Introduction

Gap Inc. (NYSE:GPS) was founded in 1969 by Donald Fisher in San Francisco, California. Primarily, stores were dedicated to young people with Levi’s jeans essentially, but In 1974, Gap introduced its first private label clothing into the merchandising mix, and by the nineties, Gap stopped to sell Levi’s jeans to concentrate only on private label clothing and to continue enlarge its customer targets. Today, Gap Inc. is an international company with some 165,000 employees supporting the company’s three distinct brands – Gap, Banana Republic and Old Navy. Denim remains a core product line, together with casual clothing and fashion items, accessories and personal care products for women, men and children. The group has currently 3 506 stores in the USA, divided into 4 divisions, namely, Gap, including Gap Shoes, GapKids including BabyGap, Banana Republic and Old Navy Clothing Company.

As well, the 704 stores established in Canada, the U.K., France, Germany, Australia and Japan depend on the fifth International Division. Although Gap plans to continue its overseas expansion, the international operations have proved to be far more difficult than its U.S. businesses. The company has yet to make money in France and Germany. But overall, including the company’s more successful ventures in Canada, Britain, and Japan, the international division has managed to grow earnings. The company is taking a cautious approach internationally, and plans to take it slow and learn from its mistakes in these initial markets so that it will be better prepared to tackle other markets as the international division begins to make significant contributions to the company’s sales and earnings. In January 2003, international sales accounted for 13% of the total.

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The Gap brand (47% of 2003 sales) GapKids, introduced in 1986, consists of apparel and accessories for children ages two to 12. The BabyGap line of newborn, infant and toddler clothing is available in most GapKids stores. Banana Republic, the second leading brand of Gap Inc (13% of 2003 sales), offers sophisticated styling and quality casual and luxury items for men and women at competitive prices versus national brands and private labels at better department stores. Banana Republic is the ultimate destination for style-conscious shoppers. The Old Navy Clothing Co. (40% of 2003 sales) sells fashionable clothing for the entire family in a fun environment at value prices. Old Navy, launched in 1994, targets low-income customers.

a) Identify the purchase behaviour of potential and actual customers.

It is important to distinguish different type of behaviour, according to the different brands, thus Gap customers do not have same behaviour that Banana Republic customers. Old Navy costumers may earn less money than Banana Republic’s. Gap Inc. has strategically placed itself in three key parts of the industry. Gap Inc is able to target many consumers through its company and cater to many people’s individual styles according to the 3 brands. GAP segments its market; each brand represents a unique image and caters to a distinct demographic.

Gap is the largest of the three brands, and is synonymous with classic, American style and carries products from jeans and khakis to pocket t-shirts. These casual, basic styles are aimed at the middle market. Although Gap stores target the college age customer, corresponding to the Bachelor stage: young single people not living with parents (Wells and Gubar). Primarily unisex, Gap clothes has recently evolved to become more gender specific, more female than male. People buying Gap items wants wear clothes easy to wear, with good quality, and not too expensive.

Products in GapKids division are essentially miniature versions of Gap products, but with more focus on color variations. GapKids, originally aimed at children aged 2 to 12, but with the introduction of BabyGap, it has been able to add even younger customers to its customer base. GapKids and BabyGap target married couples with youngest child under 6, and with youngest child 6 or over. Namely, people corresponding to the full nest, stages of life, according to Wells and Gubar.

Products under the Banana Republic division are more upscale, more tailored, and come in more refined fabrics than those in Gap stores. Leather goods and jewelry goods have been introduced into the merchandise mix. Gap and Banana Republic stores target mainly customers 20 years or older.

Launched In 1994, Old Navy is the least expensive of the three brands, however the quality is still intact. Old Navy address the market for value-priced family apparel (Full nest stage of life). Its strategy is to sell merchandise similar to Gap stores but at lower costs. Stores target lower-income shoppers and sell cheaper products.

