The Gap Inc Continues to Struggle - Research Paper Example

The Gap Inc Continues to Struggle Executive Summary The Gap Inc, listed in NYSE (ticker: GPS),. is a 40-year old Company founded in 1969 by Don Fisher and his wife Doris Fisher with its corporate headquarters in San Francisco. Created with the simple idea, as spelt out by Don Fisher, of “making it easier to find a pair of jeans”, Gap has continued to remain committed to that basic principle, and has grown into a leading player in the specialty apparel retailing industry with over 3,100 stores spread over several countries, and employing over 134,000 people. Besides the company’s own stores, there are also franchisees selling Gap’s brands in the international markets. The company clocked revenues of $14.5 billion in FY2008. With the five brands of Gap, Banana Republic, Old Navy, Piperlime and Athleta, The Gap Inc.’s product portfolio includes private label apparel for men, women, kids and babies, as well as accessories, personal care products, jewelry, footwear etc… The direct competition for The Gap in the apparel retailing industry includes national chains like The Gap, TJMaxx and Marshall combine, Nordstrom, American Eagle, Abercrombie & Fitch, Limited Brands etc…. With Department stores like Target and Wal-Mart also entering the fray along with innumerable mass merchandisers, the industry has witnessed intense competition. The top 10 store chains account for only 35% of the industry revenues of $168 billion in 2008, and only around 18% of the 75,750 stores in the organized sector (not counting the unorganized sector outlets). Price, quality, value and store experience are the main attributes that attract consumers to a store in this industry. Gap’s theme of creating emotional connections has historically paid rich dividends. But in recent years, The Gap’s revenues have been dropping since 2004. Despite the fall in demand, The Gap has done well financially, with the net earnings improving by 16% in 2008 due to good control on expenses and inventories, and with online sales increasing by 14%. Given this background this report goes into analysis of the industry as well as The Gap Inc.’s performance, using several different perspectives, including Porter 5 Forces model, Value Chain, Value Net, Resource Based View, Business Design and Value Migration, etc… Finally a comprehensive SWOT analysis has been carried out, keeping the findings of the analysis using all the above perspectives in mind, to evaluate the strategic options in front of the company, and to address the question of what should Gap’s strategy be going forward. In line with The Gap’s philosophy of being a store with a heart, the recommendations have been drawn up to ensure rationalization in store counts and to ensure capitalizing on Gap’s key strengths vis-à-vis the rivals. Thus while all brands will continue to strengthen their respective positioning in their target segments through a combination of inspiring product innovations, unique store experience and compelling marketing, the other two key strategies recommended include deeper penetration in the international markets, particularly the emerging markets, and a concerted focus to shift more sales to the online channel through aggressive positioning and advertising on the Social Networking platforms on the Internet like Twitter, Facebook etc…, using intelligent localized rich-media widget advertising with a view to promoting online purchases of Gap brands as well as driving traffic to the neighborhood Gap stores. 2 Company Background The Gap Inc., headquartered in San Francisco, is today one of the leading specialty retailing outfits, operating from several countries through its own stores as well as through franchisees. With revenues of $14.5 billion in fiscal 2008, the Company operates from over 3,100 stores [1] and employs over 134,000 people [2]. The product range includes clothing, accessories and personal care products for men, women, children and babies. The Gap Inc. was incorporated in the State of California in July 1969, and the first Gap store was opened in San Francisco the same year by Don Fisher and his wife Doris Fisher, the founders of the Company. Don Fisher continued as Chairman of the Board for 34 years till he stepped down in 2003 and is now the Chairman Emeritus. In Don Fisher’s own words, “I created Gap with a simple idea: to make it easier to find a pair of jeans. We remain committed to that basic principle.” [3] That principle of making it easier for the customers to find the right apparel has been driving The Gap Inc through its history of forty years. Over the years, the Company has launched several new product lines and brands to address the needs and tastes of different market segments. After having clocked revenues of $2 million in Sales in 1970 within a year of launching the first store, Gap has been aggressively opening new stores, covering all the 50 states in USA. The first Gap store outside the USA was opened in 1987 in London, UK, and in the same year the company reached the landmark figure of $1 billion in sales. Realizing the potential offered by e-commerce in specialty retailing, Gap had launched the first online store gap.com in 1997 to be followed by brand-specific online stores for other brands as well, and has recently integrated all brands under one website. Appendix-A gives a detailed list of events in the History of The Gap Inc. over the past forty years. Millard Drexler, who joined Gap in 1983 as the President and COO of the Gap Division, was the first non-family executive to be nominated as President and CEO of the Company in 1995, after Don Fisher decided to continue as non-executive Chairman of the Board. The baton was passed on to Paul Pressler in 2002 after Drexler retired, and five years later, Pressler was replaced by Glen Murphy, the current Chairman and CEO. Listed in NYSE (ticker: GPS), the company today has a market capitalization of close to $12.72 billion [4], and yet, it is considered a largely family-owned business with the founding family, the Fishers, controlling nearly 37% of the stock. [5] In the next few pages of this report, we will understand the Company as well as the industry from different perspectives and come up with an analysis of the strategic options before the Company in the face of the current market scenario. 