Short Case Analysis of
Gap Inc. in 2010: Is the Turnaround Strategy Working?
Author of the article Annette Lohman of the California State University, Long Beach

The Gap Inc. In 2010 Case Summary

Case Summary
This case study describes the business environment of the apparel market and how Gap Inc. tried in this highly competitive market environment to manage a turnaround in the time between 2000 and 2010. The U.S. clothing store sector accounted for approximately $156 billion in the year 2009 and had slightly declined compared to 2008 due to the worldwide recession. Average before-tax profits estimated by IBIS-World were around 3% in the year 2009. The level of globalization in the market is relatively low and made up by a large number of small and few major, domestically owned companies. The family clothing store industry is the most important sector, as it is responsible for more than half of the revenues in the U.S. clothing market. Concerning the gender woman clothes are most interesting, due to their will to spend more. Women clothing accounts for 50% of the market, followed by men and children with market shares of 37% and 13%. Hereby more than one third of the adult population has to be considered obese. According to price sensitivity 65% of the market is value-priced driven and targeted by family stores of companies such as Ross Stores or TJX Companies. They focus on still wanted brand names and discounts by delivering off-season styles. More emotional driven fashion and brand-conscious customers rather shop at Gap or Abercrombie & Fitch and are influenced by marketing efforts. These four companies are the major rivals in the family clothing store industry. These big players account for 40% of the Market, the rest is highly fragmented and consists of thousands of small local or regional retailers with little individual market shares.

20%
19%

15%
15% 13%

10% 5%

12% 7% 4% 4% 4%

2006 2009

0% Gap Inc. TJX Companies Ross Store Abercrombie & Fitch

Market share of the major rivals in the U.S. family clothing store industry Gap started in this market with Don Fishers Vision “to make it easy to find a pair of jeans” in 1969 and made an impressive developed over the years by focusing on wide variety of style or sizes. With prosecuting this vision Mickey Drexler, the 1983 employed companies president, managed through acquisitions, new ventures and strategies to produce organic growth in the following two decades. He quadrupled the amount of stores from 450 stores to more than 2.000 in the year 2002 and increased the revenue to $14 billion per year. It was his credit that Gap got a hip image and the Page 2

The Gap Inc. In 2010 Case Summary

product line was expected to be cool. On the peak of Gaps reputation it stood for affordable style for everyone through sync pop culture and taste. Families as well as celebrities wore their clothes with People even looking for their latest designs. Their products reached from high quality casual apparel for moderate price under the brand Gap, over value-priced products in the Old Navy line, sophisticated casual and tailored clothes under Banana Republic to high quality sport apparel for women or third party brand footwear and hand bags at the online-only retailer Piperlime. However, Gap started to struggle in 2000 and their decline in the store sales led Gap start two turnaround attempts in the year 2002 and 2007. TJX as one of the major competitor was the leading off-price retailer of clothing and home fashions in the United States in 2010. TJX owned several store types offering family clothing, women’s footwear, home fashion, beauty items, toys and even jewelry with prices often 20-60% below department and specialty store pricing. Internationally they had a good stand in Canada and the UK with each over 260 stores and being the only major off-price retailer in Europe. In 2009 the revenue from Canada and Europe accounted for 10.7 and 10.9% of total revenues. In the last mentioned year of 2010, compared to the prior year, the revenue increased 6.8% to $20.3 billion and the Net Income 37% to $1.2 billion. Ross Stores is also an off-price retailer and focuses similar to TJX on prices 20-70% below regular department store prices. The offer name-brand and designer approval at low prices as well as first quality, in-season fashion apparel, accessories or footwear and are very successful with this strategy. Their revenues rose by 6 to 10% in the years 2008 to 2010. Abercombie & Fitch is selling premium-priced casual clothing in the United States, Canada and Europe. In 2009 the company closed its Ruehl clothing store business after three years raising lost from $23.4 million in 2007 to $78.7 million in 2009. But not only this business segment seems is problematic, as according to their finance report the total sales shrink at 21% between 2007 and 2009. Despite these major rivals Gap also has to face competition from big box mass merchandisers such as Wal-Mart, Internet retailer or international market entries from companies like Uniqlo, Zara or H&M. To compete on this highly competitive market with this huge amount of substitutes the case emphasizes the importance to successfully develop new product lines, reflecting the latest fashion and to bring them quick to the market. Brand image helps to create brand loyalty and has to be considered crucial to hold customers and expand their shopping range while building entry barriers for market entrants. Extensive store networks enable customer to easily reach their stores, Online portals can be used to complement the network and to provide items not available at the local stores.

