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Faith Hope Consolo
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In the News

Can Gap be saved?

Remember those TV commercials where khaki-clad teenyboppers boogied to '40s swing music? Remember how you stopped to watch?And what about the West Side Story-inspired ad, when gangs in jeans fought gangs in khakis to Jerome Robbins' choreography? Remember how you stopped to watch?Remember The Gap when it was the epitome of hip and trendy, purveyor of the new uniform — basic jeans and T-shirts — for a generation that rejected "dress up" clothes for work and play? Its T-shirts were so cool that actress Sharon Stone wore one on the red carpet at the 1996 Oscars.That was then. This is now."The Gap doesn't seem hip any longer. They simply market one color or one style," says shopper Pam Schmidt of Chandler, Ariz. "They're too preppy and sterile."After suffering declining sales since 2004 and a depressing 8% drop in sales during the five-week holiday season this year, Gap Inc. dumped CEO Paul Pressler on Monday after five years.Also this month, the company lowered its earnings estimate for the third time in six months. It will report fourth-quarter and annual sales March 1.Rumors are swirling that Gap Inc. (GPS), which also owns Old Navy and Banana Republic, will put itself up for sale, close stores and/or sell off divisions."We would agree that it's fair to say that the apparel retail business has been, for many years, very competitive," said Greg Rossiter, senior director of corporate communications for Gap Inc. "We are re-examining Gap and Old Navy strategies. We're taking a look at merchandising, the products and everything that goes into" the stores.But many now wonder: Can anyone save the Gap?"This company has to emerge in a different format," says retail and apparel analyst Jennifer Black. "I don't know that it can turn around in the form it is in today."Tough options Banana Republic, with about 500 stores, is the bright spot in Gap's lineup. Its December sales were up 2%, compared with a 5% decline a year earlier. It's a higher-end retailer, a group that has done well recently. Old Navy, the lower-end Gap brand with more than 900 stores, has been struggling. But most of the focus is on what the future holds for the Gap brand stores.It could mean:•Closing stores. Gap has become too big for success in the fashion-forward part of the apparel industry, some experts say. The company has saturated the market with more than 1,200 Gap brand stores across the country. As a result, its goods don't seem unique anymore.Ken Nisch, chairman of the retail and brand consulting firm JGA, says Gap should close up to 400 of its Gap stores, but concedes the company will probably have to be taken private to do that.Paul Charron, who recently stepped down as the CEO of Liz Claiborne, said last week that as a public company, Gap can't make changes such as closing that many stores, because it would "tank the stock and drive earnings down."•Trying trendier merchandise. Over time, Gap has lost its "original basis for differentiation of having high-quality basics at affordable prices," says Charron. "Everyone else provides basics. Many other people have very affordable prices. Everyone's got classics."But it's much harder for retailers with as many stores as Gap to take chances on fashions. A flop requiring big markdowns at a company Gap's size would be truly costly."Fashion is really about self expression," says Nisch. But "as a mass brand in a specialty environment, Gap is caught from both ends." It has to be "middle of the road" enough to do business in more than 1,000 stores, he says, and hip enough to attract trendy young customers. "Not an easy challenge."•Going private. Although a private-equity deal has been rumored, it's looking less likely now that Gap's stock is trading at close to eight times its value, says retail analyst Christine Chen. She says a struggling company such as Gap is a more attractive candidate for a private-equity takeover when it's trading at six times its total value."With a business such as Gap that needs to be turned around, (private-equity investors) don't want to have to pay a huge premium," says Chen, an analyst at Pacific Growth Equities. "I'm personally skeptical a deal will get done."But Greg Segall, managing director of Chrysalis Capital, a private equity fund that invests in turnaround situations, thinks Gap could still be attractive to private equity. He says it is not highly leveraged and, as a retail business, has good, fairly predictable cash flow.Built on jeans After founder Donald Fisher opened a store in 1969 that sold Levi's jeans, records and tapes to college kids in San Francisco, the Gap exploded on a wave of aging baby boomers and their kids.In its heyday in the mid to late '90s, Gap was the must-stop place for T-shirts, jeans and other casual basics. In 1992, it stopped selling Levi's and began selling only its own brand of jeans.The