At Gap, the new plan is Old Navy
The apparel maker conquered the world with its flagship Gap label, but the company is now pinning a revival on the lower-priced brand. Can Old Navy save Gap?
San Francisco in 1967 hosted the spontaneous cultural phenomenon known as the Summer of Love, when some 100,000 hippies and flower children, clad in peasant blouses and shredded bell bottoms, danced down Haight Street seeking peace, love and understanding. At about the same time, Don Fisher, a 30-something San Francisco native and hotel owner, just wanted to find a pair of jeans that fit.
From that frustration, Fisher went on to disrupt department store apparel sales, by filling a gap in their merchandising. A department store where he bought ill-fitting Levi's didn't have a better-fitting pair in exchange, yet he knew that Levi Strauss & Co. had a plethora of sizes and designs. He persuaded the iconic jeans maker that it needed a specialty store that would be more hip than a department store and filled to the brim with more of its styles.
In 1969, Fisher and his wife Doris opened their first The Gap store (a reference to "generation gap") in San Francisco. By 1973 there were more than 25 locations, including on the East Coast, and in 1976 the company went public.
But it was arguably Mickey Drexler (who recently stepped down as CEO of J. Crew) as the new CEO in 1983, who made The Gap a household name. Drexler grew The Gap into a global powerhouse with hundreds of locations worldwide and a merchandising focus that added casual wear beyond jeans including high quality basics like sweats that, while hardly luxe, fetched a pretty penny from higher income customers.
"He was the greatest re-inventor I ever saw," said Howard Davidowitz, chairman of New York City-based retail consulting and investment banking firm Davidowitz & Associates. "The Gap was and is the biggest apparel chain in the United States. The man is a giant, there won't be another one like him — he’s in the record books. He made the Fisher family multi-millionaires."
Now the company is in need of growth and it's turning to Old Navy, a brand designed to play defense, and away from flagship The Gap.
Old Navy, the Mickey brainchild
About the time of Drexler's arrival, the retailer acquired Banana Republic, a small apparel chain with safari-themed clothing and accessories (which has since morphed to a more upscale, work wear-oriented apparel brand that is also now struggling). But Drexler's really big idea was to develop a sub-brand he dubbed Old Navy, with appealing basics similar to The Gap's, but not quite as fashionable or of quite the same quality, at much lower price points.
"His logic was absolutely perfect to me," Davidowitz said, recalling Drexler's announcement of the concept. "Target is out there with this [private label] 'Merona,' where the denim looks very attractive and it’s half the price of Gap's stuff. He thinks: 'We can’t sell at that price, but I’m not giving up all my customers to Kohl’s or Target. I’m going to build an off-the-mall chain that will compete very strongly with them.' And that’s exactly what they did. The Gap will be The Gap and work on the fashion. The Gap can’t be Old Navy."
It worked. Old Navy safeguarded the Gap Inc. customers lured by lower-priced private-label apparel, which was becoming ubiquitous as fast-fashion players like Zara and H&M expanded and as a growing wage gap and then the Great Recession tightened consumers' budgets. Old Navy, with a few exceptions, has been the feather in Gap Inc.'s earnings hat for several quarters now.
With a new strategy unveiled Sept. 6, the company is acknowledging Old Navy's strength, and Gap's weaknesses. Earlier this month at the Goldman Sachs 24th Annual Global Retailing Conference, the company announced that Old Navy (along with its much smaller athleisure and workout wear brand, Athleta), would underpin a campaign for "long-term, balanced growth."
"Over the next three years, the company expects to add about 70 net new stores, with the addition of about 270 Old Navy, Athleta and value expressions [outlet stores] across the portfolio, and the closure of about 200 underperforming Gap and Banana Republic specialty locations," the company said in a document released at the time, saying also that executives expect Old Navy to exceed $10 billion and Athleta to exceed $1 billion in net sales in the next few years, driven by growth in online and mobile channels, U.S. store expansion and "continued market share leadership in loyalty categories."
The move seems to be a tectonic shift, but Davidowitz sees it as a rational one that neither abandons the Gap brand nor overly depends on Old Navy. "There’s nothing to say that Old Navy will be great five years from now," he told Retail Dive. "But [CEO Art Peck] is trying to identify for the analysts what his growth businesses are. You’ve got a business that’s been going downhill — but by the way he never said he’s closing The Gap. It’ll still be a multi-billion-dollar business, but it’s a shrinking asset. The answer certainly can’t be the high-end business, Banana Republic. When you look at his statement carefully, I thought what he said was totally logical."
Did Old Navy hurt as it helped?
Although Old Navy, by Davidowitz's estimation, retained Gap Inc. customers who would have fled entirely, it's logical to believe that the brand has siphoned sales from its sibling, weakening it in the process. That's inevitable when an apparel company has several brands in its stable developed to reach specific demographics, according to Lee Peterson, who spent 11 years at The Limited when it was still owned by Les Wexner's L Brands.
"That’s exactly what happened at The Limited, the one [Limited Express, now Express] cannibalized the other," Peterson, now EVP of brand strategy and design at design firm WD Partners, told Retail Dive. "Eventually they start eating each other’s lunch. It’s capitalism at its finest, and it’s also the cycles of fashion."
