Can The Gap Climb Out Of The Hole?

Gap Inc. — parent company of The Gap, Old Navy, Banana Republic, Athleta and Intermix — has been around for 46 years. In its almost five decades of existence  the brand has used any number of memorable advertising taglines, but it does seem to have one that has been a particular favorite: “fall into The Gap.”

First used in a radio ad in 1971, the line has recurred in and out of Gap’s marketing for over 40 years, with a few particularly noteworthy appearances.  Like this glorious monument to the design aesthetics of the early 1980s that aired nationwide in 1981.  

Or this much more subdued specimen from almost 20 years ago featuring the late, great Lena Horne.

While the slogan is versatile, memorable and extraordinarily easily adaptable for being sang with a wide variety of Christmas songs, The Gap’s classic tagline these days also has the additional “benefit” of being ironic as well. Because as almost anyone who watches the retail markets knows, these days Gap Inc. has a problem — particularly in its flagship Gap brand and (even more acutely) in its slightly higher end Banana Republic line. A problem that is oddly well described by their own slogan.  

Said simply, ⅔ of the biggest names associated with Gap Inc. have … well, fallen into the gap.

The gap, in this case, refers to the increasingly difficult to capture middle of the market retail apparel consumer as the force of modern consumption habits seems to be polarizing consumer demand when it comes to clothes.

The lower-end brands collectively demonstrate that fast fashion is alive, well and making money, as is evident in the continued profitability of The Gap’s Old Navy brand. Old Navy has seen sales growth consistently over the last three years and now accounts for the largest share of the firm’s total sales at around 40 percent (the flagship Gap brand generates about 38 percent).

Now Gap is not alone in the hole, so to speak. J. Crew has recently reported similar troubles, as have American Eagle, Abercrombie and Fitch and American Apparel (which itself recently filed for bankruptcy).

And while each brand brings unique woes to the table, all have been hit hard by some similar factors, including: dying malls which no longer provide the sort of brand sustaining foot traffic these retailers all relied on in the 90s and early 2000s, an increased move to eCommerce-based shopping (and online-only competitors who often offer similar design aesthetics but for a lower price), and shifting sartorial preferences, particularly among their young and trendy consumer base.

Middle-market brands have also been hit hard by changing fashion habits, particularly among young office workers, who no longer maintain a separate wardrobe of more expensive “work clothes” of the sort that Banana Republic and J Crew have historically specialized in. At increasing rates over the last decade, many of those workers have started telecommuting and wearing pajamas to work — or have seen their office space transition into being a business casual environment where cost-effective fast fashion is not out of place.

Gap Inc. is quick to acknowledge those universal pressures — though they are quick to point to a commitment to evolving toward excellence going forward.

Excellence, it seems worth noting, that The Gap can admit they have not been entirely consistent in delivering lately.

“I’ve been disappointed in the women’s product in Banana Republic,” Gap Chief Executive Officer Art Peck said in a recent  interview on Banana’s 10 percent sales tumble in September. Peck further noted that customers are “being clear that it doesn’t fit well. It’s not as versatile or flattering as it should be given the price point.”

But while Gap Inc. isn’t happy with where they are today, they are, relatively speaking, an old brand, with a long memory — and this isn’t the first slump they’ve seen.

“The focus going forward for Gap Inc. is on brand evolution and delivering a consistent experience across our brands, while also developing what each line brings to consumers. And we expect to start seeing real evidence of that turnaround as 2016 progresses,” a Gap spokesperson told PYMNTS.

So what does that comeback look like?

The Online Migration

Gap’s online shopping experience generates $2 billion in revenue annually, making it a bright spot for Gap recently. It is also an area where analysts consider it ahead of its middle-market competitors. The firm has seen double-digit increases in sales year-to-year in every quarter of 2015.  

Moreover, The Gap’s CEO admits that Gap Inc. in the past has been too slow to adapt to the digital world — and that missing out on what he calls “Retail 2.0” has been a hinderance for the brand’s development in an increasingly digital environment. He remains committed, however, to actively pursuing “Retail 3.0.”

“We’ve been doing business the same way for 40 years, and there are very few 40-year-old business models that are successful forever,” Peck noted.

Details of what exactly “Retail 3.0” will mean for The Gap from a product or program standpoint remains to be seen, but it is apparent that at least part of that will be reducing the brand’s physical footprint. Gap has closed 175 locations this year, and some analysts are predicting that store closures could top out somewhere around 500. Currently, Gap has a little over 3,000 locations worldwide across its brands.

The New Gap Customer And Remaining Doubts

“The Gap brand is refocusing its efforts on the older millennial customer,” the Gap spokesperson said. “Working parent professionals who do not enjoy the same thrill in constantly replacing their clothes and are looking for fashion that is simple, timeless and durable.”

The numbers don’t lie — and are a persistent source of doubt when it comes to the future fortunes of Gap Inc. The brand, as a whole, is widely reported to be hemorrhaging customers to players like H&M and sales figures outside Old Navy are at best flat (Gap), and at worst falling every quarter (Banana Republic).

Plus, even the now powerfully performing Old Navy brand is facing turbulence. Stefan Larsson, president of the Old Navy brand, has departed for Ralph Lauren. In fairness, the Old Navy turnaround predates him. A mere 10 years ago, Banana Republic was Gap’s star player and Old Navy was the problem child — and that recovery effort was already well underway when Larsson signed on with Gap Inc. four years ago. But he is widely credited with the brand’s transformation into the powerhouse that it is today. He is also credited with H&M’s explosion onto the scene a little under a decade ago. His loss will be felt.

All in, expectations are not high for Gap when it reports its earnings figures in November — and many analysts are saying that after 40 years, the Gap may simply be too far in the hole to continue much further, or at least to continue on as the brand that most Americans are familiar with.

And while The Gap seems to agree it won’t be the same company it’s always been, it seems they might argue that The Gap has never been the same company for very long anyway, as it is always evolving with its consumer base.

Now, it is hoping that that consumer base, whether they first fell into The Gap in 1981 or 1997, is ready to dive back in, looking for something a little more timeless than fast fashion and a little less expensive than designer.

We’ll keep you posted as to whether that ends up being the best way out of the middle-market fashion retailer hole.