Question

Between 2000 and 2012, Gap, Inc. (Gap) ceded its world leadership position in specialty fashion retailing to Inditex of Spain and H&M of Sweden. These two companies, each less than a quarter of Gap’s size in 2000, were now setting the pace in the global mass fashion market, and Gap appeared to be falling ever further behind. In the intervening twelve years, three CEOs had struggled to turn around the fading brand. While several temporary profit boosts appeared to herald a recovery, a sustained rally remained elusive. Mickey Drexler, Gap’s CEO since 1983, who had been responsible for Gap’s rise to global prominence, was fired in 2002 after two years of double digit, same-store sales declines and a 75% drop in the stock price. 1 His successor, Paul Pressler, appeared to have engineered a remarkable recovery, but was fired in 2007 after disappointing sales and another slump in profits. His replacement, Glenn Murphy, fresh from a successful turnaround at a Canadian drug-store chain, promised tighter price controls, lower administrative costs, and a leaner, more aggressive Gap. He cut costs and drove up earnings per share, but sales continued to decline. After four years of troubles, Murphy brought in former J. Crew President, Tracy Gardner, to consult with the Gap brand and he began a bold program to close one fifth of Gap’s North American store base. In 2012, sales had lifted 8%, same-store sales were strongly positive for all of Gap’s domestic sub-brands, and the company’s share price had lifted nearly 50% from the prior year. After 12 years of poor performance, had Glenn Murphy finally discovered the answers to Gap’s problems?  Mickey Drexler: 2000-2002 After Gap, Inc. “misjudged fashion trends in 2000,” its sales growth rate slowed to 18%, below the historical average, and operating profits fell 20% to $1.4 billion.3 CEO Mickey Drexler, was confident that this stumble was a short term problem, but 2001 results suggested otherwise. Sales lifted only 1%, operating profits plunged anther 70% to $426 million and the company made a net loss. 2002 saw sales rise 4% and operating profits recover to $1.0 billion, but comparable stores sales continued to fall. Gap’s stock price decreased from a high of $53.75 in February 2000 to $14 in May 2002.4 Several top designers and senior executives left the company “disillusioned with how bureaucratic the organization had become.” Analysts noted that, while Gap had made “button-down shirts, chinos and basic cotton T-shirts the boomer uniform,” it was struggling to resonate as well with some members of Generation Y (those born in the late 1970s to early 1990s) who were “looking for individuality, not conformity.”6Chairman Don Fisher had had enough. The night before the Gap board meeting on May 22, 2002, Steve Jobs, a board member, called Mickey Drexler to warn him that the board was planning to fire him the next morning. Drexler entered the board meeting aggressively and a board member later described it as “a very emotional scene.”Despite his shock and disappointment, Drexler quickly recovered. In 2003, he became the CEO of J. Crew, a quality basic clothing chain which was incurring heavy losses. Within two years, he had returned it to profitability and, within five, he had more than doubled sales. Paul Pressler: 2002-2007 Paul S. Pressler replaced Drexler as the CEO of Gap, Inc. Pressler had spent 15 years with The Walt Disney Company and ended his tenure there as the chairman of Walt Disney Parks and Resorts. The press noted the difference in the two men’s leadership styles: whereas Drexler “flew by the seat of his khakis,” relying on his honed intuition to direct apparel development, Pressler was researchoriented and left decisions about apparel to Gap, Inc.’s designers. 8 Pressler stated, “I had to demonstrate to everyone that the general manager is here to lead the people—not pick the buttons.”9 Pressler moved quickly to close 200 underperforming stores, slow the rate of new openings, and reduce excess inventory, 10 resulting in a “spectacular turnaround” in 2003. 11 Between 2002 and 2003, operating profits rose 87% to $1.8 billion, marginally beating the all-time record set in 1999. Gap Brand Pressler hired Canadian Pina Ferlisi as executive vice president of product design in March 2003 to define the division’s style aesthetic. Before joining Gap, Inc., Ferlisi worked at Perry Ellis, Tommy Hilfiger, and Theory; she also helped launch the successful Marc by Marc Jacobs line. Her Gap design team was located in New York City and included Vice President of Women’s Design Louise Trotter, who formerly worked at Calvin Klein, and Vice President of Accessories Design Emma Hill, who previously held a similar post at Marc Jacobs. Both Trotter and Hill hailed from the U.K. Scores of consumer and employee insights indicated that female Gap customers felt that the brand’s offerings were too androgynous and boxy. Hence, Ferlisi made the women’s lines more feminine and focused on fabric and fit. Banana Republic For years, Banana Republic had a reputation of being “a purveyor of chic basics—casual office wear in black or beige”27—i.e., an upscale Gap. However, under the direction of President Marka Hansen, the division focused on making its product assortment more fashionable and trendy, minimizing the overlap between Gap and Banana, and catering to 25- to 30-year-old professionals . Hansen explained, “What’s the hook or differentiation? . . . It’s an affordable, covetable luxury . . . . We’re bringing fashion to a wider audience. Old Navy Under President Jenny Ming, Old Navy continued its focus on families, rolling out underwear, maternity, and infant lines to raise margins.32 The division expanded to Canada in Pressler’s first year as CEO and it targeted Hispanics with its first Spanish television spot at the end of 2003. The company’s