Gap Inc.'s new strategy of shrinking the Gap brand and growing Old Navy fuels that cycle too, he said. "One’s going to eat the other and you’re going to feed it. Old Navy is going so good — margins are better, everything’s better. Les figured that out and got rid of The Limited." (Wexner sold The Limited to private equity firm Sun Capital a decade ago and the retailer then faltered till it went bankrupt this past January, was bought by PE firm Sycamore Partners in February, and appears to be gearing up for a re-launch online, as a shadow of its former self.)
"I don’t think millennials and Gen Z relate in any way, shape or form to Banana Republic."
Shelley E. Kohan
Vice President, RetailNext
Analysts expect Old Navy to thrive and Gap to do all right, with Athleta helping in its niche. But GlobalData Retail Managing Director Neil Saunders believes that Banana Republic may disappear. "They could ditch Banana Republic completely if they wanted to do," he told Retail Dive in an interview. "But Banana Republic could become a sub-brand featured in Gap stores, where it would still mean that they have smart casual work wear."
Without drastic change, Banana Republic has a bleak future so it's no wonder Gap Inc.'s strategy includes shuttering many of its stores. (Tiny Gap brand Intermix is too small to factor into its growth strategy in a major way.) "I don’t think millennials and Gen Z relate in any way, shape or form to Banana Republic," Shelley E. Kohan, vice president of retail consulting at store analytics firm RetailNext, told Retail Dive, though she cautioned that the company still needs to figure out what to do with it. "They give a small percentage in revenue contribution. But it is 17%, so shutting it down without a replacement strategy is unwise."
The new retail triangle
The causes of the seismic changes in retail are complex and various. But according to Peterson, the market can be better understood when you recognize it's fractured into three basic segments and that a retailer must fit into at least one of them to survive. These include: discount — or perceived discount, including dollar stores, Walmart, Old Navy; convenience — "Amazon is right in the middle of the bullseye of that;" and finally, "third wave."
The third wave is what can save a brand from margin-killing discounts and, most importantly, get people's attention and dollars. "Third wave is 'I’m really cool. I’m Shake Shack.' Even Forever 21," Peterson said. "Urban Outfitters, really funky, those are big guys playing in the third wave. There's a boutique in Columbus [Ohio] called Tigertree, [that's] third wave. It's the same with restaurants. McDonald's, Walmart, dollar stores, nobody's going to say 'cool.' Discount, maybe convenience if you ship it to my home, but not third wave."
And into which of the three retail segments does The Gap brand fit? "So here’s the problem," he says. "Gap fits in none of those."
Gap's third wave?
Gap's high-quality, well-fitting basics served young people at first, but also grew to become an antidote to the waning shoulder-padded excess of the 1980s, a uniform of sorts for thoughtful, creative Americans with meaningful priorities who wanted to look and feel good in their clothes. "The Gap has never tried to pretend that it’s third wavy," Peterson said.
Still that was probably about the time Gap last had a clear aesthetic, according to GlobalData Retail's Saunders. "It’s just product that never evolves. They don’t really have a clear sense of what they would like to be. That’s why they default to the same old things, and the prices are too high for that."
There were some attempts at fashion reboots, but the brand misfired a number of times, bringing in and firing a series of designers and creative directors, culminating in an attempt three years ago to double down on essentially style-less "normcore" at a time when fast fashion was cleaning up by knocking off ideas from the haute couture runway. Meanwhile, Old Navy kept ringing up sales.
It's not too late for Gap, however. It could edge itself into a third wave spot of sorts, said Saunders (thought he didn't use that term), through small bore, but meaningful, changes. "Gap isn’t really broken, it’s just not really well cared for," he said. "There needs more effort in terms of range and product and more force in terms of marketing."
"Gap isn’t really broken, it’s just not really well cared for. There needs more effort in terms of range and product and more force in terms of marketing."
Managing Director, GlobalData Retail
Rather than attempting design overhauls that introduce more problems with fit than any excitement, Gap could get a lift with enhancements that fetch both attention and dollars these days, according to Saunders. Rather than a partnership with a major name designer, Gap could embrace more "performance" fabric, with comfortable and aesthetically pleasing stretch, drape and softness, and strict attention to fit. And perhaps embellishments that signal thoughtful design and care. It's the kind of flourish, the pattern and style of visible stitching, or the quality and size of a button, that can help make a sale, at higher prices.
"Maybe a great fit, a shirt that doesn’t come untucked or is designed to wear outside your jeans," Saunders said. "Look at Abercrombie & Fitch, and what they’ve done with a cotton oxford with a soft wash. It's super-soft when you touch it, and I mean it’s really soft. It makes you want to buy it. Or small detailing, the buttons are slightly larger, really nice buttons of obviously high quality. People don’t mind spending a bit of money on it. That’s the kind of thing that Gap could do and doesn’t. A little detail on a product can mean the difference between selling it at a discount and selling at full price."
Gap Inc.'s blog post on its new strategy, as it turns out, is illustrated with an enlarged photo of a Gap button — a copper rivet from a pair of vintage jeans. Old Navy may be the company fulcrum for the time being, but the Gap brand endures. "It’s one of those funny brands — it’s not hated, it’s just that they’re not exciting enough," Saunders said. "But that’s a very good starting point."
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