GAP Strategic Analysis

GAP products & Brands

Gap stores offer an extensive selection of classically styled, high quality, casual apparel at moderate price points. Products range from wardrobe basics such as denim, khakis, and T-shirts to fashion apparel, accessories, and personal care products for men and women.

GAP entered the children’s apparel market with the introduction of GapKids in 1986 and BabyGap in 1989. These stores offer casual apparel and accessories in the tradition of Gap style and quality for children ages newborn through pre-teen. GAP also offers maternity apparel.

GAP launched GapBody in 1998 offering women’s underwear, sleepwear, loungewear, and sports and active apparel. GAP also operates Gap Outlet stores, which carry similar categories of products at lower price points.

Brand Names

Old Navy

GAP launched Old Navy in 1994 to address the market for value-priced family apparel. Old Navy offers broad selections of apparel, shoes, and accessories for adults, children, and infants, as well as other items, including a maternity line, consumables, and personal care products.

Banana Republic

Acquired in 1983 with two stores, Banana Republic offers sophisticated, fashionable collections of casual and tailored apparel, shoes, accessories, and personal care products for men and women at higher price points than Gap. They also operate Banana Republic Factory Stores, which carry similar categories of products at lower price points.

Piperlime

Launched in October 2006. Piperlime offers customers an assortment of the leading brands in footwear, handbags, apparel, and jewelry for women and footwear for men and kids, as well as tips,trends, and advice from leading style authorities.

Athleta:

Acquired in September 2008, Athleta offers customers high quality and performance-driven women’s sports and active apparel and footwear that is stylish and functional for a variety of activities, including golf, running, skiing and snowboarding, tennis, and yoga. Customers can purchase Athleta product, as well as an assortment of products from leading brands in women’s active wear, online or through the catalog.

 

 

Mission Statement

Gap Inc. is a brand-builder. They create emotional connections with customers around the world through inspiring product design, unique store experiences and compelling marketing.

Objectives

1.      Consistently delivering product that aligns with their target customers, with an overall objective of improving their sales trend while delivering healthy margins.

2.      Maintaining a focus on cost management and return on invested capital.

3.      Generating strong free cash flow and returning excess cash to shareholders.

4.      Investing in the future while delivering earnings growth.

Strategy

By the end of 2009, a year witnessing the passing away of Don Fisher, the company founder, the global financial crisis aftermath, a strong change in customers behavior patterns (due to climate change, decreasing disposable income, & general non-spending trends), GAP has maintained a stable – proceed with caution – strategy.

Focusing on the relation with the customer, targeting a tighter bond with stores visitors, was – and still is – the main driver at GAP.

Attractiveness of the Industry – Porter’s Five Forces

A- Rivalry among Current Competitors in the Industry

§  In the apparel industry, rivalry among competitors is high. There are several strong competitors, such as Abercrombie & Fitch and American Eagle. The shortness of the product lifecycle of clothing intensifies competition, since new styles and marketing campaigns are introduced a number of times each year by each competitor. These companies differentiate their products making use of price, marketing, advertising, fashion and technology to retain or steal market share.

§  Big Discount retailers also sell clothing, reducing margins of specialty apparel retailers

§  Move to mimic high fashion in short time over staple clothing

§  Competition over brand image instead of prices

B- Threat of New Entrants/ Barriers to Entry

Barriers to entry into the apparel retail and manufacturing industry is relatively low, however large companies like Gap Inc need not worry about small retailers. For a company to enter the apparel industry and compete with Gap Inc would be very difficult and expensive.

Gap Inc and its direct competitors benefit from economies of scale; they can produce and purchase very large amounts of raw materials and finished articles and can offer them to consumers at significantly lower prices.

These companies also have very large budgets for marketing and advertising, and benefit from being mature in their industry, having very elaborated networks and connections across numerous countries.

§  Thus, the observed barriers to entry are :

§  High capital expense to establish strong retail presence

§  Entrenched brand identity 

§  Switching costs away from brand identity

C- Bargaining Power of Customers

Customers have very low buying power. Gap Inc has many clients who make small purchases that have very little effect on total sales individually. Although in some cases rapidly changing fashion desires for core demographics leads buyers to trendy brands

D- Bargaining Power of Suppliers

Bargaining power of suppliers is also relatively low, however it is more significant a threat than bargaining power of customers. Raw material (textile) is important in the apparel industry, and companies importing finished products from manufacturing overseas could possible face the threat of the manufacturer deciding to expand into the retail industry.

