothing, the ideal positioning for many consumers. Department stores are a threat because they too offer a wide variety of products for customers of all ages. Due to the negative feelings associated with overseas labor, Gap Inc. faces a threat because much of production is located overseas, so precautions must be taken to ensure fair labor practices and standards are in place and followed. The fleeting nature of fashion represents perhaps the largest threat to Gap Inc., as well as other companies in the industry. Fashion is constantly changing, and as customers follow changing trends, retailers are often abandoned if they aren’t following those trends.
Strategic Fit with External Environment and Industry
Historically, Gap Inc. has been able to maintain its competitive presence in the specialty apparel industry; and consequently has positioned itself well for future growth. Although the intensity of rivalry and threat of substitutes remain extremely high in its industry, Gap Inc.’s ability to maintain brand recognition and brand loyalty keeps the company at the top of its competitive environment. Gap Inc. has prepared itself for growth opportunities in the areas of online shopping and shifts in social trends; continued innovation in these two areas will help the company to remain very competitive in their industry. Obviously Gap Inc. does not have any control over economic trends, such as interest rates and job growth; however, it does have control over how it situates itself to handle future economic downturns better than their competition. This will always be a big key to success in an aggressive industry such as specialty apparel.
Strategic Position
Gap Inc.’s mission statement is “Gap Inc. will be the undisputed leader of apparel and accessory retailing. Our innovative and creative brands bring great style to the world.”(Gap Inc. Intranet) Gap Inc.’s mission statement also identifies the most important stakeholders: the customers, the employees and the stockholders. For customers, the mission is, “An easy, friendly satisfying and emotional brand experience.” The company’s mission for employees is “A culture that inspires, recognizes and develops talented people who act with integrity and are committed to our success.” For shareholders the statement simply reads, “Exceptional shareholder returns.” This mission statement clearly defines the stakeholders that Gap Inc. intends to focus on, and provides a clear objective that management can reference when creating internal policies and making strategic decisions. Furthermore, it provides employees with a clear vision of what Gap Inc. wants to become and, if followed, can help influence employee’s interactions with customers—whether internal or external.
Resources
Gap Inc. could consider itself in the talent business. As the mission statement emphasizes, the company strives to have a culture that “inspires, recognizes and develops talented people…” in order to “…bring great style to the world.” (www.gapinc.com) Gap Inc. needs to employ people that are talented at recognizing, defining and expressing style. It needs employees that have a knack at knowing what customers want and knowing how to help them have a “…satisfying and emotional brand experience.” If asked what its most valuable resource is, Gap Inc. would likely reply, “its people.”
Another valuable resource that Gap Inc. has is the network of over 700 sources it works with to manufacture its products. Gap Inc.’s Sourcing and Logistics group works with its buying agents to draw up production schedules and place orders with approved third party factories in more than 50 countries (www.gapinc.com).
Along with these resources, Gap Inc. has approximately 3000 retail locations worldwide. While the Gap brand currently holds the majority of these locations, [DSB1] many Gap stores will be closing and many more Old Navy retail locations will be opening.
Structure
Taking a look at the jobs available at Gap Inc., it is apparent that the company’s structure is fairly centralized. Each brand has a bit of autonomy, although within each brand a very centralized structure exists as well. The design of each retail location for each brand is predetermined to be very distinct - this is one way in which the centralized structure is able to provide consistency throughout each brand. However, when it comes to design of each brand’s products, each brand has quite a bit of autonomy to choose its style for each season (as long as each brand’s positioning is still consistent with the products that are introduced). For the most part, Gap Inc. is effective at implementing a mostly vertical integration strategy. With the exception of 3rd party manufacturing, Gap Inc. keeps all marketing, design, sales and customer-service in-house. Sourcing is managed with strategic partnerships that enable it to take advantage of additional manufacturing capacity and economies of scale it otherwise be unable to realize.
Organizational Culture
Krystal Realyvasquez, a Gap Inc. employee from the corporate offices, said that Gap Inc. successfully tries to maintain a relaxed, innovative and positive culture—one where talent and creativity are encouraged (personal communication, November 10, 2004). Gap Inc. understands that in order to offer creative products that have a high customer impact, there must be an atmosphere that is conducive to such creativity and will be a place where talented people enjoy working. This is a concept that is part of the mission statement, and Gap Inc.’s success will be dependent on its ability to make internal decisions that are consistent with this mission.
Organizational culture has the role of influencing the values and norms that help specify appropriate and inappropriate behavior within an organization. Gap Inc. manages its culture by use of its mission statement, policies and employment practices. For instance, the Code of Business Conduct states, “Employees should never give or accept anything of value from anyone, including a current or prospective supplier, vendor, distributor, landlord or competitor of the Company, when doing so might compromise -- or appear to compromise -- the objectivity of your business decisions.” (www.gapinc.com) Policies such as these provide a clear understanding to employees that, while they are encouraged to enjoy their jobs, even the appearance of a conflict of interest should be avoided in order to maintain positive relationships with vendors, fellow employees and customers.
The website states that employees work hard, are valued, and feel good about working there. Krystal gave the impression that this is true for the most part—although it is difficult to get a true indication of employee sentiment from a company representative that is responsible for representing the company to customers.
There is much to be learned about corporate structure by simply looking at the job descriptions it posts. Gap Inc. job postings appear to give preference to young, enthusiastic and talented individuals rather than placing too much importance on industry experience and education. When it comes down to it, Gap Inc.’s strengths depend on its people, and the people it attracts and retains depends on the culture within the organization.
Distinctive Competencies
Gap Inc.’s distinctive competencies lie in its level of market penetration. The sheer number of retail outlets provides easy and convenient access for customers in each market. The company owns and operates 1,699 Gap retail stores, 447 Banana Republic stores, and 854 Old Navy stores – approximately 3,000 in all (www.gapinc.com). The company’s reach is furthered through its ability to target multiple demographic segments with the three different retailers. Gap offers “great style, value, and service,” while Banana Republic is positioned as “casual luxury,” and Old Navy offers “fun, value, and fashion for the whole family” (www.gapinc.com). Few retailers offer this level of variety and access to customers, and because Gap, Inc. has penetrated so many markets, barriers to entry have been erected.
Distribution centers are located regionally within the United States, as well as in foreign countries, which allows the company to serve the needs of customers around the globe without significantly increasing transportation or inventory costs. Heavy investment has also been made in consumer research, which has fostered the development new and better products, increasing value in customer’s eyes.
