Gap’s Fall From Grace, How it Happened
Do you remember the days when a pair of khakis from Gap was a staple in your wardrobe? Maybe you are too young for this to reflect your lifestyle choices while others have simply moved on. With all of the choice in the apparel industry it is not a surprise that Gap is struggling. In 2019 the Gap brand made $4.7 billion in sales down 24.8% from 2014 when its sales were $6.2 billion. When any brand that was once iconic is declining the question is what happened?
History when studied closely always provides insight into all of the subtle and not so subtle changes that are taking place. These shifts always seem rather innocent at first but tend to have a large impact over time. For Gap as many retailers in the apparel sector will tell you it’s hard to keep up with the trends. What’s hot today is not always hot tomorrow and when tomorrow arrives companies are not always structured in a way that lends itself to success. If you are curious about what has caused Gap’s fall from grace then consider these four factors.
1. An inability to keep up with trends. The first Gap store opened in San Francisco California a little over five decades ago in 1969. By the time the 80s arrived Gap was a household name and a fashion icon. Consumers couldn’t get enough of Gap’s denim, t-shirts and of course signature khakis. This style of dressing continued to be popular with consumers throughout the 1990s. But over time clothing tastes slowly started to change with the arrival of fast fashion retailers like Zara and H&M.
Zara entered the United States market in 1989 and a little over 10 years later H&M opened its first store in the United States in 2000. Before these retailers entered the scene if you wanted to pull off a look worn by your favourite celebrity you likely couldn’t afford it. But these fast fashion retailers were able to quickly bring looks that just appeared on the runways into their stores and at low prices. Suddenly you didn’t have to wear your boring old khakis all the time, there was more choice and it looked better than what previously existed.
With more options on the market consumers began to crave trendier styles and Zara’s business model was perfectly suited to capitalize on this trend. Zara is able to bring new styles to market in as little as five weeks. It can do this because it is vertically integrated. Investment firm Bernstein has said that Zara has “the best business model in apparel,” due to its ability to quickly design, manufacture, and produce new styles. Zara can also restock fast selling merchandise in as little as two weeks. Zara’s business model also allows it to bring more merchandise to market with Zara releasing as many as 20 new collections per year.
The nature of Gap’s supply chain, which wasn’t designed for a fast fashion world, makes it difficult for Gap to get its merchandise to market quickly. If there was a need to be fast to the market 20 years ago then that need exploded after Instagram launched in 2010. Over the past decade the social media app has had a profound and lasting impact on the fashion industry. With millions of people around the world documenting their #ootd (outfit of the day) and trying to build businesses around their fashion tastes suddenly the thought of hanging out in basics isn’t appealing anymore unless they are of course, on trend basics. This need to have a constant rotation of fashionable outfits only fueled the growth of fast fashion retailers.
Even if Gap sticks to basics it faces fierce competition from the likes of Uniqlo, the second largest clothing retailer in the world. Uniqlo’s products are cheaper than Gap’s and they also feature technically innovative materials making them a hit with consumers.
Then there is the evolution of casual. At one time casual meant khakis or jeans now it means lululemon leggings. lululemon has been in business since 1998 so while athleisure is taking off in a big way now the trend towards a different kind of casual clothing has been underway for some time. Gap similar to Nike and many other retailers are now in the athleisure category but first mover or at least early mover advantages matters. Of all the types of clothing athleisure seems like one that Gap with its scale and could have become a bigger player in. But often winning in a category is a function of getting in earlier or being better than what exists. While Gap used to set the trends now it is following them.
Can Gap become cool again? Its partnership with designer and rapper Kanye West is an attempt at that. West has had great success with his partnerships with Nike and Adidas. West’s brand Yeezy is a billion dollar business for Adidas. But even West may not be able to save Gap. It’s one thing to partner with hugely successful brands like Nike and Adidas as West has done and another to try to turn around a dying brand.