3 Business Description The Gap Inc. is in the business of making it easier for its customers to find the right apparel, as defined by Don Fisher’s statement about the first Gap store referred to in the paragraph on Company background. In keeping with this basic business principle, The Gap Inc. has been striving to create emotional connections with customers around the world through inspiring product design, unique store experiences and compelling marketing [6]. Gap’s name is reported to have originated from “the generation gap”, describing the differences in tastes between generations, and also from “the gap in the market” they intended to fill with their products [7] Given the focus on emotional connections with the customer, the Company’s culture stands on the four pillars of: Think: customers first Inspire: creativity Do: what’s right, and Deliver: results Being primarily in the business of specialty retailing for apparels, the Gap Inc. has constantly been launching new product lines and brands guided by the above four points as we will see when we understand the products and services offered by the company. The ability to judge trends in the clothing industry, and to create the kind of quality the customers value and expect has been one of the hallmarks of The Gap, supported by the first-hand contact with the end customers through its own stores across the world. Whether it is introducing the casual office wear, or the launch of the formal apparel and accessories, or the value apparel for the whole family at the best price point, the company has always been creative in its offerings t the market, and thus this trait has been a defining characteristic of The Gap culture in doing business to meet customer requirements. Over and above the range of appropriate clothing being available in the stores, the way the customers are serviced – doing what’s right – has been another differentiator that customers visiting Gap stores have come to expect, and hence is another key driver of the Gap culture in doing business. Last, but not the least, the commitment displayed in taking responsibilities and achieving the goals, and thus delivering results has been another characteristic of Gap’s style of doing business. These four pillars have aptly been collectively called “wearing passion”, the main theme used to attract customers as well as employees to join the fold of The Gap family [8]. 4 Products and Services Consistent with the theme of “wearing passion”, The Gap Inc. has a series of brands offering associated products to address the special requirements of the respective market segments. Starting with the Gap brand in 1969, the brand mix has been augmented progressively over the years through acquisitions and innovative introductions. The current product lines include:[9] Menswear T’s and Tanks, Shirts, Polos, Sweaters, Sweatshirts, Blazers, Outerwear, Jeans, Pants, Shorts and Swim, Sleepwear, Loungewear, Underwear and Socks Suits, Dress shirts, Casual shirts, chinos Womenswear T’s and Camis, Shirts and Tops, Blouses, Hoodies, Sweaters, Dresses & Skirts, Capris & Shorts, Pants, Jeans, Outerwear, Socks and Tights Bras, Panties, Sleepwear, Lingerie, Loungewear, Sportswear Nursing wears and Accessories Kidswear Jeans, Pants, Capris for Girls, Shorts, Shirts, Sweaters and Outerwear, Ts, Polos, Graphic Ts, JunkFood Ts, Leggings, Sleepwear, Underwear, School uniforms, Backpacks, Flip flops, Headbands, Dance collections Babywear, and Toddlerwear including Bodysuits, One-pieces, Nursery Gear Bedding collections, Blankets and Swaddles, Strollers, Car seats, Bouncers, Feeding dishware, furniture etc… Legwear Shoes and Slippers, Flats, Sandals, Boots, Booties, Sneakers, Flip flops Accessories, Personal Care and Other Ties, Belts, Hats, Scarves, Handbags, Diaper bags, Toys and Books etc… Fragrance, Skin care Bath accessories, Towels, Washcloths Jewelry Sunglasses Currently The Gap has five brands in its fold as follows: Brand Year of Launch Style Description Sub-brands 1969 Iconic American style. Consists of clothing rooted in cool, confident and casual style Express a personal sense of style Price point – Mid-range Gap GapKids babyGap GapMaternity Gapbody Acquired by Gap in 1983 Accessible luxury brand offering premium quality apparel for men and women Covetable, uncomplicated style for work and casual occasions Vintage jewelry and accessories Price point - Approachable 1994 On-trend apparel and accessories as well as updated basics at surprising value. Famous for Old Navy Item of the Week at incredible price. Latest Fashion at amazing prices. Price point – Value pricing 2006 Fresh online shop. Latest in Footwear and Handbag trends Price point – Mid to Premium Extensive collection of Mid-range and Premium Third-party brands Acquired by Gap in 2008 Premiere women’s active apparel and footwear Price point - Premium Source: Press Kit from The Gap Inc. [10] 5 Performance Trends Within one year of incorporation in 1969, The Gap Inc. clocked revenues of $2 million in 1970, and progressively grew to achieve $1 billion in 1987, four years after the acquisition of Banana Republic. The introduction of Old Navy in 1993 was a landmark event in the history of The Gap Inc. with the Old Navy brand itself topping $1 billion in sales in 1997, within four years of opening the first Old Navy store [11]. In the recent past, however, the apparel industry, as a whole, and The Gap Inc. have been