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The Gap, Inc.

The Gap, Inc.

2 Folsom Street
San Francisco, California 94105
U.S.A.
Telephone: (650) 952-4400
Fax: (415) 427-2553
Web site: http://www.gap.com

Public Company
Incorporated:
1969 as The Gap Stores, Inc.
Employees: 169,000
Sales: $14.4 billion (2003)
Stock Exchanges: New York
Ticker Symbol: GPS
NAIC: 448140 Family Clothing Stores

Founded as a single store by Donald G. Fisher and wife Doris, The Gap, Inc. has evolved into a major retail company with well known brands, including its namesake, Banana Republic, and Old Navy. The firm sells a variety of casual-style and urbane chic clothing to men, women, and children in over 4,250 stores across the United States and in Canada, France, Japan, Germany, and the United Kingdom. The Gap flourished through the 1980s and 1990s under the leadership of Millard Mickey Drexler but has battled tough times in the early years of the new century. Drexler retired in 2002, and Paul Pressler was named CEO while Fisher remained chairman.

Capitalizing on the Generation Gap: 196975

Donald Fisher was not of the generation to whom The Gap owes its popularity. A member of a family that made its home in California for generations, Fisher was 40 years old and a successful real estate developer in 1969 when he took note of a new trend among the citys increasingly disaffected youth. Blue jeans, for years made chiefly by Levi Strauss & Co. for laborers and outdoorsmen, were suddenly becoming a part of the countercultures standard costume. Durable, cheap, comfortable, and acceptably offbeat, jeans were the perfect uniform for a generation of young people anxious to demonstrate its antipathy to corporate America.

Fisher was said to have conceived of The Gap when he was unable to find the right size of Levis in a department store in Sacramento, California. He realized that jeans had become more popular than current merchandising outlets could accommodate, and like hamburgers, stereo equipment, and gasoline, they could be sold through a chain of small stores devoted solely to that product. With the help of his wife, Doris, Fisher opened a shop near San Francisco State University in one of his own buildings, offering a combination of records and jeans. Their intention was to attract jeans customers by means of the records, but at first no one noticed the jeans, and Fisher was driven close to bankruptcy. In desperation, he placed ads in local newspapers announcing the sale of four tons of jeans at rock-bottom prices, and the clothes were soon gone. To emphasize the youthful ambiance of his new store, Fisher named it The Gap, an allusion to a then hot topic, the Generation Gap.

When Fisher incorporated his business as The Gap Stores, Inc., it was an immediate success. Although the Fishers had no experience in retailing, their stores combination of jeans, low prices, and wide selection proved irresistible to the huge market of 14- to 25-year-olds. Fisher added new outlets in San Francisco and was soon enjoying the benefits of chain store merchandising: centralized buying and advertising, excellent name recognition, and uniform pricing. Initially, The Gap Stores buying program was singularly uncomplicated, as the stores carried only one product, jeans by Levi Strauss & Co. The stores were brightly painted, often orange, filled with circular metal display racks known as rounders, and usually enlivened by rock and roll music. To hold down rental costs, the Fishers kept stores smallabout 3,000 to 4,000 square feet. They located most of their stores in shopping centers, many of them enclosed in malls.

Two years after opening its first stores, The Gaps sales were running at $2.5 million annually, and the Fishers converted the company into a public corporation, though they retained the great majority of stock. With extraordinary celerity, they opened stores across the United States while maintaining tight control over the critical accounting, purchasing, and marketing functions of what was soon a sizable corporation. In five years, sales had increased almost 50-fold, to $97 million, and the number of stores had grown to 186, spread over 21 states. Analysts credited the companys success to the Fishers observance of a few cardinal rules of retailing: Gap stores replaced its stock with maximum speed; its prices were low and stayed that way; big sellers were kept on the rack until they stopped moving, rather than being retired in favor of new styles simply for the sake of novelty; and only a few items were stockedjeans, shirts, light jacketseach offered in its complete range of colors and sizes, ensuring a minimum of disappointed customers.

The companys growth was also made possible by the extensive national advertising of Levi Strauss, which provided 100 percent of The Gaps merchandise during its early years. Such dependence on a single supplier had obvious dangers, however, and around 1973 The Gap began marketing several labels of its own, as well as national brands other than Levis. These proved crucial to the companys short- and long-term health; by 1975 Gap stores generated $100 million in net sales.

Ups and Downs: 197680

By 1976, the Fishers were ready to make their first substantial public stock offering. The companys spectacular growth had attracted widespread interest, and its offering of 1.2 million shares sold quickly at $18 per share in May. Coincidentally, however, the retail industry went into a steep slide, which, when combined with The Gaps large expenditures for new stores, pushed the company into the red for the final quarter of its fiscal year, ending July 31. The value of the newly issued stock fell to $7.25, prompting nine separate class-action suits from outraged stock purchasers who alleged that the Fishers had tried to dump their holdings before The Gap announced its bad news. These charges came despite the fact that the Fishers sold only about 10 percent of their holdings during the period in question. Rather than wage endless litigation, The Gap settled the suits in 1979 for a total of $5.8 million, or 40 cents per share, and did its best to mend its frayed relations with Wall Street.

By the end of the 1970s, the company could pay such a figure without undue strain. Adding between 50 and 80 stores annually, The Gap pushed its sales to $307 million in 1980 and was close to achieving nationwide representation. The jeans market was no longer quite so straightforward, however. Members of the great wave of youngsters who had come of age wearing blue jeans in the 1970s were now older, wealthier, and more conservative, and the Fishers were busily attempting to break out of the jeans niche by expanding The Gaps selection of clothing. Several experimental chains featuring upscale fashions were essayed and brought together under the Taggs name but later liquidated because they were unprofitable. Gap stores were enlarged to handle increasing amounts of what became known as casual wear and were frequently moved outside of shopping centers to freestanding locations, where space was plentiful and rent lower per square foot.

Along with the search for a line of clothes to appeal to an older clientele, the Fishers also faced Levi Strauss & Co.s decision to supply big mass marketers such as Sears and J.C. Penney with its jeans. Levis were now sold everywhere, underscoring The Gaps need to develop a label and look of its own. The companys own brands, created during the 1970s, generated about 45 percent of Gap sales in 1980, with Levis adding an equal amount and other national brands making up the balance. Considering that ten years earlier essentially all of The Gaps sales were Levi Strauss & Co. products, the 1980 figures represented an achievement, but it was clear that if the company were to avoid inundation by the rising tide of jeans discounters it would have to fashion a new, exclusively Gap image.

