Key Trends and Forces
Fast fashion brand Zara continues to flourish despite recession
[1]
Zara (owned by Inditex), a fast-fashion retailer specializing in bringing the latest runway trends to cost-conscious consumers at low prices, reported revenue of $14 billion in fiscal 2009 compared to $12.6 billion in fiscal 2007.[1] Zara's strong point is in its logistics system, in which a design can go from a sketch on paper to an actual product in stores in less than two weeks. The industry average for the same process is nine months. The company also keeps its inventories very lean, meaning it avoids profit-damaging promotions and sales. The company also avoids advertising in order to cut down on costs. Zara currently intends to open 370 to 450 new stores in fiscal 2009 whereas Gap plans to open only 50.[1] Zara also places its stores among high-cost luxury brands--such as Fifth Avenue in New York City--to make its lower prices stand out even more.[1] Zara is in a position to usurp Gap's position as the world's largest clothing retailer by revenue, and it's continued success is made even more glaring against the declining sales of many of its competitors.
Economic Headwinds in 2009 Complicating Turnaround
Since 2004, Gap's sales have been faltering and the company is in the midst of a turnaround effort, focusing on maintaining profit margins (gross and operating) while fostering sales growth. This has proven difficult in the second half of 2007 and throughout 2009 due to economic conditions. After the subprime lending crisis in the summer of 2007 the U.S. economy is struggling and in 2008 slid into a recession. As such, consumer spending has been shifting away from unnecessary goods, such as fashion apparel. Consequently, apparel retailers have been struggling to maintain sales in 2009. On a company-wide basis, same store sales fell 12% in FY08[2], while the Old Navy brand was hit hardest of all Gap's operations, with an 17% decrease in same store sales.[2] Banana Republic's 10% decrease in same-store sales stems from consumers shifting away from the higher prices of "near luxury" retailers. Rather than marking down merchandise to keep sales numbers high, Gap chose to keep prices constant and turn over less inventory to increase profitability from 2007. The economy failed to improve in 2009, leading The Gap to decrease its operating expenses. In March the company decided to decrease the size of its board to 10 members from 13 and will cut stock compensation for the remaining members by 15%. The chairman and chief executive has also decided to cut his salary by 15% and the company has done away with merit-based bonuses for headquarters employees.[3] In June 2009, net sales decreased by 9% compared to a 10% decrease during June 2008.[4] In addition, comparable sales at Gap North America and Banana Republic decreased by 10 and 20% in June 2009[4], compared to a 5% decrease for both brands in 2008.[4] Although the overall decrease in sales in June 2009 is lower than in 2008, the company's brands are still suffering from decreased consumer spending in addition to increased promotional activity to get rid of leftover spring/summer merchandise.
Increasing Importance of Online Sales
Gap's online (direct-to-customer) sales growth has outstripped growth in any of the company's other operations (partly due to the differences in scale between the $6 billion Gap and Old Navy brands and the $1 billion online business). In 2008, Gap's online sales grew 14% to $1.03 billion[2], the only segment that has seen a sales increase. The retail segment, on the other hand, has suffered decreasing sales from 2006 to 2008. Online sales include sales from the websites of the Gap, Old Navy, Athleta and Banana Republic brands as well as the online-only brand Piperlime. On May 27, 2008 Gap Inc. announced that all four of its brands would begin to operate on one online platform, allowing customers to shop from all four brands simultaneously using one common virtual shopping cart. The company is offering a flat standard shipping rate of $7 on all orders from Gap, Banana Republic and Old Navy, while Piperlime will continue to not charge its customers for standard shipping. This "universality" can lead to increased sales from customers investigating brands that they don't typically shop, or it will hurt sales if customers don't respond well to the association between the brands. By putting all four of its brands under one online operation, Gap risks diluting the image each brand tries to evoke; for example, Banana Republic customers seek fashionable, high quality apparel that evokes a sophisticated image and may not like the idea of the brand being associated with the value brand image of Old Navy, or may be deterred from paying a premium for Banana Republic items that are similar to lower-priced Old Navy clothing found on the same website.
Intro and Overview | Trends and Forces | Competition
References
- ↑ 1.0 1.1 1.2 1.3 Cecile Rohwedder. Zara Grows as Retail Rivals Struggle.
- ↑ 2.0 2.1 2.2
GPS 2008 Annual Report
pg. 20
- ↑ "Gap to Pare Board Size, Scale Back Compensation"
- ↑ 4.0 4.1 4.2 Gap reports June sales down and expands into Thailand.
