What went wrong with the Gap?

Commentary about business and finance.
March 9 2006 1:28 PM

The Shrinking Gap

The ultimate '90s brand slides toward the murky middle.

No one's minding the Gap anymore. Click image to expand.
No one's minding the Gap anymore

The Gap is one of the megabrands that shaped retailing and consumer culture in the 1990s. Throughout the decade, city corners, suburban main streets, and exurban strip malls were carpet-bombed with the emporia of reasonably priced denim and cotton. And along with those other megastores of the 1990s—Starbucks, Staples, Barnes & Noble, Home Depot—the Gap became so ubiquitous that consumers all over the country could share common retail experiences. The Gap also imposed itself on the larger culture with its popular ads; the Saturday Night Live parody featuring David Spade, Chris Farley, and Adam Sandler as shop girls; and Monica Lewinsky's stained blue dress.

The Gap influenced the way people dressed—remember the unfortunate jeans and light-blue work-shirt period when yuppies outfitted themselves like dock hands?—and surfed the business-casual wave. Parent company Gap Inc. expanded and extended the core brand, adding Baby Gap and Kids Gap. It segmented the market, too, rolling out Banana Republic for upscale shoppers and Old Navy for bargain-hunters. And the company could apparently do no wrong. The charts from the 1999 annual report are stunning, particularly the one on Page 16. Sales rose more than sixfold, from $1.9 billion in 1990 to $11.6 billion in 1999. In 1999, the company opened 299 Gap stores in the United States, bringing the total to 1,767.


But since the millennium turned, it's all gone horribly wrong. For retailers, same-store sales growth is the key metric. And as this chart of same-store sales since 2000 shows, the numbers for Gap stores are ugly: down 12 percent in 2001, down 7 percent in 2002, and off 5 percent in 2005. By my calculation, a hypothetical Gap store that did $1,000,000 sales in fiscal 1999 did only about $830,000 in fiscal 2005. And the trend is continuing. In February, same-store sales for the Gap North America unit fell 7 percent. "In February, traffic worsened versus fourth-quarter trends, which caused lower unit sales velocity. This led to significantly lower merchandise margins," as executive Sabrina Simmons put it. (Translation: People avoided our stores the way Republican politicians are avoiding Jack Abramoff, so we had to mark stuff down or eat the inventory.)

Declining same-store sales at rapidly growing companies can sometimes be chalked up to cannibalization—too many stores opening in close proximity to one another. But in recent years, the chain has been culling the Gap herd, according to the historical store count. (Whatever problems the company has, the Gap's corporate Web site is loaded with great material.) Between May 2002 and January 2006, the number of Gap North America outlets fell from 1,599 to 1,335, a 15 percent decline. Combine the shuttered stores with the lower same-store sales, and it's no surprise the Gap's revenues are shrinking. For the full year 2005, Gap North America's sales shrank from $5.7 billion to $5.4 billion. In Fiscal 2000, as this chart shows, the unit accounted for a whopping $5.9 billion in sales. The parent company's other units, Banana Republic and Old Navy, have fared somewhat better, but they haven't exactly been pictures of health this decade. As a result, earnings at Gap Inc. have generally slumped. And the stock has been a stinker over the last several years.

So, what went wrong? After all, 1990s-era megaretailers that sell staples—like Staples or Starbucks—have been able to forge lasting customer relationships that bring repeat business. Clearly, clothing and fashion—even the most basic clothing and fashion—don't work that way. People's tastes change as their incomes and lives change. The Gap was tailor-made for people like this writer, who, lacking any interest in or knack for fashion, just wanted affordable clothes that would be acceptable in school, at work, or at leisure. But over time, many of the Gap's core customers had to start dressing better for work. Others acquired better or more expensive tastes. Or, as in my case, they acquired spouses with more discerning taste.

It's possible—though hard to imagine in a country with the amount of vacant land and population growth that the United States possesses—that the Gap simply ran out of good shopping sites. And quality certainly has something to do with it. Based on my most recent visit, I can't help but think that the Gap is on the wrong side of the fine line separating cheap (as in low price) from cheap (as in low quality). Or perhaps, pace Jared Diamond, there's some Darwinian cycle whereby a retailing chain that expands recklessly beyond its natural habitat exhausts resources, gets sick, starts to whither, and ultimately faces Collapse.

The biggest problem for Gap stores is that the chain now occupies the murky middle, even in the parent company's own portfolio. And in the age of mass luxury and two Americas shopping, the middle market is nowhere. People who really need to scrimp on clothes spending will go to Old Navy, or H&M, or Wal-Mart. And those who can afford to spend more will go to Banana Republic, or Barneys, or Nordstrom.

Whatever the reason, the Gap, which once suffused the zeitgeist, now barely registers.

And management clearly feels the Gap has long since reached saturation. The Gap is no longer even Gap Inc.'s flagship brand: In 2005, the Old Navy unit rang up $6.8 billion in sales, compared with $5.4 billion for Gap North America. This year's plans for store openings and closings call for 175 stores to be opened in fiscal 2006, "weighted toward Old Navy." The company is investing in a new concept, Forth & Towne, for older women. Meanwhile, it expects to close 2006 with 60 fewer Gap stores in North America. The lion's share of those closings will be in the United States. In other words, every year the U.S. retail market expands, and every year the Gap shrinks, occupying a smaller and smaller space.


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