Mickey Comes to Town: 198186

To accomplish this task, Donald Fisher hired Millard Mickey Drexler as president in 1983. Drexler, then 40, had just solved a similar problem with AnnTaylor, creating a more chic image for the chain and quadrupling sales in the bargain. Drexler was born in the Bronx to a family with roots in the garment business and by age 23 was a buyer for Blooming-dales. After a stint at Macys, he became president of Ann-Taylor in 1980, where his work caught the eye of Donald Fisher, who was contemplating the future of The Gap. Drexler accepted the job as president at the end of 1983 (sales $480 million) and was given a block of stock that would make him one of the countrys wealthiest retail executives.

Drexler immediately began The Gaps wholesale transformation, in spite of the companys currently excellent financial status. The new president found little that he liked; proliferating competition in jeans and The Gaps youthful marketing image had forced the company into a price-driven volume business. Its orange-painted stores were cluttered with rounders displaying merchandise of many labels that Drexler later described to the New York Times as trendy but not tasteful... well, just plain ugly. Worst of all, most consumers perceived The Gap as strictly for teenagers at a time when people who grew up in the 1960s were developing more upmarket tastes. It would be difficult to overcome The Gaps 15-year tradition as the place where kids went to pick up a pair of Levis.

Company Perspectives:

At Gap, Inc. we never stop moving. It takes thousands of passionate, dedicated and talented employees around the world to deliver the merchandise and shopping experience our customers expect and deserve. From color to concept, it all begins with inspirationwhether its people-watching on the streets of Tokyo, a flash from a dream, or a visit to a local art gallery.

Drexler began by eliminating all private label brands but one: Gap. Levi Strauss products were kept but relegated to the background; henceforth, The Gap would be known not only as a store, but as a line of clothes as well. Drexler created a large in-house design staff to develop clothes that would be casual, simple, made of natural fibers, and more clearly differentiated by gender than were jeans. The look was informal but classicstill denim-based but including a variety of shirts, skirts, blouses, and sweaters in assorted colors and weaves. It was clothing for people who wanted to look and feel young without appearing slovenly or rebellious, a description that fit a vast number of U.S. consumers in the 1980s.

Gap stores were substantially revamped. Neutral grays and white replaced the garish orange, and the ubiquitous rounders gave way to shelves of neatly folded clothing under soft lighting. The companys advertising, as devised by Drexlers longtime colleague, Magdalena (Maggie) Gross, shifted from radio and television to upscale magazines and newspapers and featured older models engaged in familiar, outdoor activities that were not necessarily connected with the youth culture.

A few years later, Gross launched the Individuals of Style campaign, a series of black and white portraits of both famous and unknown subjects by a team of celebrated photographers. The ads stressed style, not The Gap, whose clothes did not always appear in all of the photos, and they were enormously successful in helping to change the publics perception of the company. The Gap came to mean good taste of an informal variety, and the brand name Gap soon acquired the cachet needed if the company were to compete with other retailers of casual wear such as Benetton and The Limited. In addition, the word stores was dropped from the companys name.

Drexlers revolution at The Gap cost a good deal of money, and financial results for 1984 were poor, with profits down 43 percent to $12.2 million. By the middle of the following year, however, it was clear he had pulled off something of a miracle. Gross revenue, profits, and same-store sales were all up; more importantly, the company had fresh energy and a merchandising focus that could carry it for years to come. In the meantime, The Gap had acquired a number of other retail chains, for better and worse. Foremost among these was Banana Republic, founded in 1979 by another California husband and wife team, Melvyn and Patricia Ziegler.

The two-store chain of safari and travel clothing outfits, bought by The Gap in 1983, had a well-established catalogue business. After its acquisition and the introduction of private-label clothing lines, Banana Republics sales doubled each year through the mid-1980s but slowed quickly thereafter. Despite the mixed results of the Banana Republic acquisition, the company continued to seek out other chain stores. Pottery Barn was a housewares chain of about 30 stores in New York and California; after several problematic years, it was liquidated in 1986. That same year, Drexler sought to fill another clothing need of the baby boomer generation with the debut of GapKids, featuring comfortable, durable clothes for the children of parents who shopped at Gap stores. The concept was a huge success, and along with Banana Republic (which peaked in the late 1980s with revenue of more than $250 million a year) figured largely in The Gaps long-range planning.

The Gap Continues Its Climb: 198796

By 1987, The Gap decided to try its wares outside the United States, and its first international store was opened in London. Additional stores soon sprang up throughout the United Kingdom, Canada, and France. Unfortunately, stateside, Banana Republics safari gear bubble burst, and it became a money-losing liability. The Gap also tested the higher end of the clothing market with Hemisphere, a nine-store chain of upscale U.S. sportswear with European styling. Created in 1987, the same year the company broke $1 billion in sales, Hemisphere offered elegant fashions but soon ran afoul of a severe recession. Disposed of only two years later, neither the Hemisphere mistake or the demise of Pottery Barn was serious enough to cause more than a few tremors at the parent company, whose spectacular rebirth in the Drexler era left ample room for such experimentation.

In 1990, as Banana Republic searched for secure footing, GapKids prospered and launched a new venture, babyGap. Like its sibling, babyGap was a phenomenal success and became a popular attraction in GapKids stores. For the start of a new decade, The Gap was looking very good indeed: a stock split occurred in September, and at year-end the companys 1,092 stores pulled in $1.9 billion in sales with net earnings of $144.5 million. In the early 1990s, Banana Republic was busy refocusing its image while GapKids and babyGap flourished. Overall, though, revenue, net income, and return-on-equity were all outstanding ($2.5 billion, $229.8 million, and 40.2 percent respectively due to another stock split in June) in 1991 and virtually every year since Drexlers program had taken effect in 1985. The Gaps transition from a discount jeans warehouse to a sleek fashion arbiter was not altogether painless, yet the result had been more successful than Donald and Doris Fisher ever imagined. In 1991, the Fisher family still held more than 40 percent of the company, which now operated more than 1,216 stores in the United States, Canada, and the United Kingdom, with plans to expand total sales area by 15 percent annually. Not only had The Gap followed its Baby Boomer clientele as they grew older and wealthier, it provided for their children, too. GapKids was the fastest-growing segment of the company as a whole, with most of the more than 223 GapKids stores housing a babyGap department for infants and toddlers.