localization strategy was tested in select Old Navy stores in 2004, and the company planned to extend the program to all Old Navy outlets in 2005. Forth & Towne Gap, Inc. established five test stores for Forth & Towne in Chicago and New York by fall 2005. Under Gary Muto’s leadership, the firm positioned Forth & Towne to appeal to women aged 35– 50. Gap Online Toby Lenk, a 1987 Harvard MBA, headed the company’s online division, Gap, Inc. Direct. In 2004, Gap, Inc. was the largest U.S. online apparel retailer with sales of over $500 million. It was “redesign[ing] and rebuild[ing] all of [its] websites from the ground up” to enhance visitors’ online shopping and to improve online and in-store integration.47 Lenk noted that 35% of the company’s Web site visitors were pre-shoppers preparing for store visits, and 13% of those who entered a Gap, Inc. store had visited the store’s online site beforehand. The firm’s new e-commerce platform would allow the sites to take back orders and preorders. Lenk explained, “This means we will never have to walk a sale on a basic item, and at the same time it will allow us to run our basic inventory much tighter.”48 The company planned to have most of the Web site enhancements completed by the 2005 holiday season. Marketing Along with reworking Gap’s main brands, Pressler also overhauled Gap’s public image and publically positioned its divisions as lifestyle brands. The CEO remarked, “We need to bring more theatrics, storytelling and consistency [to retail]. If you can’t tell me what a Gap dinner party, Banana Republic car or Old Navy vacation looks like, then we haven’t built our stories.”49 Pressler had also been focused on differentiating the brands and “upgrading the marketing functions at all of Gap’s brands, including the hires of new head marketers at all three units.”50 Recent Gap-brand TV advertising featured actors and singers. The company paid 40-year-old actress Sarah Jessica Parker, former Sex and the City star, $38 million to appear in television and print ads for three seasons during 2004–2005. It replaced Parker with 17-year-old British soul singer Joss Stone as its Gap spokes-model in the summer of 2005.51 In an effort to tout its “vastly expanded variety of fits” in jeans, the company planned to use more nontraditional types of advertising—i.e., “guerrilla marketing and grassroots tactics,” according to Jeff Jones, executive vice president of marketing at Gap. After lackluster results in 2005 and six consecutive quarters of declining same-store sales, Pressler pointed to 2006 as a key year to prove Gap’s recovery and justify his rebranding efforts.60 Pressler noted, “We are acting with a tremendous sense of urgency to win back customers.”61 Pressler also increased the annual cash dividend 78% for 2006 and the board authorized a further $500 million for a share repurchase program, $250 of which would be repurchased in Q1 and Q2 of 2006. Fisher: Interim CEO, 2007 Although Fisher was interim CEO for less than a year, he made a number of moves that undid much of Pressler’s previous work. Less than a week after firing Pressler, he cut many of Pressler’s hires from Disney. Cynthia Harriss, the president of Gap U.S., was replaced by Marka Hansen, the previous president of Banana Republic and an employee since 1987. Fisher also closed all Forth & Towne stores by the end of June, taking a pretax charge of $40 million.67 Although Forth & Towne has been open since 2005, financials were never disclosed for the brand. Fisher also began to reduce Gap’s workforce to bring down expenses, cutting a “relatively small percentage” of the 150,000 workers. Glenn Murphy: 2007-2012 On July 26, 2007, Gap appointed Glen Murphy, as the new CEO. Since 2001, he had been the CEO of Shoppers Drug Mart, a Canadian drugstore chain. Murphy’s first major move as CEO was to cut expenses and control inventory discounting. Quarter three profit for 2007 lifted 26% due to lower marketing spending and better product margins. In 2008, Spain’s Inditex overtook Gap, Inc. as the world’s largest specialty apparel retailer, reaching $3.3 billion in sales for the first quarter of 2008 compared to Gap’s $3.25 billion.86 With over 200 designers and rapid supply chains that could produce and stock hot items within weeks. Problems returned in 2011. Sales remained steady at $14.5 billion, but operating profits fell 27% to $1.4 billion. Murphy hired former J. Crew President, Tracy Gardner, to consult with the Gap brand. Gap announced plans to shut more than one fifth of its North American stores over the next two years and aimed to shrink the U.S. store base to 700 by the end of 2013.91 Murphy noted that China was Gap’s biggest market for further growth. However, by the end of 2012, Murphy’s strategy appeared to be working. Sales lifted 8% to $15.6 billion, a six-year high, and operating profit recovered to $1.9 billion. Store closings lifted sales per store in the North American Gap to $3.7 million (from a low of $3.3 million in 2009) and comparable store sales were strongly positive for all of Gap’s North American divisions. Gap had also made significant steps toward streamlining its production and engaging more closely with trending fashions. By 2012, Gap had cut its lead time from more than nine months in the early 2000s to less than four months for key items.96 Across all lines, production time had been cut by nearly one third. 97 In January Gap acquired Intermix Inc. for $130 million, which promised expansion into the luxury market as well as greater access to of-the-moment fashion pieces. Although Intermix didn’t manufacture its own clothing, it has established relationships with a variety of high street designers. What else could Murphy do to restore Gap’s leading position in fashion retailing? Would Murphy’s international and online focus be enough to sustain this turnaround?