The wide variety of products for people of all ages has made it possible to outfit an entire family in its products, and that has built a brand loyalty and a following virtually unmatched in the industry. Under former CEO Millard Drexler, Gap Inc. abandoned its core customer group - baby boomers - in an attempt to attract the younger and more fashion-forward teenage group with trendy products. Gap Inc. is planning to remedy this with the opening of ten test stores in 2005, aimed specifically at women over 35, offered under an entirely new brand. Women in this age group (35-54) have felt underserved in the apparel industry, yet spend, as a whole, $24.5 billion on clothing – $1 billion more than the 18-34 age group (Boudreau). Being one of the first retailers to realize this untapped market, and being a first mover will provide a first mover advantage, and therefore a large share of this important market.
Gap Inc.’s base of loyal customers is a strength it can leverage. Despite recent troubles with satisfying baby boomers, many customers still depend on the company for basics. The large base of consumer research the company possesses can sustain its competitive advantage if used to offer customers what they want, thereby increasing brand loyalty. Analyzing sales has also been useful for inventory management, allowing the company to customize regional store product selections based on the sizes and styles purchased most. The company’s many retail outlets are an additional strength – convenient access attracts and maintains customers. The fact that each brand is differentiated from the others is another strength that Gap Inc. can leverage – customers not attracted to clothes in one store may like clothes in another one. The Gap’s current advertising campaign is another strength that has contributed to its success – celebrities are featured who are recognized fashion icons, making customers feel that they too can be fashionable with clothes from The Gap. The ads are also eye-catching and memorable.
Gap Inc. will have to work very hard to regain the loyalty of the baby boomer market segment - rebuilding brand loyalty is a difficult task. The loss of this market segment has adversely affected revenues, and it faces a long haul in reaching the level of success it enjoyed in the 1990s. Another weakness lies in the fact that the rapid expansion of its retail outlets is starting to cannibalize some sales. Old Navy is very similar to The Gap, but priced lower, so many customers choose to shop at Old Navy instead. In fact, Gap, Inc. plans to close 150 Gap stores in 2005, while opening 125 new stores, the bulk of which will be Old Navy stores (AP, C3, 8/20/04). The expansion was simply too rapid and the company is now paying the price.
Current Strategies
Gap Inc.’s functional level strategy is aimed at achieving a high level of customer responsiveness. The current chief executive, Paul Pressler, is taking a much more customer-focused approach than his predecessor. He has conducted customer surveys and organized focus groups in an attempt to understand what attributes customers desire – over 320,000 customers have voiced their opinions. Gap Inc. has also analyzed sales in order to discover which sizes sell better in which markets – for instance, women in the Midwest buy more large sizes (12 to 14), while women in San Francisco, purchase smaller sizes (4 to 6). This data is then used to alter shipments to reflect such size discrepancies (Rozhon).
A differentiation strategy is employed with respect to its business-level strategy. This is achieved through the different products offered at three different retail outlets – each are aimed at different target markets and have different price points. No other apparel retailer operates such separate entities – most are aimed at one particular market segment. Gap Inc.’s plan to open the ten test stores aimed solely at the previously abandoned baby boomer generation, made up of 40 million American women, will differentiate its products even further (Merrick). The firm also differentiates itself by offering products for the entire family, which few other retailers offer. In many shopping centers, both the adult’s Gap retail store and Gap Kids, even Gap Baby, are in very close proximity to each other, increasing convenience for their customers. No other retailer can clothe the entire family from head to toe, from one mall, aside from department stores, a competitor.
Diversification is Gap Inc.’s corporate strategy – between its three retailers, it can effectively target a member of just about any market segment. Further diversifying its retailers by adding product lines such as Gap Maternity, Gap Body, Gap Baby, and Gap Kids ensures that almost any age segment can be satisfied. Increasing the types of products in each store to complement it’s clothing such as jewelry, handbags, fragrances, and shoes, diversifies its product offering even more, offering increased selection for customers. Gap Inc. is also even examining how to further diversify its products to appease the international market – through extensive customer research, for example, the company has discovered that Japanese women prefer slimmer-fitting jeans than Americans (Rozhon). The company is trying to match its products to such geographical differences.
Gap Inc. pursues an international strategy with regards to overseas operations. By and large, the products are the same world-wide, besides a few fit differences for the Asian markets, so there is a low level of customer responsiveness. Because the company is able to leverage its brand equity outside of the United States, there is little pressure to reduce prices or costs – people outside of the United States will continue to purchase the clothes because of the brand equity it has built. Gap Inc. is very good at selling standardized products, however to gain a stronger competitive advantage, this strategy may have to be reevaluated. The firm learned the hard way that its standard designs don’t translate well to some overseas markets when it had to close all of the German retail outlets because the Germans preferred different colors than what was offered. The company has learned that it doesn’t work to push ideas from the top down, the ineffective system under the former CEO, and now needs to realize that the same is true for pushing standardized styles out from the United States.
Strategic Fit with Internal Organization
After the recent restructuring of upper-level management, Gap Inc. is poised for future success. Paul Pressler’s commitment to providing better customer responsiveness through the use of consumer research is being furthered by the addition of new designers with fresh ideas, who use the knowledge gained from that research to design new products. Seeking out young employees will help to ensure that Gap Inc. keeps a pulse on market desires. Both of these activities are in line with the firm’s mission statement for employees. Allowing autonomous design decisions by each of its retailers ensures that its products remain diversified and distinct, and each brand having some degree of centralized functions allows the brands to stand alone, independent of the parent company. Keeping all decisions in-house ensures that Gap Inc. maintains a consistent image and style.
Competitive Evaluation
For the fiscal year ending February 2, 2002, Gap Inc. reported a net loss of $8 million (ccbn 9). Since reporting this loss, Gap Inc. has done many things internally to turn revenue earning around and report gains the next two years in a row. The hiring of Paul Pressler as CEO was the beginning of Gap Inc.’s turnaround.
Internal Issues
In early 2003, Pressler started an extensive market segment research project to get in touch with what customers wanted. This research enabled Gap Inc. to understand whom it sells its product to, which can lead to less volatility and fashion risk in the market. The firm also used the knowledge gained from the research to further differentiate each brand, getting back to the core of who Gap Inc. was in the first place (ccbn 5). Also, through consumer research, Gap Inc. is able to provide better product selection (size, style and climate) from region to region (ccbn 6).