Key Dates:

1969:
Don and Doris Fisher open their first store in San Francisco, California.
1976:
The company offers 1.2 million shares to the public.
1983:
Millard Drexler is named president; the firm acquires Banana Republic.
1986:
The first GapKids store is opened.
1987:
The first international store is opened in London.
1990:
BabyGap is launched.
1994:
The Old Navy brand is established.
1997:
The Gap Web site debuts.
2002:
Drexler retires; Paul Pressler is named CEO.

Though 1992 marked a dip in profits and sales growth due to slower turnover and increased competition, the company addressed these problems by turning away from unisex clothing to more gender-specific items. Along with refurbishing stores and placing more emphasis on women, The Gap came back with record numbers in 1993 and a new franchise, originally called Gap Warehouse, because for some it had become increasingly cool not to spend money on clothes (i.e., the grunge and slacker looks). Lacking the trademark flare associated with the company, Drexler hired an outside to firm to come up with a new name to no avail. Then when strolling in Paris with colleagues, Drexler saw the perfect moniker for the down-market stores painted on a building: Old Navy. Hence Old Navy Clothing Company, with stores nearly twice as big as other Gap stores, filled with sturdy, value-priced (20 to 30 percent lower) clothing for the entire family. Despite the circumstances of its birth, Old Navy became another Gap sensation.

Banana Republic, meanwhile, was gaining ground with urbane elegance as a hip alternative to The Gaps casualness. To shore up its product line, the upscale clothier initiated a shop-within-a-shop concept, featuring different collections, jewelry, and leather accessories. By 1994, there were 1,507 Gap-owned stores (188 were Banana Republic) contributing to the companys $3.72 billion in sales. Within a year, there were 1,680 stores210 Banana Republic, 902 Gap, 437 GapKids, and 131 Old Navy. International stores had surged from 1994s 124 (72 in Canada, 49 in the United Kingdom, and 3 in France) to 91 in Canada, 55 in the United Kingdom, 12 in France, 4 in Japan, and 2 in Germany in 1995. Likewise, The Gaps statistics were robust: a two-for-one stock split paid out dividends in March; sales leapt 18 percent to nearly $4.4 billion; and net earnings rose 11 percent to $354 million over the previous years $320 million.

Banana Republic, once a blemish on the perfect Gap picture, had blossomed with more new products, including footwear, personal care items, a sharper focus on women, and five new stores in Canada. At the same time, Old Navy increased its market share by doubling in size, exceeding the companys hopes for its newest division, while Gap and GapKids lost some of their momentum, although babyGap maintained its prominence. New directions for GapKids and babyGap included plush toys, other non-clothing items, and freestanding babyGap stores; The Gap debuted GapScents and continued to broaden its age range and clothing lines to include work attire. Yet perhaps the biggest news of 1995 was Donald Fishers decision to relinquish his duties as CEO of The Gap, Inc. His successor was Mickey Drexler, who added the responsibilities of CEO to those of president. Fisher remained chairman, however, and still kept a hand in running the company he founded nearly 30 years before.

By 1996, The Gaps dominance of the fashion scene was fixed; consumers of all ages could find something in one of its stores. The industry even honored the company in the April issue of Elle when such high-brow designers as Giorgio Armani, Nino Cerruti, Carolina Herrera, Todd Oldham, and Cynthia Rowley paid tribute to the little company that became master of the universe. Though it began with a singular purpose, The Gap, with its burgeoning cluster of stores and subsidiaries, changed fashion for not only baby boomers but for generations to come. The Gaps success was in no small part due to Donald Fishers and Mickey Drexlers business acuity, especially through vertical integration. By keeping the design, manufacture, inspection, packaging, shipment, display, advertising, and ultimate sale of every item with its name in-house, The Gap maintained exceptional quality and consistency in an increasingly erratic marketplace. If The Gaps clientele was not quite as broad as some department stores or mass marketers, its sophistication and ever-growing consumer base more than made up for it. The Gapits name formerly a quirky play on generational unrestcame to mean the ultimate in fashion and taste for both younger and older generations.

Late 1990s and Beyond

By the late 1990s, Drexler felt The Gap had strayed too far into the trendy genre and was losing customers as a result. As such, he retooled The Gaps image in 1997, emphasizing a return to simplicity and the companys most basic offeringspocket tees, jeans, and khakis. Long-time advertising director Maggie Gross left the firm after Drexler pulled the plug on a print campaign that did not gel with The Gaps new basic image. That year, the firm went back to television advertising with commercials that highlighted Gap Easy Fit jeans featuring well-known celebrities that included Lena Home, LL Cool J, and Luscious Jackson. In 1998, the firm launched another round of highly successful television commercialsthis time the star being its line of khaki pants. The company also began its foray into e-tailing and introduced gap.com along with gapkids.com and babygap.com. Banana Republic and Old Navy began catering to online shoppers shortly thereafter.

Thanks to Drexlers efforts, The Gap grew at a rapid clip during the latter half of the 1990s, securing record sales and earnings. In 1997, sales at Old Navy surpassed $1 billion while overall company sales grew to $6.5 billion. Sales climbed to $9 billion the following year, bolstered by the opening of 356 new stores. The company could now claim that one new store opened each day. In 1999, 570 new stores were added to the companys arsenal as net earnings exceeded $1.1 billion. According to the National Post, the company had grown by 24,000 percent from 1984 to 1999. Drexlers reign at The Gap had become one of the retail industrys amazing success stories.

The new century, however, brought with it rocky times for the 30-year-old retailer. During 2000, the company opened 731 new units and sales grew to $13.6 billion. On the other hand, net income fell to $877 million while comparable store sales fell by 5 percent. In April 2000, sales began declining. Disaster struck in 2001 when the company posted a $7.7 million loss. Simply put, wrote Anne Kingston of the National Post, The Gap has lost its groove. Its merchandising is unfocused and it has lost ground to competitors. The formula that made it great no longer has the same currency. More damningly, Gap Inc. has alienated shoppers.

Indeed, the company was losing market share in the over-30 category and was having difficulty appealing to a younger audience. The Gap had also come under fire for its labor practices in third-world countries. Various labor groups claimed The Gap advocated sweatshop labor overseas. In response, the company created a global monitoring program to supervise factory conditions where its clothes were manufactured.

