Gap Inc. reports earnings on February 27, 2020. (AP Photo/Gene J. Puskar)
For nearly a year, we’ve been anticipating Gap Inc. to split off Old Navy, the largest of its six brands with about the same number of stores globally as the flagship Gap brand – 1,219 Old Navy stores compared with 1,221 Gap – but with nearly half ($5.7 billion) of total corporate sales ($11.7 billion) compared with Gap’s measly 28% ($3.3 billion) at the end of the third quarter.
Now those plans are off and Gap Inc. will move forward to find a new path to growth, while it also looks for a new leader to make it happen. In November president and CEO of Gap Inc., Art Peck stepped down and Neil Fiske, who replaced Jeff Kirwan as president and CEO of Gap brand in February of last year, also made an abrupt departure this past week.
Unlike the announcements of Peck and Kirwan’s exits, who were thanked profusely for their service, the news about Fiske had a “don’t let the door hit you” quality, being a mere footnote in the latest news.
Going forward Robert Fisher, son of the Gap’s founders who has worked for the company for 35 years and served on the board since 1990, will be interim president and CEO, while Mark Breitbard moves up from managing Banana Republic to lead the corporation’s specialty brands including, Gap, Banana Republic, Athleta, Janie and Jack, Intermix and Hill City, and Sonia Syngal will continue as president and CEO of Old Navy.
Personally, I never got the rationale for the split, an opinion shared by many others. “Our negative view has been based on [Gap Inc.] trying to build a narrative around the value unlock of separating the portfolio of brands…after years of building a narrative around the significant synergies and the intrinsic value of the integrated brand platform,” wrote Credit Suisse analyst Michael Binetti in a note.
Righting the ship
Gap Inc. has come through a rough and tumble year, so it is no surprise that comp sales are off, down 4% for the past three quarters. With the spin-off “distraction,” as Wedbush calls it, in the rear-view mirror, the corporation can now lean into fixing the mess that the Gap brand has suffered for too long and the collateral damage that was done to the once high-flying Old Navy brand, which has experienced a 3% decline in comp store sales this fiscal year.
Overall, 2019 was a tough one for clothing retailers. The most recent report from the Census Bureau finds clothing and clothing accessories stores off .6% year-over-year and the Business of Fashion/McKinsey & Company “State of Fashion 2020” report predicts 2020 will be even more challenging.
In its survey of senior fashion executives, only 9% expect economic conditions to improve in North America this year and 61% see conditions worsening. “‘Challenging,’ ‘uncertain,’ and ‘disruptive’ were the most frequently used words to describe the industry,” the report states.
Sadly, Gap Inc. added insult to injury by distracting its leadership’s energies by focusing on the split. Effectively it has lost a year to strengthen Gap, Old Navy and Banana Republic’s positions in the market and it will face even stronger headwinds this year as competitors like American Eagle, Target, Amazon, and even Walmart elevate their fashion offerings.
On a positive note, the company has done a lot of soul-searching in the past year, or as interim CEO Fisher said in a statement, “We have learned a lot. The work we’ve done to prepare for the spin [off] shone a bright light on operational inefficiencies and areas for improvement.”
To assess what changes we might see in future for Gap Inc., I reached out to experts in the fashion retail space who’ve been watching the company closely, though none work directly with it. Like me, they are looking from the outside in, but provide valuable insights about what Gap Inc. needs to do next.
Double-down on the power of its e-commerce
While Daniel Binder, principal at Columbus Consulting who advises C-suite retail executives, says the company needs to make a greater investment in using technology to more effectively connect with the customer, Darin Archer, chief strategist at Elastic Path which provides e-commerce platforms for brands retailers, believes the company has a strong internal technology team. “A number of my friends have been working there for years and they have drawn a lot of expertise from eBay,” he shares.
Archer is particularly impressed with Gap Inc. being one of the first multi-brand e-commerce platforms to support across-brand shopping. “This is a company that pioneered the multi-brand shopping experience online, where through a single web experience you can add things to your cart from each brand. It was revolutionary at the time and we see our clients trying to replicate this too because that’s where you get unit economics to work at scale,” he says.