Another critical internal issue that Gap Inc. has successfully dealt with during the last two years is inventory and debt control. Carrying large amounts of inventory requires large amounts of cash, but through the use of regionally located distribution centers across the country and other practices, such as better relationships with vendors, Gap Inc. reduced its inventory by $344 million by the end of fiscal 2003. Through better short-term investing and financing activities Gap Inc. reduced long-term debt by $626 million (ccbn 4). With Pressler at the helm, management is being more responsive towards its shareholders. Reducing debt and inventory helps make Gap Inc. look more attractive to the investment community, which in turn increases the market value of the stockholder’s investment.
External Issues
The intensive market research that Gap Inc. is constantly conducting also helps it deal with the external issues that sustain its competitive advantage. Gap Inc.’s globalization efforts are met with lower barriers to entry in the form of less government red tape and tariffs. However, a company can’t just go around the globe and open up stores thinking there are easy profits to be made. Through research and studying local customs, a company that is trying to penetrate a foreign market can learn how to change its product for the differences in tastes and fit preferences (Hill 271).
In the clothing industry the thereat of substitutes is high, and a high level of rivalry exists among competitors. Gap Inc. is differentiating itself by offering three different clothing brands that target three different demographic market segments.
The large number of suppliers Gap Inc. uses keeps the bargaining power of its vendors to a minimum. Since the vendors have little bargaining power, no one supplier can influence Gap Inc.’s position in the market. Even though the company takes advantage of the low labor costs in other countries, to help avoid any social repercussions it also supports initiatives to improve working conditions there.
Gap Inc.’s new distribution strategy not only improved profitability, it prevented problems stemming from the unforeseen slowdown at the two main shipping ports on the west coast. By diverting the clothing shipments elsewhere, Gap Inc. avoided “empty shelves,” a problem that could make customers look to competitors for clothing needs.
Recommendations
As a major player in a highly-competitive marketplace, Gap Inc. has its work cut out for it. Gap Inc. faces attacks from all sides of its strategic position—whether it be style, price, brand-image or customer responsiveness. In order to counter these attacks, Gap Inc. must market its brands in a way that clarifies to the consumer the overt benefit each brand offers. For instance, Old Navy, might position itself as the “place for the value-conscious shopper to find fun, fresh style at a friendly price.” To the extent that each brand can communicate its benefit to the consumers in a believable manner, consumers will naturally find themselves shopping for the products of the brand that they most closely identify with. To successfully implement this strategy, each brand will need to conduct market research in creative ways to not only know who its customer is, but to know what its customer wants now and in the future; satellite research and design offices should be placed in the largest international markets to ensure that regional differences are also being addressed. The brands will then be better positioned to expand their product lines in a manner consistent with the needs and wants of its customer base—even if that means customizing the product offerings to better match local tastes in different cultures.
In addition to gaining a better understanding of each brand’s target market trends, Gap Inc. needs to be sure that customers are not only exposed to the products the company offers, but that those customers are also able to buy them. The most obvious way to accomplish this would be to expand the number of locations from which a consumer may transact a purchase on a Gap Inc. brand’s web site. The web provides an efficient and economical means by which Gap Inc. can offer its wide array of product offering and possibly even make customized apparel and accessories available to customers all over the world.
Internally, it needs to preserve a high level of differentiation between its three brands in order to avoid increased cannibalization. Furthermore, it must find a way to make the most of its economies of scope - leveraging the shared resources of IT, HR, distribution, policy, and finance (just to name a few) - while still providing enough autonomy for each brand’s business units in order to allow each to define its identity and distinguish its unique differences.
Gap Inc. is a leading international specialty retailer that markets its wide range of products under three main brands: The Gap, Banana Republic and Old Navy. Each brand offers a unique selection of apparel and accessories, with some brands offering a wider selection than others - The Gap offers the widest selection, including clothing, intimate apparel, maternity apparel, children’s clothing, baby clothes and an array of personal care products. With the combined reach of these brands, Gap Inc. is able to appeal to a variety of different customer preferences in the key areas of style, price and fit. This corporate structure is in line with Gap Inc.’s business-level strategy of differentiation, and further enables Gap Inc. to implement its functional-level strategy of achieving a high level of customer responsiveness.
As advantageous as its business structure has proven to be, Gap Inc. faces challenges that are inherent to having multiple strong brands in one marketplace: preserving a high level of differentiation between brands; avoiding cannibalization; finding and maintaining the delicate balance that exists between taking advantage of economies of scope by leveraging shared resources across the three brand groups, and providing enough independence between the brands that each can maintain its own identity.
Internal challenges aren’t the only issues facing Gap Inc.; it is a major player in a highly-competitive and ever-changing market, and the more market segments that a company competes in, the more competitors and product –preference evolutions it’s going to be faced with. With this in mind, Gap Inc. must move forward maintaining its strengths in diversification, distribution, and differentiation, and add to the list an improved understanding of customer preferences and an advanced insight of market trends, styles, and transformations.
Gap Inc. is a well-known brand in the global retail industry. The clothing retail industry Gap Inc. competes in is fast-paced, and therefore the company must constantly change to keep up with the latest trends in fashion. Recently management changes are helping the firm overcome some of the struggles with customers. The company seemed to have some difficulty with strategies to move into the future, as well as with figuring out how and which markets to focus on, leaving virtually no focus at all. The brand that The Gap offers has traditionally been very dependable for maintaining “the basics.” At a point in time, The Gap changed its focus to trendy clothing, trying to please the young college crowd. However, this conflicted in many ways. Older crowds were turned away because it was too trendy and the younger crowd was stuck on the idea that The Gap offered only the basics - jeans, T-shirts and khakis. Paul Pressler, Gap’s CEO as of 2002, changed the focus to making stores more “shopper-friendly.” Along with these changes, The Gap has focused on adding variety rather than trends and opening a test retailer that concentrates on the baby boomer generation. Ultimately the goal of Gap Inc. is to capture customers in all markets and is attempting to achieve this goal in many ways.
Corporate Description
Gap Inc. consists of three major brands in the international specialty retail industry - Gap, Banana Republic, and Old Navy. The Gap brand has several chains including GapKids, babyGap, the Gap Outlet and Gap Body, all in addition to the regular Gap stores. The major competitors for The Gap are Abercrombie & Fitch, American Eagle Outfitters and Spiegel.