Not surprisingly, Drexler announced his retirement during 2002. He later took a job to head up rival J. Crew Group Inc. After Drexlers departure, Fisher began his search for a new leader, one whose management style could catapult The Gap back into the upper echelon of retail fashion. Paul Pressler, an executive from Walt Disney Co., was tapped to revive the company just as Drexler had been called up to do in the 1980s. Pressler began to implement a series of sweeping corporate changes focused on customer research, strategic planning, new advertising, and store closures. Net income for fiscal 2002 bounced back to $477 million; however, Pressler knew he had his work cut out for him. The retail environment in 2003 remained fiercely competitive, prices were down, and the economy remained questionable. Despite these distinct challenges, both Pressler and Fisher were convinced that The Gap and its brands would carry on as a mainstay in the retail fashion world in the years to come.

Principal Operating Units

Gap; GapKids; babyGap; Banana Republic; Old Navy Clothing Company.

Principal Competitors

Abercrombie & Fitch Stores Inc.; American Eagle Outfitters Inc.; Spiegel Inc.

Further Reading

Abend, Jules, Widening the Gap, Stores, November 1985.

Barmash, Isidore, Gap Finds Middle Road to Success, New York Times, June 24, 1991.

Bensimon, Giles, How They Learned to Stop Worrying and Love The Gap, Elle, April 1996.

Caminiti, Susan, Will Old Navy Fill the Gap?, Fortune, March 18, 1996.

Gap Lands in Japan, WWD, November 9, 1995.

Karr, Arnold J., Gaps Sales Drop: What Happened?, WWD, September 1, 2000, p. 2.

Kingston, Anne, Bridging the Gap, National Post, May 4, 2002.

Munk, Nina, Gap Gets It, Fortune, August 3, 1998.

Sellers, Patricia, Gaps New Guy Upstairs, Fortune, April 14, 2003, p. 110.

Shabi, Rachel, Gap or Crap? A High Street Brand Under Pressure, New Statesman, June 17, 2002, ρ 24.

Smith, Stephanie D., Changing of the Guard, Money, April 1, 2003, p. 61.

Van Meter, Jonathan, Fast Fashion: Americans Want Clothing That Is Quick and Easy; The Gap Made a Billion Giving It to Them, Vogue, May 1990.

Weitzman, Jennifer, Gap Inc.s Dire Years: 24 Declining Months and More on the Way, WWD, May 9, 2002, p. 1.

Jonathan Martin

updates: Taryn Benbow-Pfalzgraf and Christina M. Stansell

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The Gap, Inc.

The Gap, Inc.

One Harrison
San Francisco, California 94105
U.S.A.
(415) 952-4400
Fax: (415) 512-1830
Web site: http://www.gap.com

Public Company
Incorporated:
1969 as The Gap Stores, Inc.
Employees: 60,000
Sales: $4.65 billion (est. 1996)
Stock Exchanges: New York Pacific
SICs: 5651 Family Clothing Stores

With over 1,760 stores, The Gap, Inc. has remained one of the top retailers in the United States by tailoring its clothes to the evolving tastes of the baby-boom generation. As members of this demographic group have shifted from wearing jeans as an expression of rebellion to a more general preference for informality in all modes of dress, The Gap has expanded beyond its original Levis-only format to the creation of a complete line of apparel suitable for most settings and all ages. This successful corporate transformation was due largely to the ingenuity of Millard Mickey Drexler, president since 1983. The company was founded and has remained under the overall control of Donald G. Fisher and his wife Doris F. Fisher.

Capitalizing on the Generation Gap, 1969 to 1975

Donald Fisher was not of the generation to whom The Gap owes its popularity. A member of a family that made its home in California for generations, Fisher was 40 years old and a successful real estate developer in 1969 when he took note of a new trend among the citys increasingly disaffected youth. Blue jeans, for years made chiefly by Levi Strauss & Co. for laborers and outdoorsmen, were suddenly becoming a part of the countercultures standard costume. Durable, cheap, comfortable, and acceptably offbeat, jeans were the perfect uniform for a generation of young people anxious to demonstrate its antipathy to corporate America.

Fisher was said to have conceived of The Gap when he was unable to find the right size of Levis in a department store in Sacramento, California. He realized that jeans had become more popular than current merchandising outlets could accommodate, and like hamburgers, stereo equipment, and gasoline, they could be sold through a chain of small stores devoted solely to that product. With the help of his wife, Doris, Fisher opened a shop near San Francisco State University in one of his own buildings, offering a combination of records and jeans. Their intention was to attract jeans customers by means of the records, but at first no one noticed the jeans, and Fisher was driven close to bankruptcy. In desperation, he placed ads in local newspapers announcing the sale of four tons of jeans at rock-bottom prices, and the clothes were soon gone. To emphasize the youthful ambiance of his new store, Fisher named it The Gap, an allusion to a currently hot topic, the Generation Gap.

When Fisher incorporated his business as The Gap Stores, Inc., it was an immediate success. Although the Fishers had no experience in retailing, their stores combination of jeans, low prices, and wide selection proved irresistible to the huge market of 14- to 25-year-olds. Fisher added new outlets in San Francisco and was soon enjoying the benefits of chain store merchandising: centralized buying and advertising, excellent name recognition, and uniform pricing. Initially, The Gap Stores buying program was singularly uncomplicated, as the stores carried only one product, jeans by Levi Strauss & Co. The stores were brightly painted, often orange; filled with circular metal display racks known as rounders; and usually enlivened by rock and roll music. To keep rents low, the Fishers kept stores smallabout 3,000 to 4,000 square feet. They located most of their stores in shopping centers, many of them enclosed in malls.

Two years after opening its first stores, The Gaps sales were running at $2.5 million annually, and the Fishers converted the company into a public corporation, though retained the great majority of stock. With extraordinary celerity, they opened stores across the U.S. while maintaining tight control over the critical accounting, purchasing, and marketing functions of what was soon a sizable corporation. In five years, sales had increased almost 50-fold, to $97 million, and the number of stores had grown to 186, spread over 21 states. Analysts credited the companys success to the Fishers observance of a few cardinal rules of retailing: Gap stores replaced its stock with maximum speed; its prices were low and stayed that way; big sellers were kept on the rack until they stopped moving, rather than being retired in favor of new styles simply for the sake of novelty; and few items were stockedjeans, a few shirts, light jacketseach offered in its complete range of colors and sizes, ensuring a minimum of disappointed customers.

The companys growth was also made possible by the extensive national advertising of Levi Strauss, which provided 100 percent of The Gaps merchandise during its early years. Such dependence on a single supplier had obvious dangers, however, and around 1973 The Gap began marketing several labels of its own, as well as national brands other than Levis. These proved crucial to the companys short- and long-term health; by 1975 Gap stores generated $100 million in net sales.

