The Gap, Inc.

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The Gap, Inc.

founded: 1969

Contact Information:

headquarters: 1 harrison st. san francisco, ca 94105 phone: (650)952-4400 fax: (650)427-2795 url: http://www.gap.com

OVERVIEW

In 1998 The Gap, Inc. operated about 2,200 casual clothing stores in the United States, Canada, France, Japan, and the United Kingdom. The company markets its clothes to men, women, and children under a variety of different brands and through several different retail chains including The Gap, GapKids, babyGap, Banana Republic, and the Old Navy Clothing Company. The Gap, with 1997 sales of more than $6.5 billion, was one of the world's most successful and fastest-growing clothing retailers. The company built international brand name recognition and market clout in an industry considered one of the toughest and most competitive in the world. Its continuous efforts to broaden its market and introduce products that would appeal to a wide range of consumer tastes resulted in consistently high annual growth. One example of The Gap's market-widening strategies was its development of the Old Navy Clothing Company in the mid-1990s. This particular subsidiary was aimed at teens and young adults. It provided quality apparel at low prices. From 1997 to 1998, the Old Navy chain grew by nearly half, from 180 stores to 262 stores. Ventures like this, along with the continued release of new products, helped The Gap, Inc. to become one of the country's leading fashion retailers.

COMPANY FINANCES

Over the decade from 1987 to 1997, The Gap recorded steady annual sales growth averaging around 20 percent a year. Sales rose 23 percent in 1997 to more than $6.5 billion from just less than $5.3 billion in 1996. Net earnings also climbed, up from $1.09 per share in 1996 to $1.35 per share in 1997. The company attributed its consistent sales growth to the continuous increase of retail selling space, both through the opening of new stores and the expansion of existing stores. In 1996 and 1997, increases in comparable store sales also contributed to net sales growth. By the end of 1997, Gap stock had quadrupled in value over its mid-1995 worth.

Sales continued to climb in 1998, with the company reporting sales of $609 million for the four-week period ended May 30, 1998, an increase of 47 percent over sales of $413 million for the same period the previous year. Comparable store sales for May 1998 also increased by 24 percent over sales for May 1997. With total sales of $2.33 billion for the 17 weeks ended May 30, 1998, an increase of 42 percent over sales of $1.64 billion for the same period in 1997, The Gap's growth strategy seemed to be well on track.

ANALYSTS' OPINIONS

While The Gap's consistent and broad-based success caused many analysts to look favorably on the company, the high price of Gap stock in 1997 and 1998 occasionally led to extremes in evaluations. Analysts pointed to the company's strong back-to-school sales and the success of Old Navy in attracting the fast-growing teen and young adult market—a market that showed strong trends in disposable income and consumption spending.

The Gap's extraordinary growth in sales and profits, combined with a level of stability virtually unheard of in the retail industry, led some to refer to it as the blue chip of specialty retailers. The Online Investor called The Gap a "hot apparel company whose stock was trading at big premiums," and more analysts began upgrading the company in 1998.

HISTORY

The Gap, Inc. was founded in 1969 by Donald and Doris Fisher in San Francisco, California. The Fishers opened a small store that concentrated on selling Levi's Jeans. They decided to name the store "The Gap" as a reference to the "generation gap." Eight months later a second store was opened in San Jose, California, and by 1970, six Gap stores had been opened. In its beginning, The Gap focused its attention on teenagers; but by the mid-1970s the decision was made to expand into active wear that would appeal to a broader range of consumers. Even with these efforts, by the 1980s "the Gap was still dependent upon its largely teenage customer base," according to Hoover's Online.

In 1983 Fisher hired Mickey Drexler as the company's president in an effort to update the company's image. Drexler, a former president of women's clothing manufacturer Ann Taylor, had a spotless record in the apparel industry. His preliminary efforts involved a complete overhaul in the company's mundane clothing style. He introduced apparel that was sturdy, brightly colored, and made from cotton. Drexler also consolidated the Gap's private clothing label into the Gap brand. By 1991 any merchandise sold in the Gap stores was the exclusive Gap brand, made specifically for the stores. The new president also removed many of the typical circular clothing racks and replaced them with white shelving. This decorating move not only made the clothing readily available for customers to try on, but it also created a more attractive, less cluttered shopping environment.

In 1983 The Gap, Inc., which already owned and operated well over 550 stores, acquired Banana Republic—a move that dramatically extended the company's reach and exposure. Banana Republic's line of clothing featured a safari motif. The Gap expanded upon this idea, creating a development team to add innovative fashions and accessories. Unfortunately, the novelty eventually wore off and by the late 1980s, Banana Republic's profits were declining. Drexler decided to downplay the jungle image, and introduced a broader range of clothing, including higher-priced leather goods. By the 1990s Banana Republic was in good shape and once again able to contribute to The Gap's rapid growth.