Knowing and understanding changing market trends and the likes and dislikes of customers has made Gap Inc. a lucrative and contemporary company in the apparel market. Customers change their tastes from year to year, but they also change from season to season. When companies do not pay attention to changing trends they find themselves to be “out-of-style” or “out-dated”. Gap’s success was due to the fact that it represented a fresh fashion idea: don’t chase the latest trends; let the wearer bring style to the clothes, not the reverse. Today’s twenty something buyers, the Gen Y’s, don’t identify or buy into Gap because the clothing is too homogeneous. This change in consumer tastes means The Gap is facing a huge challenge. Its original success was based on accurately assessing the consumer needs and attitudes of the time. Now it must do that again to remain an effective and viable competitor in the retail clothing market.

b) Distinguish the key factors within the organisational environment

Gap Inc. is the largest U.S. specialty apparel retailer. It specializes in reasonably priced, classically styled clothing. Its diverse clothing lines and stores include many market targets, not only young people, but all items correspond to a majority of young people desire.

Gap Inc. runs their business by focusing on five different areas. The first of these is Inspiration. From colour to concept, it all begins with inspiration. Fresh, bright ideas are generated at Gap Inc.’s product development offices in New York City from designers, product managers and graphic artists to create a new line of merchandise for each season. Each year, Gap invests in IT Development knowing that any breakthrough allows a competitive advantage for a while.

Sourcing is the second focal point of Gap Inc. Located around the globe, employees in Gap Inc.’s Sourcing and Logistics group draw up production schedules in order to place merchandise into stores in more than 50 countries where products are made. The company gets 70% of its merchandise from overseas, including 10% from Hong Kong.

A third spotlight area is Marketing. Of the three brands, each one has its own marketing game plan and marketing team, which are also responsible for advertising. These teams work to create billboards, commercials, in-store posters, and hangtags seen in stores to attract their wide array of customers in to their stores. Gap Inc. advertises mainly through major newspaper publications, but it also advertises in fashion magazines and on mass transit posters, billboards, and exterior bus panels. All advertisements stress the central theme of American design, quality, and moderate pricing, although they are produced separately in each country to suit local tastes. In 2003 GPS spent $496 million to advertise its brands.

The fourth focus for Gap Inc. is Distribution. Without third-party manufacturers there would not be a backbone for this fourth point for Gap Inc. Third-party manufacturers ship merchandise to master distribution centres located throughout the United States and other Gap Inc. countries to get the merchandise into the stores.

The fifth and final aspect that brings these focus points together is Sales. Associates and other personnel are trained in customer service to best answer questions about which style is perfect for them.

Although Gap Inc. is successful by running their business with these five focal points; they believe that the actual “magic” of the company begins with their employees.

c) Outline the nature of the competitive environment the organisation faces

Rivalry Among Competing Sellers-

Gap Inc.’s competitors for apparel, accessories, and personal care products include Abercrombie ; Fitch, American Eagle Outfitters, GUESS?, DKNY, Polo Ralph Lauren, and Tommy Hilfiger, combined with new high-end and low-end competition such as Gucci and Zara (See following Table).

DIRECT COMPETITOR COMPARISON

GPS

ANF

AEOS

Industry

Market Cap:

17.78B

2.42B

1.22B

261.00M

Employees:

169,000

22,000

15,500

2.30K

Rev. Growth (ttm):

4.40%

16.90%

6.70%

4.40%

Relative market share:

6,8%

1%

0.5%

100%

Source: http://finance.yahoo.com

GPS = The Gap Inc

Source: finance.yahoo.com

ANF = Abercrombie ; Fitch Co

AEOS = American Eagle Outfitters Inc

Industry = Apparel, Shoes ; Accessories Industry

Abercrombie ; Fitch Co. (The Limited) is a specialty retailer focuses on providing high-quality merchandise that compliments the casual classic American lifestyle. The merchandise is sold in retail stores throughout the United States and through catalogs, and an e-commerce website. Abercrombie ; Fitch targets ages 18 through college, Hollister Co. targets 14-18 year olds and abercrombie kids 7-14 ages. GUESS? is known for quality, trendsetting style, and marketing creativity, the company designs and markets a leading lifestyle collection of high standards casual apparel and accessories for women, men, children, and babies. American Eagle Outfitters is a leading lifestyle retailer that designs, markets, and sells its own brand of relaxed, versatile clothing for 16 to 34 year-olds, providing high-quality merchandise at affordable prices. Polo Ralph Lauren Corporation is a leader in the design, marketing and distribution of premium lifestyle products in four categories: apparel, home, accessories and fragrances.