Gap Inc. has world headquarters in San Francisco, product development offices in New York and distribution facilities all over the world. Gap Inc. currently operates approximately 3,000 stores around the world, employing over 150,000 workers (www.gapinc.com).
History
Gap Inc. was started in San Francisco, California, as a jeans-only store in 1969 by a husband and wife team, Donald and Doris Fisher. They began with one store and minimal employees. In 1974, Gap created its own private-label brand of clothing made especially for the company, and by 1991 that was the only brand sold. In 1976 Gap went public, offering 1.2 million shares on the open market. In 1977 the Gap Foundation was established. Millard Drexler was hired as president of the Gap division in 1983, and Gap Inc. purchased Banana Republic, which at the time was running as a “two-store safari and travel clothing company with a thriving catalog business.” (www.gapinc.com) By 1986, the first GapKids was opened. One year later, Millard Drexler was named president of Gap Inc. and Gap opened its first international store in London, England. By 1988 Gap had introduced an award-winning advertising campaign, “Individuals of Style.” Gap “controls all aspects of its trademark casual look.” (www.hoovers.com)
After being in business for 20 years, The Gap opened its first Canadian store in Vancouver, British Columbia. Between 1990 and 1993 “babyGap was born,” (www.gapinc.com) and a department was opened in Paris’ Galeries Lafayette. 1994 and 1995 were big years for Gap Inc. - the Old Navy brand was introduced, Gap Outlet was opened and GapScents entered The Gap stores. Gap Inc. had significant global expansions in 1995, opening the first Banana Republic store in Canada and the first Gap and GapKids in Japan. Banana Republic also introduced a line of personal care products and Millard Drexler was named CEO. As the years continued, Gap and its chains continued to expand across the country and also began marketing in the high tech land of the world-wide-web with gap.com, gapkids.com, babygap.com, BananaRepublic.com, and oldnavy.com. Old Navy reached $1 billion in annual sales in less than four short years of operation. Coinciding with the new Internet marketing, Banana Republic premiered its first TV commercial and introduced its private-label credit card and catalog. During this time, Gap Inc. was busy releasing its formal code of ethics, the Code of Business Conduct.
Gap and Old Navy entered the new millenium by introducing private-label credit cards. Gap also entered the market of clothing for pregnant women with GapMaternity, available exclusively online. In 2001 Old Navy joined the global expansion and opened 12 stores in Canada. Also in 2001, Gap.com was awarded a four star rating by Consumer Reports for its “policies, usability and content.” (www.gapinc.com) In 2002 Millard Drexler retired after 19 years with Gap and Paul Pressler was named the new CEO. In 2003 original founder, Don Fisher, decided it was time to step down as Chairman of the Board and chose his son, Bob Fisher as his replacement in 2004.
Gap Inc. celebrated 35 years in business this year and had several other accomplishments: net sales for the second quarter were $3.72 billion; Domenico De Sole, director of Proctor & Gamble and former CEO of Gucci, joined the board of directors; a catchy, new fall marketing campaign was launched featuring Sarah Jessica Parker; seven new stores were opened in Quebec; Old Navy launched a Women’s Plus line of clothing and the maternity line at Old Navy was expanded into 50 new stores. Banana Republic kept busy in 2004 as well, signing on as a sponsor to the new reality series on Bravo, “Project Runway.”
Ownership Characteristics
Gap Inc. is a wholly owned subsidiary with several chains that are each wholly owned subsidiaries. The chains include Gap, GapKids, babyGap, Old Navy, Banana Republic, Gap Outlet, Gap Body, and Gap Scents. Gap Inc. does not offer any type of franchise or joint venture opportunities and does not sell wholesale products, nor act as a supplier to any other company.
Financial Analysis
In 1987 Gap’s shares were trading at $2.88, achieved a high of $53.75 in 2000 and are currently trading at $23.47 (www.yahoofinance.com). According to the income statement, revenue for Gap Inc. was up more than $2 million from 2002 to 2004. In 2002 the company reported a net loss of $7,764 and has since turned that around to net income for 2004 of $1.03 million. Cash and equivalents has increased nearly $2 million since 2002 and total assets of $10 million are nearly double that of the liabilities, showing the liquidity of Gap Inc. and the ability to pay off debts quickly if necessary (www.gapinc.com).
In comparison to Gap Inc.’s competitors, the company seems to be in line with the industry averages. Gap Inc. is turning over its inventory almost five and a half times a year, which is the same as Abercrombie & Fitch. American Eagle Outfitters, another close competitor, is doing slightly better than Gap Inc. and Abercrombie at about 8 times a year. President and CEO Paul Pressler, said that, “tight inventory management” was the reason for record earnings for Gap Inc. shareholders this year and that “the company will continue to focus on inventory productivity.” (PR Newswire)
Gap Inc.’s performance levels continue to be successful. In October 2004 sales were up 5% from the same time in 2003. Profit margin has nearly doubled to 6.5% so far for 2004 versus the 3.3% from 2003. And gross margin had a five-point improvement in the first quarter of 2004 over the first quarter of 2003 due to the “leveraging of rent, occupancy and depreciation.” (PR Newswire)
External and Industry Analysis
Macroenvironment
Just like with any other industry, there are many macroenvironmental issues that Gap Inc. must be aware of and account for in order to remain successful. Some of these issues include governmental instability, changes in social trends, international market issues, and technological advances. Over the past few months some of these issues have arisen and are providing both challenges and opportunities for Gap Inc. and its competitors.
The biggest single issue to stir up the market was the recent U.S. presidential election. For the last several weeks there was a sense of insecurity in the U.S. market, as nobody knew who was going to be leading the nation over the next four years. Traditionally, most consumers tighten their spending during an election, but to most analysts’ surprise, retailers saw an increase in sales for the month of October versus the sales from the same time last year.
The re-election of President Bush did spawn some concerns on the international front. Europeans are concerned that under the Bush administration the U.S. dollar will continue to weaken (Sommerville). A weaker dollar makes it more difficult for international firms to export their goods to the U.S. because it increases the price of their products for the American consumer. This could actually be viewed as an advantage for companies like Gap Inc. and other American firms who do business on a global level, as the weaker dollar would increase U.S. exports and lower the cost of their products for the international consumer.