Ups and Downs, 197680

By 1976 the Fishers were ready to make their first substantial public stock offering. The companys spectacular growth had attracted widespread interest, and its offering of 1.2 million shares sold quickly at $18 per share in May. Coincidentally, however, the retail industry went into a steep slide, which, when combined with The Gaps large expenditures for new stores, pushed the company into the red for the final quarter of its fiscal year, ending July 31. The value of the newly issued stock fell to $7.25, prompting nine separate class-action suits from outraged stock purchasers who alleged that the Fishers had tried to dump their holdings before The Gap announced its bad news. These charges came despite the fact that the Fishers sold only about 10 percent of their holdings during the period in question. Rather than wage endless litigation, The Gap settled the suits in 1979 for a total of $5.8 million, or 40¢ per share and did its best to mend its frayed relations with Wall Street.

By the end of the 1970s the company could pay such a figure without undue strain. Adding between 50 and 80 stores annually, The Gap pushed its sales to $307 million in 1980 and was close to achieving nationwide representation. The jeans market was no longer quite so straightforward, however. Members of the great wave of youngsters who had come of age wearing blue jeans in the 1970s were now older, wealthier, and more conservative, and the Fishers were busily attempting to break out of the jeans niche by expanding The Gaps selection of clothing. Several experimental chains featuring upscale fashions were essayed and brought together under the Taggs name but later liquidated because they were unprofitable. Gap stores were enlarged to handle increasing amounts of what became known as casual wear and were frequently moved outside of shopping centers to freestanding locations, where space was plentiful and rent lower per square foot.

Along with the search for a line of clothes to appeal to an older clientele, the Fishers also faced Levi Strauss & Co.s decision to supply big mass marketers such as Sears and J.C. Penney with its jeans. Levis were now sold everywhere, underscoring The Gaps need to develop a label and look of its own. The companys own brands, created during the 1970s, generated about 45 percent of Gap sales in 1980, with Levis adding an equal amount and other national brands making up the balance. Considering that 10 years earlier essentially all of The Gaps sales were Levi Strauss & Co. products, the 1980 figures represented an achievement, but it was clear that if the company were to avoid inundation by the rising tide of jeans discounters it would have to fashion a new, exclusively Gap image.

Mickey Comes to Town, 198186

To accomplish this task, Donald Fisher hired Millard Mickey Drexler as president in 1983. Drexler, then 40, had just solved a similar problem with AnnTaylor, creating a more chic image for the chain and quadrupling sales in the bargain. Drexler was born in the Bronx to a family with roots in the garment business and by age 23 was a buyer for Bloomingdales. After a stint at Macys, he became president of AnnTaylor in 1980, where his work caught the eye of Donald Fisher, who was contemplating the future of The Gap. Drexler accepted the job as president at the end of 1983 (sales $480 million) and was given a block of stock that would make him one of the countrys wealthiest retail executives.

Drexler immediately began The Gaps wholesale transformation, in spite of the companys currently excellent financial status. The new president found little that he liked; proliferating competition in jeans and The Gaps youthful marketing image had forced the company into a price-driven volume business. Its orange-painted stores were cluttered with rounders displaying merchandise of many labels that Drexler later described to the New York Times as trendy but not tasteful... well, just plain ugly. Worst of all, most consumers perceived The Gap as strictly for teenagers, at a time when people who grew up in the 1960s were developing more upmarket tastes. It would be difficult to overcome The Gaps 15-year tradition as the place where kids went to pick up a pair of Levis.

Company Perspectives:

The Gap Inc. s brandsGap, GapKids, babyGap, Banana Republic, and Old Navy Clothing Co.can be found on casual apparel, shoes, accessories, and personal care items in company-owned stores in six countries.

Drexler began by eliminating all private label brands but one: Gap. Levi Strauss products were kept but relegated to the background; henceforth, The Gap would be known not only as a store, but as a line of clothes as well. Drexler created a large in-house design staff to develop clothes that would be casual, simple, made of natural fibers, and more clearly differentiated by gender than were jeans. The look was informal but classicstill denim-based but including a variety of shirts, skirts, blouses, and sweaters in assorted colors and weaves. It was clothing for people who wanted to look and feel young without appearing slovenly or rebellious, a description that fit a vast number of U.S. consumers in the 1980s.

Gap stores were substantially revamped. Neutral grays and white replaced the garish orange, and the ubiquitous rounders gave way to shelves of neatly folded clothing under soft lighting. The companys advertising, as devised by Drexlers longtime colleague, Magdalena (Maggie) Gross, shifted from radio and television to upscale magazines and newspapers and featured older models engaged in familiar, outdoor activities that werent necessarily connected with the youth culture.

A few years later, Gross launched the Individuals of Style campaign, a series of black and white portraits of both famous and unknown subjects by a team of celebrated photographers. The ads stressed style, not The Gap, whose clothes didnt always appear in all of the photos, and they were enormously successful in helping to change the publics perception of the company. The Gap came to mean good taste of an informal variety, and the brand name Gap soon acquired the cachet needed if the company were to compete with other retailers of casual wear such as Benetton and The Limited. In addition, the word stores was dropped from the companys name.

Drexlers revolution at The Gap cost a good deal of money, and financial results for 1984 were poor, with profits down 43 percent to $12.2 million. By the middle of the following year, however, it was clear he had pulled off something of a miracle. Gross revenue, profits, and same-store sales were all up; more importantly, the company had fresh energy and a merchandising focus that could carry it for years to come. In the meantime, The Gap had acquired a number of other retail chains, for better and worse. Foremost among these was Banana Republic, founded in 1979 by another California husband and wife team, Melvyn and Patricia Ziegler.

The two-store chain of safari and travel clothing outfits, bought by The Gap in 1983, had a well-established catalogue business. After its acquisition and the introduction of private-label clothing lines, Banana Republics sales doubled each year through the mid-1980s, but slowed quickly thereafter. Despite the mixed results of the Banana Republic acquisition, the company continued to seek out other chain stores. Pottery Barn was a housewares chain of about 30 stores in New York and California; after several problematic years, it was liquidated in 1986. This same year, Drexler sought to fill another clothing need of the Baby Boomer generation with the debut of GapKids, featuring comfortable, durable clothes for the children of parents who shopped at Gap stores. The concept was a huge success, and along with Banana Republic (which peaked in the late 1980s with revenue of more than $250 million a year) figured largely in The Gaps long-range planning.

