Gap Inc.: Can It Develop A Strategy To Connect With Consumers?

Abstract

The Gap Inc. is an apparel retail company which operates worldwide. It offers apparel, accessories and personal care products for men, women and children under brands like the old navy, Gap, Banana Republic and Athleta. This case study includes company information and apparel industry information, porter's five force analysis, PESTEL analysis and SWOT analysis. In this case study, author mentioned current issues of the Gap Inc.

and recommendations for the same. Author also mentioned financial information of the Gap Inc. in the form of income statement, balance sheet and cash flows from last three years.

Case Study

The Gap Inc. is an omni-channel retailer company that merchandise and sell apparel, accessories and personal care products for men, women and children through its retail stores, franchised stores and e-commerce portals. The company's products are marketed under various brands like Gap, Old navy, Banana republic, Athleta and Intermix. Gap also offers different services like der-in-store, reserve-in-store and ship from store. It also provides license to various third parties to sell and market these products.

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The company operates their stores across the US, Asia, Middle east countries and Africa. Its headquarters located in San Francisco, California.

Gap was founded by Don Fisher and his wife Doris in 1969 in San Francisco as a single retail store that sold discounted Levi's jeans and records to teenagers and young adults. The store's name 'Gap' was from generation gap. In the ensuing years, Fishers opened more stores and expanded their range to include t-shirts and sweaters. After years of fast growth, the company went public in 1973.

In the first couple of years after its launching, the company flourished because jeans were the uniform of the youth. Don Fisher and his wife launched Gap logo in 1972 in order to broaden their range of products. Over the years, the demand for jeans began to slow down because the teenagers of the baby-boomer generation had grown up and were not same as new teenagers. After having offered unisex jeans, t-shirts and jackets for many years, Gap started to design separate collections for men and women in 1987. In 1986 and 1990, gap launched Gap kids and baby gap offering clothing to children from newborns to pre-teens. Between late 1980s and early 1990s Gap experienced exponential growth. Gap's clothing was known for its good quality and value and consumers appreciated the shop places. In 1992, company faced decline in growth after success for many years. In 1993, Gap hired experienced designers and add more products to their unisex basics. Gap extended their product line to include activewear, footwear and personal care products. Gap expanded internationally to Canada, UK, France, Germany and Japan in 1993.

By 1997, Gap became a valuable global brand. In 2002, Gap announced a major turnaround by launching casual basics from trendy fashion. Gap earned $1 billion on record revenues of nearly $16 billion in 2003. There were nearly 3000 stores at that time. The company introduced maternity clothes in 2003 at gap body and old navy stores after trying them out as online exclusive for three years. Old navy began offering plus sizes in 2004. Furthermore, banana republic had launched more products like jewelry, swimwear and sunglasses. Gap's online efforts met with more enduring success. The websites underwent an extensive overhaul in 2005. In 2006, the gap added new online brand called piper lime. It specialized in shoes and added handbags after several years. In 2008, another comprehensive revamp of the website allowed customers to shop multiple online brands with one cart and one shipping fee.

Porter's five forces tells how Gap Inc. can maintain a competitive advantage in apparel stores industry. By using porter's five forces, managers of the Gap Inc. can explore more profitable opportunities in service sector of the retail industry.

1. Threats of new entrants (Low): New entrants in apparel industry brings innovation and competition which puts pressure on the Gap Inc. by putting low price strategy, reducing costs and providing new value propositions to the customers. The Gap Inc. has to manage all these challenges and build effective strategies to sustain position in the competitive edge. Threat of new entrants for Gap Inc. is low because of economic scale, brand loyalty and recognition.
2. Threats of substitutes (High): threat of substitute is high if it offers a valuable product that is different from present product offerings of the industry. Gap Inc. can manage threat of substitute by evaluating the core need of customer rather than just observing buying behavior of the customer.
3. Bargaining power of buyers (Moderate): Buyers always wants to buy more for paying less which puts pressure on the Gap Inc. and affects its profitability in long run. The Gap Inc. has small powerful customer base which ask for more discounts and offers. Gap Inc. can tackle this by building large base of customers which will reduce the bargaining power and provide an opportunity for firm to update its sales and production process.
4. Bargaining power of suppliers (Moderate): Most of the companies in the apparel industry buy their raw material from different suppliers. Dominant suppliers can reduce the margins for the Gap Inc., and they use their negotiating power to take higher prices from firms in Apparel industry which reduce the overall profitability of Apparel industry stores. Gap Inc. can handle this situation by creating efficient supply chain with multiple suppliers whose business depends on the firm itself.
5. Rivalry between Existing Competitors (High): If rivalry between existing competitors in the industry is high it will drive down prices and profitability of the industry. The Gap Inc. runs its organization in a very competitive market in the apparel industry which affects its sales and profitability. The Gap Inc. can handle this problem by providing high quality products with reasonable prices.