Another governmental issue is the recent rise in interest rates by the Federal Reserve. The rate increased a quarter percent from 1.75% to 2%, which has intern raised the prime-lending rate to 5% (Ip). With the rise in the prime rate, consumers can expect to see an increase in interest rates for mortgages, auto loans, and credit cards. Raising these interest rates generally means a reduction in consumer spending, which negatively impacts retail firms such as Gap Inc. This also means that consumers will be less likely to purchase goods on credit, a big source of revenue for a lot of retail firms.
Social trends also have a significant impact on the retail apparel industry. One such trend is the rising number of middle-aged women who have higher incomes. According to Melissa Otto, a vice president for DE Research, “there are 1.6 million women in the 25- to 44- year-old age bracket who make $75,000 or more per year.” Otto goes on to say that “women with more money at their disposal are spending it…” (Krampf). Gap Inc has recognized this trend and sees it as an opportunity, especially because the market for younger women is now saturated. As a result, Gap Inc. has announced that it plans to launch a new retail chain directed at women 35 and older. Other clothing retailers also see the change in the social trend and are looking to make similar moves. The industry, and especially Gap Inc., originally focused efforts on youth when the baby boomers were in that age bracket and “had become the largest consuming population the nation has ever know”. The industry then lost sight of the changing needs as the Baby Boomers began to age. Gap Inc. is expected to make a huge splash with this market since there are currently no “dominant players tapping into the wealth of professional women and young moms” (Boudreau).
Another large social trend that directly affects the retail apparel industry is the holiday shopping season. Normally companies expect significant increases in sales during the holiday season, but this year the experts are having a hard time determining what this holiday season has in store. According to some analysts, the rise in oil prices and low wage growth are named as possible concerns for consumer spending (Merrick A2). However, others believe that after the government reported an increase in the creation of jobs for the month of October that perhaps things won’t be that bad (Lazarowitz 1). For those who believe that this will be a profitable holiday season, they are projecting gains of 4.5% in overall gift spending this holiday season (Krampf). With so many differing opinions, it becomes the responsibility of the firm to do its own research to help them determine what strategy should be employed at this crucial time.
Another holiday concern that came about during the month of October was the huge delays at the two busiest U.S. Ports. The problem arose because shipping companies failed to anticipate the growth in this year’s shipments. As a result, there were not enough dockworkers to unload the container ships at the two ports. This caused great concern for many manufacturers and retailers who became worried that their holiday goods would not be delivered on time for Christmas. Thanks to a change in distribution strategy earlier in the year, this did not have a significant impact on Gap Inc., who had begun steering some shipments to other West Coast ports and through the Panama Canal (Machalaba and Staley B1).
Technology is another area of the macroenvironment that must be considered. More and more, consumers are beginning to shop online and it has become necessary for retailers to provide this service in order to remain competitive. Gap Inc. has done a nice job in organizing web sites for each of its chains (Banana Republic, Old Navy, and Gap) that are user-friendly and well designed. The one downside to its online purchasing technology is that it is currently limited to consumers in the United States and has not been extended to its international customers. A technological strength for Gap Inc. is that it is the first one in the specialty apparel industry to issue a private-label credit card that allows consumers to use one card to shop at all three chains. According to a press release published on the Gap Inc. website, this card will offer increased loyalty rewards to the consumer along with added convenience.
Industry Environment and Strategic Groups
Barriers To Entry
LOW/MODERATE
Porter’s Five Forces:
Bargaining Power of Buyers
LOW
Intensity of Rivalry
HIGH
Bargaining Power of Suppliers
LOW/MODERATE
Threat of Substitutes
HIGH
Barriers To Entry (Low to Moderate)
Among Gap Inc.’s stores in the United States, Canada, United Kingdom, France, and Japan, the various governments impose very small amounts of regulation on apparel retailers. Because textile imports/exports are the Gap Inc.’s main commodity, government regulation of textile tariffs is a factor to be considered.
The Canadian government is in the process of completely eliminating tariffs on goods of U.S. origin, which will eventually lower Gap Inc.’s cost of doing business considerably in that country. Another great reason to further explore the Canadian market is the fact that there are no traditional barriers of entry such as import quotas, local content requirements, or political turmoil.
In the United Kingdom, there are also very few trade barriers for a U.S.- based company such as Gap Inc. to overcome. Tariffs are low, no special forms of documentation or import licenses are required, and no special standards are set.
Trade barriers do not pose a problem in the French market. As a member of the European Union, France can give other European companies minor cost advantages on its textile import duties. However, a U.S. company can make up for this disadvantage in other ways, such as lowering productions costs or slightly narrowing its profit margin.
Japan comprises the “moderate” aspect of barriers to entry. There are vast amounts of government regulations in the Japanese market. To enter the Japanese business environment, a firm must complete incredible amounts of paperwork and go through extensive approval processes. Traditionally, the Japanese government supported anticompetitive and prohibitive business practices; however, they are now aggressively pursuing an increase in foreign investment and imports.
Aside from the regulatory barriers, perhaps the largest barrier for Gap, Inc. is the huge amounts of capital investment necessary to market and build brand image and loyalty in these countries. This is a key issue if the firm wants to profit from the same competitive advantage it enjoys from its advertising strategies used in the United States.
Intensity of Rivalry (High)
Gap Inc.’s main competition for men and women’s apparel is Abercrombie & Fitch Co., American Eagle, and Eddie Bauer. The Gap caters to young, college-age consumers as well as the 35-and-older crowd with apparel items ranging from very casual to dress-casual. For the teen to college-age consumers, the biggest competitors are Abercrombie & Fitch Co. and American Eagle. For the slightly older crowd, the Gap competes for market share with Eddie Bauer.
Old Navy Clothing Company finds itself in direct competition with off-price retail outlets such as Ross and T.J. Maxx. Because Old Navy offers affordable clothing for the whole family in one store, Target and Wal-Mart are also considered serious competitors. Banana Republic’s main competitors are J. Crew and Ann Taylor Loft. These three stores enjoy a commonality of finer, higher-priced men and women’s apparel (www.umich.edu).
Specialty stores are fiercely competing for the same market share and consumer dollars, thereby creating a high intensity of rivalry in the specialty apparel market. They strive to differentiate themselves based on branding and their interpretation of fashion trends. Advertising dollars are mainly spent on capturing consumer awareness and stimulating purchasing results (Funk 11).
Gap Inc.’s competitive environment expanded into cyberspace when it started selling its merchandise online in 1997. To its advantage, the company was an early convert to web apparel retailing and continues to have an extremely strong presence in the online industry (Lee 1).