In Canada, Gap seeks to steal some market share from existing chain store such as Roots, River Road, and Eddie Bauer by installing Banana Republic stores. In Britain, American-made apparels face competition from European designers, Asian-made apparels. European Union designers can ship their goods to the United Kingdom duty-free and Asian-made items are usually produced by cheap labour.

Threat Of New Entrants-

In the current economic market, threat of new entrants is low. The clothing/accessories market can be difficult to enter, and it takes time to establish a brand name. This difficulty combined with the downturn in the economy creates very little threat.

Competition From Substitutes-

There is competition from substitutes for all aspects of Gap Inc.’s business, including apparel, accessories, and personal care products. In apparel, substitutes can be found for women’s, menswear and childrenswear. One such substitute is Baby Guess brand childrenswear, or Abercrombie ; Fitch clothing.

Power Of Customers-

In the retail and apparel sector, consumers have a great deal of power. If the consumer does not like the product, he/she simply will not purchase it. If the consumer thinks the product is too expensive, they will go elsewhere and seek alternatives from different clothing stores. For example, if customers find that The Gap’s clothes are tacky and over-priced, they will go elsewhere with their business.

Power Of Suppliers-

Gap purchases are comprised of 40% domestic-made merchandise and 60% foreign-made merchandise. Hong Kong, Taiwan, South Korea, Singapore, and China constitute over 50% of Gap’s foreign merchandise sources. Even if each suppliers account for no greater than 5 percent of the purchase, sudden political instability in any of these countries could quickly have an adverse effect on Gap’s sourcing operations. In the same way, any imposition of import restrictions such as tariffs and quotas by the U.S. government on products made in these countries could slow Gap activities.

d) Undertake an internal and External Audit of the organisations position

Strengths

Currently, the retain/apparel sector is experiencing a downturn (as is the whole economy), and Gap. Inc. is feeling some of the pressure by offering about 2.3 percent of Gap’s outstanding common shares. Despite this large buyback, hopes remain high as sales still remain positive because of Gap’s previous strong success, and diversity of produces.

The company is taking action to maintain and strengthen brand loyalty, including significantly increasing its investment in advertising and marketing. The company also continues to invest in store expansion as well as development of new distribution channels to address changing market requirements. Its new channels of distribution include Gap Online, Old Navy online, Gap Maternity online and a catalog for Banana Republic.

Gap purchases merchandise from some 700 sources located both in the United States and overseas. This procurement strategy is designed to reduce each supplier’s importance, so that no single supplier can affect Gap’s overall operations significantly. Another strength is the well-educated labor force in Hong Kong which is relatively cheap to employ, and with the increased pressure of manufacturing companies moving across the border into China, even cheaper labor may result. That is a good news to sell at lower prices.

In France, customers are becoming more receptive to U.S. fashion, especially U.S. sportswear. The 15-25 year-old age group is very fashion conscious and strongly influenced by American styles, especially jeans and college or football team logo apparel. France is very promising for Gap Inc.

In Australia, The average annual growth rate for the apparel market during this period is expected to be between 3 and 5 percent. Foreign apparel retailers and their products become increasingly attractive in the face of domestic competition. Competitors in apparel include traditional department stores, discount retailers, mail-order companies, home shopping clubs, and a growing contingent of specialty shops, including Gap.

British consumers are highly receptive to U.S. designed and manufactured apparel items. Studies show that the average British consumer thinks of American designers as firm believers in making practical clothes for real people, as compared to European designers who make fashion show-style clothing that is unwearable.

The three major brands associated with Gap Inc. are Gap, Banana Republic and Old Navy, as mentioned above. Each of these brands has unique characteristics and any negative images associated with these different brands will not contaminate the organization as a whole. That is how Gap Inc. has set their organization apart from their competitors such as Abercrombie & Fitch and so on.