witnessing stagnation in the top-line as well as bottom-line. Appendix-B gives the Brand-wise break-up of revenues since FY 2004. The five year figures for Net Sales and Net Earnings are presented graphically in the chart below [12]: The segment-wise breakup based on FY-2008 figures for Net Sales, as shown in Appendix-B looks as follows: Another important performance trend indicator in this industry is the number of stores and the store productivity. So far as number of stores is concerned, starting with the first Gap store opened in 1969, the store count presently stands at 3,149, with the segment-wise breakup and the store areas being [13] as follows: Location/Brand Number of Stores Area in million Sq Ft North America Gap 1,188 11.8 Banana republic 575 4.9 Old Navy 1,066 20.1 International All brands 320 2.7 Total 3,149 39.5 Appendix-C gives the typical floor design for an adult Gap store, and as can be seen, The Gap Inc. has been attaching great importance to ensuring design standards in store design to ensure the right ambience providing fun and satisfying experience to its customers. The consolidated financial and operational performance indicators for the five-year period from FY-2004 to FY-2008 are presented in Appendix-D [14]. Some of the points that are important pointers to The Gap’s performance in the face of the global meltdown are: Although the Net sales figures have dropped from $15.9 billion to $14.5 billion between FY-2006 and FY-2008, the net earnings have increased in absolute terms from $778 million to $967 million, which is testimony to a creditable improvement in profitability due to the efforts put in improving productivity. For the same period, the diluted EPS has increased by 45% from $0.93 to $1.34 Inventory per square foot of Store area has dropped 20% from $43.7 to $34.7, bringing down the working capital requirements The net Square footage of store area at the end of the year has been more or less constant, again implying improvement in productive usage of store area. These performance trends and financial and operational indicators can give us excellent insights into The Gap’s strategy in managing the business in the face of competition and the global scenario. 6 Value Proposition The winning proposition, according to Willie Petersen [15] can best be developed by answering the question, “What will we do differently or better than the competitors to create greater value for the customers and superior profits for ourselves?” In this sense, a winning proposition, as against a mere value proposition defines customer focus more clearly. The Gap Inc.’s move in this direction appears to be the increased focus on the Old Navy stores and online shopping with integrated access to all brands from one single web portal. The closest three competitors to The Gap Inc. in the industry are [16]: Abercrombie & Fitch Co American Eagle Outfitters, and J Crew Group Inc. None of these three competitors addresses the value-priced family apparel market the way Old Navy brand does, and this value proposition is very critical in the present scenario when disposable income of the majority of families has taken a beating ever since the sub-prime crisis started. If we go back to what we had said earlier on, the emotional connections that the Old Navy brand attempts to establish with the four pillars of: Think: customers first Inspire: creativity Do: what’s right, and Deliver: results together with the “supermodelquins” conveying the attachment to the customer and the value it creates have been a real winning proposition for Gap Inc. Added to this, the integration of the websites of Gap, Banana Republic, Old Navy, Piperlime, and Athleta recently, based on customer feedback for a one-stop shop for all their requirements, has proved to be yet another initiative towards creating a value proposition for the customers of Gap Inc. One of the potential drawbacks of the overlapping product lines amongst the brands offered by Gap Inc.’s portfolio needs to be addressed, which we will look at as we go along in this analysis. The other argument in favor of the desirability of making merchandise available in the store [17]can be countered with the likely increasing trend for online shopping, and the price differential that can be offered to the end customer with the reduced costs with this strategy can make this a sustainable proposition. 7 Value Chain Analysis In this section we will carry out a Value Chain analysis to understand Gap Inc.’s operations and performance using Michael Porter’s model depicted in Appendix-E. As per this model, a firm builds the value chain through a set of primary activities, starting with Inbound logistics to Operations, Outbound logistics, Marketing and Sales through to after-sale Service; and a set of Support activities including the firm’s infrastructure, Human Resource management, Technology innovations and R&D, and procurement activities. We know that outsourcing and offshoring have reshaped the clothing industry in the past decade just as they have reshaped several other industries worldwide. This has resulted in many companies relocating several steps in the value chain to low-wage countries around the globe [18]. This has been true for The Gap Inc. as well. Gap Inc. purchases private label merchandise from approximately 600 vendors and non-private label merchandise from 300 vendors with facilities spread across 60 countries. Of the fiscal 2008 purchases, nearly 97% by value had been produced outside the USA and only 3% in the USA, with China accounting for almost 23% [19]. Thus this strategy adopted by Gap Inc. for managing Inbound logistics and Operations has resulted in substantial gains in the Value Chain, resulting in cost reduction to the company and value to the customer. So far as the other components in the Core activities are concerned, with the exception of Piperlime, all aspects of