Threat of Substitutes (High)
Unfortunately for Gap Inc., the threat of substitutes in the apparel industry is extremely high. If consumers are unable to find what they need at one of Gap Inc.’s many types of stores, they can just walk a few yards to the next store in the mall to explore the offerings there. Or even worse, they can just move onto the next website that offers exactly what the consumer is looking for. As mentioned earlier, another substitute threat lies in the fact that Old Navy stores are beginning to cannibalize The Gap in its retail sales.
Bargaining Power of Buyers (Low)
In the retail apparel industry, the bargaining power of the consumer tends to be low. Ultimately, consumers must pay the price the retailers charge for their goods. Consumers gain some amount of control by taking advantage of price cuts and sales, but at the end of the day, they have little control over the final price. Basically, their bargaining power comes from high quantities of substitute products. A potential buyer can exercise his or her “power” by choosing which retailer to shop at.
Bargaining Power of Suppliers (Low to Moderate)
“Gap purchases merchandise from some 700 sources located both in the United States and overseas. This procurement strategy is designed to reduce each supplier’s importance, so that no single supplier can affect Gap’s overall operations significantly. All suppliers account for no greater than 5% of the purchase” (Kotabe 3). Consequently, this strategy greatly reduces the bargaining power of any single supplier. By taking advantage of low labor costs in countries such as Hong Kong, Taiwan, South Korea, Singapore and China, Gap Inc. has found itself in the hypersensitive position of contending with garment factory labor standards and worldwide working conditions. In an effort to support the improvement of garment factories worldwide, Gap Inc. has joined the Ethical Trading Initiative (U.K.-based) and has begun to publish social responsibility reports on its website. The social responsibility report offers a comprehensive look at the company’s efforts to improve labor standards in the factories that supply its retail merchandise (www.gapinc.com). The bargaining power of the suppliers is not likely to marginally increase anytime soon; nevertheless, Gap Inc. cannot afford to overlook the potential impact that social irresponsibility could have on its market value.
Opportunities and Threats
Gap Inc.’s broad brand portfolio represents an opportunity in that it provides a large market share – one of the three retailers will most likely attract a customer, if not all three, which is often the case. Further, by being a first mover in the baby boomer retail market not only serves to broaden the brand portfolio, but also to attract more potential customers. Another opportunity is the company’s broad base of consumer research. By asking customers what they want and providing it, brand loyalty is sure to increase even further. Yet another opportunity for the firm is its online real estate, in which it has a strong presence. To further develop this presence and make sure that all products are available online could facilitate increased sales.
One of the threats to Gap Inc.’s business includes the cannibalization of existing sales through customers switching between brands. Substitute products are another threat – both from outside sources, as well as within the company. Off-price retailers, such as T.J. Maxx and Ross Dress for Less, represent a threat in that they offer lower prices on higher-end clothing, the ideal positioning for many consumers. Department stores are a threat because they too offer a wide variety of products for customers of all ages. Due to the negative feelings associated with overseas labor, Gap Inc. faces a threat because much of production is located overseas, so precautions must be taken to ensure fair labor practices and standards are in place and followed. The fleeting nature of fashion represents perhaps the largest threat to Gap Inc., as well as other companies in the industry. Fashion is constantly changing, and as customers follow changing trends, retailers are often abandoned if they aren’t following those trends.
Strategic Fit with External Environment and Industry
Historically, Gap Inc. has been able to maintain its competitive presence in the specialty apparel industry; and consequently has positioned itself well for future growth. Although the intensity of rivalry and threat of substitutes remain extremely high in its industry, Gap Inc.’s ability to maintain brand recognition and brand loyalty keeps the company at the top of its competitive environment. Gap Inc. has prepared itself for growth opportunities in the areas of online shopping and shifts in social trends; continued innovation in these two areas will help the company to remain very competitive in their industry. Obviously Gap Inc. does not have any control over economic trends, such as interest rates and job growth; however, it does have control over how it situates itself to handle future economic downturns better than their competition. This will always be a big key to success in an aggressive industry such as specialty apparel.
Strategic Position
Gap Inc.’s mission statement is “Gap Inc. will be the undisputed leader of apparel and accessory retailing. Our innovative and creative brands bring great style to the world.”(Gap Inc. Intranet) Gap Inc.’s mission statement also identifies the most important stakeholders: the customers, the employees and the stockholders. For customers, the mission is, “An easy, friendly satisfying and emotional brand experience.” The company’s mission for employees is “A culture that inspires, recognizes and develops talented people who act with integrity and are committed to our success.” For shareholders the statement simply reads, “Exceptional shareholder returns.” This mission statement clearly defines the stakeholders that Gap Inc. intends to focus on, and provides a clear objective that management can reference when creating internal policies and making strategic decisions. Furthermore, it provides employees with a clear vision of what Gap Inc. wants to become and, if followed, can help influence employee’s interactions with customers—whether internal or external.
Resources
Gap Inc. could consider itself in the talent business. As the mission statement emphasizes, the company strives to have a culture that “inspires, recognizes and develops talented people…” in order to “…bring great style to the world.” (www.gapinc.com) Gap Inc. needs to employ people that are talented at recognizing, defining and expressing style. It needs employees that have a knack at knowing what customers want and knowing how to help them have a “…satisfying and emotional brand experience.” If asked what its most valuable resource is, Gap Inc. would likely reply, “its people.”
Another valuable resource that Gap Inc. has is the network of over 700 sources it works with to manufacture its products. Gap Inc.’s Sourcing and Logistics group works with its buying agents to draw up production schedules and place orders with approved third party factories in more than 50 countries (www.gapinc.com).
Along with these resources, Gap Inc. has approximately 3000 retail locations worldwide. While the Gap brand currently holds the majority of these locations, [DSB1] many Gap stores will be closing and many more Old Navy retail locations will be opening.
Structure
Taking a look at the jobs available at Gap Inc., it is apparent that the company’s structure is fairly centralized. Each brand has a bit of autonomy, although within each brand a very centralized structure exists as well. The design of each retail location for each brand is predetermined to be very distinct - this is one way in which the centralized structure is able to provide consistency throughout each brand. However, when it comes to design of each brand’s products, each brand has quite a bit of autonomy to choose its style for each season (as long as each brand’s positioning is still consistent with the products that are introduced). For the most part, Gap Inc. is effective at implementing a mostly vertical integration strategy. With the exception of 3rd party manufacturing, Gap Inc. keeps all marketing, design, sales and customer-service in-house. Sourcing is managed with strategic partnerships that enable it to take advantage of additional manufacturing capacity and economies of scale it otherwise be unable to realize.
