TEN years ago Richard Hyman, founder of the London research company Verdict, walked into Old Navy on Fifth Avenue in Manhattan. The veteran retail consultant was very impressed. “It seemed edgy and hip and really cheap,” he said.
Hyman finds it hard to pass most shops without looking inside. But Old Navy was particularly alluring. There had been rumours that Old Navy, owned by the retail giant Gap, would soon come to Britain. Gap had been aggressively rolling out its stores along British high streets since 1987, snapping up some of the best — and most expensive — locations. But Old Navy’s ship never sailed, and given recent news, neither does it look likely to.
While on holiday in Florida this past summer, Hyman took another look at Old Navy. “I can’t keep out of shops, even on holiday. If I go four days, I start getting withdrawal symptoms,” he said. This time he was less impressed. “This was 10 years later. I was struck by the fact that it looked exactly the same. It hadn’t moved on at all.”
He and other critics believe the same holds true for the Gap empire. Gap was once one of the world’s most influential retail brands. It put the world in chinos and dressed the baby-boomer generation. But its heyday is well and truly over.
Gap’s sales have fallen in 28 of the past 31 months. This month it announced that same-store sales, or sales at stores open at least for a year, had tumbled 8%, while net sales slipped 4% to $2.3 billion (£1.2 billion). Analysts, on average, had expected same-store sales to fall 5%. Globally, Gap’s same-store sales fell 8% compared with 3% last year.
Last week two top executives — Denise Johnston, president of the Gap adult division, and Ivy Ross, who had served as executive vice-president of product design at Old Navy — were pushed out. The axe is now hanging over chief executive Paul Pressler.
Two years shy of its 30th birthday, Gap is in so much trouble that there is talk of a break-up. Goldman Sachs has been appointed to look at the retailer’s options, and venture capitalists are circling. “When Gap was created there was — as the name suggests — a gap in the market. It’s not there anymore,” said Hyman.
A Gap spokeswoman said the company would not comment on rumour. She said Gap was “disappointed” with its recent performance and was looking to “make significant shifts”.
Gap started in San Francisco in 1969 and now has 3,154 stores worldwide, with 134 in the UK. Founder Donald Fisher opened his first store hoping to sell Levi’s jeans, then a largely working-class staple, to college kids and counter-culture types. The Fisher family remains the company’s largest shareholder. Only two years later the company was a multi-million-dollar business, selling Levi’s-brand clothing and records.
Today’s Gap was largely the invention of retail wizard Millard “Mickey” Drexler, who was hired as president in 1983. Under him, Gap stopped selling Levi’s and forged its own identity as the purveyor of good-looking basics such as jeans, T-shirts, khakis, casual jackets, women’s tops, skirts and jumpers.
Annie Leibovitz, portrait photographer to the stars, added the glamour, shooting celebrities wearing Gap clothes for the advertising billboards.
The formula worked and the business started to expand rapidly, by buying the more formal Banana Republic in 1983, introducing GapKids in 1986 and Old Navy in 1994.
Its ultimate fashion moment came in 1996 when Sharon Stone turned up at the Oscars wearing a black Gap T-shirt.
Then everything changed. The Gap look became ubiquitous. At one end of the market cheaper outlets offered their own versions, undercutting Gap; at the higher end the rise of designer jeans made Gap look dated.
By 2000, the company was in serious trouble. Drexler resigned in 2002 and was replaced by former Walt Disney executive Pressler. A numbers man, Pressler has addressed many of Gap’s financial issues but the product has failed to excite.
Drexler refused to sign a non-compete agreement with Gap, forgoing a multi-million-dollar severance payment, and moved to J Crew, a rival to Banana Republic. Under Drexler, J Crew has flourished. The former Sex And The City star Sarah Jessica Parker was recently caught bulk-buying J Crew cashmere jumpers — while her face adorned Gap ads across the country. She is said to have returned the jumpers after the story broke.
But now it is Pressler’s future that is in doubt. “What Gap needs is a combination of Pressler and Drexler,” said a retail analyst. “Neither of them has what it takes to turn Gap round. But together they’d be an ideal team.” However, with the company in turmoil, attracting new talent is going to be a tough job.
Goldman Sachs analyst Margaret Mager wrote in a client note that she believes Gap can’t explore a sale until its business is performing better. But that was unlikely in the near term, she said. “With Gap’s leadership in some state of flux, we worry that morale at the company could suffer, making it more difficult to attract new talent,” Mager wrote.
Taking the company private, selling off Old Navy and Banana Republic and luring back Drexler are all options being discussed by investment bankers keen to assist in Gap’s company review.
“The company is well capitalised. The issue is with the merchandising,” said one Wall Street banker briefed on discussions.
But even if Pressler is forced out, any replacement faces a tough task, especially in Europe.
In the year ended last January, Gap’s total sales fell 1.5%, to $16 billion. But in Britain and France, Gap’s two European markets, the plunge was 6.1%, to $825m.
In Britain a reinvigorated Marks & Spencer and competition from retailers such as Next have taken their toll. Retailers said that the Gap chain was overpriced and as a result did most of its business when it was holding sales.
Officially, Gap does not compete with Zara, H&M, Topshop and the “fast fashion” chains. But it is a sector that is too big to ignore in fashion-conscious Britain and the company has been attempting more high-fashion looks to draw in customers.
According to the consulting firm Bain & Co, fast-fashion companies make up 12% of the British clothing market. This compares with only 1% of the $181 billion American apparel market, reports the New York market research firm NPD Group.
It is a difference in the retail landscape that Gap has ignored until recently. Until then, the company made nearly all of its merchandising and design decisions in the United States. “What does a merchandiser in San Francisco know about a shopper in Manchester?” Hyman wanted to know.
Gap’s European division is overseen by Stephen Sunnocks, a well-respected retailer, who has now been given greater autonomy.
Gap has hired a 30-strong European design team based in London and its first designs should be in European stores in mid-2007. European buying, planning, and marketing functions have also moved to London.
There are signs of change coming through. Gap recently started cutting its V-neck sweater with a deeper V, and a sharper silhouette in Europe to meet local expectations.
But the competition is fearsome, Hyman said. “The clothing market is very crowded and you cannot afford to stand still, no matter how big you are.”
And if the once fleet-footed retailer fails to speed up, the gap with its rivals may widen.