brand development from product design and distribution to marketing, merchandising, and shopping environments are controlled using the core competence of The Gap Inc. resources, again adding immense value to the customers. On the support activities front, the Research and Innovation team at The Gap Inc. has been the company’s most valuable asset, gleaning data on the latest trends and fashions in the markets. Online shopping is another value chain strengthening initiative undertaken by The Gap Inc. since 1997, and the completely integrated online platform has in fact resulted in a 14% increase in direct sales as reported in the 2008 Annual report. Thus, the efforts made by the Company in managing the Value chain to the win-win benefits of the company’s bottom line as well as value to the customer has been laudable and have translated into winning strategies for The Gap Inc. 8 Core Values and The Business Model Based on the analysis of performance trends, Value proposition and Value Chain, it is now clear that the business model of The Gap Inc. is very much based on the fundamental principle of making it easier for its customers to find the right apparel, as defined by Don Fisher’s statement about the first Gap store referred to in the paragraph on Company background. In keeping with this basic business principle, The Gap Inc. has been following a model of meeting customer needs through: Inspiring product design Unique store experiences and Compelling marketing and in this process creating emotional connections with customers around the world through its own stores as well as through the franchise operations. Given the focus on emotional connections with the customer, the Company’s culture stands on the four pillars of: Think: customers first Inspire: creativity Do: what’s right, and Deliver: results Thus, Gap Inc. has constantly been launching new product lines and brands guided by the above four points as we have seen from the product mix and brand mix offered by the company. The ability to judge trends in the clothing industry, and to create the kind of quality the customers value and expect has been key hallmark of The Gap, supported by its strong Business model giving it first-hand contact with the end customers through its own stores across the world. Whether it is introducing the casual office wear, or the launch of the formal apparel and accessories, or the value apparel for the whole family at the best price point, the company has always been creative in its offerings to the market, and thus this trait has been a defining core value in The Gap culture in doing business to meet customer requirements. Over and above the range of appropriate clothing being available in the stores, the way the customers are serviced – doing what’s right – has been another differentiating core value that customers visiting Gap stores have come to expect, and hence is another key driver of the Gap culture in delivering its business model. The emphasis on online shopping as part of its business model reinforces the core value of the Customer First. Thus the four pillars have aptly been collectively called “wearing passion”, the main theme used to attract customers as well as employees to join the fold of The Gap family. 9 Industry Analysis: Porter’s Five Forces Model The Apparel retailing industry has been one of the most competitive industries in the world, and in recent years, with retailing taking several forms of distribution in the industry, the rivalry has increased into intense competition with players from high-end brands to mass merchandisers and home-based re-sellers. Largely the apparel retailing industry can be classified into three groups of retailers: National chains Department Stores Mass merchandisers With price, quality and value as the critical attributes that drive consumers to alternate retail formats for purchase of clothing, footwear and accessories, the Department Stores, trying to preserve market share have begun to focus on private label brands to maintain a higher degree of exclusivity. The Specialty Apparel retailers (the group that Gap Inc. falls under) have been focusing on quality goods with right product offerings, unique designs and marketing. According to Chain Store Guide published data [20], the apparel companies operate over 75,750 stores and their aggregate sales volume totals $168 billion based on the 2008 statistics published in 2009. The growth rate has stagnated in the recent past as the chart below shows: Source: Chain Store Guide: Apparel Specialty Stores Industry Summary, Aug 2009 Some of the key statistics of relevance to our understanding of this industry are as follows: Industry size: $168 billion in Sales from 75,750 stores operated by 4,900 companies Top 100 companies generated $145 billion (86%) in revenues and operated 53,969 stores (71%) The Top 10 store chains, ranked by Sales are as follows and account for ~35% of industry sales: Store Chain Sales in $ billion # of stores The Marmaxx Group (TJMaxx +Marshall) 11.53 1,577 Nordstrom Inc. 8.56 157 Old Navy 6.49 1,012 Foot Locker Inc. 5.75 3,942 Ross Stores Inc. 5.57 797 Victoria Secret Stores 5.14 1,423 Gap 4.87 1,566 Burlington Coat Factory Warehouse 3.45 393 Abercrombie & Fitch Co. 3.32 948 Charming Shoppers Inc. 3.07 2,384 Total 57.75 14,199 Appendix-F gives Five Forces of Michael Porter Model for the industry. Let us look at the implications of each of these forces for The Gap Inc. Rivalry among existing firms: The industry is crowded with a large number of competitors like Marmaxx (TJ Maxx & Marshall combine), Nordstrom, Ross Stores Inc., The Limited Brands, Abercrombie & Fitch, American Eagle Outfitters, J Crew Inc., and several other known chains and brands. Besides these known players, the rivalry also stems from mass merchandisers and other Department Stores offering private label apparels like Target, Wal-Mart, J.C