Organizational Culture
Krystal Realyvasquez, a Gap Inc. employee from the corporate offices, said that Gap Inc. successfully tries to maintain a relaxed, innovative and positive culture—one where talent and creativity are encouraged (personal communication, November 10, 2004). Gap Inc. understands that in order to offer creative products that have a high customer impact, there must be an atmosphere that is conducive to such creativity and will be a place where talented people enjoy working. This is a concept that is part of the mission statement, and Gap Inc.’s success will be dependent on its ability to make internal decisions that are consistent with this mission.
Organizational culture has the role of influencing the values and norms that help specify appropriate and inappropriate behavior within an organization. Gap Inc. manages its culture by use of its mission statement, policies and employment practices. For instance, the Code of Business Conduct states, “Employees should never give or accept anything of value from anyone, including a current or prospective supplier, vendor, distributor, landlord or competitor of the Company, when doing so might compromise -- or appear to compromise -- the objectivity of your business decisions.” (www.gapinc.com) Policies such as these provide a clear understanding to employees that, while they are encouraged to enjoy their jobs, even the appearance of a conflict of interest should be avoided in order to maintain positive relationships with vendors, fellow employees and customers.
The website states that employees work hard, are valued, and feel good about working there. Krystal gave the impression that this is true for the most part—although it is difficult to get a true indication of employee sentiment from a company representative that is responsible for representing the company to customers.
There is much to be learned about corporate structure by simply looking at the job descriptions it posts. Gap Inc. job postings appear to give preference to young, enthusiastic and talented individuals rather than placing too much importance on industry experience and education. When it comes down to it, Gap Inc.’s strengths depend on its people, and the people it attracts and retains depends on the culture within the organization.
Distinctive Competencies
Gap Inc.’s distinctive competencies lie in its level of market penetration. The sheer number of retail outlets provides easy and convenient access for customers in each market. The company owns and operates 1,699 Gap retail stores, 447 Banana Republic stores, and 854 Old Navy stores – approximately 3,000 in all (www.gapinc.com). The company’s reach is furthered through its ability to target multiple demographic segments with the three different retailers. Gap offers “great style, value, and service,” while Banana Republic is positioned as “casual luxury,” and Old Navy offers “fun, value, and fashion for the whole family” (www.gapinc.com). Few retailers offer this level of variety and access to customers, and because Gap, Inc. has penetrated so many markets, barriers to entry have been erected.
Distribution centers are located regionally within the United States, as well as in foreign countries, which allows the company to serve the needs of customers around the globe without significantly increasing transportation or inventory costs. Heavy investment has also been made in consumer research, which has fostered the development new and better products, increasing value in customer’s eyes.
The wide variety of products for people of all ages has made it possible to outfit an entire family in its products, and that has built a brand loyalty and a following virtually unmatched in the industry. Under former CEO Millard Drexler, Gap Inc. abandoned its core customer group - baby boomers - in an attempt to attract the younger and more fashion-forward teenage group with trendy products. Gap Inc. is planning to remedy this with the opening of ten test stores in 2005, aimed specifically at women over 35, offered under an entirely new brand. Women in this age group (35-54) have felt underserved in the apparel industry, yet spend, as a whole, $24.5 billion on clothing – $1 billion more than the 18-34 age group (Boudreau). Being one of the first retailers to realize this untapped market, and being a first mover will provide a first mover advantage, and therefore a large share of this important market.
Gap Inc.’s base of loyal customers is a strength it can leverage. Despite recent troubles with satisfying baby boomers, many customers still depend on the company for basics. The large base of consumer research the company possesses can sustain its competitive advantage if used to offer customers what they want, thereby increasing brand loyalty. Analyzing sales has also been useful for inventory management, allowing the company to customize regional store product selections based on the sizes and styles purchased most. The company’s many retail outlets are an additional strength – convenient access attracts and maintains customers. The fact that each brand is differentiated from the others is another strength that Gap Inc. can leverage – customers not attracted to clothes in one store may like clothes in another one. The Gap’s current advertising campaign is another strength that has contributed to its success – celebrities are featured who are recognized fashion icons, making customers feel that they too can be fashionable with clothes from The Gap. The ads are also eye-catching and memorable.
Gap Inc. will have to work very hard to regain the loyalty of the baby boomer market segment - rebuilding brand loyalty is a difficult task. The loss of this market segment has adversely affected revenues, and it faces a long haul in reaching the level of success it enjoyed in the 1990s. Another weakness lies in the fact that the rapid expansion of its retail outlets is starting to cannibalize some sales. Old Navy is very similar to The Gap, but priced lower, so many customers choose to shop at Old Navy instead. In fact, Gap, Inc. plans to close 150 Gap stores in 2005, while opening 125 new stores, the bulk of which will be Old Navy stores (AP, C3, 8/20/04). The expansion was simply too rapid and the company is now paying the price.
Current Strategies
Gap Inc.’s functional level strategy is aimed at achieving a high level of customer responsiveness. The current chief executive, Paul Pressler, is taking a much more customer-focused approach than his predecessor. He has conducted customer surveys and organized focus groups in an attempt to understand what attributes customers desire – over 320,000 customers have voiced their opinions. Gap Inc. has also analyzed sales in order to discover which sizes sell better in which markets – for instance, women in the Midwest buy more large sizes (12 to 14), while women in San Francisco, purchase smaller sizes (4 to 6). This data is then used to alter shipments to reflect such size discrepancies (Rozhon).
A differentiation strategy is employed with respect to its business-level strategy. This is achieved through the different products offered at three different retail outlets – each are aimed at different target markets and have different price points. No other apparel retailer operates such separate entities – most are aimed at one particular market segment. Gap Inc.’s plan to open the ten test stores aimed solely at the previously abandoned baby boomer generation, made up of 40 million American women, will differentiate its products even further (Merrick). The firm also differentiates itself by offering products for the entire family, which few other retailers offer. In many shopping centers, both the adult’s Gap retail store and Gap Kids, even Gap Baby, are in very close proximity to each other, increasing convenience for their customers. No other retailer can clothe the entire family from head to toe, from one mall, aside from department stores, a competitor.