Another Gap subsidiary, GapKids, was introduced in 1985 after Drexler experienced several unsuccessful shopping trips with his own children. He found that many stores offered poorly designed and uncomfortable clothing for children. Added to this was the reality that basic apparel for children was often hard to find. GapKids offered clothing that was fashionable and appealing to parents who shopped at Gap stores themselves. The new chain was enormously successful. In 1990, GapKids introduced a line of clothing exclusively for infants and toddlers. Called babyGap, the new brand was available in most GapKids stores.

In 1994 The Gap launched Old Navy Clothing Company. Originally tested under the name Gap Warehouse, the new store focused on the youth market, offering trendy casual wear at affordable prices. In 1995, Banana Republic opened its first stores outside of the United States in Edmonton and Toronto, Canada. The company also launched a line of bath and body products at Banana Republic the same year.

The Gap continued its expansion in the following years, opening 298 new stores in 1997 and closing 22, for a net gain of 276. The newly opened stores included 98 Gap stores with 18 international locations; 76 Gap-Kids and babyGap stores, with 21 international locations; 34 Banana Republic stores, including 1 store in Canada; and 90 Old Navy stores. The company completed construction of a 189,000 square foot building in San Bruno, California, which serves as part of its headquarter facilities. Meanwhile, the company continued its phenomenal growth, yielding sales 23 percent higher than in 1996, and was showing continued growth into 1998.

STRATEGY

The Gap believes that its brands are among its strongest assets. Its growth strategy is focused on developing and growing those brands. One of the keys to strengthening brand loyalty is advertising. In 1997 the company boosted its investment in advertising and marketing as a percentage of sales by 0.8 percent over the prior year. The company's biggest advertisement was a coordinated print and television campaign for "Khakis," which were becoming increasingly popular among men and women. Sales began growing at a much faster pace than jeans.

In 1997 The Gap also began to explore the possibility of store label credit cards, additional flagship stores, and more extensive television advertising to complement its in-store marketing programs. New product offerings such as home accessories and personal care items were also used to increase brand recognition.

FAST FACTS: About The Gap, Inc.

Ownership: The Gap, Inc. is a publicly owned company traded on the New York Stock Exchange.

Ticker symbol: GPS

Officers: Millard S. Drexler, Pres. & CEO, 1997 base salary $1.9 million; Robert J. Fisher, Exec. VP; Pres., The Gap, GapKids, 1997 base salary $848,548; Warren R. Hashagen, Sr. VP, CFO, 1997 base salary $328,100; Donald G. Fisher, Chmn., 1997 base salary $499,274

Employees: 81,000

Principal Subsidiary Companies: The Gap, Inc.'s principal subsidiaries are Banana Republic, Baby-Gap, GapKids, and Old Navy Clothing Company.

Chief Competitors: Clothing retailing is one of the world's most highly competitive businesses. The Gap's many competitors include: Benetton; Federated; J. Crew; Bugle Boy; Calvin Klein; Dayton Hudson; Dillard's; Esprit de Corp.; Guess?; Gymboree; J.C. Penney; L.A. Gear; Lands' End; The Limited; L.L. Bean; May; Nautica Enterprises; Nike; Nordstrom; OshKosh B'Gosh; Polo/Ralph Lauren; Reebok; and Spiegel.

Along with increasing brand recognition, the other main focus of The Gap's strategy for success has been store expansion and development of new distribution channels. Moves in this direction included adding new store formats such as Gap/GapKids combined stores, large flagship stores, men's/women's-only stores, baby-only stores, airport locations, and a wholesaling arrangement with duty-free stores in Hong Kong, Guam, Singapore, Australia, and New Zealand. The company also began integrating its Gap and GapKids field organizations to strengthen brand focus. In addition, it launched an electronic retailing operation on the Internet.

INFLUENCES

The Gap's continued success has depended largely on its ability to increase sales at existing store locations, to open new stores, and to operate stores on a profitable basis. The company has always been searching for new ways to attract customers. One way of doing this was by consulting the public directly. Between 1992 and 1994 The Gap retained the services of the market research company Prophet to conduct surveys to determine what consumers wanted to see in the stores. The primary source for this information was derived from in-store surveys using portable data entry templates. Those who decided to take part in the survey were directed to Prophet employees on the basis of purchases. They were also given clothing incentives for answering surveys. The data was collected on a nightly basis to obtain the most accurate information.

The surveys provided The Gap, Inc. with reports on areas such as credit card preference, store impressions, and shopping experiences. All of the information aided the company in providing its customers with the quality service and merchandise they wanted.

Nothing breeds imitation like success—and The Gap's success has spawned a host of imitators, all of whom, as the company points out, "make the retail environment in which the Company operates more competitive." The Gap has so far weathered recessions and economic downturns, yet as a retailer, it remained vulnerable to future declines in consumer spending on apparel.

Like many other companies, The Gap faced the need to ensure that its operations would not be adversely affected by software or other system failures related to the year 2000. In 1997 it established a program to identify and implement any necessary changes to its computer systems, applications, and business processes.

