GAP CASE DISCUSSION


Description With its domestic operations in trouble, Gap isn’t getting much help from abroad. If any retail brand looked like a sure bet internationally, it was the Gap, the 3700-store clothing chain that has proliferated like kudzu across the United States. With an image as American as Levi’s or Coke, the company figured it would be an easy sell. Banking on success, Gap bragged about becoming “the world’s headquarters for khakis” in 1998. However, Gap was in for a serious surprise. Domestically, Gap was in trouble. Not only were the fourth-quarter profits expected to fall by 37 percent down $262 million from a year ago, but also same-store sales fell off by 12 percent in January: Gap needed all the help it could get and so it turned toward its stores outside the United States for rescue. However, Gap’s international business was suffering equally. Same-store sales in Gap’s 525 international stores fell an estimated 10 percent in January and were off by about 5 percent in the past halfyear. The company cryptically acknowledged to analysts last year that in Germany and France it hasn’t been able “to work out the economics.” It is cutting international store growth to 20–25 percent this year from 41 percent in the year just ended.

The company’s international operating margin (net before interest and taxes, as a percent of sales) declined to 10 percent in fiscal year 2001 compared to 12 percent in 1999; these margins were far less than the company’s overall profit margin at 16 percent in fiscal 2001. What went wrong? Gap fell because of the belief that it could apply uniform merchandising and marketing in all its stores around the world. In Japan, for example, the tags on Gap’s clothing are in English. Also, Gap employees cheerfully greet customers with the casual Japanese version of “hi,” something not welcomed by the mannerly Japanese.  Additionally, despite Americanization, the Japanese seem to be more interested in bargains. Uniqlo, Gap’s 480-store rival owned by Fast Retailing Co., cheaply sources its fashions from China and undercuts the Gap on price. In Harajuku, the heart of the Japanese fashion world, Uniqlo sells denim jackets for $25, half the price of similar jackets at a nearby Gap. Even monolithic Wal-Mart has figured out how to tailor its merchandise and suppliers to the locale, whether in the United States or abroad. In Beijing, Wal-Mart sells 20-pound moon cakes to coincide with Chinese lunar year holidays. Given the challenge of Byzantine retailing laws overseas, such customization is a big help. In Europe, for instance, retailers need special permission to build stores larger than 40,000 square feet.

Interestingly, however, some foreign tastes flow backward. Gap experimented in two of its Old Navy stores in the United States with Japanese punk fashions that included plaid shirts with ripped-off sleeves that were reattached with safety pins. However, the trend was not to the liking of Americans and never caught on. In 1999 Mickey S. Drexler merged domestic and international operations and installed Kenneth Pilot, the former head of Gap’s outlet business, to run worldwide merchandising. Pilot had replaced son of Gap’s founder Donald Fisher when he quit. Looks like it may be time for Gap to drop the jingoism. Question 1: What was Gap’s difficulty? Question 2: What should Gap do? 

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