Diversification is Gap Inc.’s corporate strategy – between its three retailers, it can effectively target a member of just about any market segment. Further diversifying its retailers by adding product lines such as Gap Maternity, Gap Body, Gap Baby, and Gap Kids ensures that almost any age segment can be satisfied. Increasing the types of products in each store to complement it’s clothing such as jewelry, handbags, fragrances, and shoes, diversifies its product offering even more, offering increased selection for customers. Gap Inc. is also even examining how to further diversify its products to appease the international market – through extensive customer research, for example, the company has discovered that Japanese women prefer slimmer-fitting jeans than Americans (Rozhon). The company is trying to match its products to such geographical differences.
Gap Inc. pursues an international strategy with regards to overseas operations. By and large, the products are the same world-wide, besides a few fit differences for the Asian markets, so there is a low level of customer responsiveness. Because the company is able to leverage its brand equity outside of the United States, there is little pressure to reduce prices or costs – people outside of the United States will continue to purchase the clothes because of the brand equity it has built. Gap Inc. is very good at selling standardized products, however to gain a stronger competitive advantage, this strategy may have to be reevaluated. The firm learned the hard way that its standard designs don’t translate well to some overseas markets when it had to close all of the German retail outlets because the Germans preferred different colors than what was offered. The company has learned that it doesn’t work to push ideas from the top down, the ineffective system under the former CEO, and now needs to realize that the same is true for pushing standardized styles out from the United States.
Strategic Fit with Internal Organization
After the recent restructuring of upper-level management, Gap Inc. is poised for future success. Paul Pressler’s commitment to providing better customer responsiveness through the use of consumer research is being furthered by the addition of new designers with fresh ideas, who use the knowledge gained from that research to design new products. Seeking out young employees will help to ensure that Gap Inc. keeps a pulse on market desires. Both of these activities are in line with the firm’s mission statement for employees. Allowing autonomous design decisions by each of its retailers ensures that its products remain diversified and distinct, and each brand having some degree of centralized functions allows the brands to stand alone, independent of the parent company. Keeping all decisions in-house ensures that Gap Inc. maintains a consistent image and style.
Competitive Evaluation
For the fiscal year ending February 2, 2002, Gap Inc. reported a net loss of $8 million (ccbn 9). Since reporting this loss, Gap Inc. has done many things internally to turn revenue earning around and report gains the next two years in a row. The hiring of Paul Pressler as CEO was the beginning of Gap Inc.’s turnaround.
Internal Issues
In early 2003, Pressler started an extensive market segment research project to get in touch with what customers wanted. This research enabled Gap Inc. to understand whom it sells its product to, which can lead to less volatility and fashion risk in the market. The firm also used the knowledge gained from the research to further differentiate each brand, getting back to the core of who Gap Inc. was in the first place (ccbn 5). Also, through consumer research, Gap Inc. is able to provide better product selection (size, style and climate) from region to region (ccbn 6).
Another critical internal issue that Gap Inc. has successfully dealt with during the last two years is inventory and debt control. Carrying large amounts of inventory requires large amounts of cash, but through the use of regionally located distribution centers across the country and other practices, such as better relationships with vendors, Gap Inc. reduced its inventory by $344 million by the end of fiscal 2003. Through better short-term investing and financing activities Gap Inc. reduced long-term debt by $626 million (ccbn 4). With Pressler at the helm, management is being more responsive towards its shareholders. Reducing debt and inventory helps make Gap Inc. look more attractive to the investment community, which in turn increases the market value of the stockholder’s investment.
External Issues
The intensive market research that Gap Inc. is constantly conducting also helps it deal with the external issues that sustain its competitive advantage. Gap Inc.’s globalization efforts are met with lower barriers to entry in the form of less government red tape and tariffs. However, a company can’t just go around the globe and open up stores thinking there are easy profits to be made. Through research and studying local customs, a company that is trying to penetrate a foreign market can learn how to change its product for the differences in tastes and fit preferences (Hill 271).
In the clothing industry the thereat of substitutes is high, and a high level of rivalry exists among competitors. Gap Inc. is differentiating itself by offering three different clothing brands that target three different demographic market segments.
The large number of suppliers Gap Inc. uses keeps the bargaining power of its vendors to a minimum. Since the vendors have little bargaining power, no one supplier can influence Gap Inc.’s position in the market. Even though the company takes advantage of the low labor costs in other countries, to help avoid any social repercussions it also supports initiatives to improve working conditions there.
Gap Inc.’s new distribution strategy not only improved profitability, it prevented problems stemming from the unforeseen slowdown at the two main shipping ports on the west coast. By diverting the clothing shipments elsewhere, Gap Inc. avoided “empty shelves,” a problem that could make customers look to competitors for clothing needs.
Recommendations
As a major player in a highly-competitive marketplace, Gap Inc. has its work cut out for it. Gap Inc. faces attacks from all sides of its strategic position—whether it be style, price, brand-image or customer responsiveness. In order to counter these attacks, Gap Inc. must market its brands in a way that clarifies to the consumer the overt benefit each brand offers. For instance, Old Navy, might position itself as the “place for the value-conscious shopper to find fun, fresh style at a friendly price.” To the extent that each brand can communicate its benefit to the consumers in a believable manner, consumers will naturally find themselves shopping for the products of the brand that they most closely identify with. To successfully implement this strategy, each brand will need to conduct market research in creative ways to not only know who its customer is, but to know what its customer wants now and in the future; satellite research and design offices should be placed in the largest international markets to ensure that regional differences are also being addressed. The brands will then be better positioned to expand their product lines in a manner consistent with the needs and wants of its customer base—even if that means customizing the product offerings to better match local tastes in different cultures.
In addition to gaining a better understanding of each brand’s target market trends, Gap Inc. needs to be sure that customers are not only exposed to the products the company offers, but that those customers are also able to buy them. The most obvious way to accomplish this would be to expand the number of locations from which a consumer may transact a purchase on a Gap Inc. brand’s web site. The web provides an efficient and economical means by which Gap Inc. can offer its wide array of product offering and possibly even make customized apparel and accessories available to customers all over the world.
Internally, it needs to preserve a high level of differentiation between its three brands in order to avoid increased cannibalization. Furthermore, it must find a way to make the most of its economies of scope - leveraging the shared resources of IT, HR, distribution, policy, and finance (just to name a few) - while still providing enough autonomy for each brand’s business units in order to allow each to define its identity and distinguish its unique differences.
posted by Dallas Smith at 11:05 PM
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