In a “Letter to Employees” (available in Gap website), Gap CEOs state that a favourable consumer attitude is a prerequisite for success. This may explain that Gap.com was awarded four out of five stars by Consumer Reports in the categories of policies, usability and content. To look after costumers seems to be a good strategy for Gap.

Weaknesses

In Canada, the new trend in Canadian apparel market is to economize by saving money on clothing. That could be good for Old Navy Clothing Company, less for the other brands. In general adult consumers are becoming more knowledgeable about the clothing they buy and are more careful in evaluating their purchases in term of value. Although, this trend is good for Banana Republic.

In Britain, American-made apparels face competition from European designers, Asian-made apparels. European Union designers can ship their goods to the United Kingdom duty-free and Asian-made items are usually produced by cheap labour. The problem is that most British retailers now are focusing on customers who are over 25 years old. This is because of increasing youth unemployment and an aging population of baby boomers.

In France, local and third-party competition is high. There is a natural tendency now for the French to buy apparel from within the European Union, in particular Italy. However, Gap’s main competitors are North African and Southeast Asian companies, which have a strong presence in France because of their low production costs. At the moment, Asian countries, Morocco and Tunisia share the majority of the French market for clothing. As far as substitutes, there has been a massive growth of supermarkets and hypermarkets in France.

Germany. “They don’t buy so many trendy articles-it’s back to basics like T-shirts, jeans, blazers, and sweaters.” Items must not only be of good quality, but must also carry a well-known American trademark. Germans have shown a willingness to pay a premium for highly recognizable American goods

Opportunities

Gap brand, focused in 2003 on developing and executing a turnaround strategy, starting with a return to a more balanced merchandise assortment and improved product quality, as well as elevated customer service levels and marketing that communicated brand messages. The company said these efforts remained priorities in 2004.

In 2001, Banana Republic rolled out Luxe, a premium credit card program available to existing Banana Republic Basic credit card holders. Luxe card members will receive a $25 award for every 500 points earned, up from a $15 award for every 350 points earned with the Basic card. A few of the perks include: free alterations on any purchase, free shipping and free delivery. Luxe card holders also gain access to exclusive Luxe Specialists, who perform such services as putting items on “Luxe Reserve” and offering cardholders gift-giving ideas. Luxury fabrications were reintroduced in 2002, and upscale service models, as well as marketing campaigns supporting a strategy of customer segmentation, were also introduced. In 2004, GPS is focusing on further refinement of Banana Republic’s brand positioning and marketing.

GPS believes a rebalanced merchandise mix and the return of items such as cargo pants and Old Navy Performance Fleece pullovers restored brand performance in 2003.

The company also launched an online store, where customers can buy Gap basics and find the locations of stores near them. Gap try to compete with other well established online retailer however, even if it is too yet to compete in an efficient way, the Internet way to sell will take more and more market share, it is why it was important to Gap to start selling in this way.

Threats

In a domestic view gap is too well established to risk loosing too much market shares but to stay competitive Gap must continue to develop its store around the world if not competitors will do. Threats concerning merchandise sources are more important, because Asie constitutes over 50% of Gap’s foreign merchandise sources. Political instability and import restrictions are not good for Gap business. Lower priced clothes from Asia are a real threat to Gap in market such as Germany where low-cost apparel imports dominate the market.

Traditional Japanese attitudes toward foreigners as being “outsiders.”, but today many Japanese prefer American fashions, in particular, casual apparel. Sports-related products such as T-shirts, sweat suits, and clothing with professional sports team logos are particularly popular, and so are jeans, outdoor wear, and any items with a casual, uniquely American look. Individuals in the 15-25 year-old age group follow U.S. fashion trends closely

Another threat is on the distribution system in Japan which is the main obstacle to market entry and may pose major problems. Indeed, the keiretsu system controls many of the distribution networks and long distribution. This makes it very difficult for U.S. companies to get into a distribution system.

While Gap Inc. experienced increasing earnings until 1999, the next few years witnessed a fall in earnings. Industry experts cited a variety of reasons, such as launching too many stores to having no differentiation between its brands. Although the company has adequate cash flow presently to settle its debts in the immediate future, it will be important to sustain itself back in an economy characterized by fierce competition.

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