Newcomers close in as gap struggles to find festive cheer

The decision by Gap not to advertise on TV this Christmas shows the changing face of fashion retail in the US as the old guard struggles to see off new rivals

Last week, Gap announced that it had failed to meet even the low expectations of most investors and analysts, with a gloomy set of third-quarter results showing a 20 per cent drop in profits and a bleak outlook for the final quarter. Largely blamed on its poor merchandising and misread fashion cues, most observers believe Gap needs to stop relying on dramatic price cuts to shift its product – by creating more designs that people want to wear and are prepared to pay full price for.

In the US, Gap also owns the Old Navy and Banana Republic brands – but neither of these have been able to make up for the poor performance of its parent, with sales falling an overall eight per cent across the group in every region – including overseas.

Gap chief executive Paul Pressler admits that the quarter’s results were “unacceptable” and says it is taking aggressive steps to improve its products. Gap head of brand Cynthia Harriss says: “We’ve disappointed our customers for several seasons and we know it will take us time to win them back.” This was highlighted nearly a year ago in a review of its unsuccessful 2004 holiday season, which concluded that the Gap brand had become too fashion and “occasion” oriented.

The other big news to emerge this month is that Gap will not be running a Christmas television campaign in the US this year. In recent years it has run a string of colourful festive TV campaigns featuring catchy tunes and celebrities such as Madonna and Missy Elliot. The fact that such a huge retailer not running TV ads in the biggest season of the year marks a significant shift in marketing strategy. Gap spent about $44m (&£25.6m) on advertising in the fourth quarter of last year, with more than half going towards TV (TNS Media Intelligence).

A Gap spokesperson confirmed that the decision not to run TV ads this quarter was due to recent research conducted to compare regions with and without Gap TV ads that saw no difference in traffic between those with and without the campaigns. Although the company will continue to run TV spots for its Old Navy and Banana Republic brands, Gap will be promoting its Christmas lines through print inserts in shopping-related magazines and the internet, including a holiday website featuring a gift guide, online games and ringtones.

Gap also faces stiff competition from trendier, less expensive rivals such as H&M, Zara and Limited Group, whose brands include Express and Victoria’s Secret. Swedish-owned H&M has already tested the US market with stores in Manhattan and on the east coast of the country. This month it opened two stores in San Francisco, its first on the west coast. One of the fashion concepts H&M has done so well is to convince consumers that fashion is almost disposable. The recent launch of a Stella McCartney range for H&M proved how successful the concept of buying high-fashion items for less has been, now embraced by designers as well as retailers.

It’s not all good news for Gap rivals however, and Limited has been facing tough times, with sales down at Victoria’s Secret as well as its Express and Limited brands. This resulted in the group reporting losses of $12.3m (&£7.2m) this quarter, compared with a profit of $78.3m (&£45.7m) a year ago.

Japanese fashion retailer Uniqlo is the latest to join the battle. The chain is only ten years old and is often described as Japan’s answer to Gap, so it seems fitting that it has turned its attention to Gap’s backyard. Uniqlo is the number one retailer in Japan – the world’s second largest economy – with almost 700 stores and revenue that totalled $3.5bn (&£2bn) in 2004. Uniqlo’s initial expansion outside Japan was not without problems, especially in the UK, where its expansion to 21 stores within a year of opening proved too aggressive, resulting in the closure of 16 stores. However, Uniqlo’s senior management claim their UK experience was a valuable one and that they have brought this experience to the US market. They quietly opened their first store in a mall in New Jersey this autumn, using inserts in local newspapers to publicise the opening. The message the four-page spread carried was simple: no models and very low prices.

Traditional department stores are another sector that many observers believe have had their day and cannot compete effectively in the tough US retail market, with standalone brands and discounters such as Target proving more alluring to many shoppers. However, there are a lot of Americans who clearly do not know they are supposed to be shopping elsewhere. Nordstrom has seen sustained growth this year, while Federated Department Stores, which includes the Macy’s and Bloomingdales brands, had revenues of more than $30bn (&£17.5bn) in 2004.

Of course, in the current retail climate the online sector cannot be forgotten. Once again it is forecast to be the fastest-growing retail sector in the run up to Christmas, with Retail Forward predicting 27 per cent growth and sales reaching $27.3bn (&£15.9bn) in the fourth quarter. A new phenomenon has also been noted – Cyber Monday – the first Monday after Thanksgiving, which this year falls on November 28. On Cyber Monday, millions of Americans, fresh from their long weekend, are back at work and back online – many of whom will have browsed offline stores over the weekend and will go online to buy things they liked. According to trade group Shop.org, 77 per cent of online retailers reported a substantial sales increase on the Monday after Thanksgiving last year. Many online retailers will offer deals such as free shipping or discounts to entice customers in the holiday mood.

The US retail landscape has changed massively in past decade and creating a lasting retail brand is a huge challenge. Merchandise needs to be fresh, distinctive and appropriately priced – a difficult mix to get right. But when it’s done properly, either online or in the mall, or ideally both, the spoils of winning the US fashion retail war are significant, with huge amounts of money to be made. Recent events such as Gap moving millions of dollars away from TV and into print and online mark a shift in retail marketing, as it becomes harder for all brands to separate themselves from the crowd and prove that they truly are the leaders of the fashion pack.â¢

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