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A Look at Gap, Inc.

Internal Analysis:

Gap Inc. is a global specialty retailer selling casual apparel, accessories and personal care products for men, women and children. They sell their products in United States, Canada, Europe and Japan.  Gap's revenue comes from selling classically styled jeans, khakis, t-shirts, personal care products, sleepwear, and other basic wardrobe items. Gap offers products for babies, children, pre-teens, teens, and adults.

Gap Inc. was incorporated in July 1969.  It began as a single store in San Francisco, California. It was founded by Donald and Doris Fisher.  It went public in 1976.  In 1983 it bought Banana Republic. In 1986, it opened a new segment for kids called GapKids which was followed by Baby Gap in 1990.

The mission statement of Gap Inc. is as follows: Gap Inc. is a brand-builder. We create emotional connections with customers around the world through inspiring product design, unique store experiences and compelling marketing.

The purpose of Gap Inc. is stated as: Simply, to make it easy for you to express your personal style throughout your life.  The values that Gap Inc believes has guided its success are: integrity, respect, open-mindedness, quality and balance.

The strategy that Gap Inc has followed in order to achieve its mission are:
1. Sell various goods under the brand name. Segmentation of Products: Gap Adult, GapBody, GapKids, babyGap and GapMaternity
2. Different Gap Brands targeted different age groups. Target men and women of all ages through it's store concepts.
3. Hybrid strategy of cost leadership and differentiation
4. Sell a wide range of products and provide the best customer experience
5. Achieve Market share by opening many stores

The company's business objectives are to create shareholder value and to provide the best customer experience. They want customers to know that when they walk into a store they are walking into a brand.  The company keeps a high degree of control on its store as all of them are company owned. The company also believes in building brands and this is reflected by the strong presence of the Gap brand in the marketplace.  The Gap brand is very well recognized and has high brand equity in the marketplace.

Over the past couple of years the company's sales are declining and for since past 28 months same stores sales have been falling. The company's traditional customer base has been eroding and it has been unable to attract new customers to its stores.

Functional Analysis:

Inspiration:

From color to concept, it all begins with inspiration - whether it's people-watching on the streets of Tokyo, a flash from a dream or a visit to a local art gallery. At Gap Inc.'s product development offices in New York City, designers, product managers and graphic artists create the look and feel for each season's merchandise.  Gap has tried to be a trend setter in the fashion industry, however, it has completely misjudged customer preferences in the past few years.  By introducing new styles in it stores it has not only alleviated its traditional customer base but it has also been unable to attract new customer to its stores.  The apparel industry is placed in a very dynamic environment and customer preferences change over night, an organization needs to cater to this changing environment.  The company needs to correctly read fashion trends and place orders with vendors accordingly.  Its inability to correctly read customer preference has resulted in declining sales. 

Sourcing

Located around the globe, employees in Gap Inc.'s Sourcing and Logistics group, along with its buying agents, draw up production schedules and place orders with approved third-party factories in the more than 50 countries where its products are made. It purchases its merchandise from over 500 vendors who manufacture Gap's designed clothing.  This large pool vendor ensures that no individual supplier has an unfair advantage. As Gap does not manufacture any of its products it is imperative that it is able to display the latest design in its stores.

It is imperative that Gap deliver the latest styles to its customers in a timely manner. The time lag between designing, sourcing and manufacturing should minimal as the company would like the merchandise to be sold in stores before fashion trends and customer preferences change. Not having a manufacturing plant for its products can be an advantage for Gap if it can effectively procure its goods for third parties and transport them to its stores in a timely manner.  As the environment in which Gap operates is very dynamic, production is likely to involve highly specialized labor and equipment which normally tends to be very inflexible.

Marketing

Gap has its own marketing team headquartered in the San Francisco Bay Area. Its in-house marketing teams create everything from hang-tags and in-store posters to billboards and TV commercials. Gap took advantage of various channels of promotions including television, print, outdoor and online.  However, its advertising is sometimes unclear and confusing.  Also advertising is a non core business activity for Gap.  Evaluating the effectiveness of its advertising is a difficult job.  It may be a good idea for Gap to outsource it advertising operations.

Gap's products and services differ from the rest of their competition because they have more to offer and they can also compete on the international market.  Their clothing is tailored to fit many different age ranges. The gap brand has a strong presence in the marketplace. Gap has introduced various product lines for its customers. It s product offerings includes jeans, pants, denim products, active wear, accessories, loungewear, sleepwear, underwear, fragrances and cosmetics. It tries to meet customer preferences by providing a wide range of products to its customers.  It has been able to successfully segment the market on the basis of the customer's age.  It provides concept stores for the different ages of its customers (example: Gap Adult, GapBody, GapKids, babyGap and GapMaternity).  The company sells products internationally and as of August 2002 it had 2,323 concept stores domestically.  Overexpansion has added to Gap's woes as one store is cannibalizing sales of another. Individual stores are experiencing declining sales and increasing operating costs.
The company also has drifted from its tradition designs and may need to reassess it customer preferences. An organization should be able to understand what the customer wants and supply the needs of the customer. 