CURRENT TRENDS

The Gap has always been willing to venture into new areas in an effort to keep up with current trends and consumer desires. It has rejuvenated its product lines and catered to as many different types of consumer as possible. Besides expanding into the children's clothing market in the late 1980s, the company launched the Old Navy Clothing Company in 1994 to capture a growing, high-spending youth market with funky casual clothes at value prices. Because traditional Gap stores appealed to an older, more upscale market, the move paid off. It helped to quickly expand the company's market.

Old Navy provided extras such as toys, accessories, trendy layouts, and special displays that would attract young shoppers. Stores featured a stripped-down warehouse look with concrete floors and exposed pipes, adding to their hip appeal. Old Navy was able to compete on price while offering a much lighter ambience well-suited to young shoppers who didn't want to spend a lot of money, but were too brand-conscious to shop at the mass market discounters. All of these factors were introduced at a time when discounters such as Target and Wal-Mart were becoming increasingly popular.

CHRONOLOGY: The Gap, Inc.

1969:: Donald and Doris Fisher found The Gap Stores, Inc. in San Francisco, California
1971:: The fishers take The Gap public but retain a majority of the stock
1976:: The Gap makes its first major stock offering
1983:: Micky Drexler is named as the company's president
1985:: GapKids is introduced
1991:: The Gap's clothing label is consolidated into Gap brand
1995:: Old Navy Clothing Company is launched by The Gap

PRODUCTS

The Gap's focus has always been to stay on top of current fashion trends while providing the products its customers wanted. When the company was first launched, its primary target was teens and young adults. Although it has diversified its customer base over the years, The Gap remains committed to offering comfortable, casual clothing. Denim was always a mainstay of the youth market, and it was not long before its appeal spread throughout the community. At the end of the 1990s, The Gap retained its youth-oriented focus as it continued to diversify its range of offerings through stores like Old Navy and Banana Republic. With everything from jewelry and accessories to T-shirts and leather jackets, The Gap's range of products has something for everyone—including children, who can be outfitted in miniature versions of popular Gap items at GapKids and babyGap.

CORPORATE CITIZENSHIP

As a modern, youth-oriented company, The Gap has always made a point of trying to behave as a responsible citizen. It has often been quick to provide aid to those in need. One such act of philanthropy occurred in 1997 when The Gap announced that it would be donating $10,000 to the American Red Cross to help flood relief efforts in Kentucky. In addition to the monetary donation, The Gap provided clothes to flood victims who were forced to leave their personal possessions behind due to rising water levels.

Some Gap employees who worked at the company's distribution center in Erlanger, Kentucky, were also affected by the disaster, with at least five of them being forced to leave their homes during the flood. Like the other victims, the Gap employees also received assistance from the Red Cross. According to Molly White, senior director of Gap, Inc. Community Relations, "When employees are affected by a natural disaster, it really brings the tragedy close to home. Because the Red Cross is there for them, we as a corporation want to be there for the Red Cross."

On the environmental front, The Gap is one of eight organizations, including the Natural Resources Defense Council, that manages the Recycled Paper Coalition, which encourages recycled paper purchasing and paper recycling. In 1996, The Gap used environmentally certified, sustainable harvested tropical hardwood for flooring in two of its new Banana Republic stores and later built an experimental "green" Banana Republic store in Texas using primarily recycled materials. A full-time environmental staff oversees manufacturing operations and coordinates programs to recycle shipping and packaging materials at Gap stores throughout the United States. The Gap was also a leading sponsor of the San Francisco area's "Spare the Air" campaign for 1998.

GLOBAL PRESENCE

Although most of The Gap's more than 2,200 stores are located in the United States, the company has opened stores throughout the world, including Canada, France, Japan, Germany, and the United Kingdom. The company also planned to open affiliates in Japan and Germany. The first European store was opened in 1987, and by 1997 the company owned more than 60 stores in Europe.

The Gap built a 129,000 square foot warehouse and distribution center in Roosendaal, the Netherlands, in order to strengthen its European base. While the European stores performed well, they remained unprofitable as of 1997 due to a soft retail market, low brand awareness, and company investments in infrastructure.

EMPLOYMENT

The Gap regards its employees as its most valuable resource. The company offers a comprehensive benefits package that was used to improve quality of life and assist employees in meeting their responsibilities at work and home. Benefits include dental and medical coverage, as well as savings plans. Vacations and paid holidays are also a standard part of employee compensation packages.

SOURCES OF INFORMATION

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"gap inc. announces may sales." san francisco, ca: the gap, inc., 4 june 1998.

"the gap, inc." prophet case studies. prophet marketing research, inc., 1997. available at http://www.prophet.com/prophet-services/cases/the gap.html.

the gap, inc. annual report 1998. available at http://www.sec.gov/archives/edgar/data/39911/0001012870-98-000890.txt.

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"the gap, inc." hoover's online, 1998. available at http://www.hoovers.com.

tagliabue, john. "international business; enticing europe's shoppers." the new york times, 24 april 1996.