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What is the case about?

What are the important events that occurred in the case?

What can we learn from reading the case?

What advice do you have for the leaders in the case and/or company in the case?

Answer 1

What is the case about?

Ans: The Case deals with how GAP struggled from year 2000 to 2012 in the market due to the leaders not able to read the market, may be because of their Management style and being a little business myopic. The company lost a major of its market share to other small companies as it grew bureaucratic and was not able to judge the fashion trends in the market.

During the intervening 12 years three CEOs who came from a successful previous positions were not able to turn the table for GAP. The case shows how they were not able to get the desired sale figures even after taking drastic measures from cost cutting to hire experts from the industry.

  

What are the important events that occurred in the case?

Ans:

1) Mickey Drexler from the year 2000 to 2002 was not able to get the hold of how fashion market was changing and due to which he was not able to put a finger on why GAP was losing its sales to other companies, the sales went below the historical average and the operating profits were declining.

2)He seems to believe it was a short term problem but the facts from the financials were stating other way. Stock price decreased from a high of $53.75 in Feb, 2000 to $14 in May 2002, several top designers and senior’s executives decided to move away from GAP. The company was losing touch from the demographics of the Market.     

3) After Drexler was let go Paul Pressler succeeded in doing some justice to the company his research oriented approach helped him in reviving the health of the company.

4)He went on reducing number of underperforming the stores, slowed down new opening and gotten rid of the excess inventory which resulted boost in sales figure for year 2003.

5)Pina Ferlisi was taken on board as Executive VP of product design, she had worked with many big fashion houses in US. A lot of changes were made to the product that GAP was selling, they went from making androgynous and boxy cloths to more feminine and chick looking clothes for women’s.

