General Strengths and Weaknesses of Gap Inc.: Analytical Essay

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A. Company Introduction: GAP Inc.

1. History and Brand Portfolio

List of GAP Inc. brands as of 2018

Includes GapKids, babyGap and GapMaternity

Banana Republic

Acquired in early 1980s

Offer style from business formal to casual

Old Navy

Launched in the 1990s

Positioned at lower price with casual apparel

PiperLime

Online fashion market launched in 2008

Closed in 2015

Intermix

Boutique retail chain acquired in 2013

2. GAP Inc.’s global presence

Gap Inc. is a global company with almost 3,700 stores worldwide, including company-operated stores in the United States, Canada, the United Kingdom, France, Ireland, Japan, China and Italy, and franchise stores in Asia, Australia, Europe, Latin America, the Middle East and Africa.

The GAP brand currently has 1,700 company-operated and franchise retail locations. GAP Inc has also expanded its online presence to around 70 countries. (2018)

3. GAP Inc.’s problem in 2016

Sales decline between 2014 and 2015 was reflected in every geographic region except Asia, and every brand except Old Navy which experienced a 1% increase in sales in 2015 (Exhibit 2).

The company also saw very little growth in net sales, only increasing from $14.5 billion to $15.8 billion in five year.

Amid the decline in store performance, GAP Inc announced closure of underperforming stores in 2016 to improve operating cost (see also Exhibit 1). The closure affects primarily Gap stores in North America and Europe, while other regions saw net gains in number of stores (Exhibit 3).

This situation, along with macro-environmental and industrial factors identified in the following part of this report, has raised the problem of whether GAP Inc. can develop a strategy that help the company back on its profitability track.

B. Case study Analysis

1. Strategically relevant components of the U.S. Retail, Family Clothing Stores industry macro-environment.

Sociocultural factors

Exhibit 5 from the case study demonstrates the demographic characteristics of the industry in 2016, where segmented sales of women’s clothing made up the majority of industry sales. Age demographics also indicated that the largest purchasers of clothing were within the employed generation with disposable income. These two factors are recognized as the “key drivers of industry growth” , indicating how the segmentation of clothing by demographics and the fluctuation of disposable income may be relative determinants of the market demand for clothing retailers.

Other sociocultural factors to be considered should be consumer’s buying habit and attitude towards product.

With the growth of Internet and smartphones during the last two decades, along with the improvement of logistics, online marketplace had been made easier and and become a more common practice. This shift in buying habits was also reflected in demographics of consumers, ‘to this degree of adoption, demographics whose experiences with such technology had begun at earlier ages have now become a primary consumer.’ Thus, brands and consumers were then becoming hyperconnected, whose relationship was to take place both online and brick and mortar.

The new retail practice of Fast Fashion also indicates consumer’s attitude towards clothings, where the assumption that ‘consumer wishes to purchase and maintain the clothing for a longer period of time’ was replaced. A faster fashion cycle of production-to-retail shows how consumers could be pushed to ‘continually monitor new clothing, while treating clothes as a disposable commodity.’

Lastly, as the industry saw a decline in mall vacancies and foot traffic, social media seemed to be a contributing factors, since the cultivation of an online presence could help substitute the purpose of entertainment and presence in malls as in the 1990s.

Technology factors

Exhibit 6 shows a 200 percent growth of e-commerce sales in clothing and accessories, compared to the traditional retail chain sales growth. Statistics of retail from the first quarter of 2016 also showed:

$93 billion in e-commerce sales in the U.S.
An increase of 15% from the first quarter of 2015, compared to industrial growth of only 2%, and accounting for 8% of total U.S. retail sales during the quarter.

‘This shift toward increasing consumer confidence in online shopping’ is believed to result from the rapid growth of the Internet, as well as the development of mobile phone, which gave consumers access a wide range information and enabled easier browsing and shopping on websites.

Technology also contributes in the improvement of logistics and delivery system, thus overall making shopping online an increasingly attractive and suitable choice for consumers over visiting brick-and-mortar establishments and in person shopping.

2. The competitive forces of U.S. Retail Family Clothing Industry

Bargaining power of Buyers

Moderate

The bargaining power of Buyers in U.S Retail family clothing industry is represented in consumers’ ability to either postpone their consumption or switching to competing brands. The adequate number and distribution of retail stores, especially within malls, variety of brands, substitutes and the growth of online shopping have overall allowed a low switching costs and strengthened Buyer’s bargaining power in this case.
As e-commerce and the Internet became a common practice, the quantity and quality of information available on products (prices, quality, attributes,…) among different brands also increased, thus giving buyers more power in bargaining.
Quality of products and brand images have becoming greater concerns to purchasers of clothes. Thus, by enhancing such attributes, company may be able to gain brand loyalty as well as bargaining power against consumers.

Bargaining power of Suppliers

Weak to moderate

U.S companies in buying contracts with offshore manufacturers seem to have more purchasing power against their suppliers. The business can be critically important to these manufacturers, considering due to the high volume of its orders, while they have little control over the industry.
In most cases, companies also have the ability to substitute suppliers and minimum supplier substitution costs, thus lowering the bargaining power of their Suppliers.
However, there are a few factors that may have impacts on the bargaining power of suppliers against companies, considering purchases from offshore suppliers compose of a large percentage of the industry. Exchange rate fluctuations and trade restrictions are some others factors to be considered significant.