There Are No Secrets in Retailing, 198795

By 1987 The Gap decided to try its wares outside the U.S., and its first international store was opened in London. Additional stores soon sprang up throughout Great Britain, and in Canada and France. Unfortunately, stateside, Banana Republics safari gear bubble burst and it became a money-losing liability. The Gap also tested the higher end of the clothing market with Hemisphere, a nine-store chain of upscale U.S. sportswear with European styling. Created in 1987, the same year the company broke $1 billion in sales, Hemisphere offered elegant fashions but soon ran afoul of a severe recession. Disposed of only two years later, neither the Hemisphere mistake or the demise of Pottery Barn was serious enough to cause more than a few tremors at the parent company, whose spectacular rebirth in the Drexler era left ample room for such experimentation.

In 1990, as Banana Republic searched for secure footing, GapKids prospered and launched a new venture, babyGap. Like its sibling, babyGap was a phenomenal success and became a popular attraction in GapKids stores. For the start of a new decade, The Gap was looking very good indeed: a stock split occurred in September, and at year-end the companys 1,092 stores pulled in $1.9 billion in sales with net earnings of $144.5 million.

In the early 1990s, Banana Republic was busy refocusing its image while GapKids and babyGap flourished. Overall, though, revenue, net income, and return-on-equity were all outstanding ($2.5 billion, $229.8 million, and 40.2 percent respectively due to another stock split in June) in 1991 and virtually every year since Drexlers program had taken effect in 1985. The Gaps transition from a discount jeans warehouse to a sleek fashion arbiter was not altogether painless, yet the result had been more successful than Donald and Doris Fisher ever imagined. In 1991 the Fisher family still held more than 40 percent of the company, which now operated more than 1,216 stores in the U.S., Canada, and the United Kingdom with plans to expand total sales area by 15 percent annually. Not only had The Gap followed its Baby Boomer clientele as they grew older and wealthier, it provided for their children, too. GapKids was the fastest-growing segment of the company as a whole, with most of the more than 223 GapKids stores housing a babyGap department for infants and toddlers.

Though 1992 marked a dip in profits and sales growth due to slower turnover and increased competition, the company addressed these problems by turning away from unisex clothing to more gender-specific items. Along with refurbishing stores and placing more emphasis on women, The Gap came back with record numbers in 1993 and a new franchise, originally called Gap Warehouse, because for some it had become increasingly cool not to spend money on clothes (i.e. the grunge and slacker looks). Lacking the trademark flare associated with the company, Drexler hired an outside to firm to come up with a new name to no avail. Then when strolling in Paris with colleagues, Drexler saw the perfect moniker for the down-market stores painted on a building: Old Navy. Hence Old Navy Clothing Company, with stores nearly twice as big as other Gap stores, filled with sturdy, value-priced (20-30 percent lower) clothing for the entire family. Despite the circumstances of its birth, Old Navy became another Gap sensation.

Banana Republic, meanwhile, was gaining ground with urbane elegance as a hip alternative to The Gaps casualness. To shore up its product line, the upscale clothier initiated a shop-within-a-shop concept, featuring different collections, jewelry, and leather accessories. By 1994 there were 1,507 Gap-owned stores (188 were Banana Republic) contributing to the companys $3.72 billion in sales. Within a year there were 1,680 stores210 Banana Republic, 902 Gap, 437 GapKids, and 131 Old Navy. International stores had surged from 1994s 124 (72 in Canada, 49 in the United Kingdom, and 3 in France) to 91 in Canada, 55 in the U.K., 12 in France, 4 in Japan, and 2 in Germany in 1995. Likewise, The Gaps statistics were robust: a two-for-one stock split paid out dividends in March; sales leapt 18 percent to nearly $4.4 billion; and net earnings rose 11 percent to $354 million over the previous years $320 million.

Banana Republic, once a blemish on the perfect Gap picture, had blossomed with more new products including footwear, personal care items, a sharper focus on women, and five new stores in Canada. At the same time, Old Navy increased its market share by doubling in size, exceeding the companys hopes for its newest division, while Gap and GapKids lost some of their momentum although babyGap maintained its prominence. New directions for GapKids and babyGap included plush toys, other non-clothing items, and freestanding babyGap stores; The Gap debuted GapScents, and continued to broaden its age range and clothing lines to include work attire. Yet perhaps the biggest news of 1995 was Donald Fishers decision to relinquish his duties as CEO of The Gap, Inc. His successor, of course, was Mickey Drexler, who added the responsibilities of CEO to those of president. Fisher remained chairman, however, and still kept a hand in running the company he founded nearly 30 years before.

A Fashion Titan, 1996 and Beyond

By 1996 The Gaps dominance of the fashion scene was fixed; consumers of all ages could find something in one of its stores. The industry even honored the company in the April issue of Elle, when high-brow designers including Giorgio Armani, Nino Cerruti, Carolina Herrera, Todd Oldham, and Cynthia Rowley paid tribute to the little company that became master of the universe. Though it began with a singular purpose, The Gap, with its burgeoning cluster of stores and subsidiaries, changed fashion for not only Baby Boomers but for generations to come. The Gaps success was in no small part due to Donald Fishers and Mickey Drexlers business acuity, especially through vertical integration. By keeping the design, manufacture, inspection, packaging, shipment, display, advertising, and ultimate sale of every item with its name in-house, The Gap maintained exceptional quality and consistency in an increasingly erratic marketplace.

If The Gaps clientele wasnt quite as broad as some department stores or mass marketers, its sophistication and ever-growing consumer base more than made up for it. The Gapits name formerly a quirky play on generational unrestcame to mean the ultimate in fashion and taste for both younger and older generations. What was next for The Gap? Only Donald and Mickey, who had become as famous in their industry as the other Donald and Mickey were in theirs, knew for sure.

Principal Operating Units

babyGap; Banana Republic; GapKids; Old Navy Clothing Company.

Further Reading

Abend, Jules, Widening the Gap, Stores, November 1985.

Barmash, Isidore, Gap Finds Middle Road to Success, New York Times, June 24, 1991.

Bensimon, Giles, How They Learned to Stop Worrying and Love The Gap, Elle, April 1996.

Caminiti, Susan, Will Old Navy Fill the Gap?, Fortune, March 18, 1996.

Gap Lands in Japan, WWD, November 9, 1995.

Van Meter, Jonathan, Fast Fashion: Americans Want Clothing That Is Quick and Easy; The Gap Made a Billion Giving It to Them, Vogue, May 1990.