But he adds, “They need to do more in the physical realm. They need to double-down on their digital lead and bring the experience they have pioneered online into the physical space and make it amazing.”
The Store must do more
Oliver Chen, Cowen’s managing director of consumer retailing, stresses the role of the store is shifting today from a place to conduct transactions to a place to acquire customers. Regardless of where customers decide to make their purchases, the physical store is a place to deepen that customer connection, build loyalty and enhance the lifetime value of each customer.
With nearly 2,500 North American stores – 1,197 Old Navy, 727 Gap and 554 Banana Republic stores – or “customer acquisition points,” as Chen describes them, the company needs to figure out how to shift the focus of each store from selling more stuff or pushing product out to drawing people into the brands.
Spotlighting dynamic, distinctive and eye-catching merchandise that changes rapidly is an important component, but so is empowering the sales staff in the store to spend more time romancing the customer.
Jay Hakami, president & CEO of Sky IT Group which provides technology solutions to CPG and retail companies, foresees a need to bring technology into the stores to make the online and physical shopping experience more complimentary.
For example, it should consider investing in cashierless technology in the stores to move personnel out from behind the counter and out onto the floor to better serve customers and elevate their shopping experience. And to replicate the multi-brand shopping experience available online, Gap Inc. might consider ways to pop-up merchandise from its other brands into different stores.
Without more attention to enhancing the shopping experience in the stores, Hakami expects the company to continue scaling back the Gap stores, with some 230 closures previously announced, to add to the 68 closures in 2018. Through the third quarter, 34 North America, 27 Asia and 12 Gap stores have been shuttered.
On the other hand, when the company was still working to split off Old Navy, it announced plans to open 800 new stores. That would have nearly doubled its footprint in North America, with new stores targeting what at the time were considered under-served small markets.
Now that the split is canceled, there is no word whether those plans will be carried out, but it is likely that the previously announced decision to exit the Chinese market in early 2020 will proceed.
Brand differentiation; Gap must stand for something
Back in 1994 when Old Navy was founded, it was based upon the concept of “Fashion, Fun, Family & Value.” It was viewed as a lower-priced sibling to Gap positioned in the middle with casual, trendy fashion and Banana Republic, acquired in 1983, positioned above it with more premium prices and classic and at the time what was considered business, as well as casual fashion.
Each brand held a distinct market position, but that was over 25 years ago. It made sense then but it doesn’t make sense now. Today consumers shop high and low and are abandoning the middle. The definition of business casual now includes t-shirts and jeans, so Banana Republic is less relevant. The Gap logo has lost its cool as Old Navy has cannibalized its business big time.
“That stratification of brands by price and budget no longer works,” Elastic Path’s Archer says. “They need to define each brand by use case, like Athleta which got them into a totally new category [athleisure wear]. Each brand needs to fit the fashion to the customer with an aim to capture a greater share of the household wallet and increase the lifetime value. They have the ability to increase share of wallet by thinking about what each family member needs and wants, not by thinking price but by use.”
Gap, in particular, suffers from an identity crisis. Old Navy is perceived as Gap-lite. Gap needs to break out from the middle, which is the worst place to be in the current market.
Back to basics, back to growth
Gap Inc. has bought itself some time thanks to its announcement to keep Old Navy in the fold, which market analysts were leery about from the start. This will allow the company to find the right leader to take the entire enterprise forward.
“The thinking was probably not to rock the boat anymore than it already is, with the CEO [Peck] and now Fiske out,” says Hakami. “They need someone new to come in, do a full assessment and make strategic decisions of how to move forward. In the meantime, they don’t want too much commotion right now.”
As for the new leader, Gap Inc. needs a strong merchant with a flair for fashion. It needs someone with a commitment to brick-and-mortar retail, but also who leans into technology and can envision new ways to harmonize the customer experience between physical and online shopping.
And as much as the board will want immediate action to improve merchandising, right-size the store fleet and enhance the supply chain, the more important job for a new CEO is to clearly, precisely and distinctly define the flagship Gap brand which has gotten lost in the shuffle.