6)In 2004 Gap started to stand on its foot again with sales of over %500 million, it ventured in to the virtual space to enhance visitors online and improve online and in store integration.

7)Big dissections regarding marketing and Positions were taken for image building and making it a lifestyle brand. Sarah Jessica Parker from sex and the city was paid $38 Million to appear in television and print ads for GAP.

8)Almost too much money was spent and Presseler made GAP go all over the place. He took too much on the plate he could handle.

9)Fisher came in as interim CEO during 2007 and took over from Pressler and pretty much undone everything Pressler has done.

10Glenn Murphey in 2007 made some changes as the new CEO, he hired former J.Crew President to consult with the GAP brand, he went on to shut down one fifth of north American store in the next two years to follow, lead time was cut done from more than nine month to less than four months for key items.

11)Significant steps toward streamlining the productions were made and it engaged more with the trending fashion inmarket.                   

What can we learn from reading the case?

Ans: Through this case study we can learn that the fashion industry is constantly evolving and adapting as consumer's lifestyles change. Businesses need to be aware of this and must constantly update their merchandise in cohesion with consumers changing wants and needs. The Gap has always offered basic clothing, classics, and over the years as people's taste's have changed, Gap has remained almost exactly the same. Consumers have found Gap's styles easy to ignore and have also realized that Gap offers merchandise one can easily find elsewhere. Gap has lost touch with its brand, and its consumer market. Fashion businesses cannot succeed without maintaining these three aspects. In addition, this case study reassured the fact that businesses need to have their own specific target markets. In order for a business to be successful, it must establish a market niche and satisfy that market through specialization and reasonable costs. Having a specific target market paves the way for a greater brand loyalty and establishes a company's image. Gap's merchandising strategy has been to sell to everyone around the world and their sales have been declining. The Gap has lost its sense of exclusivity and has declined due to cannibalization. The company expanded to the point where it began sabotaging itself. The Gap is stuck in the middle between the company's two other brands, Old Navy and Banana Republic. Customers would rather shop at one of those brands than the Gap, because consumer’s lifestyles have changed. Consumers will either look to save money and shop at Old Navy or they will go more upscale and shop at Banana Republic. Fashion businesses need to set themselves apart and make changes as consumer lifestyles change. Overall, what makes a fashion business successful is the brands customers. In order to be most profitable and successful a fashion business needs to define its target market, meet their needs and wants, and adapt to changes in consumers lives. The more consumer-centric a business is, the more successful they will be. Gap struggled with establishing their image and their consumers got confused and began looking to buy other retailers merchandise instead.

What advice do you have for the leaders in the case and/or company in the case?

Ans: In order to be successful in market every fashion house must establish a market niche and satisfy that market through specialization and reasonable costs. Having a specific target market paves the way for a greater brand loyalty and establishes a company's image. Gap's merchandising strategy has been to sell to everyone around the world and their sales have been declining. The Gap has lost its sense of exclusivity and has declined due to cannibalization. The company expanded to the point where it began sabotaging itself. The Gap is stuck in the middle between the company's two other brands, Old Navy and Banana Republic. Customers would rather shop at one of those brands than the Gap, because consumer’s lifestyles have changed. Consumers will either look to save money and shop at Old Navy or they will go more upscale and shop at Banana Republic. Fashion businesses need to set themselves apart and make changes as consumer lifestyles change. Overall, what makes a fashion business successful is the brands customers. In order to be most profitable and successful a fashion business needs to define its target market, meet their needs and wants, and adapt to changes in consumers lives. The more consumer-centric a business is, the more successful they will be. Gap struggled with establishing their image and their consumers got confused and began looking to buy other retailers merchandise instead, it is very essential that brand should clear picture to the customer of its own need and preference. In order to conduct an effective analysis of developing strategies for fashion brands, every business should research to know more about the Promotional area of fashion merchandising. Knowing more about how companies get their brand name out to the public and convey a specific image is an important factor in success of the brands. Also, I believe businesses need to know more about specialization, because I am aware that it is a key factor to set a company apart from its competitors.