Often what keeps a brand from regaining its prominence is organizational structures, processes and talent that is not suited to move in a new direction. When Steve Jobs, turned around Apple in 1997 he didn’t just design a shiny new iPod he slashed the number of projects the company was working on and restructured the company so that it was only focused on four great products. He also became CEO during the turnaround process. Most business failures are not just about a poorly designed product but everything that enables that poorly designed product to make it to market in the first place.
2. The shrinking consumer wallet. Whether you realize it or not a lot of the problems facing mid-priced retailers like Gap have to do with economics. Consumers simply have less money to spend. Since last May 8 million more Americans are living in poverty. Living in poverty means that a family of four earns less than $26,200. In total there are 55 million Americans living in poverty. While the COVID-19 pandemic has had a negative impact on the wealth of many Americans have been struggling financially for a long time.
What consumers spend their money on has also changed. Advances in technology have made it hard to live without a smart phone. Once someone buys a new phone and pays for data there isn’t a lot of money left over after they pay for food and transportation. This is why fast fashion retailers as well as Amazon and Walmart have such a dominant share of apparel purchases in the United States. Walmart is not winning consumers over for its fashion sense but it is winning the value for money proposition.
If you live paycheck to paycheck or if you are just trying to save money then shopping at a Walmart or a Target doesn’t seem like a bad idea. In 2016 Target launched a new private label clothing brand called Cat & Jack and that brand grossed $2 billion within its first fiscal year. Target also reported it gained $6 billion in new market share last year. Undoubtably some of that market share has come from mid-priced retailers like Gap.
3. Location. Location. Location. Location is everything or is it? On Gap Inc’s third quarter 2020 earnings call Gap Inc. CEO Sonia Syngal said Gap is focusing on its off-mall locations. “Our strategy is rooted in moving away from traditional malls and focusing on more advantageous locations to better meet customer needs,” said Syngal. But will having a Gap in a strip mall versus inside of the Toronto Eaton centre make a material difference? While the internet is often blamed for the decline in mall traffic the truth is that many malls have not kept up with trends either.
Traditionally malls have had an anchor tenant which is typically a department store. Malls are also the home to many clothing stores. This wouldn’t be an issue if the clothing sector wasn’t in a structural decline or if department stores were as popular as they used to be. If malls were filled with more stores that consumers are looking for or if they converted to different uses decades ago they would be facing fewer issues today. A mall with an Apple store and a lululemon tends to do pretty well. Add a Target, a Dollar General and a T.J Maxx and it would do even better.
If only Gap could move all of its store locations and change it fortunes. Traffic is always going to be higher in areas that have better stores. If a brand new Supreme store was opening it would find success in a strip mall or in a traditional mall. Perhaps Gap will benefit from having more stores in locations with higher traffic but that will not be enough to stem a decline only a revamped assortment or change in its pricing matrix can fix. While Gap is hoping better store locations will improve performance this is unlikely to move the needle.
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4. When success becomes the enemy of success. 30 years ago you would have said that Gap is doing all of the right things. Everyone was wearing its iconic khakis and life was good. But then change starts to set in. The best retailers are able to stay ahead of changes in the economy, consumer behaviour and technology but the reality is that it is extremely difficult to do this over and over throughout time that’s why there aren’t many hundred+ year old companies.
Another reality is that when you have great success making big changes is difficult, afterall why would you want to change things when they are working. Anyone looking at Gap right now thinks changes needs to be made but usually the time to change is when things are going well. Zara launched in Spain not in 2000 but in 1974 five years after Gap went into business. A different way of bringing merchandise to market was established long before everyone thought it was the best way to do so.
Most companies do not scrap their business models when their stock is surging they do it after they go through dire straights. Apple is now a trillion dollar company but there was a time in 1997 when it was 90 days from running out of cash. Apple co-founder and former CEO Steve Jobs rejoined the company and moved the company in a different direction. If success is the enemy of success then failure is often the precursor to growth. Part of the reason Jobs was able to turnaround Apple is because he’s Steve Jobs but also because the company knew it was out of options. Apple’s board of directors was actually stunned when it heard about Jobs’ turnaround strategy but ultimately it signed off on it.
A focus on short term earnings quarters and the high of capital gains can often paint a company into a box that later on is difficult to get out of.