Penny etc… The rivalry is mainly on the three driving attributes of price, quality and value. Thus there is intense price war all the time through discounts and other store offers to lure the consumer. Additionally, the stores located in malls offer other distinct benefits to consumers and holiday shoppers. (Nearly 80% of the apparel specialty stores are located in malls as per the Chain Store Guide referred to earlier). Industry growth rate has been sluggish since 2006, and has dropped severely after the financial crisis, and the resultant cut-down in spending by consumers the world over… Generic product differentiation is not much. Differentiation has largely been through new fashions and themes Brand loyalty is evident only in some of the high-end apparel Switching costs are low in the absence of basic differentiation and considering the nature of the product itself Determinants of Buyers’ power Buyers’ price sensitivity is high and this imposes high bargaining power Distribution chain is usually large, thus increasing bargaining power With catalog stores and online stores offering better prices for the same brands due to lower overall costs, buyers can bargain more Switching cost being low again increases buyer bargaining power Determinants of Supplier power The industry is characterized by extensive outsourcing and offshoring, with vendors for raw material and production spread far and wide across the globe. This imposes sever constraints on management of quality and deliveries, thus increasing supplier bargaining power acutely as a premium for quality and delivery commitments Real estate suppliers or stores can exercise immense bargaining power, and this impacts firm strategies largely. Though backward integration is technically possible, for most players this is not economical considering the lower costs in other countries, and this again increases supplier power, thus raising input costs to some extent. Threat of Substitute products New generation products with revolutionary themes pose a major threat Adoption of new styles by the consumers can increase threats substantially Switching costs, especially switching times are high, because of dependence on offshore suppliers, thus increasing obsolescence threats Threat to New Entrants Long value chains impose severe entry barrier Economies of scale are high, and act as a deterrent to new entrants Low product differentiation rules out new entrants with new ideas High real estate prices, especially in malls and preferred locations increase entry barriers To summarize, therefore, the keys to winning strategies in this industry are strategic store location to increase demand, breadth of merchandise to attract family shoppers, introduction of innovative fashions and themes with newer patterns and colors, and excellent supply chain integration with quality after sale service 10 Value Net and Game Theory Perspectives The Value Net model proposed by Adam Brandenburger and Barry Nalebuff is an alternative to Porter’s Five forces model. Here we have four main groups that influence the course of any firm – Customers and Suppliers on a vertical plane, and Competitors and Complementors on a horizontal plane [21]. As per this framework, which is based on a Game theory perspective of business, co-operation and competition both essential are when doing business. Thus, while co-operation increases benefits to all players by contributing to market growth, competition divides the benefits amongst the players contributing to market share. Thus in the case of Gap Inc. the Complementors (or Co-opetitors) are the producers of products and/or services that customers will generally like to buy along with the apparel they buy from Gap Inc. That is, the apparel and the complementor products/services, as the term suggests, complement each other. Thus some examples we can think of are: Accessories and Jewelry (depending on the buyers’ needs) Transportation facilities, especially for large quantities that the buyers may not want to carry in the boot of their car Co-branded Credit card facilities, that will help in purchase credits The Gap Inc. as always followed a strategy of promoting co-opetitive products/services either from internal resources (Gap’s own offerings) or from external sources. As, is known, Thus, all three brand stores Gap, Banana Republic and Old Navy offer assortments of accessories and jewelry suited to the respective customer segments. All brands have schemes have arrangements for free shipping for he merchandise bought by customers Co-branded and Own-brand credit cards are offered to attract buyers looking for credit facilities. Value Net promotion is a conscious step towards sustaining a win-win game along with competitors 11 Resource Based View and Competitive Advantage The Gap Inc. provides a good example of creating competitive advantage using the Resource Based View of Strategic management. Let us consider Barney’s theory on competitive advantage with the ‘VRIN’ concept of Resources [22], which states that “Firms can earn sustainable supra-normal returns if and only if they have superior resources and those resources are protected by some form of isolating mechanism preventing their diffusion throughout industry”.   Thus, to attain supra-normal returns, and sustainable competitive advantage, the resources of the firm need to be: Valuable Rare Imperfectly Imitable, and Non-substitutable The key resource of The Gap Inc. in creating a store ambience that customers have got used to over the years, has undoubtedly been Valuable and Rare to all the three store chains in the Group – Gap, Old Navy and Banana Republic. This has always created competitive advantage. The store design shown in Appendix-C has its own unique characteristics, which a customer values and has developed a personal association with. The other resource strength of The Gap Inc. comes from the quality of its human resources and this has given them a distinct competitive advantage. The ability of Gap’s store staff to engage with the customers is something the customers cherish, and has been a reason for the loyalty shown by customers to Gap, Old Navy and Banana Republic products despite no distinct product differentiation. Their fleet of 134,000 employees well-trained in different aspects of customer service is, indeed a resource that is certainly at best Imperfectly imitable, and definitely Non-substitutable in the Apparel retailing industry. 