PESTEL is an analysis of the external environment of the firm which stands for political, economic, social, technological, environmental and legal factors for the firm.

• Political: The Gap Inc. originates in the USA and its political situation is stable. The government has developed some policies for business which control the market position for the firm. As gap Inc. runs business globally, government has also developed rules and regulation for safety and employee benefits.
• Economical: It tells the nature of economy in which organization operates. Some economic factors like inflation/deflation rates, resource availability and gross domestic product affects international organization and amount of the revenue the firm generates.
• Technological: Advancement in technology became a key factor for international organizations to sustain a position in a competitive world. From manufacturers perspective, technology improves efficiency in production by automation process. The Gap Inc. should do research in this sector to get competitive advantage over rivals.
• Environmental: Business entities constantly use the concept of "going green". The Gap Inc. should follow environmental policies by saving energy and follow climate change through effective waste management.
• Legal: The Gap Inc. operates globally which puts challenge of complying with various international, domestic and regional laws and regulations.

Goal and focus of the Gap Inc. is simple: customers, creativity and doing what's right and delivering results. Company call it "wearing your passion" which is perfect match for employees and customers. Gap Inc. operates globally and have 800 factories in about 30 countries. Women make up to 80% of world's garment industry. For over 10 years, Gap Inc. has promoted financial literacy through education and training program for female workers. Gap Inc. is one of the global brands in apparel industry which implement digital payment for workers in garment sector. This will improve lives, improve transparency and drive business through digital payments and contributes sustainable developmental goals.

Gap Inc.'s business strategy in the global market of retail clothing is cost leadership in which company provides stylish products with affordable prices. Gap's competitive advantage associated with innovation of clothing products and accessories which opens door for opportunities for many customers. Gap's main strategies to improve its sales and business is to focus on its core products that is reason for global success and international market expansion.

Gap has control over strengths and weaknesses from SWOT analysis but has no control over opportunities and threats.

Strengths:

• Sustained revenue growth
• Existence in multiple channels and store formats.
• Focus on enhancing sourcing capabilities

Weaknesses: Low Inventory turnover ratio compared to peers

Opportunities:

• Targeting growth in global apparel retail market
• Focus on store expansions
• Positive outlook for online market

Threats:

• Increasing competition in the retail industry
• Risks associated with currency fluctuations

Rising Labor Costs

The company reported revenue of $15,855 USD million for the year 2018, an increase of 2.2% over FY2017 (MarketLine,2018). In FY2018, the company's operating margin was 9.3% compared to an operating margin of 7.7% in FY2017. In FY2018, the company recorded a net margin of 5.3% compared to a net margin of 4.4% in FY2017. As of February 2, 2019, the company had 3194 stores and 472 franchise stores and e-commerce sites (Yahoo Finance,2019).

From above chart, company's overall performance was not good in year 2017 compared to year 2016 and 2018. Gap CEO tried to find out reasons for these performance in year 2017 and implemented some strategies for that.

Gap Inc. did not fill analysts' expectation on EPS and revenue in 2016. Some issues company have to solve is pricing, heavy discounting, speed to market and customer traffic. One of the main issues is high initial prices for products. This would require a substantial overhaul of the supply chain and it would take time to solved. Another issue is heavy discounting offered from main brands of the Gap Inc. But if the starting prices are higher, these discounts will not be beneficial for the company. Gap should make clear market segmentation to penetrate domestic market. Another strategy Gap should use to boost its business is expanding from retailer to manufacturer. As mentioned earlier, Gap Inc. use other companies to manufacture its clothes which give higher initial prices for clothes. To reduce this cost, Gap Inc. should start manufacturing own clothes. From history information, we can see that Gap Inc. has frequent changes in its management over the past years which had affected company's overall performance domestically as well as globally. So, having continuity in management within the brands will be crucial step toward success for Gap Inc. in the coming years.

Globally Gap Inc.'s performance is not good in all countries. The management should apply some strategies to expand business in certain countries like China which has huge population to boost company's business. Alon with this expansion, Gap Inc. should also be careful about tax laws and regulations for these countries. The Gap Inc. should think about recovering inventory management by different effective strategies like lower initial prices, maintain stock prices and attract investors by different affordable price products. The Gap Inc. should focus on target market which should be appropriate based on demographic factors.

In last, The Gap Inc. should apply mentioned strategies to get long term success.

References

1. Pollach, I. (2016) The Logo change at Gap North America. The case journal,12(2),214-220
2. "The Gap, Inc." International Directory of Company Histories. Ed. Tina Grant. Vol.
3. 117. Detroit, MI: St. James Press, 2011. Business Insights: Essentials. Oct 21,2019