Distribution

Third-party manufacturers ship merchandise to Gap's distribution centers, which sort and redistribute it to our stores. The distribution centers are strategically located throughout the United States and in Canada, the United Kingdom and Japan, its distribution centers are the backbone of Gap Inc.'s worldwide operations.  However, it has been facing logistical issues.  It needs to strengthen its supply chain and ensure that low turnover items do not occupy shelf space for too long or high turnover items are out of stock. Also customers are currently unable to pick up online order through its stores. Gap needs to be able to identify fashion trends and launch new styles into the market far quicker than its competitors.

Customer Service

Gap relies on customer service as one its selling points. Sales associates and other store personnel are trained to answer customers' questions about fabric, fit and fashion, and to help them select merchandise that's perfect for them.  Gap believes that it is a full service organization and believes that the superior service that it provides to its customers will enable it to achieve differentiation in the competitive market place.

Finance

Due to misjudgment of fashion trends in 2000 and 2001, Gap's revenue grew more slowly than the cost of goods sold. During this period revenues grew less than 2%, whereas cost of goods sold grew more than 10%. As a result gross margins fell from 41% to 35.8%. Gap's total sales in the second quarter of 2002 fell to 1.1 billion from 1.2 billion in the previous year.  Both Standard and Poor's and Moody's had lowered Gap's credit rating which made it more expensive for it to raise capital.

Management:

The company has recently announced that Paul Pressler would be made Chief Executive Officer of Gap Inc and Gary Muto would be the President of Gap U.S.  The management believes in expanding its operation and it opened 663 new stores between October 1999 and October 2000, however, since then it has slowed new-store openings.  Gap has heavily invested in brand differentiation and customer service.

Competitive Environment:

General Environment:

According to the U.S. Department of Commerce sales at specialty stores rose only 0.7% in 2001. Sales at women's apparel stores fell 2.5% and those at men's stores declined 1.8%. However, young men's and juniors apparel store sales rose a whopping 24.3 percent, with units up 10 percent, in the first half of 2001--faster growth than in any channel researched. (according to The NPD Group.)  This growth in the young men's and junior segments was captured by Gap's rivals.  Overall, there is a recession in the economy during this period and high growth rates would be difficult to achieve.

Competitors

The general competition in market place is fierce and all the players are looking for maximum market share.  The apparel industry has very few barriers to entry and new entrants enter the market all the time.  There are many companies that currently compete in the specialty retail industry.  The major competitors for Gaps in the segment based on price and size of operations are American Eagle, Abercrombie and Fitch.  All of Gap's competitors are uniquely placed in the marketplace and often have retail stores in the same shopping malls as Gap and each one tries to get the maximum customer dollar. The customers who buy from Abercrombie and American Eagle are mostly the teen to college aged student while Gap attracts a more diverse group of people catering to teens all the way down to early and late twenty-something's.  Gap has casual and dressy clothing while their competitors mostly carry casual outfits like jeans, sweaters, and t-shirts.  Gap also has a baby line, a kid's line, and a body line, which includes underwear and pajamas.  
American Eagle Outfitters captures the high school demographic with price points often $10 to $20 lower than rival Abercrombie & Fitch and Gap, whose winning streak slowed in 2001. Total sales increased to $1.3 billion, up 27.6 percent over the 48-week period ended Dec. 30, 2000 . American Eagle Currently operates 633 stores in 47 states . American Eagle plans to continue capturing a segment of Abercrombie & Fitch's  and Gap's customers with its similar assortment of cargoes, tech pants, T-shirts and sweaters. Aside from price, another point of differentiation is its footwear collection. Abercrombie & Fitch earned its team letter by providing athletic-inspired sportswear to All-American golden boys--or girls, catering to the 18 to 22-year-old collegiate set. Top line was up 12 percent as of January 5 2001, to $1.3 billion for its fiscal year that started Feb. 4, 2001 . The brand is popular and aspirational to teens. It has a young and sexy image is enhanced by signage featuring scantily-clad, chiseled lacrosse players and sylph-like beachgoers. Abercrombie & Fitch played into this by introducing intimates in 2001, which has grown into one of its strongest categories.

Industry Dynamics:

The industry is very dynamic and the player needs to differentiate in order to gain maximum profitability.   The business model of Gap is different compared to its competitors because they do not try to exclude certain types of people.  Gap tries to represent an image where any type of person could wear their clothes no matter what gender, age, race or body size.  Gap offers the maximum range of products to its customers as compared to its competitors.  Most players in the industry have outsourced their manufacturing to third world countries in order to achieve lower production costs.  Industry player try to focus their attention on the design, branding and marketing aspect of business. 

