Losing home turf gap inc finds respite in the international market

Losing Home Turf, Gap Inc. Finds Respite in the International Market December 2013

Losing Home Turf, Gap Finds Respite in the International Market Gap, Inc., founded in 1969 and headquartered in San Francisco, California (US), is a global retailer (operating in c.40 countries) of apparel, accessories, and personal care products operating under six brand names – Gap, Old Navy, Banana Republic, Athleta, Piperlime and Intermix.

The company also operates its e-commerce business under five websites (www.gap.com, www.oldnavy.com, www.bananarepublic.com, www.piperlime.com, and www.athleta.com) and delivers merchandise to about 90 countries worldwide. Cross-brand shopping bag at Gap, Inc. allows customers to purchase items from across all brands in a single transaction.

Dwindling sales led to aggressive international expansion Gap, Inc.: Sales (USD Bn) and Sales Growth (%) 15.92

15.76

14.53

14.20

14.66

14.55

15.65 7.57%

3.29% -0.60%

-0.78%

-1.00%

-2.26% -7.85%

FY06

FY07

FY08 Sales (USD Bn)

FY09

FY10

FY11

FY12

Y-o-Y Sales Growth (%)

As seen from the above exhibit, sales started declining at Gap, Inc. 2-3 years before the global economic downturn hit the retail industry in 2008-09. The company was losing its sheen to the trendier retailers in the US. Its product line was not getting acceptance in the market, which led to Gap selling its merchandise at a discount. This resulted in a lower top-line and lower profitability for the company.

Surprisingly, the same product line was doing well in the international market despite Gap, Inc.’s limited global presence. Sales were increasing. The company realized that the designs that are not working in the US need not be a dud in the international market too. The company thought of cashing in on this opportunity and formulated a strategy to aggressively expand its footprint in the international market.

“The combination of our global strategy and formidable growth platform puts us in a strong position to expand our reach into the top 10 apparel markets worldwide… …In North America, we’re taking a number of steps to improve sales in the near term, and I’m confident that with a strong management team in place, we’re well positioned for sustained growth across the business."

– Glenn Murphy, Chairman and CEO, Gap, Inc. (2011)

Losing Home Turf, Gap Inc. Finds Respite in the International Market

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Sales from International Market Is Increasing FY06 (c.USD 15.9 Bn)

FY09 (c.USD 14.2 Bn)

15%

85%

US

82%

International

US

FY12 (c.USD 15.7 Bn)

22%

18%

78%

International

US

International

In 2011, Gap, Inc. sensed that it has “over-penetrated” the US market and hence planned to streamline its operations in the country by closing non-performing stores. As part of the strategy, the company also planned to open smaller format ‘outlets’ in the US in the future rather than fullline bigger format stores once it has streamlined the operations.

In the international market, Gap, Inc. bolstered its operations by rapidly expanding franchiseoperated stores rather than opening just company-operated stores (as in its domestic market). As seen from the exhibit below, over the FY09-12 period Gap, Inc. opened c.110 company-operated stores while franchise-operated stores increased by c.176. Further, the company plans to operate c.400 franchise stores by the end of 2014.

As of November 02, 2013, Gap, Inc. operated c.3,160 company-operated stores (US and international) and c. 355 franchise-operated stores (international).

Stores by Geography (No.)

2,657

2,767

2,826

Gap, Inc. increased stores in the international market while streamlining operations in the US

168 North America FY06

FY09

181

208

118

Europe FY12

FY06

FY09

147

230

Asia FY12

FY06

FY09

7

136

312

Franchisee-Operated* FY12

FY06

FY09

FY12

Company Operated Stores Note: *Gap, Inc. operates ‘Gap and Banana Republic’ stores through franchisees in Asia, Australia, Eastern Europe, Latin America, the Middle East, and Africa

Losing Home Turf, Gap Inc. Finds Respite in the International Market

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Gap, Inc. is a well-known brand in the international market, especially China where the company plans to open c.300 Gap stores and additional 100 Gap outlets over the next few years.

Conclusion Gap, Inc. plans to continue to expand its operations and invest in its infrastructure. The company believes there is an opportunity to add 1,000 stores globally and also to increase online sales by c.USD 1 Bn by the year 2016. It is bullish about expansion in the international market and hopes to launch brands like ‘Old Navy’ in some high potential international markets (like China). Although the US still accounts for about three-fourths of the revenue, its share may decline further in the future amid aggressive international expansion as planned by the company.

“Gap, Inc. is determined to build upon its product and revenue momentum in 2012, which was achieved as we focused on becoming the world’s favorite for American style. There is meaningful opportunity for our diverse portfolio of brands to gain share in the $1.4 trillion global apparel market. Over the next five years, key to our continued success will be pushing the envelope further to make shopping seamless to customers through our digital strategy, while seizing the opportunity for Old Navy in many untapped international markets."

– Glenn Murphy, Chairman and CEO, Gap, Inc. (2013)

Appendix: Brand Performance Gap (USD Bn) 5.91

Old Navy (USD Bn) 2.6%

6.25

5.91

18.2%

5.91

5.67

6.11

7.7%

0.1%

12.6% 6.1% 92.1% 60.5%

FY 10

FY 11

FY 12 US

FY12 Canada

FY 10 Europe

Banana Republic (USD Bn)

FY 10

2.66

FY 11

FY 12

FY12

Other Regions

Piperlime and Athleta (USD Bn) 5.6% 2.9% 8.2%

2.61

FY 11 Asia

0.7%

100%

2.89 82.6%

FY 12

FY12

0.25

0.30

0.40

FY 10

FY 11

FY 12

FY12

Source: Company Website; Company Reports; Secondary Research; Sutherland Analysis

Losing Home Turf, Gap Inc. Finds Respite in the International Market

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