12 Strategic Intent and Core Competencies The two statements made by the founders of The Gap Inc., clearly put the strategic intent of the Company in perspective. Quoting from the 2008 Annual Report cover page: Source: Gap Inc. 2008 Annual Report These intents are translated into core competencies of The Gap Inc. brands and store outlets over the years. “Being in the hearts and minds of the customers” has been the thrust for Gap’s strategies, and in this respect they have formulated and developed their competencies very well. The Gap Inc. has been following a model of meeting customer needs using their core competencies in: Inspiring product design Unique store experiences and Compelling marketing and in this process creating emotional connections with customers around the world through its own stores as well as through the franchise operations. Given the focus on emotional connections with the customer, the Company’s culture stands on the four pillars of: Think: customers first Inspire: creativity Do: what’s right, and Deliver: results The results delivered by The Gap Inc. for FY-2008, as analyzed under Performance Trends have amply proved their strategic intent in the face of the global meltdown. 13 Business Design and Value Migration Analysis Slywotzky [23] defines of the concept of Business Design as the comprehensive system encompassing a company’s activities and relationships, within which the company’s offerings of products or offerings of new technologies are embedded. And the argument is that value migration occurs from outmoded business designs to new ones that are better able to satisfy customers’ most important priorities. Thus, any given Business Design can, at any time be at one of three states called Value Inflow, Stability or Value Outflow, depending on the design’s value-creation power in relation to the customers’ priorities, in comparison with the value offered by competitors. Thus, Value migration according to Slywotzky is essentially an outside-in approach to strategy, as opposed to the conventional inside-out approaches practiced during the 1980s [24]. Thus it begins with the customer and works its way back, requiring thinking from the environment back into a company’s capabilities and direction. The Gap Inc. has been adopting Business Designs to satisfy the customers’ most important priorities in many ways. The Gap range has historically targeted the segment that consists mainly of family shoppers who are looking at apparels in the mid-range price point. Gap realized that these customers, who generally go shopping along with their kids, would definitely have availability of apparel for their kids as a priority while looking at options for stores to shop in. Thus the GapKids and the babyGap brands were introduced to retain customers whose value migration could be because of this reason. GapMaternity and the Maternity range in the Old Navy brand are also examples of Gap’s recognition of value migration in their most crucial market segment. Banana Republic’s launch of the vintage jewelry series as part of their portfolio was, again to meet the changing priorities of that segment of customers, especially the customers looking for apparel, accessories and jewelry for occasions like weddings. Integration of the independent websites into one single portal, as well as the launch of Piperlime and acquisition of Athleta are again cases of well thought out Business Design to address value migration based on the online shoppers’ priorities. 14 Product Life Cycles The apparel industry is an industry subject to regular seasonal cycles and heavily influenced by the unpredictable changes in fashion trends. Thus the products in this industry, by and large have short product life cycles. The stages of Introduction, Growth, Maturity, Decline and Withdrawal occur in fairly quick succession for most products, and some products do not even go through the Maturity stage and may reach the Decline and Withdrawal stages immediately after starting on a Growth stage. The only defense that a company like Gap can contemplate these vagaries of the product life cycle is constant innovation and quick response to value migration in their market segments. There are several examples of product / concept launches by the brands in the Gap fold that speak volumes for Gap’s responses to steering the vagaries of product life cycle changes in line with customers’ needs through innovative product offerings and marketing gimmicks. Gap’s unveiling its 1969 Premium Jeans at Robertson Boulevard recently is a good example of a gimmick with the denim’s lifecycle. This range will now feature rinses and hues from the darkest ink to light, distressed finishes with 12 new fits including Always Skinny, Real Straight, Sexy Boot, Long and Lean etc…[25] Banana Republic’s ingenious revitalization of the White Shirt and Trench to bring them back on a new Growth phase using the Fall 5 campaign with film celebrities is another case to illustrate Gap’s strategy for addressing product lifecycle issues for their products [26] 15 SWOT Analysis Having looked at The Gap Inc’s history, performance trends, product / brand portfolios and having analyzed the practices from various perspectives, we can now carry out an analysis of the Strengths, Weaknesses, Opportunities and Threats for The Gap Inc. and based on that