Good genes may not be enough

Despite establishing a reputation as one of corporate America’s most iconic brands, mass-market retailer Gap is not the leading fashion force it once was. While it retains its position as the largest clothing chain in the US with a network of over 3,000 stores and a growing presence across Europe, sales at the company have been in steady decline since chief executive Millard “Mickey” Drexler left the company almost six years ago.

Gap has been widely criticised for shifting away from its traditional focus on basic knitwear and denim in favour of “trendy” ranges targeting younger consumers as it has attempted to broaden its appeal. The retailer once again failed to excite shoppers over the crucial Christmas trading period with overall group sales slipping 4% to $2.34bn (£1.2bn) in December, 10% below the levels of two years ago, when the group embarked on a turnaround strategy.

The troubled chain has hired investment bank Goldman Sachs to explore “strategic alternatives”, fuelling speculation it is gearing up for a sale of the whole company or a spin-off of one or more brands. With its impressive portfolio of brands – including Old Navy and upmarket Banana Republic – Gap is a prime turnaround target, but analysts say it might struggle to attract a buyer willing to meet the expected $18bn-plus (£9.3bn) price tag for its store chain.

Verdict Research senior retail analyst Maureen Hinton says: “The failure of the management team is not something that potential buyers should take lightly. If Gap was sold as a whole the challenges would remain.” The ultimate decision about the future of the San Francisco company, established in 1969 by Donald and Doris Fisher, rests in the hands of its founding family, which collectively controls a 37% stake.

Industry commentators argue Gap has failed to keep up with fashion trends, falling behind more innovative competitors such as American Apparel as well as leading European fashion chains, such as Zara and Hennes & Mauritz (H&M).

In an attempt to woo shoppers back to its stores, Gap last year embarked on its biggest ever advertising drive. Developed by US-based global agency Laird & Partners the campaign featured an eclectic mix of celebrities from British actress Helen Mirren and Dazed and Confused editor Jefferson Hack to the singer Seal and rapper Common. It coincided with a viral promotion featuring a digitally adjusted Audrey Hepburn sporting its new “skinny” pants. But the hype was not enough to lure customers through its doors.

Interbrand chairman Rita Clifton explains that while celebrity endorsement can prove effective, Gap failed to attach these icons to an effective product proposition. “It extended the brand, but not in a way that tends to set the agenda and capture the pieces of the season.” Verdict’s Hinton agrees: “The combination of high-profile advertisements and new concept stores has failed to address the fundamental problem of how the Gap brands can become relevant again to 21st century consumers.”

Moreover, Gap has yet to embrace “fast fashion” lead times in its supply chain that would enable it to respond more quickly to developing trends.

The retailer is going some way to address these issues particularly in Europe, where it has invested heavily over the past two years. Last year, it set up its first London-based European design and merchandising team, spearheaded by Steven Sunnucks, the former New Look chief executive. The results of the new venture will be rolled out to the shopfloor later this year, and analysts have responded positively, viewing it as a step towards driving the distinction between its US and European product offerings.

“Its ranges need to be transformed from a US design-led business to a more UK-focused offering to capture the interest of UK shoppers, who often have very different ideas about clothing styles to their US counterparts,” Hinton says.

Gap’s European spokeswoman, Anita Borzyszkowska, says the results of the venture are already filtering through, illustrated by collaborations with European designers such as Roland Mouret. Gap hopes the new structure will also enable the brand to “shorten its speed to market”, Borzyszkowska adds.

But the company has just experienced an exodus of high-profile marketers in the US. Gap vice-president of marketing Kyle Andrew has left and is to be replaced in the interim by Bobbi Silten, chief foundation officer of The Gap Foundation, the brand’s philanthropic arm.

Andrews is joined by Chris Hufnagel, vice-president of brand store experience, president of Gap Adult Denise Johnston and executive vice-president of marketing at Old Navy Susan Wayne.

A spokeswoman confirms European marketing director Clare Dobbie is to stay in her role, and that changes in the US will not affect the review of European agency arrangements. Gap is poised to appoint PHD to its £30m pan-European media planning and buying account after a pitch against MediaCom.

Despite signs that change is afoot at the retailer, the company has a challenging task ahead: to win back customer loyalty in an increasingly turbulent retail environment.

Timeline
1969 Gap is founded as a specialty San Francisco-based apparel and accessories retailer by Donald and Doris Fisher
1983 Acquires Banana Republic, a catalogue safari and travel brand with only two stores. It is later rebranded as an upscale clothing retailer
1994 Launches value chain Old Navy
1995 Millard “Mickey” Drexler takes over from Don Fisher as chief executive and oversees a massive expansion plan
2002 Board appoints senior Disney executive Paul Pressler as Drexler’s successor after poor performance
2004 Donald Fisher retires from the board and is replaced by his son Robert Fisher. The family still collectively controls 37% of company stock. Begins a review of the three core brands and sells off its German operations to H&M
2005 Creates Forth & Towne retail brand 2006Begins massive ad push but fails to stage a turnaround, with total group sales slumping 4% in December. Launches online retailer Piperlime.