Page 3

The Gap Inc. In 20110 Strategy Review While even the biggest two domestic player generate only 10-20% of their sales in foreign countries, most of the domestic companies themselves rely on independent 3rd party manufacturer from Asia, Middle East or South America, facing here threats like image losses, delays or supply shortages. Currently the offshore sourcing accounts already for about 69%. This could become a critical concerning costs and profits due to rising labor costs like in China and increasing barging power of low-cost manufacturer. Analysists expect as a consequence countries like Indonesia, Cambodia or India to follow as sourcing options and Portfolio Sourcing approaches to diminish risks by relying on a too small amount of suppliers.

Strategy review
The problems of Gap started in the late 90’s, cause their rapid expansion was accompanied by making $3 billion depts., paying less attention on quality and the styling becoming less famous. In the year 2000 to 2002 Gap declined severely by double digits every quarter. It seems like Gap lost its feeling for the right style and the importance of quality due to outsourcing the production to offshore manufacturer with other standards and longer supply chains. Due to the fact, that he misunderstood signs, allocated resources to the wrong categories it is necessary to ensure a new leadership strategy by a new CEO. As a logical consequence of the store sales decrease Drexler was no longer supportable and got fired. Turnaround attempts The following attempt to turn the decline with the new CEO Paul Pressler focused on the three objectives to push the online business, expand into new markets in Asia and Middle East and to reduce the depts.. The expanding to new markets and the redesign of the websites through implementing an easy to handle and convenient e-commerce platform has to be regarded as an effort to increase the customer base. Hereby the appreciation of the New York Times reporting the redesigned websites being ”among the best e-commerce sites in retail” shows that this has been set up in a decent way. And supported by the online-only retailer Piperlime.com, as third party supply of footwear and handbags, the customer base could be increased by other brand-loyal customers. Besides of this online business Pressler biggest credit is having reduced the depts. from $3 billion in 2002 to $513 Million by the year 2005 and to finally eliminate them completely by the end of 2007, leading consequently to severe dividends increases from $0.09 per share to $0.32. But another attempt under Presslers leadership to establish a new chain Forth & Towne in 2005 for over 35 year old woman, focusing on attractiveness and fit of clothes provoked contradictory opinions whether it is lovely or hateful. The chain failed after 2 years, with some proposing the chain not being launched and marketed properly according to analysts. This and cost cutting measurements in design, product development, marketing and supply chain resulting in slowed time to market cycles and less interesting product lines led the sales decline again after in 2004. Loosing key executives due to his approach of cost cutting and lack of understanding of the apparel market was the start of his end, as it is substantial to have a executives stuff that stands by the CEO. Page 4

The Gap Inc. In 20110 Solution and Analysis In 2007 Pressler was replaced by Glenn Murphy in 2007 due to have weakened the brand through cutting substantial resources in crucial fields and the little strategic performance. With Glenn Murphy Gap choose a person with over 20 years experience in the retail market, thus someone who is likely not doing the same mistakes Pressler did by cutting crucial resources. He continued many of the measures but allocated resources to restore Gaps brand reputation and to improve the design of the lines, while pushing the sales through new international markets. In the first year Gap itself opened stores in 11 countries, mainly in middle east. Additionally Murphy opened over 100 franchise stores in 9 countries within one year and started to enter markets such as Russia, Greece, Israel or Romania. Especially the franchise store allows a fast growth, as investors or private persons who like the brand and store set up can open stores by them self. Thus without big investments from Gap the store network can increase to huge extends and allowing Gap to get a brand demand feedback from markets they did not cover so far. And by choosing more or less developing countries which are not that highly penetrated by other western competitors like European markets. In the design field the announcement of Patrick Robinson as well-known designer was an important step to redesign the brand lines. Robinson made clear that Gap shouldn’t try to compete with the new market entrants like H&M or Zara for the 18 to 24 year old, than rather focus on older 25 to 30 year old by providing the classics the brand was famous for. Wall Street analysts approved his efforts, saw the improved merchandise and clearer focus, with appreciating the new strategic direction.