come up with recommendations for the strategy for the Company going forward. Strengths Defined Company Values laying stress on continuous innovations Very strong brand recognition and reasonable brand loyalty Old Navy’s performance record, and ranking as No 3 as per Chain Store Guide database Healthy financial performance with 2008 Net earnings having improved by 16% Very good FY-2008 balance sheet with near-zero debt and $2 billion cash Quick in adapting to emerging trends, markets and environments Excellent Store locations and store ambience Well trained Human resources skills with ability to “Do what’s right” for customers Compelling marketing prowess Effective Web platform, with online sales having risen 14% and reached the threshold of $1 billion [27] Weaknesses Dropping Revenues since 2004: From $16.3 billion in FY2004 to $14.5 billion in FY2008 Comparable store sales decreasing steadily from 2004 (-12% in 2008), as seen in Appendix-D Constant opportunistic revamping of store locations could lead to erosion of Gap image: store locations opened and store locations closed during past five years being as follows: Year Store Locations Opened Store Locations Closed 2008 101 119 2007 214 178 2006 194 116 2005 198 139 2004 130 158 Large number of overseas vendors (900) implying difficulties in ensuring quality and delivery timeliness Uncertainly about acceptance of new products High family ownership (37%) could deter induction of senior professional management executives Opportunities Extensive Vendor spread could be capitalized into an opportunity in emerging markets Potential growth in baby-boomers market, where Gap brands are strong General e-commerce trends have been rising, implying potential increases in online sales Increase in time-conscious type of online consumers because of busy lifestyles Increasing acceptance of the casual workplace trend Increased opportunities to reach target segments through Social Networking websites Threats Global meltdown expected to have longer impact on unemployment and spending power General towards placing higher priorities on retirement savings, college tuition and mortgages than on fashion apparel Risky industry with fashion trends becoming more difficult to predict Competitive sector nationally, regionally and locally represented by Department stores, specialty stores and mass merchandisers Disruptions in foreign suppliers due to political climate and regulatory changes in other countries Increasing transportation costs due to likely spurts in fuel prices 16 Recommendations and Conclusions Now that we have the complete analysis of all perspectives of The Gap Inc., together with an understanding of their internal strengths and weaknesses, and the external opportunities and threats, we are now in a position to address the question of what should Gap’s strategy be, going forward. Looking at the financials (ceteris paribus), if The Gap Inc. founders are interested in maximizing returns on alternate future investments in the face of high uncertainties about market growth and falling sales for the past five years, a possible strategy that can, theoretically be considered by The Gap Inc. is a sellout. If rumors are to be believed, Gap Inc. had, indeed, put itself up for sale back in 2007 [28] after asking Paul Pressler to step down. However the mechanics would have entailed closure of over 400 Gap stores, which was unthinkable considering The Gap In. is a publicly traded company, and the only option was for private equity investors to but Gap at nearly 8-9 times its value since the stock was quoting at that rate. Other strategic options that Glen Murphy can consider to grow sales and increase footfalls in the stores are: a) Close down all underperforming stores (numbering over 400). The risks involved in such a move for a publicly traded stock are too high to be tried b) Dump the Gap image of being a brand offering “high-quality basics at affordable prices”, and consider a strategic shift to “Trendier merchandise”. Again, with Gap being a behemoth with close to 1,600 stores, the mechanics of such s strategic shift are not easy to handle, and taking a chance on fashions is again highly risky c) Reinvent all brands to suit their SWOT and focus more on Online Sales with aggressive segmentation, targeting and positioning Appendix-G gives the details of a Press briefing addressed by the chiefs of all Divisions of the Company in Oct 2008. These are definitely measures that spell out a framework on which we can build a strategy with sustainable competitive advantage Appendix-H gives a set of recommendations on the way forward for a turnaround strategy for The Gap Inc. based on the SWOT analysis. Thus our recommendation will include concerted efforts To pursue the strategies defined in Appendix-G and Appendix-H To build online sales using Gap’s integrated web-based platform To utilize Social Networking platforms on the internet, like Twitter, Facebook etc… to aggressively promote Gap brands by properly segmenting and targeting customers through rich-media advertising widgets on a localized basis depending on the locations of the stores, and finally To drive traffic and footfalls to these stores based on the above targeted promotion campaigns Bibliography Appendices Appendix-A: Gap Inc. History of Major Events after Incorporation in 1969 Year Event 1970s 1970 Sales reach $2 million. Gap's second store opens in San Jose, California 1974 Gap's "Fall into the Gap" advertising campaign debuts. 1976 Gap goes public, offering 1.2 million shares of stock on the New York and Pacific Stock Exchanges. 1977 Gap Foundation — Gap Inc.'s nonprofit charitable arm — is established. 1980s 1983 Millard ("Mickey") Drexler joins the company as President and COO of the Gap division. Gap Inc. acquires Banana Republic — then a two-store safari and travel clothing company. 1986 The first GapKids store opens in San Mateo, Calif. 