chain was popular with teens and their parents, something seldom seen with any retailer these days. While designer jeans such as those from Calvin Klein and Gloria Vanderbilt took off, Gap focused on good basic jeans.In the 1990s, Gap "defined casual Friday," says Chen. She remembers living in New York and being able to go from Gap corner to Gap corner to find the right size. But, she says, having so many stores has overexposed the brand. "It's about the Starbucks theory not working for fashion," says Chen.Left behind Fashion whizzed past The Gap in the 2000s. Since about 2002, Gap has been stung by competition from a series of retailing upstarts that cater to young people with what's known as "disposable fashion." Selling cheap, trendy clothes that can be worn a season or two and tossed has proved more successful with teens than carrying better-made "classics" — although some customers complain that Gap's clothes aren't as well made as they once were.Stores including Hot Topic, Hollister, Zara and Mango now offer far more distinctive styles at prices similar to Gap's. And lower-cost retailers such as Target and Wal-Mart have cut into Gap's sales, too.Now, Black says, Gap faces competition from every retail corner. "Everyone from Nordstrom to American Eagle to Ann Taylor is taking its market share,"Shopper Christina Griffey of San Mateo, Calif., says she asked her daughter recently what she thought of the Gap, and she said, "Gap seems to be stuck in the '90s. I always think of it as the clothes my parents wear."The big question, says brand expert Allen Adamson, is what can and should the Gap brand stand for — "beyond a nice place to get basic clothing." Adamson, managing director of brand consulting firm Landor Associates, says that may mean Gap has to go up-market with more expensive clothes. Or the other direction, down-market with cheap fashion knockoffs."What they are going to have to do is find something differentiated and relevant so they stand for something," says Adamson, author of the book BrandSimple. "It's easy to catch trends and stay on top when you're small and nimble. It's very hard when you're large. It's a risky strategy."Charron, mentioned as someone who might be able to turn Gap around, laughed off that suggestion last week. He called Gap "a very big needle to move."It wasn't always like this.In his 18 years at Gap, Millard Drexler took the chain from $400 million to $14 billion in sales and launched three new brands."A whole lot of things went right for Gap all at once," says author and public speaker Seth Godin, who wrote Small is the New Big. When the business suit fell out of fashion in many workplaces, "Everyone needed to know what to wear. So they became a national store that would sell us a uniform."Drexler, now CEO at the thriving J. Crew apparel chain, left five years ago just as Gap was starting to lose some of its luster in the face of stiff competition.Faith Hope Consolo, retail leasing chairman at commercial real estate brokerage Prudential Douglas Elliman in New York City, remembers 10 to 15 years ago when landlords were begging for Gap tenants."They would say, 'Go and get us a Gap,' " she remembers.Now, she says, New York landlords are buying Gap out of some leases. "Landlords have so many good choices now," says Consolo. "But the darlings of today can be the deadbeats of tomorrow."Can it build on an image? Whenever there are problems with apparel retailers, it's with the product, says retail analyst Dana Telsey. Retailers need fashions that "drive people into its stores on a repeat basis."Still, even if some customers have long since given up on Gap, Telsey hasn't. She says she's seen many brands, such as Burberry and Gucci, go through troubles only to re-emerge.Another sign that a turnaround is possible: Department stores, which have struggled at the hands of discounters and specialty stores, have been staging a comeback."The process certainly takes time, but the Gap name has brand awareness that has brand value," says Telsey.Nisch is less optimistic that there's a future for the Gap brand. He compares the Gap parent company to the "Giving Tree" in the book of the same name. By making Banana Republic its high-end brand, Old Navy its low-priced one and launching Gap stores for kids, babies, maternity and undergarments, "The top is off, the bottom is off and all the branches are cut off.""The tree so loves the child that it gives all of itself to satisfy the child and is not left with enough to sustain itself," says Nisch. "What's left for the stump to do?"Eve Epstein, 35, a New Yorker, is standing by Gap. She finds far more for her 2-year-old, but has been shopping there for herself for years and says she has gotten some great deals. "I think the problem now is that sometimes they have really great stuff, and other times boring, so it's not consistent," says Epstein. "But I would miss the Gap if it were gone, for sure."

 

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