Jonathan Martin

updated by Taryn Benbow-Pfalzgraf

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The Gap, Inc.

The Gap, Inc.

One Harrison
San Francisco, California 94105
U.S.A.
(415) 952-4400
Fax: (415) 512-1830

Public Company
Incorporated: 1969 as The Gap Stores, Inc.
Employees: 26,000
Sales: $1.93 billion
Stock Exchanges: New York Pacific

The Gap, Inc. has remained one of the top retailers in the United States since 1969 by tailoring its clothes to the evolving tastes of the baby-boom generation. As the members of that demographic group have shifted from the wearing of jeans as an expression of rebellion to the more general preference for informality in all modes of dress, The Gap has expanded beyond its original Levis-only format to the creation of a complete line of casual wear suitable for all ages. This successful corporate transformation was due largely to the ingenuity of Millard Mickey Drexler, president since 1983. The company was founded and remains under the overall control of Donald G. Fisher and his wife Doris F. Fisher.

Donald Fisher is not of the generation to whom The Gap owes its popularity. A member of a family that has made its home in California for generations, Fisher was 40 years old and a successful real estate developer in 1969 when he took note of a new trend among the citys increasingly disaffected youth. Blue jeans, for years made chiefly by Levi Strauss & Co. for laborers and outdoorsmen, were suddenly becoming a part of the countercultures standard costume. Durable, cheap, comfortable, and acceptably offbeat, jeans were the perfect uniform for a generation of young people anxious to demonstrate its antipathy to corporate America.

Donald Fisher is said to have conceived of The Gap when he was unable to find the right size of Levis in a department store in Sacramento, California. He realized that jeans had become more popular than the current merchandising outlets could accommodate, and that like hamburgers, stereo equipment, and gasoline, they were ready to be sold through a chain of small stores devoted solely to that product. With the help of his wife, Doris, Fisher opened a shop near San Francisco State University in one of his own buildings, offering a combination of records and jeans. Their intention was to attract jeans customers by means of the records, but at first no one noticed the jeans, and Fisher was driven close to bankruptcy. In desperation, he placed ads in local newspapers announcing the sale of four tons of jeans at rock-bottom prices, and the clothes were soon gone. To emphasize the youthful ambiance of his new store, Fisher named it The Gap, an allusion to a currently hot topic, the generation gap.

He incorporated his business as The Gap Stores, Inc., an immediate success. Although the Fishers had no experience in retailing, their stores combination of jeans low prices, and wide selection proved irresistible to the huge market of 14- to 25-year-olds. Fisher added new outlets in San Francisco and was soon enjoying the benefits of chain store merchandising: centralized buying and advertising, excellent name recognition, and uniform pricing. Initially, The Gap Storess buying program was singularly uncomplicated, as the stores carried only one product, jeans by Levi Strauss & Co. The stores were brightly painted, often orange; filled with circular metal display racks known as rounders; and usually enlivened by rock and roll music. To keep rents low, the Fishers kept stores smallabout 3,000 to 4,000 square feet. They located most of their stores in shopping centers, many of them enclosed in malls.

Two years after opening its first stores, The Gap Storess sales were running at $2.5 million annually, and the Fishers converted the company into a public corporation, although retaining the great majority of stock. With extraordinary celerity, they opened stores across the United States while maintaining tight control over the critical accounting, purchasing, and marketing functions of what was soon a sizable corporation. In five years, sales had increased almost 50-fold, to $97 million, and the number of stores had grown to 186, spread over 21 states. Analysts credited the companys success to the Fisherss observance of a few cardinal rules of retailing: The Gap Stores replaced its stock with maximum speed; its prices were low and stayed that way; big sellers were kept on the rack until they stopped moving, rather than being retired in favor of new styles simply for the sake of novelty; and few items were stockedjeans, a few shirts, light jacketseach offered in its complete range of colors and sizes, ensuring a minimum of disappointed customers. The companys growth was also made possible by the extensive national advertising of Levi Strauss, which provided 100% of the The Gap Storess merchandise during its early years. Such dependence on a single supplier has obvious dangers, however, and around 1973 The Gap Stores began marketing several labels of its own, as well as national brands other than Levis. These proved crucial to the companys permanent health.

By 1976 the Fishers were ready to make The Gap Storess first substantial public stock offering. The companys spectacular growth had attracted widespread interest, and its offering of 1.2 million shares sold quickly at $18 per share in May of 1976. Coincidentally, however, the retail industry went into a steep slide, which, when combined with The Gap Storess large expenditures for new stores, pushed the company into the red for the final quarter of its fiscal year, ending July 31. The value of the newly issued stock fell to $7.25, prompting nine separate class-action suits from outraged stock purchasers who alleged that the Fishers had tried to dump their holdings before The Gap Stores announced its bad news. These charges came despite the fact that the Fishers sold only about 10% of their holdings during the period in question. Rather than wage endless litigation, The Gap Stores settled the suits in 1979 for a total of $5.8 million, or 40c per share and did its best to mend its frayed relations with Wall Street.

By that time the company could pay such a figure without undue strain. Adding between 50 and 80 stores annually, The Gap Stores pushed its sales to $307 million in 1980 and was close to achieving nationwide representation. The jeans market was no longer quite so straightforward, however. Members of the great wave of youngsters who had come of age wearing blue jeans in the 1970s, were now older, wealthier, and more conservative, and the Fishers were busily attempting to break out of the jeans niche by expanding The Gaps selection of clothing. Several experimental chains featuring upscale fashions were essayed, brought together under the Taggs name, but were eventually liquidated because they were unprofitable. Gap stores were enlarged to handle increasing amounts of what became known as casual wear and were frequently moved outside of shopping centers to free standing locations, where space was plentiful and rent lower per square foot.

Along with the search for a line of clothes that would appeal to an older clientele, the Fishers also faced Levi Strauss & Co.s decision to supply big mass-marketers such as Sears and J.C. Penney with its jeans. Levis were now sold everywhere, underscoring The Gap Storess need to develop a label and look of its own. The companys own brands, created during the 1970s, generated about 45% of Gap sales in 1980, with Levis adding an equal amount and other national brands making up the balance. Considering that ten years earlier essentially all of the Gaps sales were Levi Strauss & Co. products, the 1980 figures represented an achievement, but it was clear that if the company were to avoid inundation by the rising tide of jeans discounters it would have to fashion a new, exclusively Gap image.