Also, Difficulty of training Eastern suppliers leads to exclusive relationships and a reduced volume of good supplier

E- Threat of Substitutes

Threat of substitutes differs for the many different brands within the apparel industry. Higher end clothing faces a higher threat than low-end clothing companies.

Clothing is considered a basic need, and in a time of economic difficulty, consumers will likely substitute designer clothing (i.e. Hugo Boss) for less expensive clothing brands (i.e. Wal-Mart, Target).  This should be a point of interest and concern among Gap Inc executives, since they carry a high-end, a mid-range, and a cheaper brand of brands (Banana Republic, The Gap, and Old Navy Respectively).

 Summary of External Factor Analysis

EFAS Matrix table

External Factors	Weight	Rating	Weighted Score	Comments
Opportunities § Growing popularity of online shopping § Expansion to the orient, opening branches in China and India § Growth in the foot wear market § Elimination of textile import quotas. § Customer Database and smart cards system. § Fast Fashion.	0.15 0.10 0.05 0.10 0.05 0.05	4 3 2 3 4 1	0.60 0.30 0.10 0.30 0.20 0.05	§ PiperLime and Athleta online stores emergence. § Branches in China & India are already operative, with more branches to come. § The global footwear market is growing, and Gap Inc should try to diversify into shoe retailing. § Better approach to high volume imports from overseas suppliers, and effect on lowering costs. § CAO hiring, better understanding of customers preferences. § The market segment is young enough for Gap to become a primary player by leveraging its economies of scale.
Threats § Decline in consumer spending § Intensive rivalry and competition § Counterfeits and Fakes § Possible governmental tariffs on imports § Increase in market segmentation by niche brands	0.15 0.15 0.10 0.05 0.05	3 3 1 2 3	0.45 0.45 0.10 0.10 0.15	§ Change in executive policies. § Marketing campaigns and sales efforts need to increase. § Copyrights, patents, & defensive actions are needed. § Balancing supply orders to mitigate risk without losing benefits of quantity no-quota § Need to distinguish new PiperLime and Athleta products.
Total	1		2.80

Financial highlights for fiscal 2009 include the following:

Ø  Net sales for fiscal 2009 were $14.2 billion compared with $14.5 billion for fiscal 2008, and comparable store sales decreased 3 percent compared with a decrease of 12 percent last year.

Ø  Gross margin for fiscal 2009 was 40.3 percent compared with 37.5 percent for fiscal 2008.

Ø  Operating margin for fiscal 2009 was 12.8 percent compared with 10.7 percent for fiscal 2008.

Ø  Net income for fiscal 2009 increased 14.0 percent to $1.1 billion, or $1.58 per share on a diluted basis, compared with $967 million, or $1.34 per share on a diluted basis, for fiscal 2008.

Ø  In fiscal year 2009, they generated free cash flow of $1.6 billion compared with free cash flow of $981 million in fiscal 2008. Free cash flow is defined as net cash provided by operating activities less purchases of property and equipment. For a reconciliation of free cash flow, a non-GAAP financial measure, from a GAAP financial measure

Ø  As of January 30, 2010, cash and cash equivalents and short-term investments were $2.6 billion, with no debt outstanding. They believe their cash balances and cash flows from operations will be sufficient for the foreseeable future.

 

Business and financial priorities for fiscal 2010 are as follows:

Ø  Consistently delivering product that aligns with their target customers, with an overall objective of improving  sales trend while delivering healthy margins;

Ø  Maintaining a focus on cost management and return on invested capital;

Ø  Generating strong free cash flow and returning excess cash to shareholders.

Ø  Investing in the future while delivering earnings growth. As to continue to focus on regaining market share in North America in fiscal 2010,plan to expand internationally through the following:

Ø  Opening  first Gap stores in China and Italy

Ø  Expanding Banana Republic in Europe;

Ø  Opening additional outlet stores in Canada, Europe, and Asia; and introducing their   online shopping experience to customers in Canada and Europe.