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Shopping Centers Today -> November 1999
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Old Navy puts wind in Gap Inc.'s sales
By Nancy Cohen
Old
Navy has been stealing The Gap's limelight.
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In those days, a rallying cry for youth was "Don't trust anyone over 30." Having reached that ripe old age itself and grown more than a thousandfold in the process, the chain Fisher founded may now be grappling with a generation gap of its own.
A younger sibling, Old Navy, has been stealing the limelight from Gap. Both are part of the $9 billion, San Francisco-based empire of Gap Inc., whose prominence as a user of shopping center space keeps its moves under close industry scrutiny. At last count, the company operated 2,680 stores worldwide, including Gap and its offspring, GapKids and babyGap, and Banana Republic.
But it's 5-year-old Old Navy that has lately overshadowed the long-established Gap. The young upstart already has grown to some 450 units and, with an explosively successful formula of low-priced fashions, retro-chic decor and campy advertising, has propelled sales at Gap Inc.
The company does not report sales by division — and its executives declined to be interviewed for this article — but according to The Wall Street Journal, senior vice president Warren Hashagen said that Old Navy leads the company's sales growth, with second-quarter same-store sales ratcheting up by 21% to 23%. Banana Republic followed, with 13% to 15% increases, while Gap and GapKids trailed with increases of just 1% to 3%.
Banana Republic, the most upscale of the three concepts, offers what the company calls "elegant, modern, sophisticated style." (SCT, May 1999). Old Navy, at the other end of the spectrum, offers value-priced apparel for the whole family, but has added pizzazz to a previously uninspired market segment. The chain has in effect reinvented the category once dominated by the likes of Kmart and Sears, and in doing so has become the darling of retail observers from Wall Street to Main Street.
"The panache Old Navy has — with its fatally cool salespeople and their microphone headsets, the fabulous decor — it's totally the cool place to shop," said Ann Taradash, director of real estate at Morris & Fellows, an Atlanta-based consulting firm. "They've changed the way people look at the lower end and created loyalty to a discount brand."
The
company describes The Gap's niche as
"modern classic clothing." |
The formula has its perils. First, Gap's success enticed other retailers to follow suit; simple, casual clothing is now ubiquitous and strong competition has emerged on numerous fronts, including at such specialty chains as Abercrombie & Fitch, The Buckle and American Eagle Outfitters.
Second, basics typically don't drive apparel purchases. August sales at Gap stores — which dipped by as much as 7%, according to The New York Times — underscored that very problem. Hashagen explained to the Times that demand for Gap's basics had been weak, and inventories hadn't been deep enough to support the unexpected interest in fashion items.
Yet even the fashion that Gap has offered has come in for criticism. "For this fall, the stores had a very young look," said Marcia Aaron, analyst at Deutsche Banc Alex. Brown, Baltimore, adding that a midmarket chain needs broader appeal. "The challenge for the Gap is to balance the mix between basics and fashion, and to make sure they don't turn off older consumers. They see tank tops with spaghetti straps and walk away — which weakens the basics business, too."
Finally, the Gap's positioning pits its basics against Old Navy's in a potential price war. "If it's similar, why not buy it cheaper?"asked Taradash. But while most experts suggest that Old Navy has nibbled at Gap's sales, they emphasize that it hasn't engaged in full-fledged cannibalization. As Taradash put it, "Old Navy and Gap stand alone, successfully, and there's room for both. They just need to focus on the Gap now."
Others in the industry testify to the concepts' peaceful coexistence, as does the fact that numerous centers house branches of both. The Summit, an open-air center in Birmingham, Ala., was the first site at which Gap Inc. opened all four of its concepts at once, according to its developer, Jeffrey Bayer, president of Bayer Properties, Birmingham. "All four are doing very well," he said. "Banana Republic and Old Navy are leading, but our Gap numbers are very good, above their averages."
One of the beauties of vertical integration, of course, is that even if one division does steal sales from another, the revenue stays in the family. But if Gap Inc.'s three core chains are designed to appeal to the good-better-best customer segments, the problem, as some observers see it, is a blurred distinction between its "good" and "better" brands.
"Good-better-best is a golden strategy, but it means putting 100% effort behind each category," said Candace Corlett, a partner at WSL Strategic Retail, a New York consultancy. Citing as one example the fleece vests that Gap and Old Navy highlighted for back-to-school this year, she said, "It's a deadly move to feature the same fashion items at both stores. They've allowed Gap to become a basics store, and when they do have fashion, they introduce it at a better price at Old Navy. I don't think the quality differential is there. They're going to have to target two distinct markets and come up with distinct strategies."
What's next for Gap?
The Gap is a mature concept, which is very difficult to grow, in comparison to a new concept, said George Whalin, president, Retail Management Consultants, San Marcos, Calif. "Gap will have to find ways to reinvent itself. Where do they go from here?"
While the company continues to flourish — it reported record sales and earnings for the second quarter — concerns about the comparative weakness at its signature stores have caused stock prices to slip from this year's peak of 52.69 (in early July) to 29 1/16 at press time.
The company's results also suffer — perhaps unfairly — by comparison to its stellar performance in 1998, which saw a net increase in sales of 39%. For 1999, second-quarter comp-store sales were up 8%, whereas the year-ago quarter saw a 19% increase. Another challenge to significant growth is already high productivity: In 1998, sales per square foot ran $532, up from $463 in 1997.
"If someone is disappointed in 6% or 8% comp-store sales — in normal times those would be considered very strong," said John Bucksbaum, CEO of General Growth Properties, Chicago. "Their numbers are strong as can be, but the Gap has raised the bar in terms of expectations."
The company gives no indication of lowering its own expectations, if expansion plans are any guide. Square footage has grown by more than 20% a year since 1997, and at the end of July the company was operating 20.4 million square feet of retail space. For 1999 Gap Inc. budgeted $1 billion in capital expenditures, including the addition of 400 to 470 stores and the expansion of another 100 stores. Plans are to keep up the pace in 2000, with new stores in locations ranging from urban to rural markets. Each chain offers a mix of flagship stores, anchor sites and standard stores, a flexibility of format that enables Gap Inc. to adapt to a variety of sites, whether in a strip center, mall, or on the street.
However, more than one developer, while applauding Gap Inc., voiced concern over the risk of oversaturation. "How many Gap stores can you have?" asked Matt Dominski, CEO and president of Urban Shopping Centers, a Chicago-based REIT. "I'm not sure Old Navy is eating into Gap as much as Gap is eating into itself, the way it's plopping down new stores every two or three miles."
The company is also developing other avenues of growth, including brand extensions like the GapBody stores, which offer boxers, bras, and pajamas; cologne and other personal care items; and accessories for bed and bath. In the year since the concept's launch, five GapBody units have opened.
Advertising is another brand-building tool in which Gap Inc. believes: It has steadily increased its budget from $96 million (1.8% of net sales) in 1996 to as much as $550 million (4.9%) this year, according to the annual report.
Despite Gap stores' growing pains, shopping center experts express confidence in the company's long-term performance and consistently praise its executives as smart, nimble, seasoned merchants.
"If they miss a season, one thing we are impressed by is their ability to quickly react and get merchandise back on track," said Bucksbaum of General Growth.
Nancy Cohen covers the retail market for SCT.
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