Critical Issues and Strategies:

Some of Critical Issues that Gap faces are as follows:

Declining Sales: Gap has faced declining sales in its stores for the past 28 months.  The company needs to do a thorough analysis of the product categories it currently represents.  It also needs to do a market study on customer profiles and customer preferences.  The company expected its traditional customers to buy its trendy style products however, this was a failure.  Hence it needs to reassess its strategy on customer focus and provide goods that customers are willing to buy.  Gap needs to lay emphasis on customer service and ensure that it provides the customer with the best service. Gap also needs to assess it current stores and study if stores are cannibalizing each other sales. The apparel market is a very generic market and Gap needs to create differentiation in order to attract customers to its stores.  It needs to be able to differentiate its products on the following basis:

1. Brand: For many customers the brand is most important asset and Gap needs to be able to exploit its Brand to its maximum.  A brand also provides a guarantee by the producer to the consumer of the quality of the product.  Purchase of apparel is a personal experience and Gap can extend this experience by providing an embodiment of identity and lifestyle.
2. Customization: By providing customers customization Gap will be able to customer with personalized products and truly meet their requirements. 
3. Price: In a competitive marketplace Gap can differentiate itself on the basis of price. It needs to price is products competitively and ensure that customer are able to see this differentiation
4. Styling: Gap needs to be able to provide its customers with stylish products and in a timely manner.  In a fast changing environment Gap needs to be able to identify fashion trends and launch new styles into the market far quicker than its competitors.
5. Product Reliability: the company also needs to ensure that the products are of the finest quality and meet the customers requirements.  The company can also bring out the message of its product reliability through its advertising.

The company also needs to create a high amount of loyalty among its customers.  In a competitive market place a business needs that its customers are loyal to it and keep coming back to it.  The company does not want to loose its existing customer base, hence it may need to undertake a loyalty program in order for existing customers to keep coming back to its stores.

Gap should also lay value chain emphasis on its inward and outward logistics.  As in the retail apparel industry, if a product does not hit shelves when it is in demand, it creates customer dissatisfaction.  The company also does not franchisee any of its stores, the company may look into this avenue for international expansion as marketing goods internationally requires region specific knowledge, which may take an unusually long time for the company to acquire. 

Alternative Strategies:

The company should also try and target the plus sizes (sizes 16-26) and extended plus sizes (28-34).  The reason for choosing this alternative is that this would be a natural expansion for Gap and create economies of scope for the company.  The company already has vendors capable of making these products and the also the logistical operations in place to execute this alternative.  The company already has the infrastructure in place to bring this idea from the design board to the shelves.  The strategy would be a low cost strategy to increase sales.  The bigger cost associated would be the reduction of floor space for current products.  The company needs to a do a thorough analysis of its floor space utilization based on profitability and sales. Also there are very few players in the plus size market, hence my being the first to enter the market the company would be able to achieve a first mover advantage in the marketplace. The company has to ensure that the products are of the highest quality and styles and designs meet customer expectations and preferences.  The company may need to employ specialist designers for the plus segment however, the company may find that the price premium of targeting this segment with a differentiated product outweighs the higher cost of small volume production.

Recommendations:

Online Store: A prominent trend with the apparel industry is its expansion of online sales.  For example, in 2001 22% percent of American Online people bought online clothing. Gap needs to follow up its online store with it promotions like free delivery, discounts, and other benefits on its websites: gap.com. 

Loyalty Program: The retail specialty apparel industry is a very competitive industry with many competitors.  In this industry customer loyalty is very difficult to achieve.  Gap needs to take steps to increase loyalty.  It can start a rewards program in order to retain its traditional customer base.
Differentiation: In a generic market place differentiation is the key to be successful.  Gap needs to differentiate itself from its competitors in order to gain market share.  It needs differentiate from its competitors by providing a unique atmosphere in its stores and selling merchandise according to customer preferences.

Marketing Campaigns:  The company needs to create unique marketing campaigns in order to bring back customers to its stores. It may also need to assign a professional advertising agency to plan its marketing campaign and not rely on its in house marketing team. It also needs to synergize its marketing efforts to create a stronger a brand presence.

Logistics:  The company needs to provide the integrated logistic and supply chain management systems.  The company also needs to ramp up its warehouse in order to lower the turn around time between design creation and the goods hitting the selves.  A low turnaround time would insure that the goods reach the customers while they are still in demand

Design Team: The company also may need to restructure its design team as they have been performing poorly.  The design team is an integral part of the operations of the company.  The design team is the core of the enterprise hence it needs to strengthen this team and ensure that they are more attuned to the changing market preferences.

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