New Entrants

Weak to moderate

There are a number of visible entry barriers in the industry, namely:
The capital requirements necessary (including infrastructure, distribution chain, human resources, marketing) stands as a great challenge in establishing a new clothing brand.
The industry has seen a moderate growth in the last few years, average annual growth under 2%, while the density of competitors remain high. Thus it is not a highly attractive industry for newcomers.
Brand loyalty and great popularity of established brands can also be a barrier for new entrants to try competing.
However, there is the potential of new entrants with differentiation strategy, especially as fast fashion is increasing in popularity.

Substitutes

Moderate to strong

Industry retailers are adversely affected by competition from substitutes, such as specialty clothing stores. For instance, statistics given above has shown how women’s clothing take up the majority of purchasers, while the market is also witnessing the grow of several women’s specialty stores, boutiques or teenage girl apparels.
Substitutes are available at convenient locations, with attractive prices and comparable quality. These stores also give customers a relatively same level of bargaining power, thus making them equally competitive.

Rivalry among Competing Sellers

Strong

The industry has an overall high density of competitors, with 46,905 businesses recorded in 2018. Statistics on market share also shows how fragmented the industry is, where major companies and brands, despite taking up one third of the industry, could obtain market share ranging from a relatively small number of 5 to 10%.
As bargaining power of Buyers is moderately high, there is an intense competition of not only product differentiation, but also marketing, customer services and other promotions to maintain a good value proposition.
Segmentation from large companies also add to the competitive force, where they are able to compete with specialty brands or with exceptional high prices in high-end brand while still offering low-end brand.

3. General strengths and weaknesses of GAP Inc. (in comparison with main competitors)

Strengths

GAP Inc. has a strong portfolio of distinct brands across multiple channels, addressing the needs and appealing to preferences of different and wider customer segments within family clothing and fashion industry. This is in fact the characteristic of other big companies in the industry, for instance Inditex Group with its portfolio of 8 brands.
GAP Inc. can pose a global presence of its brands across its large number of stores, which matches with the company outlet store and franchising strategy from early 2000s, and plays an important role in market penetrating and building brand image. As of 2016, Inditex Group was also recorded to be operating over 7,013 locations in 88 countries and 29 online markets, including 2,000 Zara stores.
GAP has been a household name due to successful marketing strategy and iconic styles of iconic jeans-and-t-shirts style products. Along with the company’s long established and wide scale business, GAP has earned a huge customer and vendor base.

Weakness

Declining sales and profits for the past few years could be considered as a major weakness that affected the company’s overall performance and strategy, which was stated as a current problem that requires solutions in this report.
Considering the changing factors of industrial environment such as technology, e-commerce and fast fashion, GAP has not succeeded in competing effectively in terms of efficient utilization of online sales channel and new business trends. Its online fashion market was also closed in 2015.

In comparison, Inditex Group proved to have epitomized the fast fashion approach, with “new apparel lines to meet rapidly evolving consumer preferences through its vertically integrated design and manufacturing strategy”. Inditex Group also “started distributing its Zara brand through an official storefront on the largest online Chinese sales platform, T.Mall” and witnesses positive results in its financial performance (Exhibit 7).

4. Key success factors for GAP Inc.

Breadth and depth of product line and selection

is GAP’s current strength,
assist in gaining market share and counter the threat of strong rivalry.

Clever advertising and strong brand-building

made GAP a household and iconic American style clothing brand,
built a strong brand portfolio.

Utilization of technology and e-commerce

is an opportunity to enhance online sales capability,
can help improve production processes and utilizing the trend of Fast fashion approach, which is currently considered a weakness compared to their main competitor.

5. Recommendations for GAP Inc to improve its competitiveness in the market while mitigating any current and future risks.

Enhancing relationships and connecting with consumers

GAP has been one of the top players in the industry, staying as a familiar and iconic clothing brand. Thus, sustaining its current relationship and brand image with customers, enhancing brand loyalty and value proposition are vital to keeping the company on the run and improving their bargaining power against buyers.

While falling behind with their outlet strategy, considering declining the problem of store performance, GAP could improve its competitiveness with a strategy intensely focusing on building a ‘hyperconnected’ relationship with consumers, improving online shopping experience – creating brand online presence instead of mall and retail presence, while flexibly catering to needs and trends. The Fast fashion practice has proved to be a suitable approach – encouraging customers to stores and serving rapidly changing trends, and would stay as an opportunity should GAP can utilize it against competitor.

The risk of offshore manufacturing

While suppliers from offshore should offer lower cost and possess moderately weak impact, a risk of dependency and bargaining power was raised when a large percent of GAP’s manufactured products are solely from China. Thus, recommendations to mitigate this risk, depending on GAP’s internal strategy and financial clout, are either to conduct business with suppliers whose power can be reduced by sole dependence on GAP, or to sourcing from various global reasons using its large vendor base.