Solution and Analysis
In total the first turnaround strategy mustn’t be recognized as failed, as it resulted in the elimination of the depts. and highly appreciated online presence. But for sure the second turnaround attempt was necessary to ensure long time substantial growth by the right customer focus, brand image securing, attractive design and strong international focus to push sells. Already in the first place is should have been obvious to focus on brand reputation and design, while cutting costs through more efficient supply chains and cheaper sourcing by developing supplier. By regarding the different operation fields the replenishment of inventory kept in distribution centers has to be appreciated, as it allows reacting fast on demands of single stores, reduces the inventory costs by more efficient storing and allows indentifying slow mover who could be pushed by store specialties. If products are higher demanded in areas further away they can easily shipped there, as the items aren’t separated but rather still on pallets. To fall back on IBM as one of the biggest IT service provider is definitely a good approach and right implementation of ensuring high performance of the data network to manage the real estate and supply chain. By the IT allowing financial forecasts of real estate decisions and remodeling of store locations the company expansion can be handled economically with being aware of the costs, financial impacts and choosing the right infrastructure. Connecting e-commerce order data with Page 5

The Gap Inc. In 2010 Solution and Analysis

software like Kiva has also to be considered crucial to economically ship products and to handle the shipments fast with growing data volume. By shifting the production to offshore vendors and producing only a small amount in the high priced labor environment of the states allows higher margins and a better competitive stand. Collaboration with designers such as with Stella McCartney or with the Paris boutique Merci reduces the development cost for new product lines and brings new design attempts to the company. The small amount of mentioned collaboration however shows that here is still room to extend this mutual benefit working with designers and initiative small sized apparel companies. Gaps attempts in Corporate Citizenship and social responsibility seems to be among the best according to the Corporate Responsibility Magazine and thereby reduces the risk of image losses by sourcing offshore. More over their support for charity events and ensuring standards like healthy working environments, not too many work hours helps to build a reputation as sustainable and responsible company helping third world countries economies to develop. Remarkable is how far Gaps approaches are reaching. They established their own Code of Vendor Conduct and send over 4.000 inspectors to their different factories while having more than 80 full-time employees who are dedicated to improve the lives of the factory workers. Being present in the news by multiple channels for adds, facebook or donating art related organization let the brand appear young and fashion. This could help staying interesting for young people while still focusing on 25-35 year old adults. But in the marketing fields there could be much more attention capturing attempts followed. Very helpful to create hypes is to offer short time available clothes from famous designers. If these normally high priced items are available for moderate prices just a few days, waiting queues are highly efficient to catch pass by shoppers. Everyone wants to know what’s so exciting worth standing there for hours and perhaps lets foreign brand loyal customer walk in the store and get in touch with Gap. And the best that could happen is that television companies start to report about the long queues in front of Gap stores. For days they will be the main talk in schools, with only spending small temporary amount and being able to still focus with its line on 25-35 year olds. Concerning Robinsons strategy shift on 25-35 year I have to totally agree. For such a huge company like Gap, being a big market player because of its family section, Gap shouldn’t try to compete or imitate these high flexible, narrow focused companies and still believe to stay interesting for adults between 25 up to something like 50. The target on 25-35 year old customers have a greater buying power, are less interested in mini trends thus allowing relatively slower time to markets but still being fashion and enabling the style still being attractive for adults up to 50 or even higher. If they really want to compete with Zara, H&M Gap should set up an own highly flexible store chain and new brand with other designer only focusing on the young customer. But to mix it with their cash cow or flagship, the family business for adults under the brand Gap should definitely be avoided, as it risks the whole company. In its main business Gap should show consistency and follow the very early attempts to make it easy to find high quality and fashion clothes at a affordable price, whit thus Page 6

The Gap Inc. In 2010 Solution and Analysis

keeping a kind of best-price solution for the broader customer spectrum. Side short time clothing lines of designers, fresh advertisement like the ones of car manufacturer and keeping the focus on classic stylish clothes while expanding the sales through international new markets, supported by efficient data and supply chain management should ensure Gaps major position on the worldwide cloth market.

Page 7