1987 The first Gap store outside the United States opens in London, England, on George Street. Gap Inc. annual sales reach $1 billion. 1988 Gap introduces its award-winning "Individuals of Style" advertising campaign. 1989 The first Gap store in Canada opens in Vancouver, British Columbia. 1990s 1990 The babyGap line is born, debuting in the GapKids store in San Francisco, Calif. 1992 Gap becomes the second-largest selling apparel brand in the world. 1993 Gap enters France with a "store" within the Galeries Lafayette department store in Paris. 1994 Old Navy opens its first store in Colma, Calif. Gap Outlet stores open their doors as part of the new Gap Factory Outlet division. 1995 Millard Drexler is named President and CEO of Gap Inc., succeeding founder and Chairman Donald Fisher. The first Banana Republic store outside the U.S. opens in Canada. 1996 Gap opens its 20,000 square foot flagship store in the Shibuya shopping district in Tokyo. 1997 Old Navy sets a retail record, reaching $1 billion in annual sales in less than four years of operation. Gap opens its Online Store at gap.com. Gap Inc. is named "Marketer of the Year" by Advertising Age Magazine. 1998 Gap opens its first store in Alaska, now operating in all 50 states. Banana Republic surpasses the $1 billion mark in annual sales. Gap Inc. launches its formal ethics code, the Code of Business Conduct. 1999 BananaRepublic.com launches. 2000s 2000 Oldnavy.com launches. Gap launches its Gap Maternity collection on gap.com. 2001 Old Navy makes its debut outside the United States, opening 12 stores in Canada. Banana Republic launches petite sizes online. 2002 Paul Pressler is named Gap Inc. President and CEO. Millard Drexler retires after 19 years of service. 2003 Gap Inc. Founder Don Fisher announces decision to step down as Chairman of the Board. 2004 Bob Fisher is named Gap Inc. Chairman of the Board. Gap Inc. issues its first Social Responsibility Report. 2005 Gap Inc. relaunches gap.com, BananaRepublic.com and oldnavy.com. The first Banana Republic stores in Japan open in Tokyo and Yokohama. Gapinc.com is honored with a WebAward by the Web Marketing Association. 2006 Gap Inc. launches its first online-only brand, Piperlime. Gap Inc. expands its global presence with the first Gap and Banana Republic franchise store locations in the Middle East and Southeast Asia. 2007 Paul Pressler steps down and Bob Fisher assumes the role of Interim Chief Executive Officer. Glenn Murphy joins the company as Board of Directors Chairman and Chief Executive Officer. Gap franchise stores open in new countries: United Arab Emirates, Bahrain, Indonesia, Kuwait, Qatar, Korea, Oman, Turkey, Philippines, Riyadh and Saudi Arabia. The first Banana Republic franchise store opens in Bahrain, followed by stores in Indonesia, Kuwait, UAE, Malaysia, Singapore, Korea and Oman.     Source: Gap Inc. Website Appendix-B: Brand-wise Historical Sales FY2004 to FY2008 (in millions) FY2004 Gap North America $ 5,746 Banana Republic North America 2,269 Old Navy North America 6,747 International 1,505 Total Gap Inc. $ 16,267 (in millions) FY2005 Gap North America $ 5,409 Banana Republic North America 2,287 Old Navy North America 6,856 International 1,463 Other (1) 4 Total Gap Inc. $ 16,019 (in millions) FY2006 Gap North America $ 5,134 Banana Republic North America 2,487 Old Navy North America 6,829 International (2) 1,466 Other (1) 7 Total Gap Inc. $ 15,923 (in millions) FY2007 Gap North America $ 4,818 Banana Republic North America 2,634 Old Navy North America 6,665 International (2) 1,615 Other (1) 31 Total Gap Inc. $ 15,763 (in millions) FY2008 Gap North America $ 4,502 Banana Republic North America 2,512 Old Navy North America 5,707 International (2) 1,728 Other (1) 77 Total Gap Inc. $ 14,526 Source: The Gap Inc. Website Appendix-C: Typical Gap Adult Store Design Source: The Gap Inc. website Appendix-D: Financial and Operational Indicators FY-2004 to FY-2008 Source: The Gap Inc. 2008 Annual Report Appendix-E: Michael Porter’s Value Chain Model of a firm Appendix-F: Porter’s Five Forces Model Appendix-G: The Gap Inc. Press Briefing on Planned Strategies Source: Press Briefing – The Gap Inc. Website Appendix-H: Strategies Based on SWOT Analysis SO - Strategies 1) Work to become even more appealing to the future teen generations (S1, S2, S3, S6, S8,S9, O2, O6) 2) Influence teens to spend more money on fashion apparel (S1,S2,S3,S5,S6,S7,S8,O5) 3) Attract and influence consumers to shop online and accommodate busy lifestyles and rising fuel prices (S1,S2,S6,S9,S10,O3,O4,O5) 4) Focus on expansion in emerging markets (S4,S5,S10,O1) WO – Strategies 1) Reduce no of suppliers and increase production and quality of products (W4,O1,O2) 2) Appeal to younger consumers to increase future product acceptance (W5,O1,O2,O3) 3) Increase efficiency of the Apparel Division and reduce selling sq footage and find a market that contains more consumer interest in casual wear in the workplace (W2,O4,O5) ST – Strategies 1) Offer more and differentiated products to expand consumer age range and appeal to the baby boomer populations (S1,S2,S3,S5,S6,S7,T1,T2) 2) Promote and offer benefits of online shopping to appeal to long-distance shoppers and economically minded (S1,S2,S3,S9,T1,T6) 3) Perform more thorough research of industry and market to make stronger and more effective prediction of future trends (S1,S3,S5,S6,T3,T4) WT – Strategies 1) Promote online sales and increase online benefits to counteract rising fuel costs, increase customer base and product acceptance and decrease debt (W1,W4,T6) 2) Reduce reliance on foreign suppliers for production to eliminate future costs and rely more on production within the US (W4,T5) Legend: SO – Capitalize on Strength with Opportunity ST – Use Strength to counter Threat WO – Eliminate Weakness through Opportunity WT – Eliminate Weakness and Threat Read More