To accomplish this task, Donald Fisher hired Mickey Drexler as president in 1983. Drexler, then 40, had just solved a similar problem with AnnTaylor, creating for that chain a new, more chic image and quadrupling sales in the bargain. Drexler was born in the Bronx to a family with roots in the garment business and by age 23 was a buyer for Bloomingdales. After a stint at Macys, he became president of AnnTaylor in 1980, where his work caught the eye of Donald Fisher, who was contemplating the future of The Gap. Drexler accepted the job as president at the end of 1983 and was given a block of stock that has made him one of the countrys wealthiest retail executives. He immediately began designing The Gap wholesale transformation, in spite of the companys currently excellent financial status. The new president found little that he liked; proliferating competition in jeans and The Gaps youthful marketing image had forced the company into a price-driven volume business. Its orange-painted stores were cluttered with rounders displaying merchandise of many labels that Drexler would later describe to The New York Times as trendy but not tasteful. . . well, just plain ugly. Worst of all, most consumers perceived The Gap as strictly for teenagers, at a time when people who grew up in the 1960s were developing more upmarket tastes. It would be difficult to overcome The Gaps 15-year tradition as the place where kids went to pick up a pair of Levis.

Drexler began by eliminating all private label brands but one: Gap. Levi Strauss products were kept but relegated to the background; henceforth, The Gap would be known not only as a store, but as a line of clothes as well. Drexler created a large in-house design staff to develop clothes that would be casual, simple, made of natural fibers, and more clearly differentiated by gender than were jeans. The look was informal but classicstill denim-based but including a variety of shirts, skirts, blouses, and sweaters in assorted colors and weaves. It was clothing for people who wanted to look and feel young without appearing slovenly or rebellious, a description that fit a vast number of U.S. consumers in the 1980s.

Gap stores were substantially revamped. Neutral grays and white replaced the garish orange, and the ubiquitous rounders gave way to shelves of neatly folded clothing under soft lighting. The companys advertising, as devised by Drexlers long-time colleague, Maggie Gross, shifted from radio and television to upscale magazines and newspapers and featured older models engaged in familiar, outdoor activities that were not necessarily connected with the youth culture. A few years later, Gross launched the Individuals of Style campaign, a series of black and white portraits of both famous and unknown subjects by a team of celebrated photographers. The ads stressed style, not The Gap, whose clothes did not even appear in all of the photos, and they were enormously successful in helping to change the publics perception of the company. The Gap came to mean good taste of an informal variety, and the brand name Gap soon acquired the cachet needed if the company were to compete with other retailers of casual wear such as Benetton and The Limited. In addition the word stores was dropped from the companys name.

Drexlers revolution at The Gap cost a good deal of money, and financial results for 1984 were poor, with profits down 43% to $12.2 million. By the middle of the following year, however, it was clear that he had pulled off something of a miracle. Gross revenue, profits, and same-store sales were all up; more importantly, the company had fresh energy and a merchandising focus that could carry it for years to come. In the meantime, The Gap had acquired a number of other retail chains, for better and worse. Foremost among these was Banana Republic, founded in 1979 by another California husband and wife team, Melvyn and Patricia Ziegler. The chain of safari and travel clothing stores was bought by The Gap in 1983 and its sales were doubled each year through the mid-1980s, slowing quickly thereafter. At its peak in the late 1980s, Banana Republic achieved highly profitable revenue of more than $250 million a year and figured largely in The Gaps long-range planning. However, the bubble eventually burst for safari gear, and Banana Republic soon became a money-losing liability. In 1988 Mickey Drexler took over direct control of the division, shifting it from jungle attire toward gentler species of outdoor wear. In the early 1990s, Banana Republic was continuing to tread water.

Two other chain store acquisitions were not as profitable for The Gap. Pottery Barn was a housewares chain of about 30 stores in New York and California that had problems for several years before it was liquidated in 1986. The Gap also tested the higher end of the clothing market with Hemisphere, a nine-store chain of upscale U.S. sportswear with European styling. Created in 1987, Hemisphere offered elegant fashions, but soon ran afoul of a severe recession; the chain was disposed of only two years later. Neither mistake was serious enough to cause more than a few tremors at the parent company, which had a spectacular rebirth in the Drexler era that left ample room for such experimentation.

Revenue, net income, and return on equity have all been outstanding since Drexlers program took effect in 1985. The Gaps transition from a discount jeans warehouse to a sleek fashion arbiter was not altogether painless, yet the result had been more successful than Donald Fisher and his wife could have imagined. In 1991 the Fisher family still held more than 40% of the company, which operated more than 1100 stores in the United States, Canada, and the United Kingdom and had plans to expand total sales area by 15% annually. Not only had The Gap followed its baby-boom clientele as they grew older and wealthier, it provided for their children, too. GapKids in the early 1990s was the fastest growing segment of The Gap as a whole, offering a modified selection of Gap clothing in childrens sizes. One-third of the more than 170 GapKids stores included a babyGap department for toddlers. Banana Republic remained something of a blemish on the otherwise perfect Gap picture, but it was at least able to pay its bills.

Further Reading

Abend, Jules, Widening the Gap, Stores, November 1985; Van Meter, Jonathan, Fast fashion. Americans want clothing that is quick and easy. The Gap made a billion giving it to them Vogue, May 1990; Barmash, Isidore, Gap Finds Middle Road to Success, The New York Times, June 24, 1991.

Jonathan Martin

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The Gap, Inc.

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

Bibliography

"the blue chip of specialty retailers." the online investor, 3 december 1997. available at http://fnews.yahoo.com/oli/98/05/13/stock_971203.html.

"corporate and government leaders join forces to launch spare the air '98 campaign in bay area." san francisco: the gap, inc., 29 may 1998.

cuneo, alice z. "gap's 1st global ads confront dockers on a khaki battlefield." advertising age, april 1998.

"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.

"gap, inc. brings casual style to europe." netherlands investment news. winter 1995. available at: http://www.nfa.com/news/archive/winter95/gap.html.

"gap, inc. donates money and clothing to help kentucky flood victims." yahoo on the money, 1997. available at http://biz.yahoo.com/bin/jump?/97/03/07/gps_y0029_1.html+gps+97+03.

"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.


For an annual report:

on the internet at: http://www.sec.gov/archives/edgar/data/39911/0001012870-98-000890.txt


For additional industry research:

investigate companies by their standard industrial classification codes, also known as sics. the gap's primary sics are:

5136 men's/boys clothing

5137 women's/children's clothing

5699 misc. apparel & accessory stores

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